Ladies and gentlemen, good day and welcome to the Westlife Foodworld Ltd Q2 FY23 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. If you need assistance during the conference call, please signal an operator by pressing star zero on your touch-tone phone. We would like to remind you that certain statements made by the management in today's call may be forward-looking statements. These forward-looking statements reflect management's best judgment and analysis as of today. Actual results may differ materially from the current expectations based on the number of factors affecting the business. Please refer to the safe harbor disclosure in the earnings presentation. I now hand the conference over to Mr. Chintan Jajal. Thank you, and over to you, sir.
Thanks, Rutuja. Welcome everyone, and thank you for joining us on the Westlife Foodworld Earnings Conference Call for the second quarter ended 30th September 2022. I am Chintan Jajal, Lead IR at Westlife. From the management team, I have with me Mr. Amit Jatia, Vice Chairman, Ms. Smita Jatia, Managing Director, Mr. Saurabh Kalra, Chief Operating Officer, and Mr. Akshay Jatia, Executive Director. We will kick off today's conversation with Smita sharing her thoughts on overall business progress and outlook. This will be followed by us through operational, financial, and strategic highlights. Post that, we can open the forum for Q&A. We will be referring to the earnings presentation and financial releases, which are available on the stock exchange as well as investors page of our website. With that, I now turn the call over to Smita. Thank you, and over to you, Smita.
Thank you, Chintan. Good afternoon, everybody. A hearty thank you to each one of you for participating in the call today. Hope you are doing well. With the quarter two FY 2023 results, I am happy to report that Westlife Development, now Westlife Foodworld, is all set on the path to the next phase of growth. Despite external headwinds, we were able to produce strong and consistent results for four straight quarters. We have been continuously beating our standards, surpassing our goals, and have achieved the required competitive advantage by capitalizing on our strengths in cost leadership and operational efficiencies. Our performance clearly demonstrates that we have established a resilient business that has produced results and is positioned for the long haul. Our coherent strategic approach has enabled excellent restaurants and create a strong and enduring brand.
We are keeping a close eye on changing market trends and are committed to renewing ourselves through disruption. We are bullish on our expansion plans and are on track to opening over 200 stores in the next three-four years. Our organizational agility and our strong focus on execution makes us well-positioned to deliver accelerated business results and create long-term value for all our stakeholders. In closing, I would like to express my gratitude to all our employees and partners for their outstanding work in navigating this environment and offering our customers excellent value. As an organization, we commit to concentrating on our core values of operational excellence and productivity, enhancing our emerging digital advantages, and prioritizing the health and safety of all our customers and crew. From the entire Westlife family, I thank you for your support and for placing your trust and confidence in us.
I will now request Akshay to share the operational highlights of the quarter gone by.
Thank you. Good day, everyone. I hope you had a great Diwali break with your loved ones. I'm pleased to highlight that this is the fourth time in a row that we have outperformed outstanding results across key parameters. A strong performance in the second quarter, irrespective of macroeconomic and inflationary challenges, was underpinned by steady growth across West and South markets. Our revenue at INR 5.72 billion, grew by 49% year-on-year and 6% Q-o-Q in Q2 FY 2023. This was backed by a strong 40% same-store sales growth. Even on a pre-COVID base of Q2 FY 2020, we saw a healthy 44% rise in sales. Our average annualized sales per store continues to grow and reached a new high of INR 67.5 billion in Q2.
If we dissect the performance, we can see that our meal strategy, our focus on omni-channel model and growth in emerging towns is playing out really well for us. We sustained QSR traffic share gains in most of our markets by focusing on elevating, doubling down on our core equities of burgers and chicken. It was also heartening to see that we achieved broad-based growth across all store types, with mall stores picking up the pace sequentially. Our systematic and well-thought-out approach to network expansion is helping new stores achieve required milestones much faster than the past. In fact, non-metro towns continue to post 1.6x growth versus metros on the pre-COVID base of Q2 FY 2020. Before talking about channel-wise performance, I would like to highlight a nomenclature change.
We have transitioned from using dine-in and convenience to using on-premise and off-premise channels, as it's easier to understand for a broader set of stakeholders. However, there has been no change in the underlying definition or numbers. Moving on to slide number six. We can see that the momentum has continued across channels with the on-premise business regaining strong traction and delivering healthy growth, while the off-premise business continued to rise steadily, creating a new high point for the business. Our on-premise business grew 96% year-on-year and 24% over the pre-COVID levels. The off-premise business increased by 12% year-on-year and 88% over the pre-COVID base. While our overall delivery channel achieved the highest ever sales this quarter, our own McDelivery platform also continued to see increased consumer affinity and posted 1.7x growth versus 3POs, thereby increasing its share.
