Gentlemen, good day. Welcome to Devyani International's Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and anyone who wishes to ask a question may enter star and one on the touchtone phone. To remove yourself from the queue, please enter star and two. If you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Siddharth Pujari from CDR India. Thank you. Over to you, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on Devyani International's Q3 and nine months FY23 earnings conference call. We have with us Mr. Ravi Jaipuria, Non-Executive Chairman, Mr. Raj Gandhi, Non-Executive Director, Mr. Virag Joshi, CEO and Whole-Time Director, Mr. Manish Dawar, CFO and Whole-Time Director, and Mr. Rahul Shinde, CEO, Yum! Brands & Whole-Time Director. We'll initiate the call with opening remarks from the management, following which we'll have the forum open for a question-and-answer session. Before we begin, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation shared with you earlier. I would now request Mr. Ravi Jaipuria to make his opening remarks.
Good afternoon, everyone. I warmly welcome you all to our earnings conference call to discuss the business performance for the quarter ended December 31st, 2022. Continuing with our store expansion strategy, we have added 81 new stores to its portfolio during the quarter. With this, our total store count stands at 1,177 stores across all our brands. We are on target to double our store count by the end of the current fiscal year with the number of stores we had three years ago. You would recall that we were at a store count of approximately 600 stores as at FY2020 end. We recently celebrated the opening of our 100th Costa Coffee store, a strong testimony to our commitment to the growth of all our core brands.
Our core brands footprint in India covers more than 225 cities now. We continue to target new grid areas in metros as well as upcoming cities for our store expansion. Broad-based inflation has somewhat moderated. Costs for some of our key raw materials like milk and cheese continue to remain elevated and are still witnessing some inflationary trends. On balance, we think we will start to see margins stabilize over the next couple of quarters. The inflation across the staples and food services seems to have a bearing on consumer sentiment and consumer demand. We are supporting our business with the requisite investments and continue to closely monitor the same. Consolidated quarterly revenues were approximately INR 791 crores, a growth of nearly 27% over the corresponding period last year.
Reported EBITDA basis reached close to INR 174 crores, which is 22% of the revenue. We have recently brought back Chizza at KFC to strong consumer reception and uptake. As we have mentioned earlier, innovation remains a strong pillar of our growth strategy across our brands portfolio. We will continue to delight our customers with many such products in the coming quarters. We continue to remain bullish on our brands and the Indian market. We believe that the current consumer demand slowdown is a temporary phenomenon. Once the inflation stabilizes, we expect the consumer spending to improve, which will help our business. In the meantime, we continue to focus on our processes, product quality, and execution capabilities. With this, I would like to conclude my address and now hand over to Manish for his comments. Thank you.
Thank you, Mr. Jaipuria. Good evening, everyone. A warm welcome and thanks to all of you for your valuable time for attending our Q3 and nine months FY2023 earnings conference call, our sixth such call since listing. As Mr. Jaipuria said, we are a 1,177 strong restaurant company now. Just a few years back, this number was 610. We opened 81 new stores across our brand portfolio in quarter three. With this, globally, we have 512 stores for KFC, 487 stores for Pizza Hut, and 103 stores for Costa in our portfolio as at the end of quarter three, FY2023.
Our metro and non-metro distribution of stores in India largely remain unchanged. The revenues for quarter three stood at INR 791 crores versus the INR 624 crores last year, blocking a healthy 27% growth on a YoY basis. Revenue growth has been led by new store openings and some volume growth, offset by some compression on the ticket spending. The gross margins stood at 69.3% for quarter three. The slight impact is a result of the continued input inflation and product mix change. We are working to narrow the gap in gross margins due to product mix changes and get it closer to the rest of the quarter two. This may take a few quarters. The combination of mix change, deleverage because of lower ADS and investments made in our business suppressed the brand contribution margins.
Brand contribution margins came in at 18.3% versus 19.6% in the previous quarter. Operating EBITDA on a pre-interest basis was INR 117 crores. Operating EBITDA margin was 14.8% and grew approximately 14% on a YoY basis. Reported EBITDA on a post-interest basis was INR 174 crores for the quarter, with margins at 22% versus INR 148 crores a year ago, 18% growth. Profit after tax for the quarter stood at INR 71 crores versus INR 67 crores in the previous quarter. There is an impact of deferred tax benefit recognition in the PAT numbers for the quarter. Coming to our core brands, KFC in India added 38 net new stores, reaching a total count of 461 stores at the end of the quarter.
