Jubilant Foodworks recently reported its Q3FY23 results which were not liked by the markets. On the face, revenues grew by 10%, but profitability was severely impacted and that led to a ~40% degrowth in PAT.
This impact on profitability has been some-bit on account of current high inflation scenario, but more importantly on account of no SSG (Same Store Sales Growth) and High Store Additions.
Domino’s store count in India grew by ~18% (y-o-y) vs a reported SSG of just 0.3% (actual SSG would be even lower as Dominos reports SSG without considering Split Stores)
This scenario of High store additions with no SSG and its impact on the business is something we had discussed in an earlier blog post in detail- SSG: The Most Important Metric in Retailing
(Highly recommend you to read that blog in order to understand what we will discuss here)
This issue of no SSG and High store additions is not new for Jubilant, an example we considered in our SSG Blog. Jubilant faced the same situation back in FY14-FY17 and that led to sharp reduction in profitability for the company.
Another thing that happened during that time period was that Jubilant was scaling up its new business of Dunkin Donuts. Jubilant scaled Dunkin quite fast without getting the economics right and that led to further pressure on margins over & above the issues it was facing with its core Dominos business.
Jubilant’s Q4FY17 Concall-
It was only post FY17 that things turned around for Jubilant when the newly appointed CEO Mr.Pratik Pota scaled down store additions for Dominos and started focusing on improving SSGs. And further, reorganized the whole Dunkin Donuts business by reducing the store count by half.
Fast forward to 2023, Jubilant seems to be in an exactly similar situation that it was in 2014-2017 period-
A. Core Business of Dominos is facing challenges
Domino’s SSG has slowed down considerably, but the store additions continue to be high. Though the management has acknowledged the issue of SSG and is focusing on getting it back, it continues to be aggressive in terms of new store additions.
Snippet from Q3FY23 Concall-
One of the things that is leading to this issue of high store additions with low SSG is the whole strategy of Fortressing. Domino’s globally has a strategy of fortressing, wherein they open more stores in the same area of existing stores. The idea behind the strategy is to provide better service to the customer by coming closer to them, keep out competition and drive out more sales in absolute numbers.
Though fortressing as a strategy is good from the long-term perspective as it allows the brand to deliver better service to the consumers, but in the near-medium term it has its own challenges of-
1. It reduces SSG as the new split store leads to some cannibalization of sales for existing stores.
2. Higher store additions & their associated fixed costs
Nearly 30-50% of new store additions of Jubilant are a result of these split stores and not a store opened in a new city or area that can capitalize on new demand.
Jubilant currently reports SSG excluding stores which were not split during the last 12 months. Considering the impact of split stores, the actual SSG is even lower.
B. Company is looking to Scale up multiple new Businesses
Jubilant is currently in the midst of introducing & scaling up multiple new brands- Popeyes, Hong’s Kitchen and Ekdum!. Not only will these new brands be loss making during the initial scale-up phase, most of them are structurally lower margins business than the core Dominos business.
And doing this scaleup at a time when core business is already facing its own challenges could result in a Dunkin Donut kind of situation again wherein new businesses further impact the profitability over & above the impact of core Dominos business.
And lastly to top it all off, Mr. Pratik Pota who turned around Jubilant in 2017 has recently left the company. So, not a great situation to be in for Jubilant Foodworks.
That’s it for this week, new insight coming up next week. So stayed tuned!
Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.
“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”
“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”
“The securities quoted are for illustration only and are not recommendatory”
More details: https://www.surgecapital.in/disclosures
Stock specific investment disclosure:
Jubilant Foods- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.