JUBLFOOD — earnings call

The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.

Prepared remarks

Moderator · Conference Operator

Ladies and gentlemen, good day and welcome to the Jubilant FoodWorks Limited Q3 FY2023

Thank you.

Our next question is from the line of Manoj Menon from ICICI Securities.

Please go ahead.

Manoj Menon

Hi team.

Good to see higher disclosures.

First is on the loyalty, a little bit more color if you could give because it has been almost like six months of the operations if you can just comment about what is your observations on the frequency increases of your cohort, and also qualitatively what sort of new consumer should have come in thanks to loyalty.

Sameer Khetarpal

To me loyalty should pan out in a full year to understand its results fully but what we have learned in six months is actually very, very encouraging.

Loyalty is targeted towards repeat customer so it is not targeted towards new customer we have other programs that target new customers, our high frequency and medium customer frequency base is at an all-time high and growing very rapidly in fact it is working quite well like I said the delivery as a channel, own-app ordering that continues to be very robust so that is something working well in the engine and our technology investments are therefore paying off so let me assure you whatever I have seen being in this industry for nearly a decade it is working quite well.

Manoj Menon

Understood, basically if I just to paraphrase essentially you are saying that there is some element of frequency which we are observing; quantification probably we need to wait for another six months.

Sameer Khetarpal

Absolutely I think frequency increase is definitely there we are definitely seeing that.

Manoj Menon

Secondly when I try to disaggregate the growth let us say at a product level is it fair to say that the pain point actually would be sub Rs.100 price point.

Sameer Khetarpal

Yes, I think my take on this one is see the focus area is Dine-in, and customers at this high inflationary environment they are making choices and we do see customer come with a total bill or total amount in a mind and the total quantity and therefore they tend to gravitate towards lower price point.

So as we are kind of competing for new customers we believe given our scale, our ability to deploy technology, our reach of stores; we can actually capture that demand if we have a very strong Rs.

49 price point menu and that is where we are doubling down on.

If we are the only ones who can offer a Rs.

49 menu then we should be acquiring customer at a faster rate and that is what we are correcting in our marketing communication.

Manoj Menon

What I was alluding to is that it is not really any competitive aspect particularly at that price point just the everything under sub 100 is what I was getting into.

Sameer Khetarpal

Yes.

Manoj Menon

Just quickly if I may just squeeze and dwell up on the third one.

We opened 265 stores in the last 12 months so given the trajectory of revenue at this point in time where there is not much positive operating leverage is getting accrued does it make sense to slowdown expansion a bit at least for the time being.

Sameer Khetarpal

So I think we debate each store while giving an approval we look at each store as an absolute versus chasing the number so that store has to make sense, it should have the right level of payback for our capital expenditure, it has clear data points and points of interest that you use to calculate, what revenue it will have and if it make sense from an EBITDA standpoint and ROI standpoint we approve the store so there is no compulsion to do x number of stores and all our stores we believe are meeting the internal threshold and guardrail and therefore I am not wedded to a number that we have to open x number of stores.

Ashish you want to add something here.

Ashish Goenka

Yes, just to add we will continue to follow demand because we don’t want to slowdown this virtuous cycle of growth but we will keep recalibrating and evaluating it every quarter as Sameer says there is no number to chase here but I think only thing will be chasing is demand or following demand so I think that is the guiding philosophy or principal that we are operating with.

Manoj Menon

Good luck guys thank you so much for taking my questions.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Arnab Mitra from Goldman Sachs.

Please go ahead.

Arnab Mitra

Hi.

Thanks again for improving the disclosure.

My first question actually is a follow on from what Manoj had asked in the previous question.

So I understand you entering new cities and there is a threshold that is getting met but almost 1/3rd of your new store opening was store split so in this environment of nearly zero LFL does it make sense to at least halt that process of store split which would increase your fixed cost for the same catchment and that increase pressure on your overall business maybe force you in this kind of an environment or you think it is not that bad and you could continue with this scenario for the time being.

Sameer Khetarpal

I keep on telling this to team - splitting the store probably is the easiest decision because it is a function of the mother store achieving a certain revenue; it is bursting at the seams during peak hours and customer service KPIs are beginning to deteriorate.

So if that is happening its an easier decision to make, which means we are leaving demand on the table and not serving it properly.

So therefore how do we preserve our capital and make sure that we are deploying it prudently we evaluate - do we need to open a 1,200 square feet store can we manage it with a delivery and carry out store.

So those debates we have, but if the store is not reaching the capacity in the peak hours then we do not split the store.

So the guardrail for splitting the stores are very, very clear and we do challenge like why cannot this store do more.

If it reaching a certain threshold of our daily orders what can we do to bottleneck - does it need more oven and does it need more bikes so we take those calls and not necessarily make it easy for the store to split.

Ashish Goenka

And Arnab, we have also raised the threshold and become more stringent in terms of the way we are looking at splitting stores.

