McDonald's India Braces For Sales Slump In FY25 As Backlash Lingers
There is need to raise awareness about the sourcing story and the Indian origin of McDonald's fries-to-burgers, Saurabh Kalra had said.
McDonald's' biggest Indian franchisee, Westlife Foodworld Ltd., is scrambling to bounce back from recent controversies that threaten not only its reputation but also profitability. The persisting negative sentiment is expected to continue affecting sales into the first half of fiscal 2025.
Saurabh Kalra, managing director at Westlife Foodworld, acknowledged the hurdles faced by the brand, including concerns about the use of cheese in its burgers and a perception among some communities that McDonald's represents purely Western values. Kalra addressed these issues during a post-earnings call with analysts, highlighting the necessity of raising awareness about the sourcing story and the Indian origin of McDonald's products.
Around 70–80 restaurants were impacted by these challenges, particularly in the western regions, said Kalra.
Despite efforts to mitigate the issues through targeted campaigns, concerns persist, prompting the seller of Maharaja Mac and McFlurry to increase marketing spends to rebuild consumer confidence, while also keeping an eye out for a revival in consumption in the fast-food sector.
"Trust is always a long-term game and we are now spending more than ever to dispel the myths and restore consumer trust in our brand," he said. One such initiative is its recent collaboration with chef Sanjeev Kapoor.
Challenges like these, however, are not uncommon in the food industry. Major brands like Nestle and Cadbury have also come under fire in the past.
Nestle, for example, encountered severe backlash in 2015 after its Maggi instant noodles were found to contain lead beyond levels that were considered safe, leading to bans in several states and consumer boycotts. The house of Nestle crumbled in two minutes following the ban and it took nearly three years for the Swiss multinational to recover its India revenues. The brand released videos with the tagline 'We miss you Maggi' in an attempt to regain trust. Similarly, Mondelez India Foods Pvt. had also faced a credibility crisis after a worm infestation controversy in 2003, prompting the brand to enlist Amitabh Bachchan to reassure consumers.
The current crisis at McDonald's, however, is not as severe as these incidents. Kalra remains hopeful that it will take another quarter or two to return on track towards growth.
Westlife owns and operates 397 McDonald’s restaurants in 64 cities across west and south India. During the quarter ended March, the company reported flat sales led by 5% decline in same store sales. While its digital channels, comprising 70% of overall sales, grew 8%, the balance 30% sales—more so in the dine-in channel—are seeing challenges due to the criticisms surrounding the brand, even as eating-out remained relatively steady as against the previous quarters. Dine-in sales dropped 2% in Q4.
Ebitda margins contracted 260 basis points to 13.3% and profit after tax tanked 96% to Rs 0.8 crore. McDonald's profitability was hit due to fast addition of new stores amid a tepid demand environment.
Despite near-term challenges, Westlife’s Vision 2027 remains intact, said Kalra. It targets Rs 4,000-4,500-crore sales with 18-20% operating margin.
Its store expansion spree will continue as the management guided 45-50 new additions in FY25, with a focus on under-penetrated smaller towns in South India. About 30-35% of new store openings will be drive-through formats. The company has lined up capex worth Rs 250 crore for this year.
Menu prices have risen across the industry over the past year to offset inflation. This year, too, McDonald's plans to take 3-5% price increases, albeit not immediately as it awaits a demand uptick.
Quick service restaurant chains have been facing an uphill battle as inflation-hit customers are increasingly opting to eat at home. The decline in sales for Tata Starbucks and McDonald's India in the year gone by suggests that the slowdown has now extended across several quarters.
And there seems to be no respite in sight. Kotak Institutional Equities has slashed its FY25-26 Ebitda estimates for the sector by 3-12%, citing continued weakness in the first half of FY25. However, it anticipates a potential recovery in the second half of the financial year.
For Westlife, analysts predict a decline in earnings in the near future, weighed down partly by weak demand and the cost of store additions.
"Though we like Westlife’s aggression in store expansion, its digital traction and thrust on drive-throughs, we keep our guard up due to its muted near-term same store sales and need for higher marketing spends," according to Emkay Global Analyst Devanshu Bansal. "Earnings de-growth is expected to continue in the first half of FY25 as misinformation around the brand still persists." The brokerage has cut Westlife's FY25/26 Ebitda estimates by 13%/4% on near-term challenges.
"Westlife has been aggressive on store additions, which was not the case historically," according to Naveen Trivedi, research analyst at Motilal Oswal Financial Services Ltd. "The current demand environment is not conducive to aggressive expansion. Therefore, the benefits of the same will be back-ended. We do not see any near-term respite in demand."
