Ladies and gentlemen, good day, and welcome to the Restaurant Brands Asia Q2 FY 2023 Earnings Conference Call hosted by Nuvama Institutional Equities. 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. Should you need assistance during the conference, please signal an operator by pressing star then zero on your touchtone telephone. I now hand the conference over to Mr. Nihal Jham from Nuvama Institutional Equities. Thank you, and over to you, sir.
Yes, thank you, Melissa. On behalf of Nuvama, I would like to welcome you all to the Q2 FY 2023 conference call of Restaurant Brands Asia. From the management today we have Mr. Rajeev Varman, Whole-Time Director and CEO, Mr. Sumit Zaveri, CFO and Chief Business Officer, Mr. Kapil Grover, Chief Marketing Officer, and Mr. Prashant Desai, Head of Strategy and IR. I would now like to hand over the call to Mr. Prashant Desai for his opening remarks. Thanks, Prashant. Over to you.
Thank you, Nihal. Welcome everybody to this Q2 FY 2023 conference call for Restaurant Brands Asia. I hope you guys had a good Diwali. This is how we are intending to take the call today. I will first hand it over to Raj to make his opening remarks, the summary on both the India and the Indonesia business. After that, I will take you through the updates on the India business. Post which I will hand it over to my colleague, Sumit. Sumit will take you through the financial update. Sumit will then hand it over to Kapil to give you an update on marketing and on our tech piece. Post which Sumit will take over the Indonesia side of the business, and then we'll open up the floor for questions.
We intend to finish our side of the presentation in about 20-25 minutes, which gives you at least 20-25 minutes for Q&A. With that, I hand it over to Raj to take you through opening remarks and then update. Over to you, Raj.
Thank you, Prashant, and good afternoon, everyone. Thanks for joining and giving us your time this evening. Let me just quickly summarize the India business first, and then I'll give you the Indonesia summary. Q2 was a growth quarter for us. If you look at Q2 over Q1, we grew about 9% in revenues from INR 377 crores to INR 368 crores. That puts us in H1 growth of 78.4% over last year. Last year obviously was you know, a COVID kind of constrained year. INR 395 crores last year, and then this year we have done INR 705 crores.
We have grown over the quarter as well as, you know, half yearly over the last year. SSG was 27% positive. Half yearly, if you take it was 32% over the last year. There's SSG growth as well as restaurant growth. Gross profit. Maintained a 66.4% gross profit, which is what we reported last quarter as well. This is despite all the pressures on inflation and so forth, right? Then H1, if you see, we are at 66.4%. This against, last year H1 was 65.3. We have seen 110 basis point improvement there as well. Restaurant level EBITDA, and I'm talking about post Ind AS.
We will share the pre-Ind AS numbers as well on our presentation. Q2, INR 60.8 crore. That's 16.5% over Q1, where we had reported INR 49.9 crore, which is at 14.8%. That's a 170 basis point improvement. Half yearly, we are at INR 110 crore, which is 15.7%. Again, 14.4%, a 130 basis point improvement over the 14.4% we reported last H1 of last year, which was at INR 56.8 crore. Company level EBITDA for the India business, again post Ind AS numbers.
For the Q2 we are reporting INR 42.1 crore, which is 11.4%, against Q1, where we reported INR 30.2 crore, which was at 9.9%. Again, 150 basis point improvement. Half yearly, that puts us at INR 75.3 crore, 10.7%. Which is again over 380 basis point over last year's H1, which was at INR 47.1 crore, which is at 6.9%, reports on that. Restaurant growth, we are at 334 count as of thirtieth December. We continue to build restaurants beyond that. We have built another six this last month. Putting total growth for the quarter was 18 new restaurants that we built.
We had some closures that gave us a net of six growth for the quarter. We have in pipeline 33 restaurants that are in construction. On top of that, we have another 60 that are ready to go into the pipeline into the construction. On the cafe piece, we actually more than doubled the number of cafes. We were at 86, if you remember last time, cafes. We added another 94 on that. That puts the cafe at 180. In fact, as we speak, we are getting very close to the 200 mark on cafes. BK app, again, marketing. Kapil is going to talk more about this. We saw a revenue growth of 33% quarter-over-quarter on our BK app.
This has come, you know, continuously, sixth quarter continuous incremental increase on the revenues coming from our BK App. 2.7 million app installs, which is again 46% growth over the last quarter. Liquidity stands good in the company at INR 460 crore. Quickly on Indonesia. Indonesia Q2 results, INR 156.7 crore. This is 2.9% over the Q1 numbers that we reported INR 152.3 crore. You know, what we are doing in Indonesia, I spoke about this last time, when I was on the phone with you guys. Basically two things we are doing in Indonesia. The first one is menu architecture.
We have, you know, aligned the menu architecture like we did in all markets, with a very strong entry level like we have here in India, which, Kapil will speak about in a moment. We have a Stunner Menu, which is that INR 50 that we advertise, which is to draw and build traffic into the business. We have a similar parallel developed for Indonesia. We call it the GoKing menu. That just got launched. In fact, it's a little over 2.5 weeks since we have launched that. We have seen an immediate lift in traffic, I think different, and this is without any advertising as such, just with some digital communication. We've looked at 20% traffic on that business.
We have built a beautiful laddered menu as we do here in India, and premium menu on the other side. We're also going through validation on taste on products, product builds and so forth with consumers. These are standard things we do when we take over a business. We actually go through you know building architecture. The most important thing is the quality and the taste of the products, and we kind of go through that. That's the phase that we are working on. A lot of work is happening. Sumit and Kapil has also been involved in helping the Indonesia team in grounding in info. That's the first work that's happening over there.
