Ladies and gentlemen, good day, and welcome to the Sapphire Foods India Limited Q2 and H1 FY 2024 Earnings Conference call organized by Orient Capital. 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 call, please signal an operator by pressing star then zero on your touchtone phone. Please note that the conference is being recorded. I now hand the conference over to Mr. Bhavya Shah from Orient Capital. Thank you, and over to you, sir.
Good evening, everyone. Welcome to the Q2 and H1 FY24 Earnings Con Call for Sapphire Foods India Limited. From the management, we have with us Mr. Sanjay Purohit, Group CEO and full-time director, Mr. Vijay Jain, CFO, and Mr. Rahul Kapoor, Head of Investor Relations. I hope everyone had a chance to go through the results and investor presentation, which was uploaded on the exchange earlier today. Before we proceed, a reminder that this call may contain forward-looking statements which do not guarantee future performance and involve unforeseen risks. Our detailed disclaimer has also been published in the presentation. I would now like to hand over the call to Mr. Sanjay. Over to you, sir.
Good afternoon, ladies and gentlemen. Welcome to the Sapphire Foods Q2 and First Half FY 2024 consolidated financial highlights. Let me jump in straight away. Our Q2 consolidated restaurant sales at INR 641 crores grew by 14%, and our EBITDA at INR 117 crores grew by 13%. This is despite continuing headwinds that we see in the quarter, and this quarter has been further exacerbated by an additional month of vegetarian days or Adhik Maas. From a quarter-on-quarter perspective, raw material inflation has been stable, but on a year-on-year basis, we have had improvement in raw material prices, and therefore gross margins have seen significant improvements year-on-year. We added 36 restaurants in this quarter to take our total restaurant count up to 814.
23 of them were KFC, nine Pizza Hut in India, and we opened four Pizza Hut in Sri Lanka. Our consolidated restaurant EBITDA margin was 16.1%. It was down 70 basis points versus last year, but it grew in absolute terms by 10%. Our consolidated EBITDA, this is post-Ind AS, is at INR 117 crores or 18.2%. This grew year on year by 13% and was down 20 basis points over last year. Consolidated adjusted EBITDA was about INR 68 crores or 10.6%, down 50 basis points versus last year, but INR 68 crores was 9% up year on year.
Consolidated PBT, and this is post-Ind AS PBT, was INR 21 crore or 3.3% and declined year-on-year by 21% or down 150 basis points, and consolidated PAT was INR 15 crore or 2.4%. Now let me go on to KFC. This quarter, KFC, as I said earlier, was impacted by an additional month of Shravan. I'm looking at slide number. I'm starting from slide number 19 onwards. But the brand delivered a very strong performance despite the additional month of Shravan. Vijay will talk about the numbers, but let me first look at slide number 19. These are our brand priorities. These six brand priorities are a continuing theme that we focus on, quarter to quarter, year to year.
It is to enhance the fried chicken category relevance through advertising and communication, to be known as the taste leader in the QSR category. Innovation drives this perception. Value is an important part. We've launched Snackers at INR 99, and the initial response has started quite well. There is lots of potential for growth in this value range. From an innovation perspective, we launched Double Down Burger. It's a repeat of our earlier limited time offer that we had done. From a frictionless customer experience, we have now digital kiosks implemented in 115 stores. Customer reactions are quite encouraging, leading us to believe that if customer is in charge of their his or her own journey, it leads into a better experience, and therefore even higher average ticket value.
From an operational excellence, we continue our seven minutes Express Pick-up. This is the nuts and bolts of our business. If we deliver operationally well, as all other, we'll be able to serve our customers good food at good experience and at good value.... And this is day in, day out, a focus at our store. And finally, from an improving accessibility point of view, the slide number 22 talks - looks at some of our new stores. Vijay, if you can just talk us through the financial highlights.
Thank you, Sanjay. Go to slide number 23. Channel-wise mix has largely remained stable for KFC, with delivery coming at 38% mix and dining at 43% for KFC. Moving on to slide number 24. Overall restaurant sales grew by 19% with flat SSSG. This despite one additional month of Shravan, which we experienced inQ2. Gross margin improved by 230 basis points. Year-over-year, it was stable quarter-over-quarter. This, along with tighter cost controls, meant that KFC delivered a very strong restaurant EBITDA at 19.2%. In fact, if you look at EBITDA at 20%, which is highest ever delivered by KFC Sapphire for H1 . Moving to slide number 26, it gives you a perspective over four years and last five quarter trend.
