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Swiggy, Zomato, and No Sweat - Domino's Proves Doubters Wrong 🍕

There are moments in life when the irresistible desire hits us to unwind, sit back, and order a pizza - echoing the laid-back style of Joey and Chandler from the TV series "Friends."

Picture this - you recline in comfort, tune in to your favourite show, and, before the initial episode concludes, a steaming hot pizza arrives right at your doorstep.

Undoubtedly, the brand that comes to mind is Domino's, the most popular pizza choice. It's the brand that pioneered the concept of delivering within 30 minutes long before Swiggy and Zomato even entered the scene.

But this consumer-favourite brand hasn’t really been an investors-favourite for a while now. From a high of Rs. 815 back in September 2021, it has come off 33% to Rs. 545 now. This, while the Nifty 50 is up 12% over the same period, marking an underperformance of 45%.

What’s Made the Pizza Cold?

There have been several reasons for the gross underperformance of Jubilant Foodworks over the last 2 years. Notable amongst them are:

1. Post COVID, Jubilant Foodworks kept disappointing investors on result expectations. Throughout 2HFY21, despite outperforming its QSR peers, its recovery wasn’t nearly as strong as for other consumer companies

2. While Jubilant Foodworks was grappling with a slower-than-expected recovery, it was getting aggressive at store expansion, which worried investors. It opened 25 Domino’s stores in FY21 and 207 in FY22, which marked a growth of 2% and 15% respectively

3. To add to this, amid the aggressive store expansion, international the MD and CEO of Jubilant Foodworks, Pratik Pota resigned from his role in March 2022, and the stock fell by 11% in just one week. While the company appointed Sameer Khetarpal as a replacement, the street of course saw near-term execution issues, especially in light of the recently-embarked aggressive store expansion plans, and investments in DP Eurasia (Domino’s in Turkey, Russia, Azerbaijan and Georgia) and Barbeque Nation

4. As Jubilant Foodworks continued its aggressive store expansion, operating deleverage kicked in. With this, margins started facing the heat, exacerbated by high inflation, and pricing challenges as Jubilant Foodworks launched a Rs. 49 entry level menu to drive footfall and fend off competitive aggression at an entry-level

5. Investors feared that the level-playing field offered by food aggregators like Swiggy and Zomato would intensify competition for Jubilant Foodworks, putting pressure on growth and margins

But the Numbers Are Still Hot

The financial performance of Jubilant Foodworks tells us a story that’s not exactly at par with investors’ concerns:

  • Revenue growth has accelerated, thanks to the aggressive store additions

  • However, despite inflationary pressures, competitive aggression and relatively poor unit economics of new stores, Jubilant Foodworks has been able to maintain margins

Why Domino’s Remains the Undisputed Leader

The financial performance of Jubilant Foodworks has been led by a broad-based improvement in all operating metrics, which also highlights how it has reduced the gravity of investors’ concerns.

1. Profitability Despite Store Addition

Despite the store count increasing by 16% CAGR over FY21-23, versus 9% over FY18-20, Jubilant Foodworks was able to maintain its operating profit margins.

The fact that margin maintenance happened despite high inflation, increased competition in the entry-level segment and store additions has been commendable.

Margin maintenance can be attributed to:

  • A constant upgrade in the product portfolio and creation of value packages, resulting in premiumisation and an increase in average order values

  • Higher utilisation of stores, which is visible from the average daily sales of mature restaurants to Rs. 82,000 in FY23, from Rs. 65,000 in FY21

  • Effective cost management strategies like replacing the import of certain raw materials by using domestic produce

2. Nailing the Delivery Model Despite Swiggy and Zomato

The entry and success of food aggregators hinged on them being the one-stop shop for everyone’s food cravings.

For a single offering player like Domino’s to thrive against this proposition seems counter-intuitive, especially with the democratisation of local pizzerias, who now share the same shelf space as Domino’s on these platforms.

However, Domino’s was able to maintain its proposition despite the changing environment, thanks to:

Delivery has become increasingly prominent in the Indian food industry, and Domino’s has been able to crack it. Moreover, with more than 35 million app installs, its offerings have been able to fetch a loyal customer base despite the existence of food aggregators.

* for 4QFY21

3. Creating New Avenues for Growth

While Domino’s and Jubilant Foodworks have been synonymous, Jubilant Foodworks has been working on several expansion strategies:

  • Expanding into more cities and towns within India to establish and maintain dominance

  • Taking its Domino’s prowess to other countries like Bangladesh, Sri Lanka and even Eastern Europe and West Asia

  • Using its Domino’s playbook on other brands like Popeye’s, Hong’s Kitchen, Dunkin’

What Next?

Using the above strategies, Jubilant Foodworks is expected to demonstrate an improvement in financial performance over the next 2 years.

  • With aggressive store expansion plans of 250 stores in FY24 (14% growth), Jubilant Foodworks is set to achieve an acceleration in revenue growth to 15% over FY23-25, compared to revenue CAGR of 11% between FY18-23

  • Additionally, as cost control measures fructify, and stores achieve higher maturity, margins too are expected to expand from 22% in FY23 to 24% in FY25

  • These elements may contribute to an EPS CAGR of 25% from FY23 to FY25, which is far greater than the 12% EPS CAGR the company reported between FY18-23

With the stock having corrected by 33% over the last two years, the stock is presently trading at a 2-year forward PE of 62x, compared to its average of 74x over the past five years.

Valuations going back to historical averages or even more, given the superiority in operational standing and performance compared to the past, could make a case for money being left on the table.

While the “pizza” may have gone cold, there seem to be several reasons why keeping it in the “microwave” for a few seconds could prove to rejuvenate its former vigour, and might just be the cheese-pull of an addition that your watchlist desires!


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