Second piece is, and we shared this with you last time, that our growth strategy in Indonesia has always been, you know, in the past, in malls and so forth. In 2017, we shifted that. 2017, 2018, we shifted to moving into building restaurants, freestanding restaurants with drive-throughs. We continue to focus moving forward on that strategy to continue building the BK restaurants over there with both, you know, freestanding with drive-through. Our work on product development on Popeyes is complete. We have finished testing the products. We are very happy with the results of the testing. The products are ready. We have started construction on a couple of sites.
We are you know kind of planning to open about five sites before the end of this fiscal year. That work is also on the way. There's some synergies that we are working, that Sumit and I are working on, bringing you know the two brands of the Popeyes and BK that in the long term will give us some effective CapEx utilization, more efficiency in CapEx, as well as to make sure that we are complementing the business to grow the business collectively in that market. That's basically on the Indonesia, not many numbers, as I've told in the past.
We are going to take our time to make sure that, you know, we move towards a recovery and then beyond because it's a fantastic market. I believe that market is going to give a very long-term good prospect for both the brands over there. With that, Prashant, I'll hand it back to you.
Thank you, Raj. Coming to slide 7, just to give you an update in terms of where we stand with respect to our store openings, both at Burger King India level and BK Cafe. If you will look slightly closer at the numbers, one big strategic shift that we had taken during the beginning of the year was to have a much more evened out store opening strategy. As you know, earlier years, the large part of our store openings would happen in Q3 and Q4. If you look at our Q1 and Q2, we opened 13 and 18 stores respectively, which is about 31 compared to our 9 stores that we opened in the first six months of the previous year.
I guess that strategy is now beginning to gather momentum, and our belief is that next year you will see a much larger impact of a more evened out store opening strategy. Secondly, the team has looked at, you know, combed through every single store, every single store economics, and we chose to close down 12 stores. Our belief is now we are done with the pruning of our store strategy. Going forward, we don't see any major store closures as we speak. We opened our first cafe, Raj, almost one year back in November of 2021. It's now been just a year, and we've opened, as Raj mentioned, 199 cafes.
It probably will be the fastest cafe rollout that the country has seen, and we continue to remain extremely buoyant and bullish about BK Cafe within Burger King. Given the traction that we have had with the 94 cafes this quarter, we remain very, very confident to give you 250 cafes by end of this year, by which time we will have 319 Burger Kings. Raj did mention 33 stores under construction plus 16 pipeline. We feel reasonably confident of giving you 390 Burger Kings by end of this year. As you know, our next year target is about 470.
Yes, we are looking at a much larger 2024 and an even larger 2025, as we speak. If you come to slide 8, this is a new slide that we have included. Over the last quarter, we've been meeting a lot of analysts and a lot of fund managers and people on the buy side all over the world. One of the data points that they've been consistently requesting for is to just try to understand where we are in terms of our vintage, just to kind of compare our ADS with others. As you know, we opened our first store in November of 2014. The business is a relatively new business. We've been operational for a period of about 8 years.
You take COVID out of the picture, it would probably be about 6 years. If you then double click on that data, you'll see that our weighted average operations has been about 3.5 years. All the numbers that you are seeing, just to help you understand those numbers a little bit better. Also, you know, in 2019, just before the lockdown happened, we had opened 74 stores in 2019. Then we opened 15 during COVID, which were under construction, 15 more. This year we opened, you know, some stores. Almost 50% of our portfolio is still almost, you can say, about 12-18 months old within this space.
It means all these are kind of, you know, things to kind of keep in mind when you go through our data. Also the fact that, you know, we've opened cafes, also the fact that we've now started breakfast at our high street. Sumit will kind of share some more data on this, just to give you and negate out the impact of all of this on the margins as well. This is one more data that we were asked to share, and we are happy to kind of share this data with you. Jumping to slide 9. Our average daily sales weighted average on a portfolio basis for this quarter has been INR 127.
As you know, September is a weak month for the entire QSR. As a result of this, you know, what we did in, you know, last year when we came in July, if you take the weighted average of July, August, September, the number stacks up to 127. Delivery is at 43% and dine-in is at 57%. That's kind of an update from my side, including the request to share everything. After this, I'll hand it over to Sumit to take you through the numbers and then to Sumit to guide. Over to you, Sumit. Sure. Thank you, Prashant, and good evening to everybody. I just want to kind of talk about a few of the numbers which are key metrics that we believe are indicators of our progress.
On the revenue side, Prashant mentioned that we've grown by 9% on an overall basis. Just to kind of delve a little more further, what Prashant was mentioning, we've got our ADS to move from INR 120,000 to INR 127,000. Of the total 9% growth that we got, 6% came from the growth of ADS. We strongly believe, with the initiatives on, concentrating on the Stunner menu to the launch of cafe and the day part is what we've literally been able to kind of help push the ADS up from 120 to 127. That's something which we clearly see as a positive. This, to our mind, is a base for us to build on, from where we stand today.
Looking at gross profit as one of the other indicators, we've always been kind of going through the difficult times of inflation. We've always been on the profitable trajectory over the last few quarters. This quarter, again, we are kind of maintaining the gross profit at 66.4%. With the initiatives that we have on the category side, we strongly believe that our target to get to 67% for the year and taking it to 68.6% for the year after, we believe that we are on the path to that as far as our gross profit margin journey is concerned. At the back of all the investments that we've done initially in the last quarter, we've mentioned that we put some money behind marketing.
We did see the result of that in ADS. Our store level data moved up to 8.2%. Prashant, you know, was kind of hinting towards some of the investments that we have made during the quarter towards cafe, towards day part and all of this. As we've seen, our ADS moving up, it has required us to kind of make some upfront investments on some of the cost lines, especially on the lines of people, as well as the increased costs on the utility side.