Overall, brand continues to be very, in a very strong position, and we will continue with our pace of expansion on new restaurants.
As we move on to Pizza Hut. Pizza Hut has undoubtedly had a tough quarter. Our SSSG has been - 20%, and overall brand, despite store expansion, has declined. Overall, brand sales has declined 6%. I want to call out three things here for you. One is macro conditions continue to remain tough for all consumer categories, including QSR, and you can see that through the results of other brands also. In this QSR category, KFC Sapphire itself is flat SSSG, and when you look at the results of other QSR companies, it is anywhere between 0% and 5%. In the pizza category, over the last 18 months or so, competitive intensity also has been perhaps the highest in the QSR category.
As you can see by the results of the number one player in this market, so the number one player always leads the market performance. There also we have seen the impact of competitive intensity. Our SSSG decline of 20% comes over a comp of 23% last year, which was perhaps the highest in our history. And if I look at a two-year SSSG average of between 1.5% and 2%, that will compare a little more favorably when you look at other brands also. So, having said that, we are not standing still as I've said. Clearly, we need to revive the brand, and I'm looking at slide number 28 in the deck. We are trying to give you a detail of the action plans that we are pursuing under four buckets.
The first one is: How do we build brand salience? We find that the brand, while overall awareness is as high as the number one player, we lag on awareness and on we lag on top-of-mind awareness and consideration. This is not something that is new. This is something that we have known for the last five or six, seven years. I think both product innovation and enhanced marketing spends are the ways to improve salience. We've launched a large pizza, initially in two states of Gujarat and Kerala. It has started to do well, and we've got a quite exciting innovation pipeline over the next six to 12 months' time. Further than that, we continue to enhance our marketing spends over and above what is mandated with our franchisor.
The second leg that we are focusing on is dine-in sales, and dine-in sales has two components. One is from an operations perspective: How do we deliver speedy service, and how do we deliver high quality of customer experience? So we've invested in a Dragontail tech solution. This is an intelligent kitchen production planning tool, and this enables us to serve hot and fresh pizzas as quickly as possible to consumers. This is perhaps we are the only player or among the very few or only player in India to have such kind of a kitchen planning tool. And it has been one or two months since we have rolled it out to all Pizza Hut stores, and it's a start. We are quite we are quite confident that this will help us going forward.
From a customer perspective, we are doing a lot to reinforce the dine-in experience through both curated deals, through analytics, and through CRM programs, and we want to build the lunch dine-in experience. The third leg is to strengthen home service. And again, there are two pillars, two big action points. We've opened late night occasions, and today 65% of our stores deliver 2:00 A.M. and beyond. So that's adding a new occasion leg to our sales. And finally, Dragontail is now being integrated with the aggregator platforms, so that irrespective of when the rider comes to the store, we are able to calibrate when we load the pizza, and therefore, in the shortest possible time, the consumer is able to receive the pizza, and therefore it's hot and fresh. So this should impact our ratings.
As it impacts the ratings, will also help us build sales. The last part is our real estate strategy, and many of you all on this call would have asked us this question: With Pizza Hut, this performance, what do you plan to do on new store expansion? We are calling out that we'll be very cautious on our rate of expansion. There are opportunities that are still available for us to expand. We'll do that judiciously. There'll be some level of portfolio corrections, perhaps 3%-5%, where we'll close non-performing assets. We continue to invest behind refurbishments because this enhances customer experience. And finally, there's a continuing project on CapEx optimization through process reengineering on the back end.
I want to reiterate this, and again, you'll have heard me and Vijay say this, that Pizza Hut remains an important pillar of our multi-brand strategy. Despite the short-term dip that we have seen, with the above action plan, we believe the brand will recover in the medium term. Over to Vijay to give you the specifics on the financial numbers.
Yep. Moving on to slide 33. The channel-wise mix has remained stable even for Pizza Hut, largely. Delivery at 49% and dine-in at 35%. Slide 34, overall Pizza Hut revenue has declined by 6%, double-digit decline on SSSG. And as Sanjay called out, last year, Q2 , we had 23% SSSG, highest ever for us. So that's a partial base effect as well, apart from the tough macro conditions and high competitive intensity. Slide 35, gross margin was up by 140 basis points. However, due to operating deleverage on account of negative SSSG, meant that the restaurant EBITDA was impacted, which came at 7.6% for the quarter. Slide 36 gives you a synopsis of four-year trend and five-quarter trend.
Again, as mentioned by Sanjay, with the action plans which we have laid out, we believe the brand will emerge stronger in the medium term.