So if you see last year, almost 40%, 45% of our stores are split store.

This year, the ratio has already come down to 30%.

But I think we will be doing a great disservice to the business and taking a very shortsighted view if we were not to split stores, which really need a split while keeping the customer in mind, and also the financial model works pretty well.

Of course, right now, the demand environment is a bit slow, but I think the financial model works well for us, where the mother and child put together, the investment pays back in about three years odd time.

So we will be far more stringent in the way we look at splitting stores.

But I think wherever needed, we will continue to do that.

Arnab Mitra

So I completely understand what you said.

My question was also that this target of getting to 20 minute delivery.

Is that necessitating store splits in certain areas where your capacity will still be there, but because you want to get to that 20 minutes, you are getting into a store split.

Is that something that you want to do in this environment?

Sameer Khetarpal

No, absolutely not.

I think we have been preparing for it for almost three years with the fortifications plan.

It is a natural outcome of that.

Now we have the density, why will we not promise faster speed.

So we will not open stores just to meet 20 minute demand.

I think we have the network in the big cities is what I am convinced of.

We are in multiple cities, Bangalore, we have the density.

Gurgaon, we have the density, Delhi, we have the density.

So why will we not offer better service.

Arnab Mitra

Ok.

My last question actually was on this loyalty program.

So I think you have explained it last quarter, but just for our benefit.

So now that the scheme is becoming large, how do you account for this additional free pizza at the end.

Does it happen when the redemption happens or from the day the person enrolls you kind of start accounting for something over the life of the time period, and therefore when does the hit on the gross margin, if at all there is a hit that comes in the P&L.

Ashish Goenka

Of course, we follow the accounting norms.

It is accounted as a discount and we take the impact upfront and not at the time of redemption.

Arnab Mitra

Okay understood.

Thanks, that is it from my side.

All the best.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Amit Sachdeva from HSBC.

Please go ahead.

Amit Sachdeva

Hi!

Good evening everyone, thank you so much for taking my question.

My question is, first, on the shape of gross margin, the way it is evolving.

So if I go to pre-COVID period, you were around ballpark 75%, and as COVID happened and delivery was the main value proposition and consumer willingness to pay also expanded for a high quality food that is coming and we were willing to pay a delivery fee etc. But as COVID has sort of receded, and multiple challenges such as input prices have also come.

But I see that 75% is sort of coming back for one reason or the other, but also adding to what Sameer was also saying that you want to also push Dine-in and with Everyday Value with Rs.49.

I would assume that would also add to some amount of pressure on gross margin, if not anything else.

So question is that whether 75 is a new normal as a strategic construct that you put together in consumer value proposition to enterprises, to how you strategically price the products, and to add to that, Popeyes I would assume, it would be a lower margin business.

As the Popeyes stores grow larger and larger, that construct will also add to margins not being able to expand.

Go back to where it is.

So is it the right thinking, and we should now take 75 as a new normal, or how would you sort of shape our thinking there.

Ashish Goenka

So, as you see, of course, during COVID, we were seeing a highly deflationary commodity environment, and that had the benefit reflected in our gross margin, and of course, now what we are witnessing is decadal high inflation across the key commodities that impact our margins, namely cheese, flour and some of the others.

So I think gross margin, by and large are currently governed by the commodity cycle and we do expect that in the coming few quarters it should stabilize or start softening a bit.

So it will be largely governed by that.

We will not have an adverse impact on margin on account of our Dine-in improving or some of the new products that we were launching because one of the guardrails that we are using in the company for launch of any new products is that it should not be gross margin dilutive.

So I think new product addition at Rs.49 or even coming back of Dine-in channel will not be margin dilutive.

I think margins will largely be a playoff of how the commodity cycle were to behave, and as I said earlier, I think at this stage, we are not looking at any pricing interventions because we want to remain high value for money proposition to our customers, and therefore, gross margin would be directly governed by how commodity cycles behave.

Sameer Khetarpal

I mean, last point on this one is, see, when customers come in for Rs.49, their bill value per order is no less.

So there, we have an opportunity to upsell, cross-sell, and I think it is a sharp call out.

We want to excel on the dimension of value to customers, and therefore, we have a wide range.

But that necessarily does not mean that customer only shops for Rs.49.

Amit Sachdeva

So that is very helpful, Sameer.

So what you are alluding to is 75% and a bit is sort of a bottom kind of thing in very adverse circumstances, and if all things equal, it should sort of jump, it may not go to 78% when commodities were very benign, but it should sequentially move up.

Is that what you are trying to sort of help us think.

Ashish Goenka

That is right.

Amit Sachdeva

And what about Popeyes impact, is it the right hypothesis that Popeyes structurally would be lower gross margin business, and as it becomes larger, it would have at least some basis points drag on gross margins.

Ashish Goenka

So I think the category structure for fried chicken is slightly different from what we have in pizza.

So in the fullness of time of course, gross margin could be slightly lower, but we do not see EBITDA margins to be any different.