Average daily sales was INR 116,000 due to some weakness in consumer spending and as a result of some digital penetration where we are expecting a smaller ADS. This also had an impact of new stores and concentrated expansion in some geographies. SSSG was 3%. Revenues at INR 460 crores grew 4% sequentially and 27% on YoY basis. Gross margins remained almost flat at 67.6%. We invested in the brand, which led to slightly lower brand contribution margin of 19.7% this quarter. On-premise consumption remained steady at 64% for the quarter. Pizza Hut in India added 17 net new stores to reach a count of 483 stores. ADS declined marginally to INR 33,000. Revenues came in at INR 184 crores, growing 18% Y on Y. Piece prices continued to trend higher.
As a result of this and the product mix changes, gross margins came in slightly lower at 73.6% versus 74.5% in the previous quarter. Brand contribution margins dipped to 14.1% versus 17% in the previous quarter because of the GM dilution, slightly higher delivery sales and investment in the brand. On-premise consumption was slightly lower at 60%. Costa Coffee crossed 300 store milestone. We added 15 new stores in the quarter to reach a total of 150. Revenues grew to INR 29 crores. The ADS for the brand improved to INR 37,000. Gross margin was slightly lower at 77.8% because of the inflation in coffee and milk prices. With better operating leverage versus the previous quarter, brand contribution improved from 19.6% to 26.4%.
On a YTD basis, we've added 239 net new stores. Consolidated revenues came in at INR 2,243 crores, with 50% year-on-year growth. Gross margin at 17.2% and brand contribution margin at 19.2% have the impact of inflationary pressures. Reported EBITDA on a pro forma basis and on a consolidated basis for the nine months has crossed INR 700 crores for the first time, with margins at 22.5%. YTD profit after tax for the year is INR 203 crores. We maintain our goal of sustainable and profitable volume led growth.
While the near-term outlook for consumer sentiment in Q3 category remains a little fluid, we are steadfast in our growth aspiration and are confident that our portfolio of high interest brands and our execution strength will enable us in achieving our aspirations. On that note, I would like to request the moderator to open the forum for any questions or suggestions that you may have. Thank you very much.
Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to 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 Percy Panthaki from IIFL Securities. Please go ahead.
Hi, sir. Just wanted to understand the reasons behind the significantly different SSG for KFC and Pizza Hut. While KFC has grown by about 3%, Pizza Hut has declined by about 6%. Is it just that the pizza category has now become too cluttered with overall about 2,500 outlets of the top two players put together? There is not much more room for penetration. That is why you're seeing the SSG being significantly lower versus KFC.
Sure, Percy. Percy, as you know, the chicken category remains a very, very strong category. Right from the last 6 to 8 quarters, we've been emphasizing that chicken is highly under-penetrated in the country, given the consumption habits which are there for the consumers. Therefore it remains a very, very attractive category. That's the reason we are focusing on a rapid expansion in KFC. On KFC also we started penetrating deeper into the country. Obviously as you go deeper, your non-meat consumption, although it has a strong potential, the consumption levels are still not equivalent to metro levels and therefore that kind of impacts a little bit on the ADS numbers. Having said that, we've seen a general sentiment issues because of the broad inflation in this quarter.
It has impacted the KFC numbers although for KFC they are still we believe healthy at 3%. Therefore, we think we are absolutely on a right track as far as KFC is concerned. On Pizza Hut, I agree with you, that obviously the market is kind of getting saturated. There is a competition from the other QSR segments as well. Having said that, we also kind of focused on the new launch that we had in the form of Fun Flavour pizzas. Fun Flavour has led to our long-term aspiration of transaction increase, and that is working. At the same time, it has led to some little dilution on the, on the average realization, which has led to a little reduction on the KFC numbers.
Having said that, we are working on the gross margin case because Fun Flavour as of now, because it's a new launch, is little bit of margin dilutive as well. In the next few quarters we will be able to resolve that. It'll also help us kind of grow the brand by attracting new set of consumers over the period of time, which will kind of take Pizza Hut to a stronger stand.
Just a sub-question here on Fun Flavour. Is it resulting in any downgrading or is it that whatever sales are coming from Fun Flavour, they are all incremental sales only which would not have come had this product not been there?
See, look, whenever you launch a new category, it takes time to kind of attract the new set of consumers, right? In an inflationary environment, when we've launched this category, obviously there is some downgrading happening because consumers are seeing a cheaper option available. Therefore, the hypothesis could well be that if I would not have launched a Fun Flavour pizza, these consumers could have lapsed out of the brand, which is not the case and therefore we've managed to retain those consumers. At the same time, it's important over the period of time we will be able to attract the new set of consumers and therefore the fundamental objective behind Fun Flavour and I think we'll be able to achieve that.