Our cumulative app downloads surpassed 21 million or INR 2.1 crores this quarter. Further on Slide 7, I see the key highlight is that we have delivered strong profitability despite inflationary headwinds. We were proactive with our pricing decisions instead of being reactive to external market conditions. Our pricing strategy, along with our supply chain initiatives and improving product mix, led to a 118 basis points sequential increase in gross margin to 60%. The gains further flow down to restaurant operating margin or ROM, which stood at 22.7% for the quarter as against 21.6% last quarter and 17.4% in the base quarter. We recorded operating profits of INR 988 million in Q2. Operating EBITDA 18.3%, up by over 500 basis points versus last year.
On a sequential basis, operating EBITDA margin was up by about 615 basis points, backed by enhanced operating leverage, partially offset by higher staff costs. We generated a solid INR 680 million in cash profit after tax in Q2. I would also like to highlight that we took a 2% blended price hike in October. While the prices of key commodities like oil witnessed softening, wheat saw continued pressure. Having said that, overall inflation in our raw material basket has been relatively moderating. Sales through digital channels such as our mobile app, self-ordering kiosks and delivery accounted for more than 55% of total system sales. This signifies that we have now greater business predictability owing to our omni-channel approach.
This strong multi-channel and multi-day part strategy also allows us to serve our customers whenever and however they need us, no matter where they are. We have added six new restaurants and entered four new cities during the quarter. With this, we now have a total of 337 restaurants, 274 McCafés, 68 Drive-Thrus and 138 EOTF restaurants across 62 cities. We remain confident of adding 35-40 new stores in FY 2023. All in all, our menu innovation and omni-channel strategy has helped us deliver over INR 63 million of average sales per store and nearly 17% of operating EBITDA margin in the trailing 12 months ended September 2022. We maintained a strong balance sheet and liquidity position. Our operating performance will continue to generate healthy free cash and fuel our growth in the future.
We have also been working hard to further strengthen our brand trust and business through menu innovations, business initiatives such as the Real Food, Real Good campaign, and McDonald's in Every Celebration, among other things. We have launched some brand films for the festival season under the umbrella campaign of Meals make Families. Finally, at Westlife, we go to great lengths to ensure that ours is an inclusive organization and a great place to work. In keeping with our vision, I am thrilled to announce that we were named recently one of the top 50 India's Best Workplaces for Women. This year also marks the sixth anniversary of Ronald McDonald House Charities in India. This program aims to keep families together in tough times. Since its founding, we have touched the lives of 35,000 families through RMHC India.
We will continue to build on this initiative over the next few years. With that, I now hand over the call to the moderator and open the forum for your questions.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star then one on the touch-tone telephone. An operator will take your name and announce your turn in the question queue. Participants are requested to only use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Abneesh Roy from Nuvama Institutional Equities. Please go ahead.
Yeah, thanks. My first question is on your gross margin going ahead. Already it is higher than pre-COVID. Of course, wheat and milk prices have been highly inflationary.
I wanted to understand in terms of sourcing of the beef, are you already well placed in the current crisis that doesn't really impact you too much? Milk of course is quite inflationary, and where it's not possible to have too much of long-term contracts. Any price hike you need to sustain the current growth margins?
Thanks, Abneesh. I'll have Saurabh Kalra, our Chief Operating Officer, to answer the question.
Yeah, hi, Abneesh. I think Amit has made it abundantly clear in the last few years commodity cycles happen. We don't see that impacting our gross margin on a month-to-month, year-to-year basis. Like you said, milk has been under pressure, and we've already taken a 2% hike in October in order to manage all the inflationary pressures which were coming. We do not see any further impact coming because of any of these commodities. One or two commodities, because we sell so many things, go up and down, but we are able to easily manage it. I do not see our gross margin coming into any immediate pressure from where we see it.
Sure. I have one question on your delivery business. Another QSR said that they saw their highest share from their own app. They've been consistently seeing a movement from aggregators to customers ordering from their own app. In your case, are you seeing similar or you are not focusing too much on this?
I think Akshay, in his commentary, already spoke about our own app delivering better than the 3PO players, which is the likes of Zomato and Swiggy. However, we would not like to believe, while we will continue to strengthen our own app towards the loyalist base, we do see that there is a play in terms of our strategic partnerships with the 3PO, so that we don't leave business on the table. We remain engaged, even with the 3PO players, to continue working on increasing the delivery size on the 3PO players. Plus also on our own app, continue to work on the value proposition and continue increasing the base of users on our app vis-a-vis 3POs.
Sure. Last question is on your other marketing initiatives. With this Drive-Thru in terms of 120-second service guarantee, what is the thought process on this, and is this very different versus, say, any other QSR in terms of a promise? In other global markets, is this a big differentiator for the customer?