However, given the fact that Popeyes is right now a very small contributor to overall JFL numbers, right now being only 12 stores and I think it will take some time before it really scales up.

It will not have any material impact, I think, at least for the next few quarters on our overall margin profile, and of course, we will come back it starts making a more material impact, but I do not foresee any material impact of Popeyes on the overall gross margin, at least for the next four to six quarters.

Amit Sachdeva

Again, it is a bit of the margin, but just quickly trying to think through the overall EBITDA margin and over the growth construct as well.

So clearly variable cost here is employee cost, which sort of expands as the store expand and some wage hikes happen in between, and you have obviously managed other overheads quite reasonably well.

They have grown at least in line with revenues and not expanded much.

So given that construct, would you sort of say that, like a 250, 240 store expansion that are happening in Domino’s.

Can that be in a construct of 24% to 25% EBITDA margin, given this is very abnormal quarter with 22% EBITDA margin.

How do you think about it.

Can expansion happen while maintaining 24% to 25% Ind AS margins.

There are more variables and it is very difficult to sort of put together to construct to it.

Where I am coming from is, is there a cost of growth and which is sort of offsetting that as well, and where things can be more volatile or at least 26%, 25% is not a normal margin, and it should tailor down or come down lower structurally.

Ashish Goenka

So two things.

One, I think in current uncertain both the demand and cost environment, I think it is very difficult for us to give any sort of guidance.

So I will refrain from that, but having said that, I would just want to give you some color on the new store openings.

So I think the store openings that we are doing is having less impact on the post Ind AS EBITDA margin.

The impact is largely seen in our PAT margins because we are taking a slightly higher debt charge.

So in terms of EBITDA, the margin dilution, it is negligible in terms of opening of more stores, and I think we should be able to absorb it.

Of course, the challenge remains for us is in terms of how do we step up growth more to start seeing leverage at even a PAT level.

So that remains a challenge, but we should be able to absorb 200 to 250 store addition without any meaningful impact on post Ind AS EBITDA margin.

Amit Sachdeva

Okay got it.

Thanks so much, that is very helpful, and all the best.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Amit Rustagi from UBS.

Please go ahead.

Amit Rustagi

Thank you for giving me the opportunity.

Dwelling up on the last point, which we were discussing about the EBITDA margin.

If we see our gross margin decline is close to 2% from Q3 FY2022, and the EBITDA margin decline is close to 4.5% - 5%.

Can we say that additional 1.5% - 2% decline in EBITDA margin is a function of new store openings.

While I know you have been maintaining this point, that they are not EBITDA dilutive at all.

Ashish Goenka

No Amit, I do not think it is attributable to increasing stores.

As I said, the new store impact on actually EBITDA margin is negligible.

It is in the zone of 15 to 20 basis points and not more.

What has impacted us more is, of course, there is a flow through from gross margin, but also the fact that some of the inflation has also been impacting all the other cost lines.

That is number one.

Number two, we have also stepped up our marketing investments given the slowdown in demand, we actually want to stay relevant and therefore we have stepped up our marketing investments, and third is, of course, we have prepared ourselves for a much higher level of growth.

We were not anticipating this sudden slowdown in demand, and that also has a sort of bearing on the EBITDA margins, where we have sort of seen a slightly negative operating leverage instead of a positive operating leverage that we are planning for.

So I think a combination of these factors is reflecting in the EBITDA margins.

Amit Rustagi

But when you are talking about reversion to previous level and improvement from here.

I think mostly, you are talking about the raw material inflation coming down, but as I can see that raw material has contributed to only 2% decline in the margins so do we have more levers in hand to improve the margins from here.

Ashish Goenka

So one is, of course, as we get more growth, we should also be getting more operating leverage.

So that should help us in improving our EBITDA margins.

The other is pan-organization wide productivity drive that we are driving very, very hard to extract more efficiencies across all our lines and also reduce wastage across our cost lines.

So I think that is a constant endeavor, and we are also mounting a full scale program right now to take cost out of the system and bring in more efficiency.

So that should have a bearing in the quarters to come.

But I will refrain from giving any guidance at this stage.

Amit Rustagi

Okay thanks a lot, and best of luck.

Moderator · Conference Operator

Thank you.

We will take the next question from the line of Vivek Maheshwari from Jefferies.

Please go ahead.

Vivek Maheshwari

Hi!

Good evening, again thank you for the disclosure.

My first question is, we have seen pickup in activity on promotion, discount ,subsides from platforms like Swiggy and Zomato.

What is your take on this issue.

So both Zomato and Swiggy are now going after instant gratification by giving, let us say, free deliveries or offering more discounts.

Whereas, in your case, let us say, the program that you have is the gratification is more delayed.

So how do you balance out in an environment where Swiggy and Zomato are aggressive right now.