As we kind of see and as the business kind of builds up, we've seen in the current quarter, roughly both these lines have an impact on our gross margins by, or restaurant EBITDA rather, by close to 2%, which we believe that as the scale, business scale kind of expanding, we should see that improvement coming into our P&L. Similarly, trajectory on store EBITDA is also reflecting company EBITDA, which has moved up from 1.1% to 3.2%. Our corporate costs, we continue to maintain at 5% of our revenue. As those are probably the financial key metrics as far as India business is concerned, we strongly believe that we are poised for our growth and improvement in revenue as well as on our business performance going forward.
With that, I'll hand it over to Kapil to take us through some of the initiatives that we've taken and which we'll continue to take our growth forward from here.
Well, thanks, Sumit, and good evening, everyone. The last quarter was very focused on continuing to drive dining growth on the back of the Stunner program. As you noticed, our ADS has improved over the last three quarters from 104 to 120 to 127. We've been focused on our strategic pillars of driving a strong and sustainable value proposition, building and promoting a very differentiated and, you know, unique menu. Creating variety of beverages to cater to the emerging consumer needs through BK Cafe and building incrementality through that. Finally, creating a strong digital ecosystem which allows the customers to access the brand digitally in every channel, whether delivery or dining. I'll start by talking about the Stunner Value program. Into the next slide, number 13. A free coffee for everyone.
Our 50-50 Stunner menu is an everyday value menu with a range of products at INR 50 and INR 70. There is a choice of format and taste for our guests, and this is a profitable layer and sustainable over time. Now, we have seen the Stunner menu volumes grow by 50% ever since we launched the offering. Customers have given us very good feedback on variety, taste, and quality of these products. This has been on the back of a sustained promotion. The most recent campaign started in mid-June with the celebrity Hrithik Roshan, and we ran it through July and August. Now, on slide number 14. I'm sure you came across the headline that Burger King had been hacked and Hrithik Roshan.
That campaign went viral, and it was a very unique campaign in our own BK style, where we hacked celebrities' daily life and created a lot of buzz. Even where the consumers are, we focus a lot on digital and social media to promote our campaigns, in addition to the conventional impact television, BTL and OOH branding programs. On the back of this campaign, dine-in traffics saw almost 20% improvement in the pre to post-campaign periods. Slide number 15 talks about how Whopper, which is our most signature product, continues to be a leading product in the category. We continue to offer consumers new innovation and taste experiences with the Arabian and the Masala Whopper, very unique products, one inspired by Middle East cuisine and one inspired by very local Indian cuisine. That allows customers to come back, you know, and improve their frequency.
The second part of the Whopper on slide number 16 is where Whopper continues to be the voice of the brand Burger King in social conversations. Our brand has established a very unique, youthful and quirky personality to connect with our consumers, and it has a very, very engaging social feed. Whether it's about events like cricket, movies, technology or informing our guests about the fact that all Burger King products and menus that we develop here is free of synthetic colors and artificial flavors. We have all these conversations on our social media with our fans. The third pillar that I will talk about is the strategic menu layer of BK Cafe. Now, on slide number 18 in the deck, we continue to rapidly ramp up cafe expansion and are well on course to opening 150 cafes everywhere.
The cafe stores continue to drive 7% incremental sales and help us explore and develop new day parts like breakfast. Now, this is a very new concept, you know, for us. It just came up, you know, in the last, you know, 12 months. In the last few months, we've tried to push for cafe awareness on social media and other engagement platforms. For example, celebrating the International Coffee Day, which is on the next slide. You know, we held a lot of events in mall atriums. Did a lot of social media promotion, influencer, you know, marketing to drive awareness about the fact that we have now a new concept called BK Cafe. The last update I want to share on the next slide is about the BK App.
We continue to grow sales and downloads on the BK App almost by double-digit in the last six quarters in a row now. We will continue to build this platform as a channel for Burger King fans in the future and as a strategic advantage for us in the long term. The next slide is just a summary of all the recognitions and awards that we got. You know, in the last quarter with the work done on digital and mobile marketing campaigns, moment marketing and the recent Brand Equity Shark Award where we won the silver for best use of mobile marketing. This was for the cricket hack campaign that we had run in quarter one of this year. With that, I would now hand it back to Prashant to walk you through the outlook.
Thanks, Kapil. Guys, our outlook more or less remains the same, except the fact that, with so many cafes opening, we believe we will probably be at the higher end of the same store guidance for next year, which we should be double digit plus, going forward. Despite the inflationary trends, given the way we managed our products and our cost, we remain confident of giving you a 67% gross margin this year and 100 basis points over that, next year. On the cafe side, as we had guided last time also, we'll end this year with 250 cafes, and next year we plan to open another cafe, take this to 350, by which time we'd have total bookings of 470.
No major change in our guidance that way. I'll then hand it over to Sumit to take you through the update on the Indonesia side. Sumit?
Thanks, Prashant. I'll just quickly talk to you about Indonesia because Raj in the initial update did cover Indonesia to a very large extent. As far as Indonesia is concerned, we did open 5 stores during the fourth quarter and shut down 1. All of these were freestanding drive-throughs, and we spoke about this, that as we go along our foot-
Growth strategy would be revolving around freestanding 500. We will see the portfolio to kind of move more and more directionally towards that. As far as average daily sales is concerned, we still remain in the region of around INR 98,000, and that's one focus area for us. Various initiatives largely starting with complete menu architecture, which kind of we've already touched in subsequent slides, and I'll just talk to you about that. To realignment of the portfolio, which we believe should be able to kind of help us get back to the normal levels of ADS in terms of pre-COVID levels. If we really just do a little bit of deep dive into numbers, yes, revenues have remained flat.
At the same time, with the menu architecture, kind of redefining the value strategy in Indonesia, we did make certain investments on the marketing side towards later part of the quarter, and which we would continue to do as we go into this quarter as well. We did see the company EBITDA in the negative or the loss to kind of expand. This, which we believe is, should only help us, as we go along, because the large part of the investment has gone towards spend on the marketing to help build the brand. That's one part which we feel that should help in the long run as we go along. As far as go-forward strategy is concerned, as Raj was mentioning, the key part is effectively to rebuild the entire menu or reposition the entire menu.
