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Jubilant begins test-run of Chinese fast food venture

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Jubilant FoodWorks Ltd., the operator of Domino’s Pizza and Dunkin’ Donuts in India, has started test runs of a Chinese fast food venture, its third restaurant brand in the country, two people aware of the development said.

The Chinese Kitchen is the working name of the listed food chain’s first independent venture, the people said.

“The brand, currently in test-run stage at a store in New Delhi, is based on mass-priced Chinese cuisine. JFL is leveraging its backend synergies on the same and this will be its first home-grown brand,” one person said, asking not to be identified citing confidentiality reasons.

A JFL spokesperson, responding to ET’s email query, said the company would not comment on the development.

Industry experts said JFL is seeking to capture a niche in a fast-growing segment that has only a few national operators such as Mainland China owned by Speciality Restaurants and food entrepreneur Ashish Kapur-promoted Yo! China.

“Unlike other quick service restaurants, one can operate pizza and Chinese models at 27-30% of the food cost and yet meet per-head consumer spend expectations. The food cost at value-pricing in other QSR formats is usually over 42%, which is a significant margin disadvantage,” said Jaspal Sabharwal, a food industry and private equity veteran who helped set up Burger King in India, and is co-founder of online food industry platform TagTaste. Sabharwal currently holds shares in JFL.

Another person said JFL has also been exploring acquisitions and has sounded off at least two investment banks.

“JFL has been looking to extend its operations to scale with a third brand since Dunkin’ Donuts has remained small and didn’t work according to initial expectations,” the person said.

JFL has more than halved the store count of Dunkin’ Donuts to 32 now from 77 two years ago and is now focusing on small stores and kiosks to cut losses.

The company reported a 60% growth in net profit in the quarter ended September and same-store sales growth of 21%.

“While JFL reported 20%-plus same-store growth (SSG), it largely happened because of low post-demonetisation bases. Starting in the third quarter, it will be difficult to post high single-digit SSG. Additionally, Domino’s is finding it difficult to grow their network beyond 1,100 outlets in a profit-sustained mode, so adding the Asian leg to their business is the appropriate move,” Sabharwal said.

Some brokerages have reduced the JFL share price target.

“Worries on cost push driven by rising fuel prices, impact freight, delivery costs and competition for delivery manpower from food aggregators and ecommerce companies could keep the stock trading sideways,” said Rohit Chordia, an analyst with Kotak Securities. “Next couple of quarters will be a test of healthy SSG sustainability as the base gets stiffer.”

Goldman Sachs downgraded the JFL stock to ‘sell’ with a target price of Rs 1,026. The share price fell 2.5% to Rs 1,063.90 at the close on the BSE on Tuesday.

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