Number one, I don't think too many competitors, competitive players have the number one omnichannel player as far as Drive-Thru is concerned. We already have around 60+ Drive-Thrus operating across. One of the use cases which we see people using Drive-Thru for is when they are in a hurry. For us, we are very, very happy that versus pre-COVID, we have changed the momentum of Drive-Thru dramatically. While we don't give the breakups on the investor call, but we've dramatically increased, exponentially increased our Drive-Thru volumes. We are committed to opening more Drive-Thru as a percentage of portfolio when you see our new store openings.
We are very happy about the place we are in as far as drive through is concerned.
Sure. That's very helpful. That's all from my side. Thank you.
Thank you. Thank you, Abneesh.
Thank you. The next question is from the line of Avi Mehta from Macquarie. Please go ahead.
Hi, Amit and team. Thanks for the opportunity. I had two questions. First was on the store addition. You know, we have done first half only about 10, 11 stores, and you've said your guidance for 2023 remains at 35, 40. I just wanted to understand what is there a delay that happened, which is why first half was so skewed in the second half? What is it that gives us that confidence? That would be my first point. Just trying to understand this better.
Sure, Avi. It's a great question. You know, I mean, we've seen this trend across the board, across markets. Typically, it, because the cycle is a capital cycle, and at least the McDonald's stores are 3,000 sq ft, we are doing a lot more Drive-Thrus. Acquisition of land, our contracts are 25 years, so the cycle is long. Typically it all ends up in the last two quarters. Therefore, we still maintain very strongly that we will be able to deliver the 35-40 that we talked about. The pipeline is in place, the ground breaks are happening, and therefore the opening will come through as well.
What would the CapEx come down? Would you have any number in mind when you think of the full year, how much should we be penciling, if you could help us with that?
CapEx?
Yes.
It will be in the range of INR 2 billion-INR 2.2 billion.
Okay, perfect. That's an input. The second bit was essentially just, you know, taking this further. With new stores now accelerating in second half, I mean, I remember in the last call also you said that the annualized per store sales should be more at the 60-65 range. And first half has been 67. Is that, you will still maintain that 60-65 because your impact should start coming in during the second half because you're gonna have more new stores. Is that the right understanding?
So-
If yes, how will this filter to margins?
We are confident of maintaining the INR 67 million mark that we've talked about. One, our new stores are opening much better. Number two, we have a huge under-penetrated market. In fact, many times when we are entering smaller cities, we sometimes do better than that as well. You know, for example, when we opened the airport. The average was much greater. We have a couple more stores coming at the airport as well. Drive-Thrus normally open better. It's all factored, and we are quite confident of maintaining the INR 67 million average unit volume.
Perfect. I mean, if I were to paraphrase it's more like the new stores are also doing better and your new launches that you have just checked in, that traction also continues, which means the existing stores is also kind of doing at a much better pace than what we imagined in the first quarter. Correct?
Correct.
Last bit, Amit, just, you know, you have announced 2% price hike. I mean, I recollect the last time, I know that time was very different, but you were one of the few ones to use your supply chain strength to make price hike. You were actually one of the few ones that, you know, went against the market, and you saw good profits and gains. This I'm talking about the 2010 period. I just wanted to kinda get your take, because you've taken a 2% price hike, which means clearly the situation is not that weak, but I would love to hear your comments on how you want to approach this?
I'll explain to you. To my mind, you know, pricings are very much an art, and I feel we've handled it very well when I look at our 25-year history. Firstly, we still maintain that we stay within the 3%-5% price hikes, but I've also learned the hard way not to fall back on price increases, especially when there's an opportunity to take it and inflation in the minds of the consumer is still there and other peers have taken much greater price hikes, because you may not be able to take it later. First and foremost, you know, in 2008, 2009, 2010, when, you know, we doubled our same-store sales, we stopped taking price hikes, and we paid for that dearly in 2013, 2014 and so on.
We were forced to take a 10%, 12% price increase, which was a rare situation. Also, in the last two years, we did not take any price increase at all, and we didn't wanna fall back on that. Therefore, first thing, our three pillars of improving growth, margins continue, which is control on raw costs, product mix, and the new price increases. The same pillars continue quite strongly, which is why in the industry, I'm proud to say that we are probably gonna be the rare one that has improved growth margins even in this quarter. Number two, you've seen that top line's not been impacted. I mean, 40% same-store sales growth in the quarter and 49%, top-line growth in totality. While maintaining our sales, we've been able to get a margin growth.
We feel that's not a bad situation. Moving forward, it goes back to the 3%-5% a year. I hope that answers your question. The important thing is we are not changing our strategy or our thinking around how we need to move forward.