Right. Second question from my side is, what is the store opening plan for FY24 across your different brands? Are you sort of tickling down the store expansion given the kind of demand environment we are in?
Firstly, as far as next year is concerned, in the past, as you remember, we've talked about 250 stores odd. In the recent times we talked about 250-300 stores. We remain steadfast on that guidance. We are talking about 250-300 stores for next year as well. There could well be some mix change between the brands, depending on how the market sits and depending on how things are. Therefore obviously we'll be accelerating KFC more because that market is kind of responding very well. The overall numbers remains the same, 250-300 stores for the next year as well.
Okay. I have more questions, but I'll come back. Thank you.
Thank you. The next question is from the line of Devanshu Bansal from Emkay Global Financial Services. Please go ahead.
Sir, thanks for the opportunity and congrats on strong store additions in the quarter. Sir, for KFC on-premise mix in this quarter has remained similar to this quarter. This is amidst the higher pressures for dining as was expected in this quarter. What according to you is the reason for this?
Devanshu, sorry, can you please repeat your question? There was a miss in between.
Yeah. I was asking that on-premise mix for KFC has remained similar to what it was in the base quarter. However, in my opinion, the mobility was much better this quarter versus base. What is the reason for that?
Devanshu, as I said, I mean, we are kind of taking brands deeper into the country, and obviously there it is more of a novelty value to order at home. As let's say your food individuals are kind of expanding, people are experimenting with home delivery. It has a novelty value and that is how it is. Having said that, we are absolutely focused on the on-premise consumption. I don't know whether you've noticed in our presentation, we've started opening flagship stores for the KFC as a brand. Our objective is that over a period of time, we will open at least 10% of the stores as KFC and as KFC flagship stores.
The fundamental premise and logic is that these stores are going to be bigger as far as the real estate is concerned. They'll be more digital. They will have expanded menu. They will have some localization in terms of look and feel, which will kind of help us expand the KFC portfolio from a dining perspective. Therefore we've already started taking those initiatives. During the quarter we opened about 5 flagship stores only.
Got it, sir. For Pizza Hut, how many you have been guiding for high single digits sort of for SSG over the medium term because in the last two quarters the performance here has not been up to our expectation. Are we sort of revising our this SSG sort of number for the medium term? As you also indicated that this category is being impacted because of it being largely penetrated as well as because of other QSR.
Devanshu, as I said, if you look at, I mean, one is obviously the market issue. The second is. When I say market issue means, Pizza as a market, which is what Percy also alluded to. Second, it has been an inflationary environment, and obviously the consumers are kind of, given that their wallet sizes remain the same and it's a broad-based inflation, they are also tightening their spends, in terms of various discretionary categories. At the same time, I also mentioned that because we launched a competitive pizza during the, during the quarter or let's say we kind of pushed it has had some impact on that. Otherwise the transactions are kind of up. On a medium-term basis, we remain confident that we will be more or less, with the numbers that we've spoken earlier.
Okay. Last question, Manish, if you could indicate, the kinds of inflation that you are expecting on the raw material basket in future. If you could provide any guidance for next year, full year FY24 on this account will be really helpful.
Devanshu, KFC portfolio seems to be stabilizing now, as far as the raw material and the input prices are concerned. Having said that, I mean, in today's environment, given the geopolitical situation, given what could happen in the world, obviously we will not be able to kind of guide accurately what will happen. As we see today, the next quarter, KFC portfolio seems to be stabilizing. On Pizza Hut, there still remains a challenge as far as the milk and the cheese prices are concerned. We believe that overall as a cycle, I think inflation is stabilizing now. It's no longer the same trends that we used to see a couple of quarters back. Therefore, we are moving towards stabilization. As Mr. Dawar also mentioned in his address, that we see margins stabilizing over the next few quarters.
Just a follow-up on this. Stable on a sequential basis you are indicating, right? The prices are stable on a sequential. Got it.
Yeah. Yeah. As of now we are not seeing any indicators which kind of gives us that the prices are rolling back. We're talking about the input prices. They are just stabilizing, whereas earlier they were going up on a month-to-month basis, quarter-to-quarter basis.
Got it, sir. Thank you.
Thanks so much.
Thank you. The next question is from the line of Shirish Pardeshi from Centrum Broking. Go ahead.
Yeah. Hi, good afternoon, Ravi and Manish. Thanks for the opportunity. Just two questions. When I look at the slide 17, which says that, the gross profit, which is at 67.6%, obviously on a YoY basis, not comparable, it's coming down. Is it fair to assume that, taking your comment that, the input material is now stabilizing, we'll inch up towards 69, 70 or maybe historically what we have delivered or it will again stable at this number?