Let me speak about Sri Lanka. Sri Lanka, the country is showing green shoots of macroeconomic recovery. Inflation is down to single digits. There's Forex stability. The tourism business is picking up substantially. There's ease of availability of raw materials. However, there is inflation in other categories. For example, utility costs have gone up, electricity costs have gone up. We launched quite an innovative product called Melts. This is an exciting innovation. It's what I call an individual consumption inverted pizza option, and it's doing well. We also opened two stores in Mattakkuliya and Kilinochchi. And quickly, can you just run through the numbers, please, Vijay?
Slide 41. Channel-wise mix, so Sri Lanka, delivery mix is at 36% and dine-in is at 30%. SSSG was 1%, while the overall revenue grew by 8% in LKR terms, because of the Forex benefit. In Indian terms, we grew by 29% for the quarter. Gross margin saw a 650 basis points improvement, and the overall restaurant EBITDA came at 15.3%, which is highest in the last five quarters. Slide 45 shows four-year trend and five-quarter trend. It can be seen that this is the best quarter probably in the last five, and we remain confident of the growth opportunity, that presents to us in Sri Lanka.
Yes. Finally, in conclusion, and despite consumer demand headwinds, I think we've had a good quarter. KFC H1 , delivering the highest ever restaurant EBITDA margin, shows the power of our operational focus and the excellence that we drive at a operational level. We also grew the brand at 20%. So 20% growth and 20% restaurant EBITDA is quite powerful. We know we have headwinds on Pizza Hut, and we have to solve this, but we are doing everything in our control to be able to resolve this. Sri Lanka is positive and it will continue. Again, if you'll remember, us saying this, that we expect Sri Lanka to start turning around in in calendar year 2024. We are already seeing these green shoots today.
If you put it together in a multi-brand strategy, there'll be some quarters where all three pillars are firing. In our case, over the last, say, 18 months, we've had perhaps two out of the three pillars firing. But we are doing everything that is in our control to get all three cylinders firing. With KFC doing well, Sri Lanka doing well, our overall results are still strong when we look at the rest of the market. I'll pause out here. I'll stop out here, and now we'll open it up for questions. Thank you very much for listening.
Thank you very much. We'll now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. The first question is on the line of Jaykumar Doshi from Kotak. Please go ahead.
Hi, team. Hi, team. Afternoon. Good afternoon. Thanks for the opportunity.
Can you speak a little bit louder, sir?
Sure. Hi, team. Good afternoon, and thanks for the opportunity. I have two questions. The first one is, Dragontail tech was acquired by Yum! about a couple of years ago. So are there any case studies of it helping, Pizza Hut in some other markets, where there is a significant improvement in, delivery experience, and, customer ratings?
Yeah. So you have two questions. I'll answer this, Jay. So, Dragontail is now a company that has been acquired by... It's an Asian company that has been acquired by Yum!. They've had two big cases. One is actually of helping a competitor of ours in a market like Australia, where they saw a quite strong, you know, improvement in delivery metrics. And then before we adopted this, we had gone to our Singapore and Malaysia businesses, where we do a lot of the delivery ourselves, so it's in those markets. And, so what it does in a simple manner is, basis rider availability, it tells you when to put the pizza into the oven, and therefore, when the rider arrives, he or she gets a hot pizza to carry.
In other words, the typical response is as soon as you end, as soon as you get the order, you try and make the pizza and load it into the oven and then wait for the rider. So this reduces the time that the pizza is there in the store waiting for a rider. In our case, because aggregators are a large portion of our business, it is important to integrate with the aggregator partners. This has taken longer because we are actually the only brand perhaps to have or to have a solution like this. But again, they've been magnificent partners, and they've helped us.
This is quite recent, I must say, Jay, but even we think that because we are now able to timestamp every part of our production and delivery journey, this will result in better customer experience.
Understood. I have one more question of Pizza Hut, but, let me ask another question that often comes from investors. So Sanjay, we want to know your thoughts on, you know, would you at any point of time, consider biryani as a category of your interest from an M&A perspective? And especially, you know, there is a biryani brand in the group entity. So a lot of times investors, you know, bring up this question whether, you know, at some point of time, would Sapphire acquire that business? So just your thoughts about, you know, merits of that business, and how does it, so how do you think about it?
