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Jubilant Foodworks: Secret Sauce to Success? 🍕

It’s 2004 - India won its first silver medal in the Olympics, people still use landlines and eating fast food is a foreign concept to a majority of the country. Then comes Paresh Rawal in an ad that changed the way people thought about ordering food - Domino’s 30-minute delivery promise, an incentive so unique that people ordered with the sole purpose of hoping to get a free pizza!

20 years on, the delivery ecosystem in India has changed and how.

Many thought the entry and success of food delivery apps in India would severely impact standalone delivery players like Domino's. However, Domino’s is far from over - it is not only the largest QSR (Quick Service Restaurant) player in the country, but also the third-most downloaded delivery app after Zomato and Swiggy.

Over the last 10 years, Domino’s has tried, tested, and successfully executed a strategy that has now resulted in 87 million app downloads, and 95% of its delivery from its own app. The stock has gone 4x over this period, and while looking at anything in hindsight can give you FOMO, this pizza party is far from over, and Jubilant Foodworks might just be set to repeat its great recipe for success yet again!

Recipe for the Dough

Domino’s' recipe for success has quite a few components that have either subdued its competition (Pizza Hut with less than half the outlets) or eliminated it (Papa John's left India in 2017, closing 66 outlets):

Pricing - Domino’s has always been 15-20% cheaper than peers, and has offered entry-level products below Rs. 50 and Rs. 100 (everyday value – Mix ‘N’ Match menu)

Localisation - It also hyper-localises its menu to suit the Indian palette, from having a wide variety of vegetarian options (8 in 10 Indians opt out of meat), to capitalising on seasonal flavour trends to attract crowds (Tandoori pizza, Paratha pizza)

Marketing - From showcasing some of the most memorable TV ads to now having the largest social media presence among Indian QSRs, Domino’s has always been a master advertiser

While all of these factors made Domino’s almost synonymous with pizza in India, its success story is more closely linked with how it nailed the delivery model. It did this by doing two very simple things:

1. Limiting dependence on food delivery apps

While Domino’s had already set high standards for delivery in India through its dial-in service back in the day, and promised 30-minute delivery, it was also quick on riding the shift from ordering over calls to ordering through an app.

Unlike all other restaurants that jumped onto Swiggy and Zomato for listing, discovery, ordering and delivery, Domino’s took a rather calculated approach.

Domino’s got on board with the likes of Swiggy and Zomato but limited its engagement to listing and discovery. It kept delivery to itself ensuring it paid lower commissions (which now go as high as 30%), leveraged its already successful delivery model even further, maintained the quality of delivery, and kept delivery times short - while still taking advantage of the increasing popularity of these apps

It built and launched its own app in 2013. With no commissions to be paid to delivery apps by going native, it could price its products lower on its own app, which made for a strong proposition for the extremely-price-sensitive-Indian consumer to download and regularly use the Domino’s app

2. Strategic store additions to achieve supremacy

While one would imagine a swanky app to do to the job of online ordering success, it is actually the brick-and-mortar infrastructure that is key to Domino’s victory. After all, it needs more stores to achieve higher reach, and lower time to delivery.

Domino’s app launched in 2012, and in just 5 years, its digital sales mix grew from 10% of sales from Domino’s app to 68%.

But in parallel, over the 5 years from FY12-17, Domino’s also went from 465 stores to 1,127 (2.5x more stores). Most of these stores were small and meant to facilitate deliveries as that is the major source of revenue for Domino’s (80-85% of revenues at the time).

These investments were yielding results as delivery already made up for most of Domino’s revenue, and digital was further propelling more orders. Over the five years from FY12-17, the number of stores for Domino’s grew at an average of 20% YoY, and also resulted in a revenue CAGR of 20%.

However, investments come at a cost. While the brick-and-mortar stores it was setting up were supporting an easy riding of the digital wave, it was also cutting into profitability. EBITDA margins for Domino’s contracted from 18% to 10% in just 5 years.

But, while aggressive investments come at the cost of profitability, they also tend to yield results in the long run. This was validated in the next 5 years, where from FY17-22, Domino’s added stores at an average of just 7% YoY, and saw equivalent revenue growth. However, in the same period, its EBITDA margins shot back up from 10% in FY17 all the way to 25% in FY22, exhibiting a 27% CAGR.

Repeating History?

As digital ordering goes beyond the boundaries of cities and sees an increase in adoption throughout the rest of India, Domino’s has entered in its next phase of investments. Over FY23-27, it intends to add around 1,000 stores, from the current 1,928.

Additionally, the store addition also enables it to reduce delivery time from the current 30 minutes to 20 minutes. In fact, this has already been done in 20 zones and 14 cities. Now more than 70% of our delivery orders are being delivered in under 20 minutes.

FY23 already saw this plan being set in motion with the addition of 300 more stores, the largest YoY addition in Jubilant’s history, and the highest number of stores added in a year by Domino’s worldwide!

Naturally, just like earlier, the aggressive store addition has already started taking a toll on Domino’s profitability. 4QFY23 margins have contracted to 20.1% from 25% a year earlier. This trend is likely to run through the next 3-4 years, as execution on expansion keeps pace.

And just like the last time, this aggressive expansion could lead to Domino’s being able to milk its investments and see steep profitability growth, leading to yet another success in profitable scaling up.

Right Time to Invest?

In its last expansion phase from FY12-17, while revenue growth was strong at 20%, EBITDA margins saw heavy contraction. However, despite the dip in profitability, the stock continued trading at its long-term average one-year forward EV/EBITDA of 28x, and in fact, even doubled in price.

The stock’s resilience despite dipping profitability can be explained by high revenue growth and the market’s belief in Domino’s execution capabilities. This can play out in a similar fashion this time too, with aggressive investments leading to the possibility of a 5-year CAGR over FY22-27 of 13% in store additions, 11% in revenue and 7% in EBITDA (as margins can contract from the current 22% to about 18%).

If history were to repeat itself, valuations would remain steady at around 28x despite the dip in profitability, linking stock price appreciation to profit growth, and resulting in steady appreciation over the next 5 years.

Opportunity in Distress

The only time Domino’s has dipped significantly in the last ten years has when a CEO resigns:

  • Ajay Kaul's resignation (Sept 2016) - Stock fell by 10%

  • Pratik Pota's resignation (March 2022) - Stock fell by 18%

The stock is still about 10% down from March 2022 as Sameer Khetarpal takes over the reigns, which could just make for the right time to start kneading that dough.

With a new CEO, the same proven game plan, and a strong tech backbone to support it, Jubilant Foodworks looks like an interesting player to look into in the ever-growing QSR space. So go place that order and read all that you can about this company - the food might arrive faster than your revelation to invest!

Disclaimer: Investment 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. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

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