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For McDonalds, getting an option to pay a higher GST with input tax credit would help: Amit Jatia, Westlife Development

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Talking to ET Now, Amit Jatia, Westlife Development , says has no plans to take over the north and east franchise for McDonald’s as they have their hands full with 500 million customers in West and South India.

Will the recovery in the QSR same store sales growth sustain?
At least from McDonald’s point of view, we are delighted that for the last nine quarters we have had positive same store sales growth and therefore we have demonstrated that even in the long term, all the work we have done to recreate the foundation for brand McDonald’s has worked for us.

I had mentioned in my last earnings call that the consumer sentiment is beginning to change month on month and I continue to see that trend. We are quite excited to see that consumers are coming back, the footfalls in retail locations are growing and all the work we have done around imaging and McCafe, our McDelivery business, the work we have done on the new value platform of the happy price combos all are yielding phenomenal results and of course fortunately that is reflected in our results as well.

Given that you have painted a fairly optimistic picture about business so far, what has been your experience with respect to the new changes in the GST regime? How has that really impacted your pricing and operations?
Basically, what the government did when they brought down GST from 18% to 5% was very good for the wider spectrum of the industry. There was a big technical factor. They took away input tax credit and therefore the 18% and 5% is not comparable in the true sense. Remember that in the restaurant industry, there are roadside vendors to super organised players like McDonald’s. We have actually built a local supply chain which has gone all the way up to the farmers with huge investment in production facilities worth thousands and thousands of crores. Effectively, every purchase that McDonald makes is from third party vendors and when we buy from them, we are paying 12%.

On the rest of the services that we consume like rent, advertising or royalty, we pay about 18%. So effectively the input tax cost to us is about 15% and if I were to apply that to 80% of our purchases where we pay GST, the impact is 12% on our P&L and therefore from 18% if the impact is 12%, basically there is a 5-6% of tax which is precisely where the tax is right now as a composite scheme of 5%.

I do believe that it is a good move by the government because majority of the industry has benefitted from it. For brands like McDonald’s that have invested heavily in supply chain, it has been kind of neutral except if I were to add capital expenditure because we are investing about Rs 100 crore a year in building new restaurants, McCafes and so on, now we have lost the credit on that as well. So the impact itself is quite substantial, on a Rs 100 crore investment, it is about Rs 10 crore.

At the end of the day we believe that the foundation of GST was built around cascading impact of input tax credit. For brands like us to get an option to pay a higher tax but get input tax credit would actually move in the right direction. That is how we see it. It has been all right for consumers who understand it, have accepted that well.

Another big trend for Westlife is that we have been seeing in the sector as well as for the customer, the tendency to go healthy. Given that your brand is fairly different from that, can Westlife adapt to this tendency?

Absolutely. There is no question of us delivering these kind of sales growth numbers, if we are not serving products that resonate with our consumers. You might have read that we have made announcements where we have been able to cut down the calorie content in our sauces by 60-70% which led down to cutting the calorie content of a burger by 10%.
Other than that, we have cut sodium content in all our products. Also, a lot of facts are not known to the consumers, which we are working on. For example, all the patties that we use have no artificial flavours, no artificial products of any type in the formulation and if you were to break the patty out, it is primarily vegetables in a McVeggie patty.

Additionally, right from day one, the fat content in our ice cream is about 3% and an ice cream cone has 90 calories and is made of fresh cow’s milk. Consumers are realising that as we are talking about it. Another big move we made was to move to whole wheat wraps in the recent past and you will see such innovative and leadership moves coming from McDonald’s over the next 12-18 months.

We also introduced salads and soups in some of our restaurants which we are now expanding quite aggressively to all our restaurants as well. Collectively, when you look at it, there are enough choices for the consumer like the egg burger which is steamed and the other things that I have just mentioned. We are going to stay in touch with our consumers. As a consumer brand if you do not serve consumers what they want, there is no way we can succeed in the country.

Will Westlife take over the north and east franchise for McDonald’s as well because that is an empty slot right now?
No. As I have maintained throughout the last three to four years, we have 500 million customers in west and south and we have our hands full. Our current focus is really to grow the business in our territory. We have laid out our 2022 vision where we are saying that we will be anywhere between 400-500 restaurants and plus we are going to double the base of our McCafe, double the base of restaurants.

And what about the outlook on same store sales growth? For nine consecutive quarters, we have seen positive same store sales growth and the last two quarters also you have managed to grow plus 8%. Is this level sustainable?
We think that as we had maintained, the brand foundation has been reset. Some of the work we have done around the experience of the future restaurants is resonating extremely well with the consumer. McCafe continues to grow extremely well. The value platform has connected with the consumer. Currently we are doing the promotion Flavours without Borders with the chatpata naan. The innovation that we have done on the menu is resonating very well with the consumer. As we had said, we will definitely see ourselves maintaining mid to high single digit same store sales growth in the coming quarters. We are quite optimistic about where we are heading.

You have also been able to outperform your peers on the QSR space like the ones that have a pan India presence, given that your exposure is limited to the west and the south, is it safe to conclude that those regions are outperforming the rest of India?
I would not say that. I think what I have learnt in my 20 years of experience in the QSR business there may be minor shifts here and there between regions but generally pretty much everything is moving up. I do not see a very major difference in north and east as well from a consumer point of view but in my experience, the whole country consumer sentiment is moving up.

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