We've gone live with the value part of the menu, which we call as GoKing. The early results that we've got seems to have been very, very encouraging. Now our next part of the strategy which we would roll out on the menu side during the quarter would be to reposition the core of our burger menu, which would be led by Whopper. Whereas as far as Indonesia market is concerned, it's fairly deeply dependent on the technology side. We have the advantage of very strong customer loyalty, customer base standing at 6.7 million. We would further invest on the CRM side to get more traction on the customer side as far as the loyalty is concerned.
That's a quick brief on the loyalty on the Indonesia side. With that, I'll hand it over back to Nihal to open up for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may enter star and one on their touchtone telephone. If your questions have been answered and you wish to withdraw yourself from the queue, you may enter star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask a question, you may enter star and one. We have the first question from the line of Devanshu Bansal from Emkay Global. Please go ahead.
Thank you. Thanks for the opportunity. I just wanted to understand in-store margin performance. In my view, there have been likely two headwinds. One is our delivery mix is reduced in favor of dine-in. The second one is we have gained a strong traction in standard menu. Despite that, on a YOY basis, our gross margins in India business have improved by about 100 basis points. Just wanted to understand what has led to this. In H1, we are at about 66.4% gross margins, and we have retained 67% gross margin target for the entire year. That suggesting an improvement in H2, despite some raw material inflation.
Just if you could cover these two questions, it would be helpful.
Thanks, Devanshu. Raj has been consistently communicating with investors and analysts alike that when we look at gross margin, it's a function of both the numerator and the denominator. A lot of people often look at just the denominator and what's happening on the cost side to evaluate gross margin. One of the things that you know we've been doing consistently in Burger King India ever since we started was to build a very balanced menu architecture. You know, we have a standard menu which is up to INR 50. Then we have a classic menu, anything between INR 51-INR 100. Then we have Whopper, INR 101-INR 150. Then we have the King's Collection at INR 150-INR 200.
Our ability to first acquire a customer at a standard level and then keep migrating him across classic, Whopper and King's Collection. Our current understanding and belief is that this is something which is playing out to our advantage. This is also besides the fact that we just started BK Cafe and our hope is that, with the way we are doing on BK Cafe next year, you will see a push for the gross margin coming from BK Cafe. Product mix has been a very critical part of our gross margin strategy. Second, we like to open our stores within clusters. We've repeated this in the past that 70% of all our new stores open in the same city.
What that does is, you know, let's assume we have a city where you have, say, 8 stores or 9 stores and I open 3 more stores. The same truck that is going and delivering product to these 7 or 8 stores now delivers to more. In our case, as you know, our cost of goods sold includes the distribution cost. As we open more stores within that same city, there is a leverage which comes to us by way of, you know, distribution cost, which obviously gets reflected in gross margin. Third, again, as we keep growing in scale and in size, and now with the Indonesian business also being acquired, which we are now trying to explore the possibility of, you know, sourcing some ingredients and raw material from India.
Our ability to now sit across the table and discuss and negotiate with vendors will probably go up. As a result of this, you know, we've been able to maintain our gross margin. Normally, you will see us that if we are saying 67, you know, we will probably want to outdo that. Unfortunately, because of the inflationary pressures this year, if we have not been able to outdo, we remain confident of at least delivering a 67% gross margin.
Great. Great, Prashant. That's encouraging. Secondly, you covered it a bit, but still wanted to understand. Versus Q1, our ADS has increased by about 16%, and we had some 220 basis points of one-time marketing expense in Q1. Adjusted for that, still we are not seeing any sort of improvement in the store level EBITDA margin. What potentially are the reasons for that?
There are two things. One, my colleague Sumit tried to explain. What happens is we are, when you're opening 200-250 cafes in a year, anywhere between 2 to 3 baristas or 4 baristas per cafe that you need, all these people need to get trained. Over and above that, we are opening 80 burger teams. We'll have another 1,200-1,300 people to train over there. All this training costs somewhere has got incurred, you know, last quarter, this quarter. You will see this impact at least for another couple of quarters. What happens is still the ADS will take a little, will go up with a little lag.
Today, if you look at my people cost, my people cost would have been higher by about 150 basis points as a result of this initiative. Second, you know, as we open cafes, you know, we started breakfast early morning for all our high street restaurant now open at about 7:00 A.M. Now, the breakfast ADS takes 12-18 months to kind of build up. Today, it's only about 2%-3% of our day part. Over a period of time, this will be a very large, meaningful part of our business. We have to open the restaurant at 7:00 A.M. if you want to build that business. There is another 50 basis points impact on that coming on the utility side.
These two alone, you know, will push my EBITDA margin at a store level to a respectable level this year. I think we are one of the reasons why we showed that slide on our weighted average store. We are still a three-and-a-half-year-old company, right? Our ADS today stands at INR 127. As you keep moving forward and your ADS keeps growing, this is a change for guidance that we have given you. When profit begins to kick in, what you will see is as your ADS keep growing, there is a disproportionate operating leverage that kicks in. One, gross margin, two, rent, three, people cost, four, utility. All of this next year will give you a store level EBITDA margin which will be significantly better.
Just I would request you guys to be little patient for the next two, three quarters. As the business scales up, as all these new initiatives begin to reflect in the ADS, we'll catch up on the margin front as well.
Got it, sir. Last question from my end. We closed 12 restaurants this quarter. Where is the cost associated with these closures? Where does this cost sit in, I mean, in which line item?
One is the capital cost with respect to LHI. We kind of accelerated the depreciation up to date of closure. Largely that cost will sit as part of the depreciation line there. That's how it gets represented.
