Sapphire Foods (Indian operator of KFC, Pizza Hut and other restaurants) slipped to a loss in the third quarter after registering a special charge related to the implementation of new labor codes. Revenues continued to increase.
These results highlight the increasing cost pressures faced by fast-food brands in India. Regulatory changes, heavy discounts, and unequal consumer demand have all contributed to a shift in profitability.
A franchisee of Yum Brands reported a net loss of Rs4.7 Crore for the three months ended December 31,
The company’s profit was Rs11.9 crore during the same time period in 2013, reflecting higher costs, despite a steady growth of the top line.
Earnings are affected by labour laws
Sapphire stated that the quarter’s loss was largely due to a charge of Rs 8,02 crore relating to India’s new labor laws.
The total expenses increased 8.4% on an annual basis to Rs 813 crore. This is in line with the revenue growth and indicates that there are limited cost-saving opportunities.
The revenue from operating activities increased by nearly 8 percent to Rs. 814 crore. This was largely due to the addition of new stores and promotions.
The close match between revenues and costs highlights how operating and regulatory costs have been reducing margins in organised restaurant chains.
Discounting deepens competition
Local eateries, cloud kitchens and many others with low overheads continue to pose a stiff challenge for fast-food operators.
Sapphire used aggressive promotional tactics to protect its volumes during the third quarter. This included a chicken-burger meal at Rs99.
As companies try to balance rising input and labour costs with value-added offers, they have also increased pressure on profits.
KFC and Pizza Hut move in opposite directions
The demand trends for Sapphire brands are very different.
KFC’s same-store sales rose by 1% during the third quarter of this year, after a decline of 3% a few months earlier.
This improvement indicated a modest rebound in the consumer base at this fried-chicken chain.
Pizza Hut, on the other hand, continued to struggle.
Pizza Hut’s same-store sales fell by 12% on an annual basis, while they had increased by 5% in the previous quarter.
This decline was attributed to a weaker consumer demand for casual dining and increased competition.
Consolidation and expansion continue
Sapphire continued to expand despite the loss.
During the period from October to December, the company opened 31 new stores. This brought the total number of outlets to 1,028 in December.
Sector-wide, the situation remains tense. Peer Devyani International – which operates KFC, Pizza Hut and other outlets in India – reported an even larger third quarter loss this week.
Sapphire shares have dropped 1% in the last week.
Sapphire and Devyani, in January of this year, announced their plans to merge. The $934 million merger was aimed at creating an even larger platform for fast food franchisees in India.
Operators are looking to increase their scale to manage costs better and to compete in China, the most populous nation on earth.
As new information becomes available, this post India’s Sapphire foods posts loss in Q3, as new labor laws squeeze margins could be updated.