If I may just probe you further, Amit, is it fair to say that you still remain the cheaper option because others have taken price hike? Is that what you're alluding to?
No, no. See, for example, it's value for money. You know, you look at the gourmet burgers.
Yeah, yeah. Value for money. Correct. Is that the fair way to look at it, value for money? Sorry. Go on.
No, I was just saying, see value for money, gourmet burgers, for example, even at INR 200 is quite value and people are buying that. So ROIC margin on that is quite strong. Similarly, you know, McCafé has come back quite strongly and that is improving our margin is pretty much what happened in the past. I'll let Akshay and Saurabh add a couple of thoughts they have.
See, we don't look at it as the cheapest option, right? Because we're not playing a price game. We're playing a value for money game, where value for money means many things, and we've discussed this before around it. It means pricing, it means experience, it means quality of product. In that equation, yes, definitely, we are showing differentiation and we are showing, you know, very good customer response. Pricing is a strategy and, you know, we've used it the way that it is supposed to be, hence it's been well received by customers.
On top of that, even if you take our gourmet burgers, right, like the example we were talking about, even at, say, you know, an average price of INR 280-INR 320, people are seeing it as extreme value because it's not only, you know, well priced for them in the relative basket, it's quality, it's filling, and it's an occasion with their families. That's how we look at it, and that's how we're looking at managing both volume as well as margins.
Perfect. Cumulatively, we would have taken what price hike? That's the last question from my end. Thank you.
About, uh-
From sale. Okay, that's all. Thank you very much. Thank you.
Thank you all.
Thank you. Next question is from the line of Kapil Jagasia from Edelweiss Broking. Please go ahead.
First of all, congratulations on a great set of numbers. My first question is, just wanted to understand this 1.7x growth of McDelivery in this period of strong performance of dine-in channel. What was the growth number of McDelivery in previous two quarters, and any promotion campaign which has worked for you or any other promotions done for this delivery channels?
Okay. I'll have Saurabh answer this question.
Yeah. So obviously from a pre-COVID standpoint, we are seeing 1.7x growth in sales on our McDelivery channel in terms of percentage. If you look at it, we do multiple things. For example, we launched KitKat McFlurry, and that helps us both in dine-in and delivery business altogether. It's not that our menu strategy is only playing out in dine-in or delivery. How we look at it, like I said earlier also, is look at it in two parts.
Delivery business is an important business in which one lever is to work with the third party operators like Swiggy and Zomato and continue strategic partnerships with them to maximize sales. The second is from our own app standpoint, look at what our loyalists want and interface and user experience continuously. We have done a lot of work around that, and we see that giving us good results in terms of our app growing dramatically more than the growth we saw on 3PO operators. Therefore, the percentage which our own app contributes has also become significantly high.
Okay. Thank you for that. Just like McCafé's, would McDelivery also be available in 80% of the store network? Like, what is the number here?
Yeah, yeah, absolutely. Almost 300 stores have delivery.
Yeah.
That's 90%.
90%. Okay. Just one bookkeeping question from my side. This employee spends are up by 25% sequentially. Any one-offs here?
Basically, you know, you have to look at it's not employee cost, it's all G&A. Sorry, you wanna, Saurabh, you wanna take it?
Basically, there are no one-offs in here. It's basically the merit increases come in the current quarter.
Yeah, you know, just to add to that, obviously, you know, during COVID and the last few years, there's been a lot of, you know, pressure on keeping our costs in check. Obviously, the merit cycle has come up, and we wanted to appropriately, you know, reward and manage that cycle. It's in line with, you know, what we expected, and there are no one-offs. It was, you know, part of our whole high performance culture.
Yeah. Very shortly, you will also see the investor presentation when we do an Investor Day. In that, we are already planning ourselves up for the next five years of our new vision, and therefore we're adding new skills in the system and making sure we know whom do we want to keep in this journey. Hence there is a marginal increase in employee costs, but absolutely in line with what we had planned for.
Okay. Thank you. Thank you for that. Thank you.
Thank you. The next question is from the line of Percy Panthaki from IIFL. Please go ahead.
Hi, sir. In response to a previous question on CapEx, just to get this right, did you mention that it would be about INR 220 crore of CapEx this year?
Between 200 to 220 is what I said.
Okay, sir. Would it be possible to give some color on the breakup of this? As in how much of it could be for setting up new stores, how much for renovation, how much for any other IT projects, et cetera, et cetera?
No, we don't share breakup on CapEx.
I mean, it's used for, like you said, new stores, reinvestments, and other CapEx.
Okay, also, sir, just wanted to understand your margin journey. You have already reached about 13.5% on a pre-interest basis. What's your medium-term target here, and what could be the main contributors to the expansion going ahead?