Sameer Khetarpal

We have all forms of levers in our hands, right, from brand marketing to promotions, and also running a sharper marketing call out and event celebration like you saw this in Diwali, we had Diwali Dhamaka.

So I think we want to stand for value.

We want to stand for great tasting pizzas and fast delivery.

Together, I think the value proposition is rock solid.

So, I mean aggregators or competition will I am sure they will double down on their strength.

We have to play on these core values.

We are still, by far, the most valued in terms of price point in the category or even in the QSR.

So I think customers will look at what is the cost to order their meal, and I generally believe we are like supremely competitive over there.

Ashish Goenka

And just to add to what Sameer said, we did extensive testing to our loyalty construct before launching it, and we had evaluated an instant gratification program as well, but that did not find favors with the customer, and that is where we launched Cheesy Rewards, and response has been very good, and also I think any membership or subscription led program, which aggregators run, actually brings complementarity to the program that we are running because our customers still continue to earn the points on our program while getting the benefit of the subscription based program on the aggregator.

So we do not see that conflicting.

We see it as complementing.

Vivek Maheshwari

Interesting.

Second, in your opening remarks, you made a comment that post November, there was a deceleration that you have witnessed in your business.

Can you just talk about how the exit numbers were compared to, let us say, quarter average of where November was.

Sameer Khetarpal

I think we do not give month wise guidance.

I think let me just say this, we have tremendous opportunity to tap in areas of demand and growth.

So that is not a concern for me at all.

Vivek Maheshwari

No that I completely understand.

But anything on how the trend has shaped out.

So at least directionally was December better than November.

Ashish Goenka

Certainly Vivek, December also had the advantage of, of course having the big days and the festivities.

So December certainly was much better than November.

But October was even better.

December was better than November, but lower than our expectation.

Vivek Maheshwari

Which means Y-o-Y again, because given the seasonality your November, December comparison may not be fair.

So on a Y-o-Y basis December was as much let us say good or bad as November was in a way.

Ashish Goenka

I would say much better, yes.

Vivek Maheshwari

Last one, Sameer, you mentioned about 500 customers interaction, 200 store visits.

Can you just talk about, let us say, a couple of key, let us say, critical feedback that you received or things that require your urgent attention that is what you felt after doing these visits or meetings.

Sameer Khetarpal

Good question.

So firstly, as you have seen in the past we have taken calibrated price increases.

We have added delivery charges.

So customers do feel impact.

In consumer’s mind, the intensity with which we are offering the value that perception had come down.

So that was the learning where we quickly introduced EDV 49.

So that was one learning.

Second is they gave us a lot of credit for our delivery credentials, but we realized that when they are dining out, we are not their first choice, especially in tier one and tier two cities.

While in tier three, tier four cities, we are probably the destination when it comes to dine-in.

When I looked at the root causes it goes back to doing appropriate and timely reimaging and upkeep and sprucing up the store with the current times, and with competition coming in, opening newer stores, we were kind of saddled with older stores, and that is what we are correcting at a rapid pace.

So two things, one is we stand for value when they constantly look for value, double down on delivery, they expect us to deliver faster, and third is they do want to celebrate their precious moments or joyous movements in their life in our stores like birthday or eating out with friends, and therefore the feedback was very clear - take it couple of notches up.

Vivek Maheshwari

Got it.

Thank you Sameer and team wish you all the best.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Latika Chopra from JP Morgan.

Please go ahead.

Latika Chopra

Thanks for the opportunity.

A few follow ups on your earlier comments.

The first one was, clearly, you are targeting to tap into the more value segment and you just alluded to the fact that you want to improve the value proposition to the consumer.

Could you help me understand - you had mentioned earlier that even at a gross margin level the Rs.49 pizzas are more accretive.

But I thought you have brought down the price points from Rs.59 to Rs.49 so are we changing the way the pizza is made or anything in terms of ingredients as well where you say that this will not be margin dilutive.

So that is one aspect, and the second bit is related to spends that we are doing on reimaging these stores.

So today, you have about 1760 of Domino’s stores how many are in new format and what is the kind of cost that you can incur to turn them into these new reimagined stores.

Sameer Khetarpal

The Rs.49 price point is not dilutive, I think that is the point that Ashish was making because we do want to keep and we have a hurdle rate in terms of gross margin.

So how we are handling it is and if you see the mix and match value you have to buy two items, and that is why you get Rs.49 for one product number one.

Second is I think, again, firstly we do have the sourcing capabilities and the back end capabilities, right, which others do not have that allows us lower cost structure.

But more importantly, when we are designing the menu and the recipes, we are innovating so that the margin is not dilutive.

For sure, it is not only just discounting, it is value engineering and it is leveraging our scale to bring costs lower and therefore it is not dilutive.

Ashish Goenka

Also just to add we were already having EDV 99 and now we are saying EDV 49 which you buy two products.

And, therefore we are not compromising at all on the product quality and that is always sacrosanct for us.

There is no way we will ever compromise on better quality.