Yeah. So we have been quite clear about articulating the seven mantras for scale and success, for success and scale in this QSR category. And one, the first and foremost is that it has to be center of plate or habit formed or habit, you know, part of a daily habit. It has to be difficult to make at home. It has to have production processes that are easily aligned and so on and so forth. Therefore, when we looked at Pizza Hut, for example, seven years ago, we thought it met most criteria. There were one or two criteria that it didn't meet, for example, omni-channel at that time or value, and those were the areas that we tried to fix.
If I look at biryani, it does meet most of these requirements, except that the production processes should not require a chef. So, there are a couple of things that need to be fixed in this category. If those areas are fixed, undoubtedly this category can deliver success with scale. So that is point number one. When we look at internationally also, the big food cuisine categories in any of the big markets, you will find a local option to have a strong play in a particular market. So that is number one. Number two is, while we get asked this question, we have built this company on a strong governance platform.
So anything that we'll do will be done in as transparent a manner as possible, you know. The third point for me to say is that there are no plans at this particular point in time.
All right. That's very nice.
Purposely to give you a little more detailed answer, Jay. Forgive me if it was too detailed.
No, no, no. This is very helpful. Thank you so much. I just have one last question. I'm sorry for the third one, but look, in the H2 of FY 2023, your performance on same-store sales growth was broadly comparable to market leader. I mean, you know, and in line with category headwinds or category trend. In the last six months, in two quarters, what has changed for such divergence in, you know, such 20% unprecedented decline, whereas, you know, for market leaders there is marginal deterioration. So where do you think Pizza Hut has lost out in the last six months?
So, last year, the six months also, we were outliers in the category from a SSSG perspective, both when we compared to ourselves to the number one player and when we compare ourselves to the other franchisee, we were outliers. So we performed; our SSSG was significantly higher than both brands. Now, on a two-year basis, if you do the same analysis there, you'll see that actually it is comparable. So, is that what we want? No. I thought we were flying, and we had most of the elements of our strategy in place. But, as this downturn has hit us, and as consumer headwinds have, demand headwinds have been there, perhaps it's impacted us a little, more. I think we just have to work to strengthen the brand and continue to work on our operational efficiencies.
I see crisis always as an opportunity. These are the times to learn, and these are the times to really up the game, and this will play itself out over a period of time. Even the competitive intensity part, we know how people have expanded, and when you expand through a sub-franchisee model in a downturn, it is hurting everyone. And when it hurts single store franchisees, then we know what can happen to overall quality of product and customer experience. So I think in the short term, we've just got to bite our lip and take the punishment, or bite our tongue and take the punishment. But this will play out over a period of time. We are here for the long term, and we are quite confident that we can recover our position on this brand.
Thank you, and wish you the best for the upcoming festive season.
Thank you, Jay.
Thank you. The next question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.
Hey, sir. Hi, thanks for taking my question. Just a follow-up on Jay's question. So what is the kind of investment that has gone into our Dragontail solution? And what are the kind of time savings that we are initially seeing from making of the pizza to delivering of the pizza to the consumers?
So there is no CapEx investment, Devanshu. It is a per transaction investment. I can't share with you a per transaction cost and also, you know, what is the internal metrics that we monitor. I think over a period of time, this will - this should show up in the kind of aggregator ratings that we have got or the ratings the brand has got on the aggregator platform, and therefore should translate into sales.
Got it. I agree, sir, we are obviously in a challenging environment, but there are also some positive tailwinds in the form of World Cup festive season, plus there has been an Adhik Maas in the previous quarter as well. Wanted to check, what should be reasonable expectation on sequential pickup in both KFC, Pizza Hut, for Q3, Q4?
So typically, Q3 is higher than Q2, especially for KFC. Pizza Hut is roughly similar right across the quarters. And this year we've had a World Cup, but last year also, we had the T20 World Cup and the Football World Cup. So, if you ask me, Devanshu, all, and all of this is plus, minus.... I mean, in general, the last 20 days of, or the last 2 weeks of, December is what contributes to Q3 being higher than Q1 or Q2.
Any deviation or pickup from historical trend that we should expect in Q3, or it should be more normalized, what we have seen in the historical quarters between Q2 and Q3?
The only difference in this time in Q3 is that in October month, we had a lag impact of Shradh, and then we had Navratri. So that's the only change. Because of the Adhik Maas coming in Q2, October will be softer. But again, when you look at the entire quarter, we don't see it going to be materially different than the pre-previous seasonal or historical trends.
Got it, Vijay. Sir, globally, Yum! has been sort of also adopting a loyalty rewards program. So wanted to check your thoughts on this trend, and are we sort of planning to implement in India as well?
Yeah. So that's a part of the... We don't have a loyalty program right now, but it's part of the agenda, going forward.