Basically, you know, we had laid out a vision 2022 in 2016 when our EBITDA margins were 6% or 7%, and we had boldly talked about 13%-15%, and here we are. I'm quite pleased that we've actually delivered pretty much on all parameters. While aspirationally I've always maintained 18%, but we have an Investor Day coming up and we will give more color on vision 2027 in that particular Investor Day, which is not too far away.
Okay, sir. That's all from me. Thanks and all the best.
Thank you, Percy.
Thank you. The next question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.
Yes, sir. Congratulations on a strong execution on the AUV front. Historically, there is a 5%-10% increase in revenue per store from Q2 to Q3, and incrementally we have taken 1% on the high side as well. Can we expect these historical trends to continue this year Q3 as well?
Absolutely, because our pricing strategy so far has worked, you know, for all these years, and we have pretty much a very good balance between art and science of pricing. We are quite smart about how to do it, and so far our results indicate that it worked quite well for us.
Got it. For FY, our CapEx is closer to about INR 1.3 billion, and we have opened about 11 stores with an annual target of 35-40. Since you mentioned that you'll be entering INR 2 billion-INR 2.2 billion, so is a significant part of this CapEx in the CWIP?
Devanshu, what you see in the cash flow is the payout of CapEx, not the actual CapEx. Okay. What I have achieved, so it will include the advances to capital vendors and everything. Hence, the cash flow will not give you the correct picture of how much CapEx has actually happened. What Amit says still holds good. That my CapEx, when he says it's what we like capitalize at the year end. Okay. It has nothing to do with the cash outflow and inflow.
Got it. Understood. Lastly, as you explained the reason for higher employee costs, does the same explanation apply to higher head office costs as well, for this quarter?
Yeah, absolutely. The same thing. You've got to look at, you know, things like employee costs, because what happens is as the business grows, you start sort of hiring part-time workers, you train them. You've got to look at it over a period of six months to one year. If you look at corporate G&A, which we are proud to say as the only company that actually spells it out, because we really care about controlling it's about 5% of sales, which is very much in line with global trends.
Got it. Thank you. These are my questions. Thanks for your time.
Thank you, Devanshu.
Thank you. The next question is from the line of Chirag Lodaya from ValueQuest. Please go ahead.
Yeah. Thank you for the opportunity, and congratulations on the set of numbers. Sir, my first question was on McCafé. Can you just throw light on how McCafé is doing now?
McCafé has come back because, you know, that's pretty much an in-store strategy from our point of view. You know, McCafé was just getting out when this COVID thing happened. Firstly, I believe the opportunity on McCafé is at least double or triple of where we are at, as McDonald's and coffee continues to build in the consumer's mind. With in-store growing at 96%, you know, McCafé thankfully has kept in line with that and has done
Okay. It's been now about pre-COVID, right?
Yeah. Almost.
Right. Sir, in terms of gross margin, we have improved our gross margin, but, we are still, you know, below our historical levels. With McCafé also doing well, is it fair to assume that, you know, going ahead will improve gross margin as well?
That's a constant endeavor. I do believe that we are at a very healthy number. I've maintained this for the last five years, but yet we do get 100-200 basis points here and there movement. Is that a dramatic focus to grow gross margin? No. It is to maintain and grow at small bits. The bigger objective for us is to grow our top line. You know, currently we have 6.7 average unit volume. The idea is aspirationally to grow that quite nicely, and we will share details of that in our Investor Day. I think that's the bigger focus, not that gross margin improvement is not. But we are in very good territory for our type of business. Okay.
Within QSR, by the way, there are different sectors that have different sort of baselines around growth margin, employee costs and things like that. For our industry, that is the burger sector, we are in a pretty strong position on growth margins.
Got it. Just lastly, what kind of inflation we are seeing in, you know, CapEx per store?
CapEx per store is pretty much in range with what we are talking about. There had been pressure because there is an imported component. The dollar has appreciated. Simultaneously, you know, as I've maintained this forever, that we recognize that rupee keeps depreciating. We know that. If you know something and you don't act on it, then what's the point of having sort of people involved? We simultaneously take cost out. Typically it had been in the past, you know, between INR 2.5 crore-INR 3.5 crore. As we've added business models, McCafé has now become a standard. Experience of the Future has become a standard.
Again, we want to give more color on the cost structure to build a restaurant in our Investor Day, you know, where we will share what it's gonna look like for the future.
Got it. In terms of store mix, how it is trending now? As you mentioned, you know, new stores are doing much better.
It's trending very well because if you look at our return on invested capital, you know, it's, we're doing very well over 30%. That clearly reflects, you know, how the paybacks are looking like. The good news is that stores are opening very well and therefore the payback cycles are only getting better.
Right. In terms of years, can you help us understand?
In terms of years, it's normally four to five years.