But we are able to manage the value proposition as Rs.49 becomes far more attractive to the customer than even an EDV 99 proposition.

Latika Chopra

So what I wanted to understand is what is your hurdle rate of gross margin in your mind.

So do we say that 75% to 76% is the new band of gross margins you are comfortable as a company, and even if cheese prices are to moderate, that is what we should look for considering the initiatives that you have on the Dine-in side.

Ashish Goenka

So as I said earlier, as well on gross margin it would largely be governed by the commodity cycle.

So if cheese prices were to soften, we should see improvement in gross margin because the hurdle rate that we look at internally is that any product that we launch and any proposition that we launch should not be dilutive to the existing gross margins.

So if there is a benefit of commodity, it will flow across all product class.

Latika Chopra

Sure.

I know you do not want to give guidance on growth per se.

But, the operating margins in this quarter, of course, are a reflection of operating deleverage as well, and do you anticipate that we have seen the bottom of operating margins in this quarter.

Or do you think there is more downside to go till some of these new initiatives on LFL really fructifies assuming the external environment remains the same.

Ashish Goenka

So I think again it will be difficult to give any guidance at this stage given the uncertainty in cost and demand, but I would reckon that we would have pretty much hit the bottom.

Latika Chopra

All right, and the last bit long-term.

So what is the target LFL that you have in mind because that is your priority that you think this business can sustain over the medium-term, and the second bit was from your assessment so far do you see that Domino’s format in any way allow you to cater to more consumption occasions in terms of either the format or in terms of menu that could be accretive to the growth going ahead.

Sameer Khetarpal

Yes, I think the target LFL in the range of 6% to 8% and I do see that opportunity, and from your second question standpoint like I said there is a huge opportunity for lunch menu for day part, for evening snacking and we have a terrific chef team.

Like I said, on one hand, we are launching Rs.49 menu on the other, we are also launching gourmet pizzas.

So the opportunity to tap into many India, multiple price points, multiple customer cohorts.

That to me, gives me the confidence that this is indeed possible.

It is just not an aspiration.

Latika Chopra

Sure, thank you so much.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Sheela Rathi from Morgan Stanley.

Please go ahead.

Sheela Rathi

Thanks for taking my questions, and thank you for improving the disclosures here.

So my first question was with respect to the demand.

Yes, the demand has been lower and Sameer you have also mentioned the key reasons why the demand could have been slower.

But just wanted to understand that the focus on value proposition, focus on double down on dining channels, is it that there is much higher competitive intensity which is coming back, especially from local and regional players, and that is the reason why we are focusing more on the dining side or is there any other reason.

Sameer Khetarpal

I think the reason to double down on Dine-in I think is one after pandemic, we see the opportunity right.

I mean, the customer habits have shifted to delivery and we want to use Tees se Bees(30 to 20 min delivery) and capitalize and fortify that.

Now we have a great set of stores.

We have invested in new ace design.

These are inviting, and why will we not get the growth when I am a neighborhood store.

So whether it is a delivery or a takeaway, and when we spoke to consumers, it was very clear at this high inflationary environment they are looking for value, and therefore, it becomes easy to marry the two.

If I have a store, which is next door on my way going to the home or office.

If I have great value proposition I will go in to either eat or for carry out.

Stores that are not inviting, which are older, more than 7, 8 years old, they do need a refresh look and I think more I would say looking at our internal measures and what customer are telling us, less about competition.

Sheela Rathi

Understood.

Just a follow up on this is currently as you have highlighted in the presentation the share of delivery is about 2/3 and Dine-in is 1/3.

Is there an ideal ratio you have in mind which you would like to keep over the long run, whether it is 50-50.

Or is there something else here.

Sameer Khetarpal

In the short-run, I would want the Dine-in to get to 40%, and then take stock from there.

It also helps by the way I think of some of the earlier questions, it reduces the burden on splitting the store.

Because delivery does become a bottleneck at many stores because you cannot add number of bikes or the right time to start increasing.

So I mean, in the near-term we do want to get to 40%.

Sheela Rathi

My final question would be, are we seeing some improvement in the demand trends because we have already done with the month of January.

I am not looking for any numbers, but just qualitatively, are we seeing an improvement with the efforts we have made and the new innovations we have done.

Sameer Khetarpal

The uncertainty continues and wherever we are focusing on whichever cities we are focusing on those are seeing a lift.

So it is about deploying our internal strategy that is the only bottleneck at the moment, again like I said there is so much of untapped opportunity we need to focus on that versus only talking about the demand scenario.

Sheela Rathi

The demand trend still continues to be weak.

Is that what I hear correctly?

Sameer Khetarpal

Yes, it continues to be uncertain and between like December and January there is not a material change.

Sheela Rathi

And versus November it would be much better.

Sameer Khetarpal

Yes, I think like Ashish said December was better than November.

November seemed like an aberration in the whole when I look at the entire last 24 odd months.