Versus last quarter, I guess, depreciation has been reduced. Why the, can you explain that? Earlier it was around INR 33-34 crore. Last quarter it was INR 48 crore. In this quarter it is INR 43 crore. Number of closures happened in this quarter.
As I was explaining actually that we, you know, once we decide on the schedule of closures, we start accelerating the depreciation from that part. A good part of the accelerated depreciation went in last quarter itself. All these stores were closed in the early part of the current quarter around July, August or so. That's why, while you are seeing a dip or drop in depreciation, the closure related depreciation cost or the cost is sitting in depreciation line. It's just a substantial portion will get recorded in quarter one, and a small part of that came in quarter two. That's the reason why you are seeing that.
These are planned closures, right? At some point, you decide that, you know, you are going to close these restaurants. Obviously, it takes a little while to put all your agreements and everything in order before you close the restaurant. What you start doing is to accelerate your depreciation before the closure date. It takes. Usually, closure lags behind the cost depreciation. That's why you saw it in previous quarter.
One other thing, we also, since you are talking about the closures, this was a detailed evaluation that we did during the early part of the year and kind of decided to take a decision to carve out a portfolio which was not doing well for us. Now we've, as we now stand, we are now sitting on a very strong healthy portfolio. We feel that we will not see stores as we go along over next from here on for at least 3-4 quarters.
Got it. Thanks, Alot. Thanks for the presentations.
Thank you, Raj.
Thank you. We have the next question from the line of Palak Shah from Infina Finance. Palak, please go ahead.
Hey. Hi, thank you for taking my question. The store's thought process. What are the criteria when you look at a store closure for a store success?
Criteria for store closure success?
You know, obviously if a restaurant does not have potential to increase revenues, you know, past the average revenue of the business, and you know, there's sometimes other important things like, you know, when we are offsetting a restaurant, there's a better site across the street or down the road. Then what we do is we offer that restaurant, build it in the newer site, better site. The synergies have gone there. We move the restaurant there and close the restaurant in the old place. There's multiple things that we look at that we take into consideration.
Like, if you look back at our 8 years, you know, we have closed maybe 6-7% of our restaurants, well below the you know 10% industry kind of standard. We have been opening restaurants, a lot of due diligence and you know closures are always good when they are not possible or useful in the long run. Those are the kind of things we look at before we close the restaurants.
Also, just to add to what Raj mentioned, you know, given a lot of our CapEx investment happens in the kitchen and then the furniture, almost two-thirds of the CapEx when we choose to shut down the restaurant is recovered by us. To that extent, you know, as a discipline, if we feel that, you know, the restaurant will not be able to do the numbers we think it would do when we sign off the restaurant after giving it a certain amount of time, we will then be disciplined enough to close it.
Correct. Thanks, Raj. One more question on the quarterly margins. If you look at last quarter, you had referred to percent additional expense towards AMP spend. But given that it will be more normalized this quarter, despite of that, we are not seeing any material change on a sequential basis, the margin both at store level as well as company level. And as in one of the reasons they explained was the additional spends towards the employee cost or employee training. Just want to understand if there is something else that drives this in this quarter.
Yeah. We've been sort of saying there are. If you look at our business, even from a near-term perspective with versus a medium to very long term, there are four broad operating leverage levers at play. One, we believe that our longer term direction is to take our gross margin from where we are. We'll be this year 67% to closer to 70%. Second, rentals currently sitting is at about 3.5%. Our view is as we are opening more and more stores, the current, you know, threshold of stores are all being opened at about 10% rent to revenue plus 18% GST. As your ADS improves, your rent as a percentage of revenue will come down.
There is a second lever of operating leverage that you will see at play both in the near term and also in the longer term coming from rent. This is second operating leverage. Third operating leverage, you know, Sumit was mentioning is currently our people cost will be about 150 to 200 basis points higher than a lot of our peers. That is as a result of two things. One, because our ADS currently stands very stretched. As you do more ADS, your people cost as a percentage of revenue will come down. Last couple of quarters because of all the training of our current staff as well as the new store, you've seen a little bit of a slightly higher impact. Fourth is our utility cost.
Utility cost also there is a smaller impact in terms of operating leverage, but there is a certain amount of operating leverage that we can take there. The last lever for us when it comes to operating leverage is our corporate cost. As you will see, as we open more restaurants, our restaurant growth will move this year from 390 to about 700 by December of 2026. With the growth in ADS, you will see our top line growing far aggressive than our restaurant growth. As our ADS growth grows more aggressive than the restaurant growth, all this operating leverage coming into play. Corporate cost as a percentage of revenue will come down significantly. We don't expect our absolute corporate cost to go higher than about 8% every year.
Now when you factor all these four pieces, you will start seeing the, you know, shades of that, which is what Devanshu also asked. Starting, you know, end of this year and entire of next year, you'll start seeing all these four levers, playing out.
Correct. Just on that. The point that I'm trying to make is that if you look at this is the point under corporate overhead expenses. This quarter itself on a sequential basis is gone up by 9% and at 20% on a YOY basis. This is factoring the reported restaurant EBITDA minus the corporate EBITDA that you mentioned. Actually, the operating leverage is not being able. We're not able to see the operating leverage benefit that should be accrued.
I know, yeah. If you start keep looking at quarter and quarter, then you get into so much of semantics. Broadly, if you look at it, you have the entire team that we have over here. As we keep growing, do we see significant addition to our senior leadership? Answer to that is no. Will we keep adding supervisors and staff over there? Answer to that is yes. 10% is a fair number to assume in terms of our corporate cost going up. INR 70 crore number will next year probably go to INR 75 crore-INR 80 crore. Will that INR 70 crore number go to, say, INR 90 crore? Answer to that is no.
Got it. Just lastly, on the Indonesia business. Last time you mentioned that the July 2022 exit ADS was IDR 105, but this quarter the reported ADS is just IDR 98 thousand. Is there something specific that we have taken an initiative related to this drop or this is more structural?