Okay. Okay. Thanks, and all the best.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants, please limit your questions to two per participant. The next question is from the line of Prateek Poddar from Nippon India Mutual Fund. Please go ahead.
Yeah. I just wanted to check the 2%-3% price hike, is it across optimize and across channels, which means value to premium?
Sure. Saurabh will take.
When we say 2% price hike, obviously we don't take price hike equally across all our products. It's a weighted average, which is 2%. Some of it could be higher and some of the things might not have price increase. Obviously, that's the breakup which we don't share. But weighted average, we've taken a 2% price increase across channels and geographies.
You could confirm this is across channels or again, it's weighted average?
Across channels and geographies.
Okay. That's clear. Thank you.
Thank you.
Thank you. The next question is from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.
Hi, Amit Jatia and team. Thanks for the opportunity and hearty congratulations for the talk you have delivered. I'm pretty impressed with the numbers. Just clarification, I'm sorry, I have a habit of repeating. I joined a little late. What is the current inflation which we are seeing in quarter two? And that is towards the end of October or early October. Have you seen that, from the previous quarter inflation standpoint, we are seeing the inflation is coming down?
You know, I covered that in our commentary, and yes, Akshay will take you through that again. We have seen a relative moderation in inflation. While some key commodities like oil, fats is softening, you've seen pressure on other commodities like milk and wheat. What we can say is that, number one, you've seen volume growth. Number two, you've also seen margin growth. Despite taking price, we've been able to manage both volume, because it's been done scientifically, and margin, because we've played with multiple levers. There's pricing, there's cost initiatives, as well as product mix. As a result, you've seen us deliver, you know, very high SSG as well as, you know, our highest ever operating profits. That's inflation.
Essentially, I personally don't believe in looking at it quarter-over-quarter. As Akshay said, you know, some things go up, some things go down, and we cannot react to it. The question is that you factor in something and then you work towards taking costs out of the system regularly, and you stay ahead of the curve. That is how we manage it quarter-over-quarter. If you look at our history over 15 years and look at India's inflation and map that, yeah, I think 10, 15 years is a great timeframe for us to be confident that year-over-year we've been able to manage that quite well. It's hard to comment quarter-over-quarter.
No, I agree with your point, Amit. What I was trying to extract, say for example, the inflation in food is running 7%-8%. If you are assuming that the similar inflation is there, you have been able to just pass on 6%. It gives the arithmetic calculation that 6% you have observed or would have tried to do some internal cost synergies and engineering. I just wanted to understand that.
I mean, my point is that math does not work like that because you are reading a reported number around food, and that's not how it translates down at work and business. If one, we work directly with farmers and what is reported, I don't know what basket they are talking about. Plus our contracts are long-term contracts, and they don't change month -on -month and quarter -on -quarter. Plus we have price contracts, we cover, we hedge. I'm not able to give you any color around this 7% versus what ours is and so on and so forth. Important thing is, please look at our trends. We will manage it.
I cannot promise you quarter-on-quarter you will see management, but you will see over a period of time that we will continue to sort of manage inflation and hopefully keep our gross margin ahead of the curve.
Okay, my last question is on the digital demand. Obviously, you will not share, but I'm still making an attempt. What level of interest, or maybe if you can share, the digital demand is towards for value segment or it is for the premium segment or it is completely the mass segment which is driving?
It's across the board. See, we are an omni-channel business now. You know, we've very proudly stated that 55% of our business is coming from digital channels. When we say 50%, it can't be skewed in any direction. It's got to be a pretty holistic mix. You know, I mean, if you look at our Experience of the Future stores, if you look at all the work we've done around digital delivery, I've talked about user interface, making the ability to order more easier. All that is continuously growing the digital base. It's across the board.
Okay. Wonderful. Thanks a lot, guys.
Thank you, sir.
Thank you.
Thank you. Next question is from the line of Vishal Punmiya from Nirmal Bang Institutional Equities. Please go ahead.
Yeah. Congratulations on a very strong set of numbers and felicitations to the team. My question was.
Thank you.
My question was on the desserts portfolio. Now, if you look at the current portfolio, obviously it's a good mix of frozen desserts as well as to some extent muffins and cakes, even within the McCafé portfolio. What is the potential for this business? Or what is the potential for this category for us? Can it become a part of the meal that we offer? From that context, I just wanted to understand the potential of desserts portfolio.
Sure. You know, I'm quite pleased that if you look back in the period between 2016 and 2018, we kind of broke out the different categories in which there's opportunity for the McDonald's brand to grow. Beverages was not talked about because of McCafé. McCafé is not just about coffee. Similarly, desserts is something that we do quite well in. Most recently our McFlurry with KitKat. It's an amazing association with a very strong brand. When the two come together, you know, results just take off. McFlurry is a big winner and it's worked beautifully for McDonald's in many markets. Also, we have a dessert kiosk strategy. We don't talk about it because if we tell everything then we have nothing left for the future on a lighter note. We do believe that desserts in McDonald's can grow.