So having said that, there are enough and more analytics which we do with the consumer data base. So for all our channels, dining, takeaway, and delivery, including the aggregator delivery, we pre-set the consumer data on which the various analytic program, be it in terms of repeat customers, lapses, offers getting customized to the customer requirements, all those programs is, are in place. The only part it is probably missing is the loyalty program.
Thanks, thanks for taking my questions and all the best for the upcoming festive season. Thank you.
Thank you, Devanshu.
Thank you. The next question is from the line of Jignesh Kamani from GMO. Please go ahead.
Yeah. Hi, team. Just want to know, if you remove the Adhik Maas for the balance two months, have you the apples-to-apples SSSG for us in the Q3 ?
Oh, that's tough to really try and-
You are asked to predict the SSSG for Q3 , is that or Q2 ? Yeah. Yeah. Yes.
So again, we always typically avoid giving quarter-on-quarter guidance to be fair. All I can tell you is that from a trend point of view, the KFC has remained flat in H1. From a consumer demand point of view, we are not seeing anything different, materially different for it to be, moving either downward or upwards. That's one thing. Same thing on Pizza Hut. I think, what we are seeing in H1, there's a lot of work in terms of action plan required to change the trajectory. So that's all I will say, that we are not seeing any materially different in terms of trajectory for both the brands.
Why? Because in Q2 or Q1 also, your SSSG was almost flat on KFC.
Yeah.
Despite Adhik Maas, we are flat on the SSSG. So if you remove, then it will be slightly positive. So trend has improved to that extent?
No, so the way to look at Q2 would be that while there's a Adhik Maas in Q2 , there's part benefit, I would not say full month benefit, part month, part benefit, that the Navratri got pushed to the October as well. So that's how to look at. So I will not read too much into-
Understood.
+1, -1. So when the movements are so small, in 100 basis points-200 basis points, I typically try and avoid reading too much into those indications.
Understood. And-
For us to call a green shoot or a change in direction, it has to be a 3%- 4% movement for us to call that out, to be fair.
Understood. Second question, the value layer in the KFC. We introduced snacking category, also we introduced chicken roll and other seven, eight innovation of INR 99 range. Can you color how large it is now for some of the store, which is there for three to six months, kind of? Earlier it was first initially led to cannibalization. Are you seeing that now, revenue per customer or the customer is much higher and impact of the cannibalization started settling down?
Again, typically, three months period is too small a period for us to give out the category mixes. We typically wait for nine months to 12 months to call that out. Having said that, we are seeing a positive movement. Also, what we saw—the flat SSSG in Q1 was with a slight higher transaction de-growth. What we have seen positively in Q2 , that flat SSSG has come with a marginal or a flat transaction growth. You can already see the positive of this snackage range coming through. In the long run, that's not how we look at in terms of cannibalization. In the long run, it helps us to drive transaction, and that's what we are doing for through the snackage range.
Understood. Sure. Thanks for letting me know, guys.
Thank you, Jignesh.
Thank you. The next question is from the line of Tejas Shah from Spark Capital. Please go ahead.
Hi. Good afternoon, team, and thanks for the opportunity. So, last time we spoke on the slowdown, you highlighted on personal financial consumption slowdown, and then there is some correlation with category slowdown. When we entered the quarter, we all thought that Adhik Maas will have much more impact on KFC than Pizza Hut, but clearly, consumers were still eating chicken more than pizza in the quarter. So just wanted to understand, if we have to go bottom-up now on the reason, it seems more like category issue than the consumer issue. You highlighted there's a competitive intensity. So you have much more granular data. So just wanted to understand, the competitive intensity can't be uniform across the country.
Is there any further insight that which area or which region? And what is the character of this competitive intensity? Is it like established players are going aggressive on pricing, or there are new competition which is coming in, and they are at mass end and taking away the consumer?
There are two parts to this. One is, Pizza Hut has perhaps been impacted a little more because as the second brand in that category, and undoubtedly we are one-fourth of the number one player, we've got impacted by consumer headwinds a little more. So first it's at one level, it's a category issue because you've had number of store openings in the same trade area by another competitor. That in the short term will impact. Over a long term, people, the consumer experience that is delivered will, you know, ensure that consumer, that they come back to the Pizza Hut brand. So that's at the category level.
At the brand level also, we've got work to do, because in a downturn, smaller brands, and Pizza Hut in the category is a smaller brand, that has been impacted a little more. Therefore, we have called out those four things that we are trying to do, Tejas.
