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Domino’s India has cash reserves and a delivery strategy prepared for COVID-19, but cuts cost on rent and employees

Jubilant Foodworks, which runs Domino’s Pizza restaurants in India, was uniquely prepared among for the pandemic. For one, Domino’s is among India’s most successful fast food brands, with over 1,000 stores in the country. Second, it has always been delivery-focused, meaning that relatively speaking, it stood to lose less from restaurants shutting down dine-in — even before the pandemic, Domino’s riders in India started delivering wearing plastic gloves and masks. In most markets, food delivery has been allowed since the earliest days of the lockdown, meaning that only stores in malls, which remain shut, have been impacted completely. Two-thirds of Domino’s sales in India are from delivery and takeout orders.

In spite of this, the company, which told investors that it actually expects to bounce back stronger than it was pre-lockdown, is taking extraordinary cost cutting measures. In several markets, it is invoking force majeure clauses in its rent agreements, and downgrading permanent employees to part-time workers. Jubilant CEO Pratik Pota said, “Unexpected as this event was, I believe that our strategy for growth rolled out for growth in 2017, and its disciplined execution since then have in a way almost prepared us for this crisis. Our strong balance sheet, our towering strength in delivery, our continued investment in digital and technology and our lovemark brands, all place us in a unique position of strength, in which not only can they weather the storm, but actually come out from this even stronger.”