I assume you're talking about KFC margins, right? Because slide 17 is the KFC.
Yes. I'm talking about KFC.
So as I said, KFC as a portfolio is stabilizing, but we've still not seen the prices getting rolled back. And a 69% is only possible when the prices start to roll back. We've still not seen that. So therefore, when we talk about stabilization, which means that we'll be stabilizing around this level. And as we go along, and there is a broader exception, maybe we can expect something, but we are not alluding to that.
Have you taken any price increase in quarter three or maybe early January 15 as in now?
We've not taken any price increase on KFC.
The question here is that, is it that you think, the inflation if doesn't subside, you will have to take, at least 2%, 3% price increase?
Let's see how it goes. Because for example, let's say if you remember KFC pricing, we took payback in April, May of last year, and after that, we kind of managed to hold on to KFC prices for nine months now. Therefore, let's see how it goes. Our preference will be not to increase the pricing, because as you know, I mean, it's a discretionary category, but it's discretionary closer to staples because that is how the consumption is happening. Let's see how the situation pans out, and then basis that we will take appropriate calls, whatever is good for the business.
The reason why I'm asking, Manish, is primarily, when I look at, if there is normally the inflation, if it is subsiding, most of the companies would up the ante on the ad spend, and you are now quite visible on traditional media. My previous assumption is that, is more to do with the customer acquisition or is it more to do with the benefits what we are getting because of the falling raw material?
Look, it's a little different hypothesis because if you look at the voices which are coming from staples is basically they're talking about rollback of prices because they are seeing very clear trends whereby the input materials for staples category are actually getting rolled back. Typically the discretionary segment follows the staples where whenever the prices are going up or whenever the prices come down. Therefore, that's the reason we are seeing that we've still not seen a rollback, but let's see how the situation pans out.
Okay. My second and last question on Pizza Hut.
Before I interrupt you, sir, may I request to please stay on the queue. We have participants waiting for you.
Sure.
Thank you. The next question is from the line of Srinath Vasan from Bellwether Capital. Please go ahead.
Hi, sir. Would like to understand what is working for Costa Coffee, even SSG numbers have come strong. ADS is also very strong. Could you help us understand what is working in Costa Coffee? From a new store opening perspective, are these similar formats to what it was before we had this scale down few years back? You know, are these the larger format stores or more kiosks? What would be the size of the store? Anything you could probably share. The last one on Costa would be, you know, is this largely a beverage-only offering or are there food offerings also, and how are the food offerings doing? Any broader perspective on product side also? Thank you, sir.
Sure. Let me answer your second question first, Srinath. If you go to a Costa store, and in Bombay we've already opened a store at Phoenix Mall, Kurla, and therefore, you'll be able to see the complete offering there. We have food present in our menu. You have sandwiches, you have wraps, you have rolls, you have cakes. There are multiple formats of snacking items and food items there. We have pita bread and hummus, therefore, I mean, you can actually go and have a lunch there. Therefore it is there. Having said that, the dominant contribution still comes from beverages. Our focus is to continue to push food as well, and that's how we are coming up with the innovation as far as Costa is concerned.
It's kind of a well-balanced and well-mixed as far as the overall menu contribution is concerned. Coming to your first question, in terms of what is happening in Costa. Costa also, because as we said, I mean, we are bullish in this, on this category. Coffee is an aspirational drink in this country. Whatever consumer feedback we get, we consistently get a feedback that Costa Coffee is probably one of the best coffees in the market from a taste perspective, from a flavor perspective. The genuine coffee lovers, prefer Costa over any other brand. That is what our consumers tell us. Having said that, I mean, and having attained that position, it is a matter of, making sure that we reach the consumers through our distribution network and the stores network.
That is what we are, we are trying to do. Costa, I don't know whether you're aware about the history. I mean, was acquired by Coke, there was little bit of uncertainty as far as the journey was concerned, that's the reason we in between kind of sort of downsizing the brand, we did not expand. We signed a fresh agreement around the IPO time last year, since then we've been kind of expanding the brand and it is gaining salience now. That is what is happening.
Yes, I am reasonably aware of the history. The specific question was on the launch format, like so we've seen Pizza Hut store format evolve over the past 8 years. To some extent, may not be to the same extent as Pizza Hut or KFC format. Could you help us understand how the Costa format, from a store size or, or a service area, has it changed from what it was three, four years back before the bigger Coke acquisition? You know, how are you looking store rollouts? The last one here is the 20% SSG price driven or, or old stores are also seeing volume growth? Thank you, sir.
