Fast Food Chains Are Store Splitting. Is This Growth Hack Future Proof?

It has been a strange year for India’s quick service restaurants (QSRs). Companies operating fast food chains such as Domino’s, Pizza Hut, and McDonald’s have seen their revenue grow in FY24, but the growth is accompanied by a sharp decline in a crucial metric: same store sales growth or SSSG.

While eating out rose dramatically in the first post-pandemic year 2022, 2023 saw a subsequent decline led by a rise in inflation and a slowdown in wage growth.

Fast food chain operators have been steadily adding more stores, not just to unlock new geographies, but also to have more stores in the areas they already serve, reducing home delivery times. 

Same store sales growth indicates that existing stores (more than a year old) of a retail business are growing in size. The decline in SSSG raises the question: are fast food chains sacrificing long-term sustainable growth for short-term revenue growth? 

Store Splitting

SSSG is a crucial metric to judge the health of any retail business. But a decline in a fast food chain’s SSSG may indicate demand is weak for an existing network of restaurants. Yet, restaurants are steadily opening more stores, adding to their topline. 

One reason is that fast food chains are increasingly relying on store-splitting. This refers to opening a new outlet in the same territory as the older store to satiate excessive demand. In doing so, the existing stores’ revenues take a hit.

Smaller fast-food rivals are also resorting to this strategy to grow the topline. Take the Chinese fast food chain WOW Momo for example whose co-founder Sagar Daryani told The Core, “Suppose I have a store A in Lower Parel and it’s doing 10 lakhs,”. ”When I open another store which also does 10 lakhs, the first one drops to 7 lakhs.” However, this does not worry Daryani. “Because, the area is doing 17 lakhs (as opposed to 10 lakhs) for me then.”

Customers’ expectations for shorter delivery times may also be driving the need for multiple closely-situated stores. “Speed is a very big parameter to grab market share. You don’t want one store that’s catering to a very big radius and too many orders coming in,” Daryani said. 

With food aggregators adding new joints and the local competition heating up, the ability to deliver food fast is expected to give the QSR chains an upper hand. Domino’s has already reduced its guaranteed delivery time from 30 minutes to 20 minutes. To fulfil orders in the lesser time frame, the stores would need to be close enough to all locations. 

Jubilant FoodWorks –which holds the master franchise for Domino's Pizza, Dunkin’ Donuts and Popeyes in India– CEO, Sameer Khetarpal said in an earnings call (pdf) for the December 2023 quarter, “Now we have 200 stores in Bangalore. Our endeavour is not to add more stores unless and until the store is struggling and bursting at the seams… But I also want to consistently give 20-minute delivery in top cities. We may have to add a few stores."

Devyani International Limited –which is the largest franchisee of Pizza Hut, KFC and Costa Coffee in India– chief financial officer and executive director Manish Dawar also said in the Q3FY24 earnings call (pdf), “...lower radius numbers across KFC and Pizza Hut has led to the impact on brand contribution margins.”

The Core reached out to Domino’s, KFC, Pizza Hut and McDonald’s for a comment, this story will be updated when they respond. 

The Problem With Splitting

QSR chains today increasingly rely on deliveries for growth; dine-in as a percentage of sales has been dropping steadily across the industry. Consider Devyani International Limited's KFC outlets. Per an earnings presentation, dine-in was 84% for KFC in FY20 versus 63% in FY24. In this scenario, decreasing food delivery times becomes a bigger priority than everything else. 

But when demand is muted, the downside with store splitting is the long-term risk of cannibalising the business of the existing store network. In a February note, brokerage firm Jefferies noted that Devyani International opened 94 new restaurants in the December 2023 quarter and was on track to even exceed its FY24 target of new store openings. This, despite facing weak demand in India. Jefferies predicts the company’s EBITDA (earnings before interest, taxes, depreciation and amortisation) will drop by 11-12% in the next two years.

“The decline in dine-in started in 2017 when aggregators started to build their food delivery business… after a brief period of outperformance in H1FY23, it has been on a declining trajectory,” Jubilant FoodWorks’ Khetarpal said in the Q3FY24 earnings call, “Delivery comes out to be more convenient and relatively cheaper versus anywhere in the world. And we are doubling down on delivery.”

In Australia and New Zealand, store splitting got Domino’s into legal trouble. “By the time one of my stores reached break even, Dominos opened [a] new store; was outside my legal territory but still was very close to impact[ing] my store’s sales,” a submission to the parliamentary inquiry on Domino’s practices in Australia said. 

Advantage: Insurgents

While the big food chains might be looking at possible cannibalisation to rethink their expansion strategy, for those with a lesser store count, the capacity to expand still exists. 

“We are at a 140 store level… We have scope to expand in the existing places too. Delhi has 20-22 stores and I think there’s potential to open 50,” Tarak Bhattacharya, chief executive officer of Mad Over Donuts said. While the chain was started in 2008, being a bootstrapped company they were conservative with their expansion plans. 

The company has also had leaner growth in the last few quarters, however, the SSSG has remained positive, Bhattacharya said. He also attributes this sustained growth to their slow and steady approach. 

“We are a bit slow in starting new stores. We do not want to open stores next to each other or in that 10 km radius,” Bhattarachya said. 

Now, if overall the additional stores are able to bring in more revenue for the company, should QSRs be worried about the negative SSSG?

“I think the same store sales growth is not the right parameter,” Daryani said. According to him, the industry should be looking at same store cluster growth which would track the combined performance of multiple stores in the same area. Alternatively, Daryani tracks the same store EBITDA growth to determine whether a particular store is doing well or not. 

Batting for the decision to open multiple stores in the same area, Daryani said that the dine-in customers to the WOW Momo outlets in malls are very different than the ones on high streets which leads to negligible overlap of consumers and therefore negligible potential loss of business for the older stores. 

“If this (lower demand) trend continues for this year, it will become a very big concern, you’re looking at cannibalising your business and unnecessary buildup of overhead costs,” WOW Momo’s Daryani said. 

The slowdown in consumption and demand is expected to be short-lived and hence the SSSG is also expected to bounce back. However, if things do not improve soon, QSR chains may be looking at these multiple stores as big liabilities. 

Editor's Note: The dine-in figures for KFC have been corrected to reflect the accurate numbers. 

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