Sheela Rathi

Thank you very much.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Shirish Pardeshi from Centrum Broking.

Please go ahead.

Shirish Pardeshi

Hi!

Good evening Sameer.

Thanks for the opportunity.

Just a quick two observations when I look at last 2, 3 years, we built a very solid digital asset, and then we saw the traffic is humongous and then COVID is behind.

Now what we have seen over the last 5, 6 months, we are now maintaining that traffic and you are building how we can get the depth of the customers.

So we started Cheesy Rewards and then now we are saying we will deliver in 20 minutes.

So one observation is that we have built a strong traffic, but the retention of the customer is not visible or rather that is declining.

This is just purely an observation while interacting to a few stores and on ground, and then you build saying that we are now offering that instead of Rs.99, we are giving single serving at Rs.49.

So to my mind, I think the second observation, which is there and having spoken to customers rather in my house also the price value summation somewhere is a weaning out and retention of customers is one of the big challenge or pain point for us.

So is this observation correct, and that is why I am saying that 0.3% LFL growth is going to be very weak and you are saying confidently 6% to 8%.

So these Cheesy Rewards and maybe you can say the 20 minutes delivery and now Rs.49 is short-term fixes.

But in the long or medium-term do you think really we need to do something better or extra to get that 6%, 8% target.

Sameer Khetarpal

So let me firstly say that if we deliver a vast majority of our pizzas under 20 minutes, that is a structural advantage.

It is not a short-term initiative, it takes years of preparation to build the store network and automate the store processes, have the right training and manpower tools to actually deliver on a 20 minute promise.

So first is that it is not a short-term piece.

One can argue about Rs.49 because competition can drop prices and create it, but at Rs.49 to maintain the gross margin is again structural.

I would not say it is a short-term gimmicky kind of a thing.

Now specifically to your question that there are consumers, maybe like yourself, who are not driven by Rs.49 price point, they are driven by better experiences or either a wider range, looking for a gourmet pizza or looking for local flavors or something unique.

That is the menu innovation that, we continuously want to do, and to kind of remind you, we launched Paratha Pizza then it was the East range with Kasundi, Kosha and Malai, gourmet pizzas.

So we are also constantly innovating for customers who are more upwardly mobile and looking for a better experience versus value.

So the beauty of our stores in neighborhood and our digital effects and CRM, we can customize our communication to the cohort that we are present in or we are targeting.

Shirish Pardeshi

I think that is exactly my follow up question is that we have done the product intervention.

So will you be able to share these innovations, what has come after COVID period and specifically over 17, 18 months.

Is that new innovation is driving the growth, because I am not sure the product intervention what we have done actually is justifying that 0.3% LFL growth.

Sameer Khetarpal

Of course, there are other factors too.

So something you see that growth in delivery, and if you tease out Dine-in and therefore we have to fix Dine-in.

Would product alone satisfy, I mean the answer is no. You have to have better experience inside the store, your stores need to be modern and relevant competing with the competition.

So again the strategic pillars are very simple look at customers what they are demanding in cohort they are demanding value give them the value in cohorts, there are many Indias, there are many who are looking for different cuisines, different flavors, then there are customers looking for gourmet pizzas, innovate on that dimension, engage them with technology and when the service is being delivered give a very consistent high quality service.

So if we do all these three Shiressh, we will be able to tap that growth.

So I do not know whether I have answered your question or not.

It is not one silver bullet is what I am trying to say all three have to come together.

Shirish Pardeshi

No, I understand, and you justified saying I completely think with but my industry experience tells me that and that is the last question, which I am asking you, rather than giving discount and do the customer engagement and if there is a price relevance or price commission in the consumer mind, which is where the customer retention is a big challenge why not instead of drop the delivery charge or give the straight discount or drop the prices and get the traffic back.

Sameer Khetarpal

So I take that as a suggestion.

I think at the moment, like I said, we have done extensive consumer reach.

They look at the landed cost to them for a similar size of meal or a pizza.

So if we have to, if we are learning that we will take those calls at the moment, at least this delivery charge I think during the pandemic delivery charge has become a norm and acceptance.

So why put pressures on the margin and not innovate on the menu that is our approach.

If we learn something new we obviously will look at it, but at the moment, no plans to take out delivery charges.

Shirish Pardeshi

Thank you Sameer and all the best to you and the team.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Akshen Thakkar from Fidelity.

Please go ahead.

Akshen Thakkar

One slightly strategic question, and apologies if it is going to be repetitive to what you guys answered, but just help us set the context of what guardrails to gross margins on your business are, I mean, you had a period where it went up quite a bit with the introduction of delivery charges etc., and obviously you are facing the pressure, you are doing the right thing by not taking up prices, so putting pressure in near-term but when you are thinking about this business three to five years out maybe on EBITDA margins or on gross margins, whichever way you are comfortable with.

Just help us understand what guardrails are what is the lower bound and upper bound that is sort of the long-term question, and the short-term question really is how do we look at the increase in depreciation for the quarter.