Sure. If you were to go back history four, five years, we used to focus on a little larger format, as far as Costa was concerned. In the new avatar, it's a good mix of whatever is working in a, in a particular environment. We do have a focus on a smaller store. We, we are not focusing on large format lounge type stores. These are very, very functional, very accessible to consumers, very easy for consumers. At the same time, because we need to establish Costa as a brand, we also look at some of the flagship locations. It's a mix of both. Our focus will be on smaller format Costa Coffee stores.
Thank you, sir. I'll get back to you. The call, just, last one would be the SSG. Is it price driven, volume driven? Any broad qualitative feedback you can give, and I'll get back to the question. Thank you.
Sure. It's largely volume driven. Very small, very, very small impact of pricing.
Thanks.
Thank you. Next question is from the line of Kaustubh Pawaskar from Sharekhan by BNP Paribas. Please go ahead.
Good afternoon, sir. Thanks for giving me the opportunity. My question is on the gross margins again. In your initial comment, you alluded to the point that product mix change has had some bit of impact on the gross margin. Can you just explain that point? Is it specifically towards Pizza Hut or for the overall portfolio?
Yeah, of course. It is specifically for Pizza Hut. The product mix that we talked about was basically the Fun Flavour portion that I talked about in the earlier answers.
Right. In that case, for Pizza Hut, we used to, you know, derive around 74%-75% of gross margins. If now, the product mix is kind of a, you know, a bi-margin dilutive, should we expect our gross margins in Pizza Hut to stabilize at around 72%-73% going ahead once your raw material prices stabilize? Or there is a scope of margin improvement once, you know, inflationary environment recedes?
Yeah. As far as Pizza Hut category is concerned, you know that milk prices even let's say for example, a few days back, there is a INR 3 increase in the milk prices, which would lead to almost INR 30-INR 40 for cheese prices. Therefore that environment still remains. At the same time, Fun Flavour is also diluting the margins a little bit, whereby I said that we are working on correcting that, and it'll take three to six quarters to kind of get the Fun Flavour margins in line with the rest of the portfolio. Post that, let's say once the milk prices and cheese prices are stabilizing or they're getting rolled back, we could see the gross margins inching up.
Okay. My, second question is on KFC. You mentioned that you are also looking for some large format stores in some of the markets. Whether it will initially have impact on the, you know, from the cost front, because normally, if the store size is higher, it normally, you know, have a lower, you know, the cost is on a higher side. Considering that, you know, just wanted to understand what exactly the, you know, would be the size of the stores and how the store economics would be for this KFC large size?
At a store level profitability, what you're saying is right. There could be small impact because of the rentals and all. The reason why we are doing it, because we expect that because of the larger format and extended menu, we will have the increase in ADS for these stores, which will more than make up for the increase in costs. Therefore there could be some training mismatch because obviously we have to first put up the stores and then the consumers will start to walk in. Otherwise, in general, we do expect that this will result into higher ADS, this will result into higher brand acceptance and reach and prominence, and therefore it will be good for the P&L as well.
Okay. Got your point, sir. Thank you. Thanks for all your best
Thank you so much.
Thank you. Next question is from the line of Jaykumar Doshi from Kotak. Please go ahead.
Hi, good afternoon. Sorry, I joined the call repeating the question that was already answered. I'll go back and let you and read the transcript. You know, there is some weakness in general in ADS, you know, across the space. You know, how do you think about store opening targets, you know, that you have set for this year and next year? Rather, I mean, for FY2024 or calendar year 2023, the way you look it. That's my first question. In case of KFC or maybe even Pizza Hut, what percentage of your stores will open in new cities where, you know, essentially environment does not matter as much you are opening a new store in a, you know, single city store?
How many stores would you open in the existing markets where you already have stores and there could be some cannibalization?
Sure, Jay. Jay, I did answer the earlier question on the number of stores. Let me just repeat it. Pardon. Let me ask for the pardon from others. We've talked about opening 250-300 stores even in the current environment. If you see, our guidance in the past has been 250 stores. Of late we've been talking about 250-300. As a result of the current environment that you've rightly pointed out, we are not changing the store opening guidance. We will remain with 250-300. However, depending on the immediate market situation, there could be some mix change.
For example, we are definitely looking at opening higher number of KFC stores and a little lower Pizza Hut stores, but overall the store count will remain the same and we are not changing that. We remain bullish as far as the overall market is concerned. We do understand that currently because of the inflation, the consumer sentiment and the consumer demand is impacted, but we remain bullish in the medium to long term, and we don't see any reason.
How, what percentage of stores, how many new cities would you be entering for KFC?
