Jubilant FoodWorks Limited (JUBLFOOD) Q3 FY23 Earnings Concall Transcript

Jubilant FoodWorks Limited (NSE:JUBLFOOD) Q3 FY23 Earnings Concall dated Feb. 01, 2023.

Corporate Participants:

Deepak Jajodia — Vice President, Finance

Hari S. Bhartia — Co-Chairman and Director

Sameer Khetarpal — Chief Executive Officer and Managing Director

Analysts:

Nihal Jham — Nuvama — Analyst

Manoj Menon — ICICI Securities — Analyst

Ashish Goenka — Chief Financial Officer

Arnab Mitra — Goldman Sachs — Analyst

Amit Sachdeva — HSBC — Analyst

Amit Rustagi — UBS — Analyst

Vivek Maheshwari — Jefferies — Analyst

Latika Chopra — JPMorgan — Analyst

Sheela Rathi — Morgan Stanley — Analyst

Shirish Pardeshi — Centrum Broking — Analyst

Akshen Thakkar — Fidelity — Analyst

Chirag Shah — CLSA — Analyst

Avi Mehta — Macquarie — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Jubilant FoodWorks Limited Q3 FY ’23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Deepak Jajodia, Vice President, Finance, Jubilant FoodWorks Limited. Thank you, and over to you, sir.

Deepak Jajodia — Vice President, Finance

Thanks. Good evening, everyone. Welcome to Jubilant FoodWorks’ Q3 and Nine Months FY ’23 Earnings Call for Investor and Analyst. We are joined today by senior members of the management team, including our Chairman, Mr. Shyam Bhartia; our Co-Chairman, Mr. Hari Bhartia; our CEO, Mr. Sameer Khetarpal; our CFO, Mr. Ashish Goenka; and our Group CFO, Mr. Arvind Chokhany. We will commence with key thoughts from Mr. Hari Bhartia. We will then turn to our CEO to share his perspective. After the opening remarks from the management, the forum will be open for the question-and-answer session.

A cautionary note. Some of the statements made on today’s call could be forward-looking in nature, and the actual results could vary from the statements. A detailed statement in this regard is available in Jubilant FoodWorks’ earnings documents.

We will share today’s opening remarks along with the recording of the call on the stock exchange and on the Company’s website under the Investor Relations section.

I would now like to invite Mr. Hari Bhartia to share his views with you. Thank you, and over to you, sir.

Hari S. Bhartia — Co-Chairman and Director

Thank you, Deepak, and good evening, everyone. Welcome to our earnings call. We are operating in an uncertain macro environment. While the festive season helped us deliver record revenue in the month of October, the consumer demand momentum suddenly decelerated starting November. As a result, Domino’s India reported a flat LFL growth in the quarter. And our overall revenue growth was 10.3%, low by our own standards. Our team is focused on getting the LFL growth back by focusing on providing excellent service to our customers, doubling down on our digital assets, enrolling customers in the loyalty program and carefully planning on geographical expansion. Over the last 25 years, we have always executed with operational excellence and empowered the frontline teams of our restaurant managers while delivering high value for money quotient to consumers.

In these years, our emphasis has always been on driving internal productivity and closely monitoring our cost structure. Notably, we continue to remain the most affordable national pizza brand while being the most profitable foodservice company in India. We are doubling down on our strengths and focusing on the core businesses. In this call, Sameer will share more details on this topic.

The delivery channel has grown on a strong base of last year and the dining and take-away sales continue to present the opportunity for growth. I’m happy with our progress in driving our digital agenda, which has helped us deliver all-time record app installs and MAU of 9.4 million and 11.3 million, respectively. Cumulatively, enrollments into Domino’s Cheesy Rewards crossed 10.6 million mark in December and order contribution from loyal members reached 39%.