It is significantly more than the increase in the store count and even if I adjust whatever do some calculation on Pre-Ind AS depreciation as well.

That number seems to have gone up quite a bit over year.

Just wanted to understand if there is any onetime items in depreciation or that is a recurring number that we should be looking at.

Ashish Goenka

On gross margin, I think as I alluded earlier, it would be difficult to give near-term guidance.

But I think in the medium-term our target would be to be at a range of 23% to 25% on the post Ind AS EBITDA margin I think that is our endeavor and if all the things fall in place, as Sameer was highlighting earlier there is no reason we should not get to that.

I think your second question was on the depreciation.

So I think our depreciation has largely three components almost 70% plus increase attributable to new stores - combination of both the Capex and the lease increases.

This quarter I think 20% of the increase is also abnormal because we had a onetime charge accelerated depreciation for two businesses that we have taken a call to unwind this quarter, namely ChefBoss and Ekdum!.

So there was an artificial impact also this quarter but almost 70% of the increase is attributable to new stores around 10% attributable to the investments that we are making in supply chain and about 20% was a one-off charge that we have taken on account of accelerated depreciation.

Akshen Thakkar

Thank you.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Chirag Shah from CLSA.

Please go ahead.

Chirag Shah

Thanks Sameer and team for laying out your plan on the business ahead.

I have just a couple of questions left.

So first on the city penetration.

On the store expansion, if I look at we have practically added 100 plus cities in the last two years.

Now if I just try to see in context of what the food aggregators are saying, effectively 99% of their business is coming from the top 300 cities and then there is a long tail.

Given that context, is there much upside left for us in terms of the geographical expansion into newer cities, and you already mentioned about the ROIs and guardrails that you have, but are the ROIs and payback period in the lower tier cities now comparable to what we have right now and is there a consumer resistance to pay for higher delivery charges.

Sameer Khetarpal

I think I will let Ashish answer the first part, but the second part on the consumer propensity like in tier three, tier four.

So in tier three, tier four the Dine-in ratios are far stronger than tier one and tier two.

So naturally in many cities, if you take Daltonganj, Karwar or Latur, we will probably be the only organized QSR player so we have become a natural destination for consumers in those cities to come and grab a meal or hang out.

So the Dine-in portion is lesser.

At least from a consumer survey or feedback perspective we have not seen that consumers are not willing to pay for delivery charges that has not come out, and over a period of time we have also seen as consumers get used to Domino’s service they do orders so in fact the frequency also goes up.

So that is our answer on tier three, tier four cities.

Ashish you can answer the first.

Ashish Goenka

To add to what Sameer said and if you look at the growth profile at least in our experience we do not see a significant differential between tier three, tier four versus tier one and tier two, and in terms of new stores, Chirag, in fact the paybacks and return on investment are slightly better in tier three, tier four, simply for the reason that the operating costs tend to be much lower.

While the ADS in these towns tend to be a little lower than tier one because the operating costs are low we are able to recover our Capex in under two years.

So the paybacks are less than two years.

So the economics work very well for us and therefore we do see an opportunity in these towns as we expand.

Chirag Shah

To my point that we have already crossed the benchmark that the food aggregators are talking about in terms of the revenue contribution from the cities, is there a long headroom for us to grow geographically.

Ashish Goenka

So as we have said earlier, there are clearly 500 to 600 towns which have more than 1 lakh population and to create a profitable Domino’s store, we need a catchment of about 10,000 households so in terms of macro opportunity if you ask me there is clearly close to 600 towns in India that we can go to.

Of course, we will be very calibrated in our expansion, and we have to make sure that we are getting the payback.

So we will keep going to these towns as long as we are able to get our payback within two years and therefore I do see significant headroom.

In terms of contribution to business of course tier one and tier two will contribute bulk of the business given the density of stores that we have in these cities.

For example our top ten cities alone would contribute to bulk of our stores, but in terms of penetration and presence I do see an opportunity to keep expanding into tier three, tier four.

Sameer Khetarpal

Most of these cities are single cities, single store cities.

So even I would say we have seen many towns where the store does exceedingly well and in third year, fourth year there is a pressure to add another store.

So again we are guided by the economics of that individual unit that is being put in and the only reason to expand should be that we have strong demand signals.

Chirag Shah

When I look at the Capex numbers that we are talking about for the next two years, there has been a significant increase.

Now of course, you are also talking about improving in-store experience.

So is there a large component that we are now placing in terms of Capex for improving the in-store experience and then there is a 500 Crores to 600 Crores number that we have put for the digital initiatives.

Can you just explain where this amount would be going in.

Ashish Goenka

So, bulk of the Capex would still go in our store expansion because as we would look to expand Domino’s and Popeyes.

So bulk of our Capex will still go into store expansion.

Relatively smaller contribution, of course is going to reimaging.

We have been reimaging our stores in the last few years, but of course we will step up the pace of that reimaging.