July, as you know, right, you know, once the Ramadan gets over, you know, there is a period whereby you know the whole country opens up and people kind of come and celebrate in a bigger way. July was largely because of that. Let me say here, Indonesia delivered to our expectations. Answer to that is clearly, you know, our earlier understanding was that, and we spoke to you guys and we mentioned that, you know, by September or latest by December we expect a full COVID recovery. We go back to our pre-COVID. Currently, you know, if you ask us, we believe that instead of December, we are hopeful that by March we should be able to come back to our pre-COVID.
What we are doing internally, as Raj and Sumit mentioned, are two things here. We are doing a lot of work on the menu and the menu architecture, and it's a resultant impact on the gross margin. You know, our gross margin when we acquired this business was about 57.5%. We've already been able to take this from 57.5% to 59%. Gross margin sitting at from where we are is a very important qualitative metric that we drive because in our view that is a very, very, you know, important part of how well you are running the business. Because a lot of the other things sitting below gross margin are all linked to ADS. If your ADS grows, those numbers will automatically grow. Gross margin is something that is under your control.
That's one area where the team has significantly kind of spent time and worked to pull that up. We believe that we'll still further take this to closer to 60 by the end of this year. Second thing we have taken a call once we went there and did a lot of work is, you know, over the last 3, 4 years, the company in Indonesia had little bit underinvested on the marketing side. They were not present on television. As the macro recovery picking up, we are ready with our strategic like celebrity there. We will take, we are playing on the front foot PR, and we will take the Indonesian business to television. We are hopeful that 2024 will be a very different year.
Yes, in some ways you can say that, you know, we are running six months behind the Indonesia side.
This is the operator. Mr. Shah has answered all your questions.
Can I just one more question, if you don't mind? Just on the Everstone stake. There were media articles mentioning that, Everstone is looking to sell this entire stake they hold in Restaurant Brands Asia. Your thoughts on this, please.
When we had done the roadshow, we had guided all investors that 2023 their fund life gets over. I think the process will start. We as a company are yet to hear about that. At some point of time they will take an exit. We had mentioned this during our roadshows at the IPO. The exit is gonna not happen in the public markets in India. The exit is gonna happen at the RB Asia level, which is in Singapore. We were at that point of time able to understand was that, you know, when they exit, either a large financial partner or strategic buyer will come in. Yes, it will be fair to say 2023, 2024 is somewhere where you will see that process unfolding.
All right, great. Thank you so much for the update. Thank you.
Thanks, Palak.
Thank you. We have the next question from the line of Sabyasachi Mukerji from Centrum PMS. Please go ahead.
Yeah, hi. Thanks for the opportunity. My first question is, you know, in line with the previous participant. See, I just wanted to understand that what is the issue with the Indonesia business? Because, you know, pre-COVID we were doing, you know, IDR 135,000 kind of ADS number without the menu alignment, without the advertising spend, without the celebrity endorsement. Now we are struggling. I mean, it's COVID is gone. What is the issue over here?
Yeah. Thank you. This is, I think Prashant did explain that very articulately, but I'll take another shot at it. A couple of things. If you remember back when India's COVID opening had started, and it started slowly and it kind of gradually opened up, right? It was state driven. It was driven, malls came in, then the offices and schools and colleges. It wasn't a switch that was flipped in one day. It took over time as the business kind of opened up to the customers. It was a process. We also shared with you last quarter that Indonesia was about, you know, 3-4 months behind India in terms of opening up. That's the first thing, right?
They're kind of lagging a little. Now, here in India, when we were in the COVID stage, there's a lot of work that was done on menu architecture. I mean, most of the companies and ours, specifically, we did a lot of work in restructuring and putting up menus and planning to come back post, you know, opening for post-COVID. That kind of work is going on in Indonesia, right? The 135 was there, and the potential is significantly higher than that. That's the excitement about the Indonesian market, is there's a potential to drive that business significantly as we see, you know, that opportunity. There's a lot of work we are doing on menu, and you will understand that in our business, it all starts with menu.
starts with building a quality menu architecture, filling that menu architecture with the right items that are tested, you know, by the consumer, that have all the checks and boxes ticked. Once you have that structure in place, menu architecture is just not about quality and food, but it's also about pricing. It's about setting up a parameter. That is the work that is going on. That's why we said we will need some time to make sure all those things are in a row. The recovery over there is just in the process of getting into gear. Overall, the industry over there is kind of in line with the recovery process that we see at our workings over there.
Maybe slightly better in some of the businesses, but predominantly in line with what we are experiencing. You will find that as this thing is kind of behind us, that we, when we open up, you know, fully and we are fully structured moving forward, that we have a proper menu architecture in place. We have the campaigns in place to come back hard, like Kapil had here in India. He had a fantastic campaign lined up with Stunner. Those are the things that we're putting in. The initial thing, the first thing that we did over there was GoKing, right? I spoke about that in my opening, which is the Stunner for Indonesia.
Menu architecture again is about bringing people into the business, graduating them over time period, and building in larger menus for those occasions, right? That storyline is we are building it on it. Rajeev Varman, our CEO over there, is not today with us. He's on the road and could not make it to the call today. He's working diligently with his team. We have a new CMO there. A lot of contribution from Kapil Grover over here, who's also helping out with the menu architecture and so forth. Our head of operations also was there for a few days to kind of guide on the opening process. This will take a little while, but you know, this is a very strong business.
I'll tell you as I spoke a quarter ago, I am fully convinced about this business. I feel this is a strong business with very good economics. It has a very good rent over there. If you look at the rent in our portfolio right now, we are kind of moving. We have gradually brought it down from 15% to 14% to 13%, and we're kind of moving it towards 11%. That business already sits at a 8.5% kind of a rent. That's the kind of business that is. The cost of sales on delivery is significantly lower. There's some intrinsic advantages to that business that exist, and the rest is about you know, just hard work and getting it back in there.
