Quick Service Restaurants

Westlife: Growth Outlook for McDonalds stores

Westlife Development Limited (WDL) is a part of the B.L. Jatia Group. The Company carries out its business in the operation and promotion of quick service restaurants through its wholly owned subsidiary Hardcastle Restaurants Pvt. Ltd (HRPL). HRPL operates McDonald’s restaurants in West and South India through its master franchise arrangement with McDonald’s Corporation.

McDonald’s operates through various formats including standalone restaurants, drive-thru’s, mall food courts, McDelivery and dessert kiosks. It also has 3 thriving brand extensions – McDelivery, McCafe and McBreakfast.

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About the Subsidiary company - Hardcastle Restaurants

HRPL was established as a joint venture with McDonald’s Corporation, USA in 1995. Hardcastle Restaurants Pvt. Ltd. (HRPL) has been the privileged custodian of the McDonald’s brand in West and South India since its launch in 1996.

HRPL is the master franchisee of McDonald’s under an agreement of 2010. The agreement grants HRPL the authority to provide initial capital for the business, with operational and technical business support from McDonald’s Corporation, the world's leading global food service retailer with over 36,000 locations serving approximately 69 million customers in over 120 countries each day. More than 80% of McDonald's restaurants worldwide are owned and operated by independent franchises.

In July 2013, the promoters turned Hardcastle Restaurants, into a direct subsidiary of Westlife (earlier called Dhanaprayog Investments) which was a family-owned but listed shell company. Thus Hardcastle Restaurants, Mr. Jatia's vehicle for the McDonald's business, is controlled by his listed firm Westlife Development Ltd.

(1) Family Chart of Westlife Development Ltd

Westlife Development Ltd detailed research with Family chart managing McDonalds

(2) Executive Board Members

(i) Mr. B L Jatia - Chairman

Mr. Banwari Lal Jatia has over 45 years of experience in paper, textiles, chemicals, food processing, mining, hospitality, healthcare, investments and finance and retail sectors.

Mr. B. L. Jatia holds B.Com and LLB degrees from the University of Mumbai.

Mr. B. L. Jatia is currently the Managing Director of Hardcastle & Waud Mfg. Co. Ltd. Besides, he also holds directorships in a number of other companies and is a trustee of a charitable trust.

(ii) Mr. Amit Jatia - Vice Chairman

Mr. Amit Jatia has over 26 years of experience in the QSR industry. He holds a B.Sc in Business Administration (Finance) from the University of Southern California. Also he has completed programmes on Management Control Systems at the Indian Institute of Management and on strategy, leadership and governance at Harvard Business School.

He has been recognised for his achievements with the ‘Young Achievers Award’, bestowed by the Indo- American Society in 2003, Business World’s ‘Most Respected Company’ award for the Food Sector in 2005, for the third consecutive year, as well as Images ‘Retailer of the Year’ award in 2004 and 2005.

(iii) Smita Jatia - Director

Ms Smita Jatia comes with two decades of experience in the QSR industry. She has been an active member of the McDonald’s India team since the commencement of its operations and over the years, has handled various roles within the organization.

She joined Hardcastle Restaurants Pvt. Ltd as Director, Marketing, in 1996 and was the Chief Operating Officer for Hardcastle Restaurants Pvt. Ltd.

She currently performs the role of Managing Director, Hardcastle Restaurants. A commerce graduate from Sydenham College, Mumbai, Ms Jatia has also completed an 18- week executive management program from Harvard Business School, Boston, and has undergone a rigorous Marketing and Restaurant Leadership program at the Hamburger University, USA.

(iv) Akshay Jatia - Director

Mr. Akshay Jatia is the Chief Strategy Officer at McDonald’s India (West and South) leading Business Strategy, Consumer Technology and Innovation for the company.

He holds a Bachelor of Science degree with majors in Finance and International Business from Leonard N. Stern School of Business, New York University.

Akshay joined McDonald’s India in 2015 and has worked cross-functionally to understand the operations of the company. He has been appointed as an Additional Director on the Board, with effect from 13th August, 2021, to hold office until the ensuing Annual General Meeting of the Company.

(v) Mr. Manish Chokhani - Director

Mr. Manish Chokhani is one of India’s most respected investors and financial experts. He is an Advisor to Axis Bank and holds Board positions in various companies including Axis Capital, Enam Holdings, Zee Entertainment Enterprises, Shopper’s Stop and Westlife Development.