We continue to open at least four to five new cities every quarter. That is what we'll be doing. Therefore the entire strategy is all around densification in the existing cities, plus the new cities, plus, as you know, there are some cities where we have single stores, and we continue to evaluate that by opening the next store and the next store there.
Thank you so much.
Thanks, Jay.
Thank you. Next question is from the line of Percy Panthaki from IIFL Securities. Please go ahead.
Hi. I'm just looking at your corporate overheads. In Q3 last year it was INR 34 crore, which was 5.4% of sales. This time it is INR 28 crore, which is 3.5% of sales. There is a 190 basis points savings on this as a percentage of sales, which has really sort of hit your overall company level margins. Can you just help us understand why this is the case? Even in INR million terms, the number is down by about 18%.
Sure, Percy. Percy given the current environment, obviously we're tightening our belt and there has been some initiatives on the cost control and cost reduction. At the same time, there is a small element of some old provisions, which are no longer required and that is also was written back, but that's a small one. Overall, we are tightening the belt because of the current environment. Therefore, this is not a big concern area for us.
Going ahead, shall we take this INR 33 crore-INR 34 crore as a sort of, number, quarterly number, in future?
Yeah, you can take, around that number.
Okay. Okay. Understood. Secondly, just wanted to understand in terms of your margins at a restaurant level, for, I mean, I'm not looking at individual formats. I'm just looking at the overall restaurant level as a company, assuming that there will not be much change in restaurants going ahead. The kind of margins that you've done this quarter, are they here to stay temporarily, given where the input costs are, given where the demand environment is, et cetera, et cetera? Or do we see some revival? Because at individual restaurant level, margins have fallen by about 250, 300 basis points in your two major formats.
Firstly, if you see the restaurant level margins are typically driven by the ADS numbers, and the ADS is little lower in the season, even though it's a good season. It is a combination of basically some of the new store openings on, and at the base, we are kind of opening the new stores because if you look at the base, I mean, we are probably the leaders in the industry as far as the new store openings are concerned. As things start to stabilize, as the new stores start to mature and start coming into the, into the base, we will see the margins coming back.
Understood. Lastly, on Costa Coffee, while your margin profile is very healthy, the sales per store is, sort of, pretty low at about INR 2.5 million-INR 3 million per quarter. Do you think that given the kind of format you are operating, this is the kind of sales per store that you will generate? Let's say someone like a Starbucks is a completely different format, and they make like INR 7 million-INR 7.5 million sales per store per quarter, which is like maybe 2.5x-3 x yours. That's not a number that we would aspire for, given that it's a completely different model or do you think that there is significant headroom for improvement in this number?
We are not looking at that number. To be honest, we are not aspiring for that number also, because as you said, it's a completely different format and it's a completely different positioning. As far as we are concerned, we want to have a good, healthy mix of both top line and bottom line, and that is how we are approaching all of our brands. Having said that, as I said earlier, we are focused on the food category. This whole focus and stabilization of the entire supply chain will give us some additional ADS numbers. For sure, we are not aspiring at INR 7.5 million revenue number.
Okay. Yeah, that's all from me. Thanks a lot, Manish.
Thanks so much, Percy.
Thank you. The next question is from the line of Akshen Thakkar from Fidelity . Please go ahead.
Hi team. Congratulations on a good set of numbers in a relatively difficult environment. Most of my questions have been answered. I just wanted to push a little bit and understand on the flagship store strategy. You said 10% of stores will be flagship stores in KFC. Is 10% incremental or total? And if I were to think about sort of economics there, what's the kind of incremental CapEx or delta ADS are we thinking about in these stores? I know it's more to do with just sort of keeping the product, more relevant, more fresh, et cetera. But just in terms of how it plays out into numbers one to three years out, just wanted to also understand, you know, how much more CapEx you're spending on that and what sort of incremental ADS you can expect out of that. Thanks.
Hi, Akshen. How are you? As far as KFC flagship is concerned, our immediate target is that whatever new store openings we are having, 10% of new store openings will be flagship stores. As we go along and we get confidence on the format, our eventual objective is to have 10% of the store count. Because we don't want to kind of push it and rush it in one go. That's even as internal management team, we've taken a target of 10% of the store openings to begin with, stabilize the format, see what the results are coming, is the increment ADS coming or not coming, and then we will... Our eventual objective is to go toward 10% store count for the entire portfolio.
Very marginal CapEx increase of 8%-9%, not much. Yeah, we are yet to see the perform numbers on top line coming up. Whatever stores we've seen in the few weeks, the response is encouraging. We'll keep you posted as to how this strategy is going.