To my mind, I mean, from what I recollect, it's a $500 million-$600 million category for QSR, and I think we are reasonably well-entrenched, but we have a long way to grow in desserts. It's not been a crazily focused area for us. Like I said, you know, strategy is about where to prioritize, you know. You have to go after the biggest bang for the buck. As we've shown you in our presentation, about meals, and we've gone about it with chicken and with our gourmet burgers. On the quiet we're working on desserts, so more on that as what I call horizon two, horizon three for the future. It is something that has got opportunity.
Okay. Basically, after looking at some of those Asian market portfolios, I could see that there is a decent opportunity in the pie portfolio, the apple pies, the pineapple pies. Is there a potential of adding that kind of products in our India business?
We started with apple and pineapple pies and, you know, they are pie products. So I think it leads us, we have a pretty good understanding of how to build a dessert portfolio. You know, that is work in progress for us and it will continue to grow like what we did with McCafé. We feel it's a lower hanging fruit with a new product, at least at this stage.
Sure. Sure.
A sweet pie, like you're saying, is a category creation job. We already have a lot of notes on the menu, which we can clarify before we go to apple and pineapple pie from where we stand. Then, like Amit has already mentioned, menu, I think you've got to trust us that with the resources we want to put our money where the mouth is. Given that the long-term or medium-term to long-term strategy for now is to shift our focus towards meals, and dessert will have a part to play in meals, like you saw in the KitKat McFlurry promotion. We will continue that.
Understood. Thank you and best of luck for the future.
Thank you, Vishal.
Thanks.
Thank you. Ladies and gentlemen, to ask a question, you may press star and one. The next question is from the line of Sanchit Agarwal from Kredent Infoedge. Please go ahead.
Hello, sir. Congratulations on your results. My question is in line with the fried chicken. I remember like when we did fried chicken and then very early in South India and we had also introduced in West India in somewhere in five locations. Can you share how what has been the response in West India in terms of the product?
Yeah. Saurabh can take that.
For us, fried chicken was a very, very big imperative in South because our standing as a brand in terms of relevance was relatively on the weaker side. With fried chicken, we've been able to change that completely. Our average unit volume in South looks as good as what it looks like in West. In West we already are a very strong brand. For us, when we make that choice, obviously there is CapEx involved as far as launching spicy chicken is concerned. Therefore, we prioritize the gourmet burger collection on top as far as winning the meal occasion is concerned. In that also we've got very exciting chicken products, and we are experimenting in five restaurants.
Unless and until we see that fried chicken will be really a big driver for customers to come into McDonald's, on an incremental basis I think it's not worth our while to add complication to operations in the West. We are evaluating in five stores where we are experimenting, what's the role of fried chicken, what's the role of wings, do we need to have a fried product without bone, and so on and so forth. It's all work in progress as far as menu is concerned. We're very excited the way our fried chicken has played out in South and then we continue to remain optimistic of the role of fried chicken in South. On West we are still experimenting.
Okay. Thank you, sir.
Thank you, Sanchit.
Thank you. The next question is from the line of Dhiraj Mistry from Antique Stock Broking.
Yeah. Hi, sir. Congratulations on the good number. Just to continue with the previous question. In how many stores in West our fried chicken would be available?
It's basically just in test market, five to seven restaurants. That's it.
In South also.
No, no. In South it's across the board. In West it's a test. I don't think West is worth conversation right now. In South it is across all our restaurants.
Yeah, follow-up question on that. Like if I compare the mature store in fried chicken, although we are very new in fried chicken, how is the traction in the first store or mature store for the fried chicken? Earlier, you have guided that there could be an incremental sales of INR 50 lakhs per store from the fried chicken. How's the development over there?
You know, just to give you firstly that McDonald's is a very strong chicken brand in the whole world and probably sells more chicken than anybody else in the world within the QSR category. We are leaders in the top ten countries in chicken. First thing is it's not new. It's been part of our strategy from a brick by brick point of view. You know, couple of years ago we felt it's the right time to launch it. In South India, the traction for fried chicken continues to be very strong. The number that I talked about, we are getting ahead. Aspirationally, you know, we are looking at over INR 1 crore per restaurant per year in South India, and we are moving in that direction. We will give more color on that when we are ready.
For now, you know, it's doing very well.
Okay. That's helpful. Just two questions. Going forward, our effective tax rate would be the corporate tax rate?
23%.
Okay. Sir, lastly, can you comment on the royalty payment, where you were in talks with a credit company? Any development on that?