Got it. And you spoke about store shutdown also. So just wanted to know, is this because certain MPS we are not achieving in the stores, or it is that they are loss-making? So financial reason or consumer reason, A. And B, this quarter, expansion Pizza Hut is one of the lowest since COVID actually, kind of mellowed down. So just wanted to know how we think about the store expansion also going forward.
On store closures, we definitely look at the financial metrics and the loss-making ones, typically, which are longer period and still loss-making. And where we don't see a possibility of revival after taking all the necessary steps in terms of marketing, in terms of consumer awareness, only post that, once we know that there is no further possibility of revival or further potential, we will take a call. Even previously, we have taken those calls. We have just called out specifically because this would be a query on top of the mind of everyone. This was the first part of your query. The second part, which was on expansion, yes, this quarter has been the lowest. We typically, I don't read too much, or we should not read too much into quarter-on-quarter growth numbers.
I think one should look at the numbers, which is on annual basis. Sometimes the quarter number is lower, a quarter number is higher, that should not be taken as run rate. We have called out that the Pizza Hut, this financial year, the number will be lower than the previous financial year. I would keep it at that. But suddenly a number of eight in one quarter and a number of 15 in another quarter should not mean anything, because these are store opening, which are also dependent upon the store pipeline and the execution, and not necessarily an indication of run rate.
Sure. And does the guidance, whatever it was earlier, does it take net of the closure that you spoke about, or we need to adjust for that?
The guidance remains net of closures, and if I try and give a long-term or the medium-term guidance of three to four years, I think we are moving towards closer to four marks towards doubling the count rather than closer towards three years. So that's the one-year leeway I think we are looking at, in terms of doubling the store count for Pizza Hut, and this guidance is net of store closures.
Got it. Thanks, and Happy Diwali to the team in advance. Thanks, and all the best.
Thank you, Tejas. Happy Diwali to you.
Thank you. The next question is from the line of Saurabh Kundan from Goldman Sachs. Please go ahead.
Sorry, all questions are answered. Thank you.
Thank you, Saurabh. Happy Diwali to you.
The next question is from the line of Palak Shah from ITI Alternate Funds. Please go ahead.
Okay. Hi, sir. Thank you so much for taking my question. Just one thing. Earlier, just couple of years back, we had decided to move from a higher focus on dine-in stores in Pizza Hut to delivery, more delivery-focused stores, and that's how we reduced the store size as well. And now we are again, sort of revisiting our strategy to focus on dine-in more. Just can you share your thoughts why the sudden change? That's one. Secondly, does it entail us to again revisit our store sizes or additional CapEx to revive it as to more dine-in, deliver?
So I guess there was some either misunderstanding or misinterpretation when this confusion came out that we actually moved towards delivery-led stores. The reduction in sizes of the Pizza Hut has been gradual, and it has happened much before actually even COVID kicked in. So we were at one point in time, 3,000 sq ft, moving down to 2,500 sq ft, 1,800 sq ft, and then 1,200 sq ft. The reduction in the space has happened over a period of time by two parts. First, big work has happened on the back end, and when you reduce the back end, there is absolutely no impact on the front of house. And the front of house was reengineered basis the number of covers required.
Our restaurants still have 45-50 plus covers, which we believe are enough to cater to 14 big meal locations in a week. Yes, there could be a possibility that on a Saturday evening, those covers may not be sufficient. Few customers would take away, few customers would turn away. But we have been able to partner with the aggregators and through our own app get those sales covered up more than enough through an omni-channel strategy. So we never moved towards a delivery-only strategy, we moved towards an omni-channel strategy. Now also when Sanjay has called out those action plans, we have called out both how do you plan to increase revenue in a home service, where that is, where Dragontail, the late night deliveries and the improvement in aggregator ratings should help us.
Similarly, we have called out the dine-in also. The kitchen planning production tool should help us improve our service level in store, in restaurant, along with building lunch occasion. It's a combination of action plans on both the sides. We continue to operate omni-channel stores. There is absolutely no rethink in the strategy in terms of our store format, and there is no change in the size of the stores even going forward. This size is good enough to cater to all the three channels, dining, takeaway, and delivery.
Got it. So just one more. So in terms of the margins, despite Pizza Hut seeing a 20% sales decline and our gross margin actually improving only by 200 basis on a YoY basis, have you done some optimization on the cost side to maintain or at least, sort of control the cost increase in the last 12 months, which are giving us the benefit in this quarter? Because I would have assumed a 20% decline would have been a far lower margins at restaurant EBITDA level.