He graduated as among the youngest MBAs from the London Business School soon after obtaining his CA certification.

Total Remuneration to Directors of the company is Rs 41,00,000 for the year FY21 which is 0.04% of net sales and -0.41% of net profit of the company for FY21.

(3) Shareholding Pattern

Westlife Development Ltd detailed research with Shareholding Pattern
Westlife Development Ltd McDonalds 
detailed research with details of change in shareholding pattern
  • Shareholding of Promoter and Promoter group includes shareholding by Horizon Impex Pvt Ltd. and Subh Ashish Exim Pvt Ltd. owned by Amit Jatia and his family.
  • In FY 13 in order to comply with the requirement of minimum 25% public holding in the share capital of listed companies, the Company declared 1 : 1 bonus for only public holders of the Company’s equity shares.
  • During FY13-14 the shareholding of Horizon Impex Pvt Ltd. which comes under promoter and promoter group reduced from 38.35% in Mar-13 to 30.45% in Mar-14. Also the Shareholding of Subh Ashish Exim Pvt Ltd. which is again part of Promoter and Promoter group reduced from 29.24% in Mar-13 to 21.37% in Mar-14. However Makino Holding Ltd. which is also part of promoter and promoter group increased their shareholding from 0% in Mar-13 to 7.64% in Mar-14. However, currently Makino Holdings Ltd. holds 3.79% of the total share capital as of Mar-21.
  • Moreover Promoters are reducing their stake to increase liquidity in the stock. Promoters aim to reduce promoter holding to 53% over the next 3-5 years from 56.4% currently.
Westlife Development Ltd detailed research with Shareholders holding more than 1 %
  • Shareholding of promoters reduced in the company over last 10 years from 75% to 56.4%.
  • However the shareholding of Mutual funds have been increased from 1.3% in 2014 to 12.67% in 2021.
  • Moreover the overall shareholding of FPO has also increased over last 10 years.

(4) Business Model of Westlife Development

The company holds master franchise for McDonald's in western India and South India. As per the agreement between Westlife Development and Mc Donald's every store of Mc Donald's located in west and south India will be owned by Westlife Development. For this master franchisee right, the company pays some percentage of revenue as royalty charges to Mc Donald's for using the brand in India. Moreover, the Royalty charges paid by Westlife to Mc Donald's are not fixed and expect to increase in future.

WLDL’s convenience platform offers alternate channels besides dine-in for the consumers. These include:
a) McDelivery Services (MDS),
b) Drive-thru,
c) On-the-Go (recently added due to the COVID-19 situation to over 250 restaurants by converting them to virtual drive-thrus.

Products Offered by Westlife Development Ltd.

(a) Mc Donald's

(b) Mc Café

Launched in 2013, McCafé is McDonald’s in-house coffee chain offering over 45 hot and cold beverages. Besides serving delectable hand-crafted coffee made from 100% Arabica beans, it also offers a range of non-aerated, dairy and fruit based beverages.

McCafé now enjoys a loyal base of customers who walk into McDonald’s for its coffee and desserts, hence giving customers one more reason to visit the restaurants.

(c) Dessert Kiosks

Dessert Kiosks are McDonald’s booths that operate outside the restaurants and offer customers an array of delicious desserts. Our Dessert Kiosks are located strategically to maximise visibility, thereby helping us create another occasion for people to consume our food.

(5) Operating Parameters

(a) McDonald's Store Count

Westlife Development Ltd detailed research with Mc Donald's Store count

Westlife Development has more than 300 stores of McDonald's in west and south India. Moreover 70% of company's restaurants are in six cities. Further management expects that the company will open 25-30 restaurants every year from FY22.

(b) Mc Café Count

Westlife Development Ltd detailed research with Mc Cafe Store count

The launch of Mc café was a brand extension strategy of the company. As due to the growing trend of coffee culture among the youth, WLDL started adding Mc Café kiosks to its existing store network, a globally successful strategy. Mc Café offers desserts and beverages. Besides providing an additional occasion for the consumers to visit McDonald’s, especially during the erstwhile non-peak hours, it helped drive premiumization, boosting gross margin. Moreover Through the Mc Café format, the managements expects that this will result in a better utilization of restaurant day parts and cross-over into revenues across different dayparts and formats. Thus will help the company to increase its margins.

