Daybreak - How fried chicken helped McDonald’s become an investor’s favourite

Episode Date: January 13, 2023

In May 2020, McDonald's decided to launch the McSpicy Fried Chicken in the southern states of India where majority of the population consumes meat.Two year later, the shares of McDonald’s India franchisee, Westlife Foodworld, shot up by 40%.Tune in to find out how fried chicken was one of the key drivers behind the fast-food chain becoming a the top-choice among public-market investors.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me. My interruptions, my analogies and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. 2020 turned out to be the best year on the stock market for Westlife Food World,

which runs McDonald's franchisee in South and West India. Its shares saw their biggest spike in, more than five years. One of the reasons for this was the company's commitment to opening new stores. For the next five years, including this one, McDonald's wants to open between 40 to 55 new outlets every year. And then last week, in a letter addressed to its global employees, CEO Chris Kempzinski also announced that McDonald's will aim to build more restaurants.

He said that this was a part of the fast food giants, dated business strategy. In India, Westlife is already following this global strategy with some very interesting customizations. Here, the addition of new stores will be more focused towards states in South India. And that is because South is big on chicken. It is a known fact that chicken, specially fried chicken, is one of the most popular segments in the fast food market. So guess what McDonald's did. They introduced mixed spicy fried chicken in India's southern states in May 2020. And it really paid off because in 2022, Westlife became the favorite fast food company amongst investors. It even left KFC behind. So today, I will tell you about how McDonald's in India

became the go-to fast food company for public market investors in 2022. Welcome to Daybreak, a brand new podcast from the Ken. I'm your host Nick Das Sharma and in each episode, I will tell you a business story that is significant, interesting and most importantly worth understanding. Today is Friday the 13th of January. It was not just KFC. 2022 saw McDonald's leave every other fast food chain operator behind, including Pizza Hut. The shares of McDonald's India franchisee shot up by a whopping 40%. As of now, Westlife's market capitalization stands at 12,000 crore rupees.

It was a combination of strategic decisions and some well-timed luck that made the years so successful for the fast food chain. And one among them was McDonald's decision to focus on South India. According to a national government survey conducted in 2019 to 20, except for Karnataka, over 90% of the population eats meat in all South Indian states. Even in Karnataka, this number is nearly 80%. The national average, meanwhile, is only 70%. Plus, southern states have relatively higher incomes compared to the rest of the country. Add to this, the fact that fried chicken is one of the most popular non-vegetarian fast foods in India

and South India automatically becomes the country's largest market for fried chicken chains. So in May 2020, McDonald's decided to tap into this market. It launched its mixed spicy fried chicken, specifically in southern states. Now, fried chicken is served in all the 135 McDonald's stores in the south. And in the West, where West Life runs over 200 stores, it is being rolled out on a tribut. basis in five stores. This is because the region is relatively more vegetarian. In 2022, Jubilion, which runs Domino's Pizza, brought the American fried chicken chain Popeyes to India. The same year, Wow MoMo Foods, too, launched its new Wow chicken.

Jubilion decided to launch its first eight Popeye outlets in Bengaluru, and 80% of Wow chickens' 37 stores are in South and East India. East is the second largest market for fried chicken. But Westlife was the early bird here, and it chose only one of these two regions for the launch of fried chicken. And now, Westlife's current annual per store sales is 6.3 crore rupees, and fried chicken makes up almost one-tenth of McDonald's sales in the south. According to Westlife, fried chicken is a 5,000 crore-rupy market in South India alone, and the product enjoys gross margins of 70% or so. And this is nearly 10 percentage points higher than those of McDonald's value burgers.

Until McDonald's came into the picture, the fried chicken market was mostly dominated by KFC. Sagar Daryani, the co-founder and chief executive of Wow MoMA Foods, told my colleague Sita Ramanji, who covered this story, and I'm quoting, it was only KFC ruling the market. KFC's competition was only from the unorganized sector, including many copycats with similar names. Now that we understand why McDonald's decided to focus on South India, let us look at the next big question. Can fried chicken actually helped McDonald's drive the number of its customers. In September last year, Smita Jatya, the managing director of Westlife, said that the company wanted to become the market leader in fried chicken. And it looks like McDonald's is really doing everything it can to achieve this goal.

In his report, my colleague Sita Raman mentioned how it is almost impossible to miss promotional ads for fried chicken if you visit any McDonald's outlet in South Bengaluru. But how much can an add-on item like fried chicken push football? After all, McDonald's main stay are its burgers. Sagar Daryani told the Ken, and I'm quoting, KFC's Zingerberger was supposed to be an add-on. But now people go there just for that. End quote. And this is probably why Westlife is rooting for fried chicken

to achieve the same success for McDonald's. But we still have to remember that Westlife operates McDonald's only in South and West India. Unlike Wow Chicken, which also expanded its outlets in the east, Apart from South India, West Life only has the West to look at. And the region, as we know, is largely vegetarian. So even if fried chicken becomes the biggest hit at McDonald's, a customer who is used to having it in Bengaluru or Chennai

may not find it in, say, Pune or Ahmedabad. But for now, West Life is deliberately choosing to remain focused on the South, at least when it comes to chicken. During an earnings call in November last year, Sorab Kalra, the CEO of Westlife, said that unless fried chicken is a big driver for customers, and I'm quoting, it is not worth our while to add complications to operations in the West.

End quote. But Rajiv Ranjan, who is the MD of McDonald's in North and East India, told Sita Raman, and I'm quoting again, we see good potential in the fried chicken segment and are keeping a close watch. We will enter at the right opportune time when we are ready with a compelling offering in terms of food, taste and value.

End quote. But fried chicken and the focus on South India were not the only reasons that pushed McDonald's shares on the stock exchange. There were a bunch of other important reasons as well. Among them was McDonald's decision to expand its coffee house-style kiosk, McAfee,

to more than four in every five stores. This number was just one in every three in 2016. According to Priyam Tollia, an analyst at Brokerage Access Securities Limited, this is important because McCaffee beverages enjoy gross margins of over 80%. On the other hand, burgers, which are McDonald's mainstay, offer 60 to 70% gross margins depending on their prices. Then, there were also the unforeseen gains due to the pandemic. Unlike pizzas, burgers were not considered delivery-friendly.

But that changed with the lockdown. A second analyst with a domestic brokerage who did not wish to be named, told again, and I'm quoting, delivery was maybe 15% of their revenue three years ago. They wouldn't have thought it would go up to 35%. End quote. And then one more factor played in. The fact that there aren't many Westlife shares available for buying. In December, the average daily volume of Westlife shares traded,

relative to the total number of shares available for trading, was 25% less than jubliants. So with the high demand, the prices of the shares went up. Its shares are currently trading at almost 130 times more than its previous year's profits. As I record this, Westlife's share is trading at $742.50 per share. But like my colleague Sita Raman said in his report, given the premium that the investors are paying for Westlife, a lot depends on whether its growth recipe is in line with its 2027 targets. And how many takers make spicy fried chicken finds is a crucial ingredient in that. Daybreak is produced

from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps, and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.