India’s KFC and Pizza Hut operators, Sapphire Foods India and Devyani International, announced on Thursday that they would combine in a $934 million deal to form a fast-food franchise in the most populous country in the world.
The deal is being made amid increased costs, slowed same-store sales, and margin pressure for fast-food franchises in India, with stiff competition between McDonald’s MCD.N and Domino’s Pizza DPZ.O franchises in an environment where consumers are reducing spending on non-essential items.
Devyani will offer 177 of its shares against every 100 shares of Sapphire as part of the deal, and it anticipates annual synergies of 2.1 billion to 2.25 billion rupees ($23.34 million to $25.01 million) from the second full year of operating as combined entities.
The companies that are partners of Yum Brands YUM.N operate more than 3,000 restaurants both in India and abroad, KFC and Pizza Hut dine-in restaurants, and they compete with the Indian franchises of McDonald’s and Domino’s Pizza chains, Westlife Foodworld WEST.NS and Jubilant Foodworks JUBI.NS.
An independent consumer goods consultant, Akshay D’Souza, stated that the franchisee of KFC and Pizza Hut in India is in a net loss, and thus, this is a challenge in scaling.
He further said, “With the single entity, if they can unlock even half of the expected synergies, we will be seeing a profitable enterprise… where they can control costs better.”
The consolidated total costs of Sapphire increased on-year by 10 percent to 7.68 billion rupees and Devyani by 14.4 percent to 14.08 billion rupees in the quarter ended September.
Devyani reported a net loss of 219 million rupees in the quarter ended September 30, which is a reversal of profit of 170,000 rupees in the same quarter the previous year, whereas Sapphire registered a broader consolidated net loss of 127.7 million rupees compared to a loss of 30.4 million rupees in the previous year.