I hope that answers your question, right?
Follow-up to that is how long will it take for all these exercises to kind of be in place and you reap the benefits out of it?
Okay. We will carry you through the journey. We are with you every three months. We're on the phone every three months. Let's just carry you through the journey. Let's not make a forward-looking statement on the call. Let's just carry you through the journey. We are working very hard. We are working with the team over there. There's a lot of work going on, and we'll keep updating you.
Sure. My second question is on the India business. If we look at on a sequential basis, Q-on-Q, there is a 9% growth, and out of it, 6% has come from ADS growth, as you mentioned, in your opening remarks. I just wanted to understand that, you know, you have done this campaign on the Stunner menu with Hrithik Roshan. Also, you know, BK Cafe, the count has increased. All of this only, you know, increased the ADS by 6% only. Is that the number we can achieve or we can achieve far more?
There are two things, right? One, if the number is what it is, which is 9,000, yes, we've opened almost 150 cafes. But if you look at on a weighted average quarterly basis, of that, you know, 7,000 incremental ADS, the cafe contribution would be about INR 2,000. But the bigger piece to look at it as cafe is doing an incremental ADS of about INR 8,000-INR 10,000. And if you just multiply that number into 365 days into 250 cafes that we will have at the end of this year, you will get a sense in terms of the impact of cafe next year, considering the fact that it is a number significant higher gross margin compared to that. From that perspective, you know, keep that in mind.
Number two, we have still guided for a 25% same-store growth rate. Sometimes what happens is we have one very good quarter. People expect that every quarter we will have that kind of. It's not just us, right? The July or the September quarter for the industry as a whole is a softer quarter. Will it be fair to compare it with June? I do think it's a fair comparison to make that comment on the basis that I think look at our business slightly more on an annual basis. We'll deliver you a 25% same-store.
We are guiding 10% AI share next quarter anyway, so.
I understand that September is a weak quarter. If I may know, how have things been in the October, and the first 10 days in November?
Yeah, October, as I said, right. October is the build-up of for us. All QSR, December is the biggest month. Yes, as we enter December, we are all also hoping it's our big month. We'll have a lot of store openings that have happened. Yes, looking forward to December.
Okay. Last question.
We are guiding sales SSG. You've seen that on Prashant's slide. We continue to grow there. We have told you that the cafe is adding about 6-7% incremental sales, where our intention over there is to continue building that. We put all these building blocks. The intention is not that we do one Hrithik Roshan campaign for a quarter and then we're done with it. This thing just keeps going forward, right? That's why it's a scale business. Not only number of restaurants we build, but the amount of sales we build over time within the same restaurant.
Right? You will see all this coming through as we build it. Okay?
Thanks, Sabyasachi Mukherjee.
Last question.
I'm really sorry to interrupt between the participants waiting.
I would request you to come back. Yeah, thank you. We have the next question from the line of Niraj Chheda from ICICI. Please go ahead.
Yeah, hi. Congratulations and good first half number. My first question is, regarding inflation. What kind of inflation we are facing on CapEx, and what will be the current run rate, or current CapEx per store right now?
First of all, we did see some headwinds in the early part of the year, which is now slowly starting to kind of settle down as far as the capital related inflation is concerned. That is one. Secondly, you know, a part of the inflation impact which we are seeing, we are also trying to address through re-engineering the assets that we kind of put at the stores. That's one. Secondly, you know, what Prashant was talking about. You know, for us, literally speaking, the scale is shifting for us. Earlier when we were buying assets or for that matter, anything, it would have been buys per India. Now we've consolidated the entire asset buys for India and Indonesia on a consolidated basis.
While there is headwinds on the inflation front, we've also been able to in some form mitigate it by the, you know, manner of scale, increasing the total scale of the buying that we are doing for both the geographies. Otherwise, average inflation on the CapEx side has been around 4%-5% as far as we're concerned. Roughly, on an average, we spend around INR 3.2 odd crores for the purpose of setting up a store. I'm talking about more from the purpose of high street stores, which is what are going to be our strategy way forward. This also includes, you know, incremental spend that we put for setting up the cafe, which is in the region of INR 20-35 lakhs. That's roughly the CapEx spend that we have.
Yeah. Thank you. That's really helpful. Second, I understand that management is completely independent from the promoter as day-to-day activity is not being interfered by the promoter. In any way, stake sale or overhang of this will impact our strategy to expand or, will it impact our day-to-day operation in any way?
Yeah, hypothetical question, Neeraj. My answer will also be a little hypothetical in that sense. Two things, right? If you structurally see, you know, the store opening guidance is defined by the Master Franchise and Development Agreement. Irrespective of the change that happens, that will not change. If somewhere in 2023 and 2024, when, you know, assuming there is a change that takes place in terms of control, a lot will depend on who's coming in. If you also structurally see, you know, we've been driving this ship pretty well and pretty efficiently. I don't see a reason why somebody will want to come and disturb a ongoing ship that's doing well, because, you know, ultimately they will also pay top dollar for good asset, right?
You don't pay top dollar to come and then kind of disturb a well-run ship. Hypothetical, Neeraj, in that sense. All I will request is just to wait and watch till something develops.
Sure. Thank you. That was my last question.
Thank you. Ladies and gentlemen, we will take one last question and then close the question queue. We have the final question from the line of Prateek Kumar from Gordon & Company Mutual Fund. Please go ahead.
Yeah, hi. Let us, go a bit deeper into this 200 basis point of cost impact, which is roughly INR 7 crore, which is on people. Could you just help me understand what is this INR 7 crore of impact, please?
Sure. Prateek, basically what happens when we've kind of gone ahead implementing cafes across 180 odd stores, we had to literally get people trained. On an average, we put 2 baristas to be able to serve a good beverage to our customers when they come up to it. That is one major shift that we've had this incremental cost on the labor side, on the cafe side, as I was just talking about.