We have clarity until 2026, and when there is more clarity, we will definitely come back. We are very confident that, you know, in the last 25 years of our history with McDonald's, I think we've always focused on growing the market. We are very confident that that will not be a barrier on us in our growth.
Okay. Thank you very much, sir, and all the best.
Thanks, Dhiraj Mistry. Thank you.
Thank you. Next question is from the line of Manjeet Buaria from Solidarity Investment Managers. Please go ahead.
Hi. Thanks for taking my question. I just wanted the data, what was your rent you had paid in FY 2022 and FY 2023, the cash outflow for rent?
The cash outflow or rent. I mean, it is declared. It is there in our annual report. We'll have to pick that up and come back to you since you want the cash outflow. We will pick that up and come back to you.
Sir, if you could just give me the rent on an accounting basis. I just want to adjust for the Ind AS 116 . I just want to know what the actual rent has been?
Well, we have given the reconciliation in our investor deck, it's there. If you go to page, see, it is there in the investor deck that was sent out earlier today.
Thank you.
There's a reconciliation which gives you the rent, depreciation and all of that.
Thank you.
In case if it's not clear, you can just write to us offline and we can come back with whatever, you know, appropriate.
Thank you.
Yeah. Thank you.
Thank you. The next question is from the line of Amnish Aggarwal from Prabhudas Lilladher Private Ltd. Please go ahead.
Congrats, Amnish and Akshay Jatia, on great set of numbers. I have a couple of questions. My first question is that if we look at on-premise, off-premise sales, although we have grown very well in terms of on-premise sales-
Sorry to interrupt you, Mr. Agarwal. May we request you to speak a bit louder?
Yeah. What I am saying is that we have grown on-premise sales by 88%, whereas off-premise sales have grown by 12%. If we compare the Q2 numbers with the Q2 2020 numbers, the on-premise sales are still lower by 9%. As we understand it, the more on-premise sales you have, the more will be the operating leverage. Do you believe that in the coming quarters also on-premise will grow faster and will it provide more operating leverage in the coming quarters as well?
I mean, I first wanna correct your thinking. In my opinion, there is not much difference between operating leverage of delivery business and the on-premise business. I've maintained this by the way forever, in all my previous calls when delivery was not that well-known as well. To my mind, wherever business come from, if our sales are growing faster than our cost, the leverage will come and that's that. We don't see much of a difference between on-premise and off-premise.
Amnish, I think what we have written over here is that our on-premise business has grown around 24% over the pre-COVID levels. I'm not sure about the number that you're referring to, where that FY 2020 has witnessed strong growth across channels and hence our overall sales growth versus FY 2020 is around 44%.
Okay. It means that the incremental operating leverage will not be very high whether the sales are from off-premise or on-premise.
Correct. If you see our overall sales growth is 44%, and if you obviously compare margin, there's significant operating leverage that we've seen kick in.
Okay, fine. My next question is on the sales mix. Like, we have been focusing a lot on premiumization and trend is really gaining momentum. We have even launched the gourmet burgers. Do you have any data with us to share that what could be the sales per portion of book price which are, say, above INR 80 or INR 100 as a part of the total sales?
Amnish, we don't break that out, but, you know, as we mentioned, we've seen very strong traction in meals and a lot of it has come through our meal strategy, which is anchored by our gourmet burgers. Even our current campaign that's running in October, November, December centers around our McCheese platform which, you know, revolves around our gourmet burgers. We are seeing strong growth across the burger category led by meals as well as premium burgers.
Okay, thanks a lot.
Thank you.
Thank you.
Thanks.
Ladies and gentlemen, to ask a question you may press star and one. The next question is from the line of Manjeet Buaria from Solidarity Investment Managers. Please go ahead.
Hi. Thanks for the follow-up. I just took a look at the reconciliation on the rent that you mentioned. You know, roughly my understanding from this is around INR 22 crore was your rental expense for this quarter, which translates to give or take around 4% of sales. I just wanted to understand, I mean, structurally, how do we think about this rent expense line item, you know? Steady state, where does this settle down at, you know, as percentage of sales for the entire company?
You know, we look at this more on a yearly basis. We look at the business more from what is the right strategy to tackle rent rather than an Ind AS point of view. We continue to do 20-25-year deals and so on, so forth. I think typically rent is between 7%-8% of the P&L. I think that's a great number as we've seen globally as well. That is how we think about it.
Got it. Steady state, 7%-8% should be the rent expense, which is a good number to be at. Okay. Very helpful. Thank you.
Thank you, Manjeet.
Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments.
Thank you very much everybody for participating. We really appreciate it. Have a lovely day and talk to you all very soon.
Thank you. On behalf of Westlife Foodworld Ltd, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.