  • 83% of delivery area is covered; North recovering faster: “You would be glad to know that today we have opened 938 store which is covering 87% of our entire delivery area before the lockdown. We certainly hope to open 100% of the delivery area by the mid of this June,” Hari Bhartia, Jubilant Foodworks co-chairman said. Domino’s has a total of 1,335 stores, and a large portion of the stores that remain closed are in malls, which should open in the coming days as lockdowns around the country loosen. “We are seeing some encouraging signs in delivery, especially in the smaller towns many of our stores have recovered from [sic] their pre-COVID delivery sales,” CEO Pota said. “So north has seen a slightly slower recovery, but most other markets are seeing, even the large town[s] are seeing robust and good recovery of delivery sales.”
  • Overall delivery craze will benefit Domino’s: “This crisis period has been almost a driver of lost consumers embracing online ordering, even for categories where they were not doing earlier, like grocery, that behavior will rub-off onto our category as well. So we will see a lot more adoption of delivery and of online ordering, even among consumer cohort who weren’t doing so earlier. Those are the likely trends the way we are seeing it. And like I said earlier in my remarks, most of these trends, in fact, all of these likely trends are going to be playing to our strengths,” Pota said. “Our cost per delivery has been coming down over quarters, further we expect to continue the trend on the back of efficiency using data and smarter manpower deployment in the stores.”  When an investor asked about sales in April, when lockdowns were stricter, Pota declined to provide specifics. He also declined to provided takeaway-specific numbers, saying that number was too small for the moment, but said that it had a lot of “headroom” to grow.
  • Domino’s preparation for COVID-19 in three phases: In the first phase, which took place over March, Jubilant provided its supply chain and restaurants with sanitation training and PPE kits. In the second phase, which happened during the lockdown, the company undertook some “aggressive cost reduction initiatives”, including pay cuts for employees and seeking rent reductions. In the third phase, right now, Pota said that the unorganised sector as a whole will take a beating, while the organised sector will grow. “And within the organized sectors, trusted credible brands will grow faster and will gain market share. There will be, in all likelihood, a reduction in competitive intensity with many restaurants closing.”
  • “Cloud kitchen” type stores to contribute more: The company said that its DELCO stores, or delivery/carry out stores, will contribute much more to the company’s growth than before. These stores are built mainly for delivery and takeout orders, just like cloud kitchens, and have minimal dine-in space. ” We are right now taking a pause in opening more stores for quarter one, waiting for the situation to unfold. As and when it unfolds, as and when we start opening stores, like I said, there will be even more optimized and efficient stores oriented towards delivery and carryout,” Pota said.
  • Full time employees now paid on the hour: “[Our] manpower was a combination of full timers, part timers, and pay-per delivery. […] I think it was critical for us to variablise even that model. So, we have moved to convert all our full timers and part timers to flexi-timers. In other words, we do not need to call them and commit to them x number of hours, either eight hours or four hours, but we can indent and call for them in incremental slabs of one hour each,” Pota said. On top of that, the company said it had made “reasonable progress” in invoking force majeure in some stores and getting reductions on rent payments.
  • Why employees cost Domino’s: “Employee cost is a big line item for us. So obviously, as you are aware, that employee cost is subject to inflation, because in our case, as you are aware, that most of our employees, including the store manpower, were company employees. And part of employees were covered under minimum wages. Now, the government keeps on changing the minimum wages, when the minimum wage increases we have to give the minimum wage, we have to also give the increments,” CFO Prakash Bisht said.
    • Employee poaching won’t be a problem: An analyst posed an interesting question on increased demand for online orders leading to delivery agents being poached by other players. Pota said it wouldn’t impact Domino’s, saying: “We don’t expect that to be a headwind or structural issue in the future for a variety of reasons. The first one is that, given that 90% of ordering now is online, and we have technology adopted in our delivery ecosystem, we have a very good idea of our delivery performance in terms of efficiency. And using data we are able to drive a lot more efficiency, and therefore a lot more orders with the same or lower manpower. That’s number one. Number two, and I talked about it earlier in my response to an earlier question about the structural shift we make of moving all our store and delivery manpower from being fixed and full timers to being flexi timers. That will allow us to flex our deployment of delivery manpower in response to the demand curve. A third point, of course, we traditionally had extremely very, very powerful sourcing system for sourcing manpower from small town and from interior markets, that remains robust. And therefore all three things put together, we don’t expect manpower cost to be a structural headwind for us in the business.”
  • Cash reserves: In spite of the sharp rent and employee cost reductions, Domino’s is sitting on an enviable reserve of cash. “At a time like this, it gives us rock solid comfort to have a balance sheet that we do and the cash reserves that we do. Our singular focus right now is on ensuring that we conserve cash and manage it well to tide over this crisis. So that is absolute razor sharp near term focus,” Pota said.”At this period, even if we have cash reserves the
    focus would be really on how to bring Domino’s back to its full form and growth that we used to see in the last two years,” co-chairman Bhartia said.
  • Box8 delivery agent’s infection impacted Domino’s: “I think we were impacted as a category by the incident in mid-April which created some headlines and news,” Pota said, referring to a Box8 delivery agent in New Delhi testing positive for COVID-19. News reports initially described that delivery agent as an employee of a pizza chain, until Box8 came forward and admitted that it was their employee who tested positive.
  • “Lipstick effect”, or how to not waste a crisis: “Also remember the lipstick effect, that in a time of crisis people look for some markers of normalcy, some markers to tell them that life hasn’t changed so much. We believe brands like Domino’s which are strong, trusted brands, having here for the longest time, for 25 years plus, will offer that comfort, will offer that reassurance that all is still well,” Pota said. Chairman Shyam Bhartia added, “I would just like to add, that for some players, the total availability of restaurants will come down because many of the restaurants will close down, which will benefit us because those people will come to us and more trusted brand.”
  • Aarogya Setu as a “self-certification” of health: Domino’s store employees have had Aarogya Setu installed, and this serves as a “self-certification” for their health, Pota said. “We moved very quickly to remove cash on delivery from our OLO app. So we only now accept the prepaid orders to further minimize the risk of contamination. And additionally, we have now introduced for all of our store employees a 100% medical checkup that’s done every week. So all our store employees get checked every week by a doctor, and that is additional comfort for our employees that they are safe, and they are taken care of.”
  • On strategy for Hong’s Kitchen: While Domino’s is Jubilant’s main business, the company also operates a few Dunkin’ Donuts stores, and has a homegrown Chinese food brand called Hong’s Kitchen. “There is a vast chasm between the fine dine-in and the premium casual dine-in in Chinese. Most consumers adopt the street-side Chinese consumption, between the two there is a gap. And therefore, the space of an affordable, safe, hygienic, tasty Chinese food experience, that space is waiting to be taken. And Hong’s Kitchen plays fair and square in that space. We were seeing good momentum on Hong’s Kitchen pre-COVID. After the hiatus in end March and early April, we have seen momentum pick up in Hong’s as well,” Pota said.
    • Delivery rather than cloud for Hong’s: “I think given the ubiquitous nature of dine-in being under pressure, we will also have Hong’s Kitchen focus more on delivery and carry out, not so much cloud kitchen, because brand significance is important for a new brand, but certainly more optimized smaller stores which are oriented towards doing delivery and carry out. So, that will be the strategy. We will be focused to begin with on the Delhi-NCR region this year, and thereafter we will expand to other markets,” Pota added.
  • Essentials delivery is only for the duration of the pandemic: Domino’s is delivering essentials like atta and cooking oil through its app, but says it’s only doing it to “make a difference”, and that it will not evolve this into a grocery delivery vertical after the pandemic. “The Essentials project was born out of that consumer need and the community need. It is intended to stay in operation for the duration of this pandemic and as long as we believe the community still need us. It is not envisaged right now as a long-term business opportunity,” Pota said.
  • Contactless dine-in: The company says that it has also designed systems for contactless dine-in with social distancing for when going to restaurants will be allowed again. “The zero contact dine-in will allow consumers to maintain social distance and to avail of a dine-in experience, order pizzas in dine-in, stay and consummate the transaction. We also have redesigned all our stores in dine-in. And changed the layout completely to make sure that there is six feet of separation between tables, we put the floor markers and stickers. So we are completely ready to hit the ground running as soon as dine-in is allowed. Dine-in will remain a challenge for some time. But like I said earlier, dine-in will come back at some point of time because people will want to go out and eat together as a group. But we are prepared to respond to the consumers’ needs for a safer and more transparent dine-in experience,” Pota said.
  • Cheaper milk and cheese: “[We are] happy to report that on account of a variety of reasons, including increased supply, we are seeing the milk and cheese prices come down. That impact has not flowed into the P&L in quarter four because we are carrying inventory, but we expect to see going forward some positive rub-off on account of dairy inflation coming down,” Pota said. Cheese is a key supply item for Domino’s, since it goes on pretty much every pizza pie they sell, whereas milk is a key ingredient in desserts.

Results for March 2020 quarter

  • Operating Revenues at Rs 8,979 million, growth of 3.8%.
  • EBITDA at Rs 1,695 million and EBITDA Margin at 18.9%
  • Profit After Tax at Rs 210 million, Normalized PAT at Rs. 452 million and Normalized PAT Margin at 5.0%
  • Overall 17 stores were opened, 13 stores for Domino’s Pizza and 2 stores each in Dunkin’ Donuts and Hong’s Kitchen
  • Online orders as a % of delivery orders was 88.9%, compared to 75.3% in the same quarter in Q4FY19.

Press Release | Presentation | Concall Transcript | Results

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