Similar to that, you know, as we kind of got into putting our money behind cafes, we also parallelly saw a very clear opportunity now to expand into the breakfast side of the segment for us, which essentially means that we have to open the stores at least, almost all the high street stores literally started opening at anywhere between 7-8, which is incremental 2-3 hours of operations, leading to getting 3-4 people during that period of time. Literally as a combination of these two, if you really look at it, is why there has been an increase in the labor or we didn't get the leverage efficiency which we would have otherwise got had we not made this investment.
At the same time, we would have also not got the increase in ADS as well. It's a catch-22 situation in terms of whether do you invest ahead or not. We decided to invest ahead of the curve.
See, these are kind of costs that they sit on the P&L because of all the accounting. But really, if you look at this is an investment the company makes for the future, right? When you start a new cafe or you start a new day part like breakfast, investment ahead of time, wherein the sales will come behind. And that's how you kind of build those blocks on your journey towards, you know, from 127 to whatever the journey is you're planning that has blocks. Those blocks are menu items. Those blocks are day parts. Those blocks are check. Those blocks are traffic. There's a strategy and I think if you heard Prashant's speech, he had those pillars.
Those pillars are the strategy how to build those blocks moving our journey from 127 upwards.
No, I understand and appreciate that, Raj. The thing is, Cafe is a 75% gross margin business. You know, if I take the cost of 2 baristas for a month and, you know, divide it by gross margins, and you see the ADS which you need, it's insignificant or it's quite less relative to what you have just talked about on an incremental basis. For me, it's very difficult to understand that because the idea is that, you know, if that's a barista cost, which is
Let me tell you this experience, right? We have hired about 1,000 baristas, right? 800 to 1,000 baristas. They've had to go through training for several weeks, right? That training will happen before they're put into a restaurant. You just don't hire them and switch on. You know, there's a training. Plus, in addition to that, you're building, you know, 60, 70 restaurants, right? Those crews don't just go on day one to that restaurant. They go into another restaurant, they train for several weeks, and then they get certified before they go into a restaurant. There's a lot of training that happens that goes into a labor line. There's no separate training line on our P&L. It's all in the labor line.
Okay, that's it. Secondly, just wanted to check with you, have you taken any price hikes in the month of October?
Yeah. You know, we haven't taken any significant, you know. We take, you know, slight changes here and there on price, whether it's driven by, you know, which market we have gone into. For example, we go into Northeast, we might go in with slightly higher pricing there. Nothing very significant that has been done at all in October. Yeah.
I don't know where you are coming from. As compared to where you are coming from in terms of your question, no, we've not taken any price hike.
Okay. Lastly, just to Prashant, you know, if I were to think of next year and you called out the four levers for operating leverage to play out, which is corporate costs, including people costs, again, going down incrementally and utility, how should I think about store level margins or company level EBITDA margins? Do you think we're able to get next year with all these investments paying off?
Sir, we will be somewhere in that vicinity. I'll tell you where there's little hesitation in kind of committing to that number on the call, which there'll be a transcript, you know. Structurally, I think everything is a function of how the ADS goes, right?
Correct.
Let this quarter go, you know, October, November, December. Let's see where our base stands in December. Maybe we will be in a much better position probably if you give us one more quarter to answer when we come to you in February. Given the Cafe, given that we have about 390 Burger King stores, we are just waiting for one good quarter in terms of offensive because it resets the base. Because one thing is very clear, and if you look at our ADS, which has reduced to 127 compared to about 110 when we were pre-COVID, we are still short of transaction by about 110, 120 at a check size of about 310.
If this traffic were to come back, you know, then we'll very, very easily hit the number that you are showing. For that, we need one good quarter of festive period for people to come out. One thing which is currently not helping our cause, given that we have a large part of our, almost 60% of our portfolio is in malls. Unfortunately, the Bollywood movies are not doing well, right. I'm just hoping that with this festive quarter coming, a little bit of a Bollywood movie doing well, we should be in a much better position to come and answer this question, when we come back to you with the December number.
It is extremely successful in drive-throughs rather than high streets, isn't it? So any thoughts why you have opened breakfast in high streets where generally the uptake, whatever I have understood of this industry, is less versus what it is for drive-throughs?
No. We opened both the places. It's not that we've opened one. The only place where we don't open for breakfast is malls because malls open a little late. Otherwise, across the board, for high street and drive-throughs, we opened everywhere.
What's the share of drive-throughs out of 332 restaurants?
Around 24% of our portfolio is drive-throughs.
I'm sure. I think it takes a little longer to build drive-throughs because, you know, it's a greenfield kind of project.
Mm-hmm. Yeah. Yeah.
Yeah. We're kind of still building the pipeline. You will see a lot more of these coming as we kind of move forward. You know, the malls are done like I told you the last quarter. You know, malls are done. We did about 15 malls a year, so we've done those. We've done high street. You know, today in Mumbai, we have a lot of opportunity. We are sitting at 40-some restaurants. The opportunity is to maybe even double or triple that number of there. A lot of high streets will come in because these are going to be high street. There's no room in Mumbai to be building a drive-through restaurant. There's freeways and so forth, so we continue building those.
Prashant, we have 41 drive-throughs today.
41. Sorry. 41 drive-throughs.
Thank you. Ladies and gentlemen, that was the last question, and we will now close the question queue. I would like to hand the floor back to the management for closing comments. Please go ahead.
Thank you everybody for joining the call. I know, some of you we've not been able to answer your questions. Do send in your questions if they have not been answered to, info@burgerking.in, and we'll do our best to answer them. Thank you, and have a wonderful weekend.
Thank you, guys.
Thank you, members of the management. Ladies and gentlemen, on behalf of Nomura Institutional Equities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.