Yeah. So again, cost control is a continuous process to be fair. Are we done with it? I will not be able to say that we are done with it. You would always look for newer and newer opportunities, but yes, it's increasingly difficult if the SSSG is 20% to negative, to hold on to the margins level, and that's what you have seen in this quarter results. So yes, any drop which goes beyond this, you would see an impact on margin, which is much sharper. And again, if you see an improvement from this level, you will see an impact on margin, which is positive, which will also be much sharper. So yes, at a 20% SSSG, with the kind of deleverage, it leaves little headroom for cost maneuvering.
If you can just share any material change, savings that we have done, which would be sustainable going forward as well, too, so that whenever the margins come about, they'll be far, the margin will be far better than what we were reporting on pre-quarter or pre-
If I can just give out some qualitative indicators. So across the PNL, for example, our gross margin improvement, while a lot of times it gets attributed only to the cooling of inflation, there is some structural savings which we have been able to build through, vendor development and alternate procurement strategies as well. There has been a savings across the cost of labor forces. With the kind of capacity additions in terms of new stores, labor cost has not gone up by that level in Pizza Hut. So again, how do you optimize, how do you do manpower planning through variable, flexi hours, planning? So that's on cost of labor, again, sustainable. From again, our utility costs, for example, gas and electricity cylinders, electricity, units and gas cylinders, we have implemented, a few things.
For example, energy monitoring systems, which is again sustainable. There's some kind of work which is going on, on even on the gas cylinder consumption, which we believe is sustainable in the long run. So I'm just giving you a few qualitative inputs without, without calling and giving those specific details of it.
Sure, sir. This is helpful, wish you both a very happy Diwali. Thank you.
Thank you, Palak.
Thank you. The next question is from the line of Gaurav Nigam from Tunga Investments. Please go ahead.
Yeah, thank you, sir, for taking my question. I have two question on the KFC. Just wanted to check on the first, as we have said, in KFC, we have optimized the store sizes and, what has been the improvement on revenue per square foot on a pre-COVID to now? Any sense of proportion would be helpful, sir.
So again, revenue per square foot is a matrix which typically is not followed in QSR industry, while it's one of the important metrics in a retail industry per se, because the store sizes are so, so small. So that's not the way to look at. Having said that, the reduction in the store size is without compromising any capacity on the kitchen side. So the same store size, let's say 1,600 sq ft store size, is perfectly capable to deliver the same revenue and throughput which earlier a 3,000 sq ft stores would deliver. So the size is, the reduction in size is what we have cut down in terms of inefficiencies, and the revenue is as good as the previous store size.
Depending upon what is the maturity level of a store, they would be at a revenue stage. But does... Are there examples where a 1,600 sq ft delivers same or better, better throughput than a 3,000 sq ft store? The answer is yes.
Got it, sir. Understood. And sir, one more question on the KFC business. On the KFC portfolio, if I were to look at, like, let's say, three years down the line, how should we think about the restaurant EBITDA margin, and how should we think about the leverage on the corporate overhead? I'm just trying to get to, like, how should we think about the KFC portfolio, net EBITDA margin three years in on a system?
Quite happy that you actually asked this question, because it actually allows me to sell out the KFC strategy, and we have taken a slightly different path on KFC compared to our competitors in the QSR industry. I don't think we are looking at trying to expand the margin beyond 20%. What we're trying to do is how we can hold the margin at 20%, in and around 20% mark... and grow faster, and that's what we have done over the last three years. If you see the kind of additions we have done on the brand, we have over the last three years, the brand has doubled its revenue and tripled its restaurant EBITDA. So that's the strategy on KFC, that how we can densify more and more without compromising the restaurant EBITDA.
So if, if our restaurant EBITDA moves beyond 20%, it only gives us a tick mark that we can grow even faster. So that would be the strategy on KFC for the next three years, three to four years, double the restaurant count, grow faster, and if you're able to deliver restaurant EBITDA beyond 20%, grow even faster.
Got it. And, sir, any leverage on the corporate overhead, like, which comes after restaurant EBITDA, any leverage that we should expect on that as well?
So if I look at a three to four-year picture, yes, you will definitely look at the leverage. Currently, when the overall growth has been a challenge, you may not see so, you may not see such big leverage on the corporate cost side. But typically, what we see overall revenue growth, if it's 20%-25% of a business, corporate cost would typically grow at 15%-20%. So that's the general thumb rule, and that gives you a leverage on the corporate cost.