Also, a sizable chunk will also go into creation of some of our new commissaries because as I had said in the past, the last commissary we opened was in Greater Noida and that was in 2018.

Since then we have significantly expanded our network and therefore we will need to keep creating back-end capacity as we expand our store network.

So the first commissary which is going live next year is Bangalore that itself will entail an investment of about 250 Crores and then we would look to expand footprint or make further investment in some of other commissaries like Mumbai which may come in next year.

So there is a full road map that we have to of expansion that we have planned out for the next two to three years.

So we will see a slightly elevated level of Capex as we invest in creating this backend capacity.

But these are typically step investments because once you invest, then you do not need investment for the next three to four years.

So these will not be like recurring investment every year.

This will be like more like step investment where we will see a slightly higher Capex cycle over the next two to three years before it normalizes.

Sameer Khetarpal

Also on reimaging, see, you are reimaging the customer area, and you are not reimaging the kitchen because the oven, the make line, the refrigeration, the chillers those are reused.

So it is only the front of the house which is typically being reimaged, and in many cases also it is not the entire front of the house.

So I think we look at the store and then design.

So it is not as capital intensive as opening a new store.

Chirag Shah

Got it.

Very clear.

Just one last question on the Cheesy Rewards Program.

Can you just help me explain, I mean, the cumulative membership that we now have on the Cheesy Rewards program, is 10.6 mn practically touching the MAU numbers that we have.

So how much more can we extract from the Cheesy Reward membership program.

That is number one, and number two when we launched this we were very clear that it would not lead to margin dilution.

Now given that we are now two to three quarters into this, I mean, is there a margin impact and if not is it because of the higher frequency that is now driving it.

Or is it because we are replacing other discounts with the Cheesy Rewards spend that we have.

Sameer Khetarpal

I will not compare 10.6 million enrollments of Cheesy Rewards to 11 million MAU for the very simple reason that customers come back and shop multiple times in a year and I should compare it to total customer base which we do not disclose, but that number is materially higher than the MAU.

So we are acquiring customers right at a fair clip.

So I think there is huge headroom, what I am delighted is the engagement of loyal remember that they find this enticing enough to come back and give their share of wallet to Domino’s.

So that bit is exiting and the headroom is huge I will not compare this to MAU at all.

Ashish Goenka

Just to answer your question on margin.

So number one, I think this program is more cost effective because you give a product free and that is also on a redemption based gratification which comes in after almost six orders.

So if you see the overall discount that we have actually putting down in this scheme is not very high.

That is number one and number two we are substituting it with other discounts, and therefore it does not have a negative impact on margins, and third is that we have also been able to calibrate and make it more targeted, therefore keeping our overall impact on margin minimal and it also pays back because we get higher frequency.

Chirag Shah

Thank you very much and all the best.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, please note we will be taking our last question now.

That is from the line of Avi Mehta from Macquarie.

Please go ahead.

Avi Mehta

Thanks for the opportunity.

I just wanted to clarify on the Capex bit.

You had indicated last time that you are doing about 650 - 700 Crores in the next 12 months and then there was subsequent release about 900 Crores in the next 12 to 18 months.

Could you just elaborate what is the Capex plan and help us understand that more.

Ashish Goenka

I think in line with what we said, in this fiscal, we will be in that zone of 650 Crores to 700 Crores and as I just explained we will have probably a similar level of Capex in the next financial year as well.

If you put the two together in the next 12 to 18 months, we are looking at the number of 900 Crores, and as I explained earlier I think bulk of the Capex would be attributed to higher store openings followed by investment in our commissary followed by investment in digital and followed by some of the store reimaging that we will do.

Avi Mehta

Understood.

The second question is I wanted to kind of just understand the comment that you made about increasing marketing intensity to drive demand.

Just wanted to understand if this is something that you are also seeing across the industry, say, from aggregators or other brands or is this something that is just that you have done.

If you could help us understand that from an industry perspective.

Sameer Khetarpal

I cannot comment about the aggregators or competition as I will be very anecdotal, at least for us, from a communication standpoint towards Dine-in, we have not done that for the right reasons because of the pandemic.

So now taking that as a communication targeting towards Dine-in, I think it is channeling more marketing spends towards that particular format, and at overall level where we do, we had cut back on few expenses.

We will make sure that we remain relevant as customers are mobile, they order everywhere.

So we will invest in.

But it is not something that is going to be materially that we were not doing a quarter or two ago.

It is more channeling and slight uptake in marketing.

Avi Mehta

So it is not promotions, it is more marketing.

Sameer Khetarpal

That is correct.

Avi Mehta

Prefect, sir.

That is all from my side.

Thank you very much, sir.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, that brings us to the end of today’s call.

On behalf of Jubilant FoodWorks Limited, we thank you for your participation.

You may now disconnect your lines.

Note

This transcript has been edited for readability and does not purport to be a verbatim record of the proceedings.