Okay, great. The second question was, you know, to go back to what Percy was saying.
Sorry to interrupt you, Mr. Thakkar. May we request you to speak a bit louder? We cannot hear you clearly.
Sorry. Is this audible?
Please go ahead.
Just going through to Percy's point on corporate overheads, you know, on a run rate basis, given where you, where you are, what kind of growth we should expect generally going ahead?
We should expect the growth on corporate overheads to be in line with the normal inflation. As we continue to expand our store portfolio and we continue to grow on top line, you will see a leverage coming in on corporate overheads and a percentage of the total sales will continue to drop.
The last question from my side is, you know, if you think about terms of trade that we have with some of the food tech platforms, you know, given that some of those platforms are focusing more on profitability, are you seeing any changes in terms of take rates for them, et cetera, going up or your terms remain broadly same? Thanks.
We've not seen the link rates going up as of now. Obviously, the pressure is always there. It's through a negotiation. So far the link rates have remained stable for us because we also are continuing to grow our store count. We are continuing to grow in volume, so therefore, they are also getting additional business from us. Therefore, to that extent, the relationship is very mutual in that regard, and it's going well.
Got it. Okay. Sorry, I said the last question, but let me just slip in one more. You mentioned that you're thinking about adding more KFC next year versus versus Pizza Hut. Whatever your store opening this year was, maybe it'll be different. That mix will also have a bearing on your eventual store level EBITDA, right? Because KFC is a better margin business.
Correct. You're right.
Thank you.
The next question is from the line of Devanshu Bansal from Emkay Global Financial Services. Please go ahead.
Yes, sir. Thanks for the follow-up opportunity. Sir, KFC reported a little bit of growth divergence within Q3. Specifically November was quite bad. If you could sort of throw some light on the trends during that period would be helpful. It would be helpful on that front.
Devanshu, we also saw a little bit of weakness in November because obviously, the two months, which was October and December, it did well, but there was some weakness in November. Let's see. I mean, we believe it is temporary, but yet to be tested, yet to be seen. Our belief is that it's predominantly because of the all-round inflation which is happening, whereas the consumer wallets have remained the same. At the same time, if you see this entire scenario on tech layoffs, that also is kind of gaining prominence, although let's say the tech layoffs are in the U.S., but most of these companies have their backroom operations in India, and they are also getting impacted.
We've seen lot of announcement from the Indian tech companies also where these tech layoffs are happening. Obviously, all of this has some bearing on the consumer sentiment.
Where December picked up from November, so that growth likely continues in January or January, is more or less similar to November?
Let's see. I mean, it's like because obviously it's too early to comment on the overall quarter results because we are not giving any month-on-month results. Let's see how it kind of shapes up. It's not so bad as probably you're thinking.
Okay. sir, Mr. Jaipuria also mentioned that there are quite a bit of new launches, that if you could throw some light on that front because they definitely are a big growth driver in the QSR industry. If you could throw some light on the new planned launches way going ahead.
We are not looking at any new brands as of now. Obviously, if we kind of finalize something, we will come back to you guys.
No, I was asking for new product launches, not brand launches.
Got it. Got it. That's a continuous cycle, Devanshu. As we, as we speak, Mr. Jaipuria talking about the KFC innovation pizza that we talked about in Pizza Hut. As you know, we launched a complete range of Fun Flavour pizzas. We launched a new version of Momo Mia. We've launched new sides. Therefore, that's a continuous process. In every quarter we keep on doing something or else in our portfolio.
Got it, sir. Thanks.
Thank you.
Thank you. The next question is from the line of Prashant Kutty from Sundaram Mutual Fund. Please go ahead.
Yeah, hi. Thank you for the opportunity. Just one question on the demand front. We seem to be seeing a very different kind of direction in terms of how pizza is behaving and versus probably how burger is behaving. Any thoughts on this front specifically because you also spoke about opening flagship stores. Is it anything to do with the fact that maybe last two years was more about delivery and this year seems to be more about dining or things kind of coming back? Can one probably pick out some trends with that?
Prashant, look, obviously, as we've spoken earlier also, I mean, last two, three years, there are no trends emerging because we got impacted by COVID first. This kind of changed the entire consumer thinking. That lasted for almost two years. As we were coming out of COVID, obviously there has been a significant inflation pressure that all commodities and all and most of the categories are witnessing. Obviously these are not the normal times that you are able to kind of see the trends and extrapolate those trends.
But again, I mean fundamentally how we look at the business, if you look at India as a country, the way the demographics are, the way the income levels are growing, the way the consumption habits are changing, we are absolutely and we remain bullish on the QSR segment. It is highly underpenetrated in the country and there is a strong potential. Within that, obviously these are some short-term impacts which are there and that's the reason we are not changing our strategy and we continue to remain bullish and we continue to kind of execute on our strategy.