(c) Restaurant Operating Margin

Restaurant operating margin represents total revenues from Company-operated restaurants less the operating cost of these restaurants (including royalty etc.) before depreciation and corporate overheads.

The company reported positive growth in ROM from FY17 to FY20. Moreover various lockdowns in different states affect the revenue of the company. As a result in FY21 the company reported negative growth in ROM.

(d) Same Store Sales Growth

Same-store sales refers to the difference in revenue generated by a retail chain’s existing outlets over a certain period, compared to an identical period in the past, usually in the previous year.

Westlife Development Ltd detailed research with SSSG

Various lockdowns in different stated in FY21 affected the SSSG of various stores of the company. The company reported positive SSSG for first three quarters of FY 20. But due to Covid-19 and Lockdowns in last quarter of FY 20 the company reported negative SSSG. As a result of lockdowns in FY21 also, the company reported negative average SSSG of -54%, -40.7% and -24% for first three quarters of FY21. Moreover As per management Q4FY21 was the strongest quarter of FY21 with a positive SSSG at 10.5% and year on year revenue growth at 6.3%.

Moreover, to increase the SSSG The company entered into value-enhancing 20-25 year tenancy agreements, strengthened rental portfolio, created format complements to make it possible to increase services from the same store space. Company also strengthened the supply chain to negotiate volume-based discounts and invested in technology to enhance agility and cost competitiveness.

(6) Cost Structure - Westlife Development Ltd

Westlife Development Ltd detailed research with Cost structure of McDonalds
Westlife Development Ltd McDonalds 
detailed research with Financial Parameters

The company has maintained its employee cost as well as its cost of materials consumed. However, Depreciation and Interest cost of the company has increased from FY 19 due to adopting IND AS 116.

Over last 10 years, Westlife Development's spend on advertisement is around 5-6% of sales. It only lowered to 4-5% in FY19 onwards.

(7) Financial Parameters

Westlife Development Ltd McDonalds 
detailed research with Financial Parameters

FY 17

In FY17, Company recorded a revenue growth of 11.7% to Rs. 931 crore compared to Rs. 833 crore in FY 16. The increase in revenue was primarily driven by the opening of new restaurants, the Company added 25 restaurants in year 2017 taking the total restaurant count to 258 restaurants across west and south India. However the company reported negative PAT growth. As there was increase in cost of food paper on distribution due to which the packaging cost of the company increased thus having an impact upon the profits. Moreover, demonetization in FY17 certainly affected the outside eating habits of the people.

FY 20

During FY19 the company's PAT affected due to increase in Other Interest cost (Finance Cost increased due to charge on lease liability created under IND AS 116) and depreciation cost (Depreciation increased due to amortization cost of Right of Use Assets created under IND AS 116). Therefore, Rent Expenses lowered and instead considered under additional depreciation and finance cost.

FY 21

The company's Revenue greatly affected by lockdowns due to Covid-19. As a result the company's profit also affected. However, the loss of first three quarters was set off by the profit of last quarter of FY21.

(8) Management Discussion and Concall Highlights

(i) Expansion Plan

  • The management sees an enhanced opportunity for organized players and forecasted a potential of 1,000 McDonald’s stores (up from 800 previously) in west and south India.
  • Moreover management will continue to focus on six key metros and target network expansion in Tier II towns that offer growth opportunities.
  • Westlife development will add seven McCafés and 11 EOTF (Experience of the future) restaurants in 1QFY22.
  • Management has a target to open 25-30 restaurants from FY22. Further, the management sees this number as 30-40 store. The CAPEX per restaurant would be INR 25-30 million.
  • WLDL opened one store during the Q4 FY21 – a flagship store at the T2 terminal in Mumbai.

(ii) Launches fried chicken and BTS Meal

  • The company launched fried chicken last year and recently launched McSpicy Fried Chicken.
  • The management feels this is a good proposition for the South India market. As the market size of the Friend Chicken category is INR50b.
  • The company also signed on film celebrity Rashmika Mandanna as its brand ambassador and launched a brand campaign for its newly launched – McSpicy Fried Chicken.
  • Management Expects to generate INR 5m sales per store through this product.
  • The brand launched a special BTS meal along with coveted merchandise as part of this collaboration which was available for Indian consumers till July 4 2021, across restaurants in West and South India. This campaign was mainly done for promotional and advertisement reason.

