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McDonald’s franchisee Westlife looks to boost same-store-sales growth

LiveMint logoLiveMint 28-03-2017 Nasrin Sultana

Mumba: Quick service restaurant (QSR) McDonald’s is likely to see healthy same-store-sales (SSS) growth after it launched a series of initiatives like change in menu and new pricing. Westlife Development Limited, owner of master franchisee of McDonald’s restaurants in south and west India, has been struggling with stagnant SSS growth due to weak consumption sentiment. However, analysts are hopeful that its new restaurant format experience of the future (EOTF) will boost SSS growth despite pressure.

Earlier in March, McDonald’s launched its EOTF offering a completely new dine-in experience with a significant thrust on revamping the menu and giving customer option of customization as opposed to standardization.

CLSA sees over 8% annual SSS growth with over 11% Ebitda margin by FY20 on product innovation, premiumization, cost optimization and capex rationalization. “We believe that consumer sentiment is at a trough in urban India and a pick-up will drive a strong over 60% Ebitda CAGR over FY17-20,” said CLSA in a report. The company’s Ebita margin halved in the past five years due to high operating leverage despite a steady rise in gross margin but gross margin rose to 60% in FY17. Ebita, or earnings before interest, taxes, and amortization, refers to a company’s earnings before the deduction of interest,

Initiating coverage on the stock, CLSA said that Westlife Development rides on a strong multi-year growth story and consumer sentiment pick-up will drive strong growth earnings while series of initiatives will aid growth and margins.

Brokerage firm, Nirmal Bang said that the initiatives will continue to help maintain a competitive presence and support improvement in SSG to high single-digit and/or teens in the medium term. “Despite significant slowdown in the industry and continuous entry of new players, it has managed to deliver positive SSG. The strategy of brand extension such as McCafe and McDelivery is the key aspect which helped in managing this downturn,” it added.

According to Nirmal Bang, SSS growth is likely to strengthen even further with the addition of breakfast day part and EOTF stores over the next one to two years. Both McCafe and McDelivery cumulatively contribute to around 20% of store sales, wherever they are available.

Its SSS growth was at 1.8% in FY16, growing from negative 6.4% and 5.6% in two fiscals before it. However, SSS growth was at 6.2% in FY13. In line with industry trends, the McDonald’s franchisee has seen a severe slowdown in SSS growth in the past several quarters although the recent trend is much better.

Stagnation of SSS growth and significant increase in wage and utility costs led to an Ebitda margin decline of around 650 basis points (bps) over the past few years. According to the management, in the past few years it focused significantly on reducing store break-even and operational costs and this should yield benefits in the near future.

The stock ended up 2%, gaining intraday high of 6% on the BSE. The stock gained 28% in 2017 so far.

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