Yeah, absolutely understand. I just want to know when you talk about this as a focus more towards KFC. Pizza Hut obviously was more about a turnaround story and it kind of achieved that. Thereafter probably, incrementally is there a case that you feel that the opportunity is more on KFC rather than on Pizza because we are the challenger over here? Is that a thought or there's an equal amount of focus towards both?
It is an equal amount because if you see, I mean, these are all temporary adjustments. I'm not saying that we are changing our. Temporarily, for example, it is easily possible that in a year we could focus more on KFC. In the maybe next few quarters, we could focus more on Pizza Hut because obviously we need and we want to optimize the return on capital, and that is how we approach the business. Otherwise fundamentally Pizza category also remains a large category. It is a growth category. It remains an attractive category. There's nothing wrong with the category as such.
My last question is on the margins. Obviously, last year were more driven by the fact that there were a lot of tailwinds as well. This time you do have headwinds because of especially in the lack of gross margins and all. At a steady-state level, when you look at margin for the KFC or for the Pizza Hut, are these the norms which you should pick up as the as the as the rest of the EBITDA margin numbers or what should be the right benchmark?
As we see the ADS improve, as we see the frequency is improved, as let's say we have the new stores maturing, on the maturity curve, we will see some improvement in the contribution margins.
Sure. Fair to say that maybe something like KFC or 21%-22% is more like a normalized level and maybe for a Pizza Hut a 15%-17% is like a more normalized level. That's a fair assumption to make in a normal scenario. I'm not saying, generally in normal scenario that should be a fair assumption.
Yeah, that's a fair assumption. I mean, give or take some points here and there, otherwise, in the normal scenario, you're right.
You're not really worried on the demand from Pizza Hut has been extremely weak and is it like things are only deteriorating? I mean, is that a worry for us?
I think probably the worst is behind us.
Sure. Glad to hear that. Thank you so much and all the very best to you.
Thanks so much, Prashant.
Thank you. Next question is from the line of Zishan, individual investor. Please go ahead.
Congratulations on. Hello.
Please go ahead.
We can hear you.
Yeah. Congratulations on aggressive expansion and reaching 100 stores for Costa. I'd like to understand a little bit more on your store opening strategy. Like how do you choose a new location and what is the difference between metros and non-metros? It's for Costa Coffee.
Okay. Costa predominantly is a metro phenomenon as of now. There is, there are very few stores which are outside the metros, maybe a handful, but otherwise it remains a metro phenomenon as of now because that is where, as you know, bulk of the consumption is. As far as the store opening rigor is concerned or the discipline is concerned, Costa is no different compared to our other brands. We have multiple databases available. We have the consumption habits available for various trade areas. Whatever rigor we follow for opening a KFC store or a Pizza Hut store is followed for Costa as well. Costa as of now, we have focused more on metro areas because the store count is really small compared to where we are on KFC and Pizza Hut.
Once we've kind of done that, we will start to go into the smaller geographies as well.
All right. I have another question to follow, sir. How long does the Costa store take to stabilize looking at your aggressive plans? I mean, I'd like to understand how long will it take to stabilize and start generating, you know, trying to achieve them basically.
We normally try and achieve the breakeven in the first six to 12 months for our entire portfolio of stores. The maturity curve will be close to 24 months.
Another question to follow. You know, just trying to understand the AOV of Costa versus KFC and Pizza Hut, these three brands because coffee as such is a margin-rich product. Just trying to understand what kind of AOV does Costa enjoy versus the other brands that you have?
It is not very different. Costa also is about close to INR 400-INR 500.
The average order value.
Yeah. Within that you have coffee, which is a strong margin contributor. Food is little kind of lower compared to coffee. Our focus is to kind of push the food category because it will eventually help build the Costa ADS also. Therefore, that is how we are approaching the brand. Our objective is that for Costa also margins should be in line with the rest of the brands and rest of the portfolio and so that it is not dilutive on the overall business.
Thank you so much, sir. Thanks a lot.
Thank you.
Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand over the conference over to the management for closing comments.
Thank you, chairman and all the investors, analysts who have been on the call. I do hope that we have been able to respond to your questions satisfactorily. Should you need any further clarification or would like to know more about our company, please feel free to contact your investor relations team. Thank you once again for your time to join us on this call today and to participate in our growth journey. Thank you.
Thank you. Ladies and gentlemen, this concludes this conference. Thank you for joining us and you may now disconnect your lines.