(iii) Strong Performance from Convenience Channel

McDelivery reported its highest ever sales in the month of March 2021. Company's Drive Thru channels reported 81% growth in the Q4 FY21 and "On the Go" grew three times over the last three quarters. Overall Convenience sales has been one of biggest growth drivers for the company especially MDS and Drive Thru. These have grown by over 26% and 80% respectively in Q4 FY21 over Q4 FY20.

(iv) Gross Margins of the company

Management is trying to make Gross margin (GM) expansion through volume recovery, channel optimization, and supply chain initiatives. Management expects that the recovery in McCafé would further support the GM. Nevertheless, the company’s efforts on fixed cost reduction should aid margins going forward.

(v) Highlights from management commentary

  • The restaurant operating margins touched a five year high of 16.4% for Q4 FY21, a whopping 527 basis point growth on a Y-o-Y basis.
  • Cash profits of Q3 FY21 and Q4 FY21 together have helped the company wipe off 100% of the losses of first half of the FY21 and hence company delivered cash profits of Rs 24 million for the full year FY21 on a lower sales base versus FY20.
  • Management wants to maintain a robust liquidity position, contain debt and build a stronger balance sheet.

(vi) Moat of Westlife Development

  • Westlife Development is in the QSR business from many years on the other hand its competitor Burger King is a new player in the Indian market.
  • Westlife has strong supply chain management as compared to Burger king.
  • Moreover Westlife maintains better returns on equity and on capital employed during pre covid years as compared to Burger king.
  • However Burger king India has Master Franchisee rights of Burger king in whole over India. On the other hand Westlife has the master franchisee right for only West and South India.

(9) Opportunities and strengths

(i) Market leader in the QSR sector

Mc Donald's is the market leader in India in Burger Chains. Moreover Mc Donald's has a good brand image. Thus the company enjoys brand loyalty. Moreover due to Covid-19 situation people are shifting towards organized brands that can ensure the safety of food. Thus, it is an opportunity for the company to grow in this situation.

(ii) Superior Unit Economics

westlife development average McDonalds store sales

Westlife has superior unit economics – about 30-40% higher revenue per store – relative to peers. Mainly because of its value pricing and strategies aimed at increasing in- store visits and offering complementing menus.

(iii) Robust supply chain management

Westlife Development has 65 supply chain vendors as of FY21 which support best in class supply chain management. Farm to fork concept of McDonald's - the company has there own potato farms as only selected potatoes are used as a raw material for its products thus which help the company to manage the quality and quantity of supply of raw material.

Moreover Westlife is among one of few QSR players to have developed a backward integrated as they are not much dependent upon outside distributers for the supply of raw material. Thus closed loop supply chain that ensures strong business continuity through the COVID 19 crisis.

(iv) Burger Chains offer huge scope of growth and scalability

  • Burger chains offer huge scope of growth in India given that global leader McDonalds has ~480 stores. While No2 chain Burger king has 270 stores.
  • Burger chains grew at a CAGR of 19.4% between FY14-20 and are expected to sustain momentum in the coming years led by improved affordability, rising consumer aspiration and favorable demographics.
  • Moreover the organised QSR sub-segment in India is projected to grow at a CAGR of 19% between FY 2019-20 and FY 2024-25 on the back of consistently improving QSR infrastructure.
  • Further, with the increasing penetration of internet and adoption of digital payments, the QSR market will grow even faster.

(10) Risks

(a) Competition from organised and unorganised market

Westlife Development faces huge competition from various organised and unorganised players in the market. For Instance Burger king, Dominos, KFC and several local players from the unorganised market in India.

(b) Sudden lockdown in areas with high COVID-19 infection

Sudden lockdowns and other dine -in restrictions are also a risk for the company as being in part of QSR sector. As QSR sector is one which was most affected by Lockdown.

(c) Inflation risk

Higher inflation could affect pricing of various raw material. Thus there will be an effect on margins of the company.

(d) Increase in Royalty Cost

The royalty fees charged by Mc Donald's from Westlife Development is not fixed. Therefore any increase in Royalty fees might act as an increase in overall cost thus will affect the profits and margins of the company.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry's Publications.

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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