India’s KFC and Pizza Hut operators, Sapphire Foods and Devyani International, have said they have agreed to merge in a $934 million deal, forming one of the country’s largest fast-food franchisee entities. The merger has come at a time when fast-food operators have been facing rising costs, slowing same-store sales and margin pressures in India’s highly competitive quick-service restaurant market.
The deal has been announced as Indian consumers have been cutting back on non-essential spending and franchisees have been grappling with intense competition from rivals such as McDonald’s and Domino’s Pizza operators, as per media reports. The combined entity has been positioned to better withstand cost inflation and competitive pressures through scale and operational efficiencies.
Under the terms of the merger, Devyani International has said it will issue 177 shares for every 100 shares of Sapphire Foods. Devyani has also said it expects annual synergies of between 2.1 billion rupees and 2.25 billion rupees from the second full year of operations of the merged company.
Both companies are partners of Yum Brands and have been operating more than 3,000 outlets across India and overseas, including KFC and Pizza Hut dine-in restaurants. They have been competing directly with Indian operators of McDonald’s and Domino’s Pizza chains, Westlife Foodworld and Jubilant Foodworks.
Industry observers have noted that both KFC and Pizza Hut franchisees in India have been operating at a net loss, making scalability a challenge. Akshay D’Souza, an independent consumer goods consultant, has said that a single, combined entity could unlock profitability if even part of the projected synergies is realised, allowing better cost control.
In the quarter ended September, Sapphire Foods’ consolidated total costs have risen 10% year-on-year to 7.68 billion rupees, while Devyani International’s expenses have increased 14.4% to 14.08 billion rupees. Devyani has reported a net loss of 219 million rupees for the quarter ended September 30, reversing a marginal profit a year earlier, while Sapphire has posted a wider consolidated net loss of 127.7 million rupees, compared with a loss of 30.4 million rupees in the same period last year.
