Fast Food Giants Fight Over Value Meal Deals But Can't Hook Frugal Foodies

Restaurant Brands Asia Ltd., operator of Burger King, slipped into negative same-store sales growth — a key metric that tracks the performance of existing outlets — during the July-September period. This marks the company's first drop in two years after consistently outperforming its peers, and the shift suggests that attracting thrifty consumers to its Rs 99 burger combo has become progressively harder.

"The environment has been tough in India, and the traffic numbers have been kind of subdued," said Rajeev Varman, chief executive officer, Restaurant Brands Asia, in a post-earnings conference call.

Other major chains have been struggling with declining same-store sales for several quarters now. While July-September is typically a seasonally weak period, this quarter has been even slower than that of last year. Among those declared results so far, Sapphire Foods Ltd., which runs 461 KFC stores and 323 Pizza Hut outlets, along with Westlife Foodworld Ltd., the operator of McDonald's, reported a 3–8% decline in same-store sales growth in the second quarter, with no signs of recovery in sight.

"The demand environment remains challenging across retail and mass consumption categories," according to Saurabh Kalra, managing director at Westlife Foodworld. "Furthermore, erratic weather patterns are not just impacting business operations but also leading to heightened volatility of input costs," he said, highlighting the challenges of driving profitable growth.

Typically, the second quarter is the softest for KFC due to the higher number of festival days that cater exclusively to vegetarians, said Sanjay Purohit, whole-time director and group chief executive officer of Sapphire Foods. "Interestingly, this year, we have seen a greater impact, a greater negative impact during such vegetarian-only festival days." Even post-Dussehra, KFC's performance continued to reflect the trend observed throughout the year, he said. "What we are seeing in the third quarter is a continuation of what we have seen perhaps over the full calendar year, with SSSG hovering around minus 5-6%."

The weak show persists despite aggressive rollouts of value meals. For instance, McDonald's introduced McSavers+, offering a chicken burger or a snack along with a Coke combo meal for just Rs 69. KFC and Pizza Hut also joined the trend, providing meal options for Rs 99, Rs 149, and Rs 169, respectively. Meanwhile, Domino’s has been attracting diners with its Rs 99 lunch feast.

Their emphasis on value offerings comes at a time when food inflation forced consumers to carefully evaluate every rupee spent on meals. Squeezed by higher grocery bills, consumers are cutting back on discretionary spends, be it on food, fashion, cars, or smartphones. Notably, urban consumers drive a chunk of fast-food sales, and this data gives further credence to the deeper "shrinking middle class" problem the country is facing, as recently pointed out by Nestle India chairman Suresh Narayanan.

The global brands are losing their edge after years of dominance as they now face stiff competition from a growing number of regional and hyperlocal boutique-style eateries. Online platforms like Zomato and Swiggy have made discovering these local gems easier than ever.

"In a high street, you may face competition from 7-8 competitors, while in a mall, that number increases to 20-25 restaurants," according to Sapphire's Purohit. "Then, in the digital space, you'll encounter competition from around 100 brands," he said, adding that the competitive intensity in the QSR space is significantly higher than any rise in private consumption expenditure.

Analysts, meanwhile, have also called out the "value" strategy as fundamentally flawed, arguing that these brands are lacking in innovation.

"Today's consumers are spoilt for choice," said Karan Taurani, senior vice president and consumer sector analyst at Elara Capital. "Without real demand, value meals will only hurt the profitability of these chains unless they provide a distinctly unique experience, particularly to appeal to young, experimental Gen Z consumers—the driving force shaping consumption habits."

Average daily sales, the other key metric to gauge the performance, have also declined in the second quarter amid a persisting consumption slowdown and as these brands continue to push lower-priced meals. Consequently, their revenue growth has remained sluggish.

Analysts expect the pizza category to face prolonged competitive pressure compared to fried chicken and burgers.

"We believe, though Pizza Hut has introduced new products in the category, competition in pizza will remain high in the near term," said Sachin Bobade, vice president-research at Dolat Capital Market Pvt.

Companies are pinning their hopes on the ongoing festive quarter to boost sales, but some QSR chains may adopt a cautious approach to expansion if performance remains lackluster.

"We will be a little more cautious than we have been over the last three years in terms of our expansion on KFC, where we doubled the count," said Purohit. The fast-food chain will revisit its guidance after December, upon reaching its target of over 500 KFC stores.

A combination of factors such as cheap deals to spur sales, rising costs, and a shift from dining to delivery have exerted pressure on companies' margins, which collapsed by 800-900 basis points in the past few quarters.

"Our gross margin in the second quarter was affected by temporary spikes in fresh produce prices, particularly lettuce, where availability did become an issue," Westlife Foodworld's Kalra pointed out. "However, we will get back to our 70%-plus levels of gross margin in the second half; we are very confident about that."

Analysts, however, remain sceptical about a potential recovery at this time.

"We do not see any near-term respite in demand and operating margin," according to Naveen Trivedi, research analyst at Motilal Oswal Financial Services Ltd.