Very helpful, sir. Sir, if you allow this, I have one more question, just more on the concept of the business. So you have in India, you have these two franchises, right, for Yum!? So when a consumer places a delivery order,
Yeah.
How does, like, it's decided that which—actually, which store it will go to? Because sometimes the store of both the franchisees are close to each other. How is it decided that where the order will go? Who will service it?
I'm assuming you are asking particular for Pizza Hut, because in case of KFC, there is absolutely no overlap, there is clear territory demarcation. So you are referring to Pizza Hut, right?
Yes.
So on Pizza Hut, again, on Olo app, which is our own app, there is a clear digital maps which are in place, so there is no overlap between us and the other franchisee partners, so this confusion does not exist. In case of aggregators, yes, the consumer may be able to see more than one options available on the app. Again, I think the consumer would go for the restaurant which offers better consumer experience, which is reflected in the rating, and secondly, in terms of estimated time of delivery, which is the ETA. So a restaurant which is typically nearest and if it has a good consumer experience, that would be in line to receive that particular order. But the option is left for the consumer to choose.
Yeah. Having said that, having said that, Gaurav, when you look at any of the aggregator apps, they'll typically, and if you say, choose even KFC, you will get stores that are close to you and stores that are far from you also, and typically the consumer chooses a store that is closest.
Yeah.
I mean, in any brand. So they'll. If you are in Malad, as we are in right now, they'll even give you perhaps a store in Bandra and say that it will take 90 minutes to deliver.
Having said that, this overlap between us is minimal. While there is no overlap at all on the Olo, the overlap between the two franchisee partners will be minimal.
Got it, sir. Thank you. Thank you, sir, for answering my question.
Gaurav, conscious of time, we've got another. Yeah.
Yes, sir.
We can take one or two questions more.
Yeah. Ritik?
Thank you. The next question is from the line of Ritik Tulsiyan from Concept Investwell. Please go ahead.
Yeah, hi. Hello, everyone, and Happy Diwali in advance to the team. So, I have one question regarding Pizza Hut. So if you look at the leader, the gap between us and them is already huge, right? And now they are going further in the sense, like, 20 minutes delivery, doubling down on technology and et cetera. So as a company, how do we plan to reduce the gap between us and them in the long run? So I want to know from the perspective of three, four years down the line, if you can elaborate more on the strategy?
Sure. I think it is incorrect to say whether we reduced the gap with them or not. What are we doing to strengthen our brand? And I talked of the four things, Hritik, in the, you know, in my presentation. So whether that closes the gap or not, it will certainly have an impact on our performance and it will certainly strengthen the brand. I think that is how we have to look at it. Otherwise, to predict what this will result in a market share improvement, et cetera, is, you know, a difficult conversation to really have.
So having said that, again, with Pizza Hut's omnichannel strategy, I don't think we have to try and bridge that gap, even if we are able to hit our kind of areas and, again, with the omnichannel strategy means the dine-in sales and the dine-in profitability is better. So this is not how we are trying to track internally, because the mix is very different. So we don't have to really bridge that gap. Even if we go somewhere closer, should be able to deliver that kind of profitability, but we are far off from that particular situation right now. This could be probably a very long-term ambition, but as Sanjay said, we will focus on our own thing.
And one thing which I'll call out, while you said a 20-minute delivery, I think the Dragontail is somewhat to address that. I think what customer is looking at today is whether we can deliver a hot and fresh pizza or not. As long as they are comfortable with the ETA, which is the estimated time of arrival or delivery, and they get hot and fresh pizza, they are less fussy about the, about the specific 25, 30, 35 minutes. And this is clearly reflected. For example, on our own app, we are able to deliver the majority of our orders below 30 minutes. Still, the share of our own app is lower, whereas on, on the aggregators, a lot of time the order goes to 30, 35 minutes, 40 minutes, but customer is happy ordering that.
All we are looking for is the quality, which is hot and fresh, and I think they're less fussy about five minutes here and there.
Okay. Thank you so much for the detailed answer. Thank you.
Yeah. Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments.
Yeah. Thank you very much, all of you, for joining. I just want to wish all of you all Happy Diwali, wonderful festive season with your family and with friends. This quarter has been, like I said, very strong financial performance from KFC. Green shoots of recovery in Sri Lanka. Pizza Hut has had a difficult quarter, but we are clear on the steps that we are taking to help the brand recover. That's all from all of us right now. We will see you again in a quarter's time. Again, Happy Diwali, and God bless!
Thank you. On behalf of Sapphire Foods India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.