The management's review of where we are where we would like to go
"In our short operating history, we are proud of the significant progress we have
made, but there is still much to achieve."
DEAR SHAREHOLDERS,
This is my maiden address to you following our successful Initial Public Offering in
late 2021. I would like to take this opportunity to give you a background of how Sapphire
started, what we want to accomplish and our journey thus far.
We ventured into the Quick Service Restaurant business in 2015 because we were excited
about the possibilities that the food service industry had to offer. We believed that the
QSR sector would see multi-decadal growth, and that KFC and Pizza Hut could lead the
charge for the industry.
So even while we had acquired unprofitable businesses and territories, we set ourselves
the moon-shot aspiration of being considered as India's Best Restaurant Operator someday.
From the start, we believed that we could add more value to global brands like KFC and
Pizza Hut than just being a restaurant operator. The diversity of consumer and retail
facing experience that our management team possesses can enable brands to grow consumption
by continuously sharpening the brand proposition and then bringing this to life in our
restaurants. The latter manifests itself in the articulation of our Core Purpose - the
passion to serve our customers great food and great experience at great value. You will
recognise this as being just another way of saying ‘Atithi devo bhava'.
Execution excellence is what differentiates restaurant operators, and it entails every
day relentless rigour - getting the right restaurant teams in place, building capabilities
and enabling them through superior back-end operations.
Our customer listening methods are elaborate and sophisticated, comprising Guest
Experience Surveys, social media comments, rating and feedback on our delivery app and
aggregator platforms, and direct customer feedback on our websites. This continuous
feedback provides the backbone support for our restaurant teams to improve guest
experience and take corrective action in the case of a breakdown.
We have an in-house supply chain function that works closely with our food, packing
material, distribution, warehousing and capital equipment vendor partners to optimise
cost, quality and inventory levels of our input materials. We have invested significantly
in a comprehensive technology stack comprising restaurant level SAP enterprise resource
planning (ERP) system, LS Retail Point of Sale system and customer-facing digital
applications. This has enabled us to build several solutions using this technology stack
to improve customer experience, operating efficiency and financial controls. This
technology backbone will "enable us to seamlessly scale our operations multi-fold
from the 579 stores we currently operate.
An example of the confluence of technology, financial controls and relentless execution
is our Pacesetter programme. This programme enables continuous benchmarking of cost
parameters amongst cohorts of restaurants, thereby improving our financial —
performance at the individual restaurant level. This Pacesetter program has enabled us to
improve our overall Corporate Adjusted EBITDA from Rs.662 million in FY20 to Rs.1,808
million in FY22.
Disciplined capital allocation is at the heart of our restaurant expansion program. The
restaurants we acquired were large stores, primarily dine-in focussed (KFC ~2700 sq.ft.
and Pizza Hut ~2500 sq.ft.) with high operating costs. A new restaurant in this format
would deliver a payback in 5-6 years.
The growth opportunity for KFC and Pizza Hut is to drive easy accessibility to
consumers and be considered neighbourhood restaurants. This led to smaller (KFC ~1500
sq.ft. and Pizza Hut ~1200 sq.ft.) omni-channel restaurants with reduced capital and
operating costs at similar revenue levels compared to the earlier larger stores. This
change is leading to improved store profitability and paybacks of ~ 3 years on both brands
and giving us the licence to rapidly expand our restaurant base. We opened the highest
ever number of 142 restaurants in FY22.
Perhaps the single most important element in nurturing the execution excellence mindset
is our values-based culture and high governance commitment. When we acquired multiple
franchisee businesses and merged them, we were required to deal with multiple work
cultures clashing in the organisation.
This had to change. The 5 Sapphire values of Excellence, Courage, Integrity, Empathy
and Accountability helped people navigate their daily behaviours. Over a period of time
through a reinforcement of these values, through hiring and separation, these values have
been woven into the fabric of the organisation. Our employee engagement scores, as
measured through the global Gallup Engagement Survey, have steadily improved from 57th
percentile in 2018 of all companies surveyed by Gallup to 76th percentile in 2022.
One of our values-Accountability-is about having an owner mindset.
We also converted this mindset into actuality, when nearly a 1000 employees, including
our Restaurant Managers were awarded ESOPs in 2021. This large ESOP plan is rare in this
industry.
All of these have reflected in our performance. At the end of FY22, after a Covid
pandemic that could potentially have derailed the business, Sapphire Foods delivered the
highest margin expansion of all companies in the industry. At the end of FY22, Sapphire
Foods was among the top three companies in the industry in terms of revenue, revenue
growth and PAT performance.
We are excited about the opportunities for Sapphire Foods in the QSR sector and have
built our team and backend capabilities to become a multi-brand restaurant operator.
While KFC and Pizza Hut enjoy a substantial runway for growth, we intend to acquire and
scale other QSR brands as well. We are selective about the kind of cuisines we believe
possess the potential to scale and on Page 35 you can read about our 7 mantras to drive
scale in the restaurant business.
I remind the team often of our aspiration: to be considered India's Best Restaurant
Operator. In our short operating history, we are proud of the significant progress we have
made, but there is still much to achieve.
The journey ahead is really exciting.
Sanjay Purohit,
Whole time Director and Group CEO.