The restaurant industry was among the hardest hit in early FY21 due to the COVID-19 led pandemic. According to a survey conducted by Zomato, quick-service restaurants (QSRs)  bounced back only in July 2020, after struggling through the Q1 and Q2 of FY21. 

In the first and second quarter of FY21, the dining-out market was operating at 8-10% of normal levels as except for the most adventurous diners, consumers stopped venturing out. The food delivery market, however, recovered to 80% of pre-COVID operations. In cities, only 17% of restaurants were open. Out of the 83% restaurants that were shut, an estimated 10% closed permanently.

Restaurants that were open in Q2 saw lower revenue due to lower footfalls. For the quarter ended September 2020, revenue for listed QSR companies declined by 47.7%, with net profits dropping by 330% on a YoY basis. 

In the second quarter, the stock of Jubilant Foodworks, the master franchisee of Domino’s Pizza and Dunkin’ Donuts, rose 37.3%, Westlife Development, the master franchisee of McDonald’s in west and south India rose 27.7%, and Speciality Restaurants, the owner of Mainland China, Oh! Calcutta and Hoppipola, rose 15.8% outpacing the benchmark Nifty which rose by less than 8%.

Restaurant stocks versus the Nifty

Even with restricted restaurant operations, market optimism was high. Riding this positive wave, restaurant operators shrugged off their poor Q1 and Q2 numbers and began operating differently.

Delivery becomes the new normal

With social distancing the norm, dine-in took a backseat to delivery. “We brought a strong focus on delivery and takeaway channels to mitigate the pressure on dine-in,” said Pratik Pota, the CEO of Jubilant Foodworks in the Q2 earnings call. 

Jubilant Foodworks’ delivery and takeaway sales rose above pre-COVID numbers, while dine-in sales continued to struggle.

Jubilant Foodworks sales recovery by channel

Jubilant Foodworks’ Q2 revenue grew by 110% sequentially. However, in YoY terms, Q1 and Q2 revenues declined by 12% and 16.5% respectively.

Delivery and takeaway contribution to revenue grew by 6% and 50% respectively in Q2 compared to the previous year. In June, Domino’s Pizza introduced delivery fees of Rs 20 per order, rising to Rs 30 in Q2. The second quarter was the first complete quarter with delivery charges in effect and contributed to improving gross margins to 78% from 75% on a QoQ basis. Levying delivery fees could increase Domino’s Pizza’s revenue by 1.5%-2%.

Another QSR which prioritized deliveries and takeaways was Westlife Development’s McDonald’s. The QSR’s operations are divided into dine-ins and convenience, which includes dessert kiosks, delivery, and drive-thrus. During Q2FY21, delivery sales didn’t fully recover, reaching 90% of pre-COVID levels, but rose 156% QoQ. However, the average delivery order amount in September jumped 31% over the February 2020 levels, as customers increased their home delivery order ticket. The delivery shift pushed Westlife Development’s gross margins to 63.5% in September from 56.8% in June.

QSR companies' YoY revenue change% in Q1 and Q2

McDonald’s takeaway service on the delivery app, which provides contactless delivery to customer vehicles, has seen volumes rise four times since its July launch to the end of Q2. The forced switch to delivery helped revenues double from Rs 112 crore in June crore to Rs 224 crore in September. In YoY terms, revenues were lower by 44% in Q2. Westlife Development recorded a net loss of Rs 32.5 crore in September against a net loss of Rs 60.5 crore in June and a net profit of Rs 4.6 crore in September 2019.

A focus on cost optimization

With pandemic fears still prevalent in Q2 and restaurants adopting a delivery model, costs were eased. Jubilant Foodworks managed to control fuel, energy, maintenance costs. The manpower structure was shifted to a variable rotational model, due to lower customer footfall. This resulted in a 15% YoY decrease in staff costs to Rs 170 crores in Q2.

In Q1, Westlife Development converted all McDonald’s dine-in restaurants to drive-thrus using the mobile app. This helped reduce fixed costs by 30% in Q2.

QSR companies' operating expenses from Q1FY20 to Q2FY21

Jubilant Foodworks’ employee benefit expenses, making up 22% of total expenses, rose by 11.2% in Q2 in QoQ terms. This rise was due to higher customer demand than in Q1. However, employee benefit expenses were lower by 16.2% in YoY terms.

Despite costs decreasing on a QoQ basis, Jubilant Foodworks closed 105 Domino’s Pizza restaurants during the quarter. The management said that these stores were geared towards dine-in, and did not expect footfall to return anytime soon. However, they said that the same number of stores would be opened before the end of FY21.

Capacity crunch with social distancing

Restaurants reopened in July across many states, operating at a third of total capacity. State governments gradually increased capacity to 50% by the end of Q2. Even with daily COVID-19 cases decreasing and business recovering, social distancing will ensure capacity is capped. 

During weekends, when customer footfall was higher, capacity restrictions proved a problem for McDonald’s. Westlife Development managed to divert the customer traffic which would’ve been lost due to restricted traffic to the takeaway service on the delivery app. “We would have otherwise missed because the person does not want to come in, order, even pre-COVID,” said Amit Jatia, vice chairman at Westlife Development stating that the contactless service will become a “very large part of our business moving forward.”

Some restrictions are beyond seating capacity. Both Jubilant Foodworks and Westlife Development restaurants in restricted areas like technology parks and business districts were closed. Work from home meant lower footfall in these restaurants which haven’t opened since March. IT services companies like Infosys, TCS, and Wipro, have said they will return to offices only in Q1FY22. The franchises have said they cannot convert these outlets into delivery kitchens and will remain closed until companies return.

On the upswing: Cloud kitchens and the organized sector

According to Technopak, the Indian food services market is valued at Rs 4.2 lakh crore in 2020. The unorganized market accounts for 59% and the organized market, which includes standalone restaurants and chain-restaurants, accounts for the rest. In Q4, the unorganized sector will still be impacted due to COVID-19, sanitation worries, and social distancing norms. The organized space will absorb the demand from the unorganized sector, helping it recover to 72% of pre-COVID levels. The main beneficiaries within the organized sector will be established QSR chains, cafés, and the new ‘cloud kitchens’

Expecting pandemic fears to continue, Wendy's, a popular QSR brand partnered with Rebel Foods to set up 250 cloud kitchens in India. Rebel Foods operates over 3,000 cloud kitchens across brands like Faasos, Oven Story, and Mandarin Oak. 

The established players in the space, like Domino’s Pizza and McDonald’s will benefit from the move to the organized sector. Even if dine-in fears subside, which is unlikely, capacity restrictions, especially during high footfall periods, will inevitably limit revenues. The move towards this model is not only because of the fear around food delivery reducing but also because it lowers restaurants’ operational costs, without any capacity constraints.

Going into 2021, the theme for Indian’s quick-service restaurants will be delivery first, dine-in second.