We continue to add stores at a rapid pace, stores in India, and have picked up pace in Sri Lanka and Bangladesh. We continue to be humbled by customers’ love that profiles in receiving and have expanded to Chennai. We added a total of 73 stores in this quarter and year-to-date, JFL has added 221 stores.

On the cost side, dairy prices, particularly cheese, is one of the highest that we have seen in this decade, coupled with high inflation in wheat flour and hikes in minimum wages in many states. The team is focused on reducing wastages, driving productivity and improving efficiency with full intensity.

Overall, I remain confident of getting growth back into business by looking at how our Company is focusing on providing best tasty food to our customers, innovating on price points, rapidly building our digital assets and investing in long-term health of the business.

Let me now turn over to Sameer to share the quarter’s highlights and plan to bring JFL like-for-like growth back.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Thank you, Mr. Bhartia, and good evening, everyone. Firstly, a warm thank you to all of you for joining the call today.

At the outset, I’m happy to announce greater disclosures for all our investors. To the extent it doesn’t hurt our competitive interest, we have shared all relevant disclosures allowing the entire investor community to understand our unique business positioning, how we are progressing, and I hope you will find this added disclosures enriching.

I will first start off by sharing the quarterly highlights. I will then turn to sharing a specific update on my immediate agenda to improve LFL growth for Domino’s. And in the end, having spent nearly five months, I will share my strategy and elite priorities with you before — with all of you before turning into Q&A.

The revenue from operations of INR13,166 million grew by 10.3% versus the prior year. In Domino’s, revenue growth was order-driven. The like-for-like growth came in almost flat near 0.3%. The historic inflation in cheese and flour prices have significantly impacted the gross margins, which came in at 75.5%, lower by 213 bps year-on-year and 77 bps quarter-on-quarter.

EBITDA was INR2,900 million, which was lower by 8.6% versus prior year. The EBITDA margin came in at 22%, lower by 457 bps year-on-year and 228 bps quarter-on-quarter. Profit after tax came in at INR886 million with a PAT margin at 6.7%.

Let me turn on to key operational updates. Network expansion in India. First, we added 60 new Domino’s stores, entered 16 new cities during the quarter. We are now serving our guests through 1,760 Domino’s stores across 387 cities in India. We have added 193 net stores in the current fiscal year. I’m happy with the rigor attached with every new store proposal that we evaluate, which forms the backdrop for sustained profitable growth led by network expansion.

We’ve added 12 new Popeyes stores in Bangalore in the last 12 months. And as you are aware, in January, we opened our first Popeyes in Chennai. Our new state-of-the-art factory in Bangalore likely to be commissioned in Q1 FY ’24 is central to our network expansion strategy for Popeyes in South India. Notably, India is the first market for Popeyes globally and the only chicken QSR player in India to move chicken marination in preparation to centralized facility, which ensures consistent high-quality, high fill rates to the store, which significantly improves the consistency of taste visibly translating into higher repeat rates for the brand.

In Hong’s Kitchen, we have seen remarkable progress with further enhancement in taste, improvement in repeat rates, increase in orders and record high NPS. During the quarter, we closed two stores to relocate them to nearby locations that will offer both dine-in and takeaway.

In Dunkin’, during the quarter, we unveiled a new restaurant design in India as part of inspire brands global coffee forward evolution. The entire brand overall reflects our intent to be young at heart and the go-to coffee destination. The coffee retail is constantly expanding, and Dunkin’ will continue to innovate fast with the beverage first and a donut as a value proposition.

On the digital front, all our Domino’s app-related metrics are scaling to a record high and are holding up to high levels. App installs at 9.4 million, MAU at 11.3 million with a growth of 22.8%. Our app rating continued to be strong, placed over an IUS [Phonetic] at 4.5 and 4.7, respectively, which is a testament to a series of periodic investment being done with a well-structured combination of product management technology, back-end support and necessary investment to surpass consumer expectations.

Domino’s Cheesy Rewards Program has delivered a phenomenal early response that speaks about the strength of our engagement and the power of our brand. The program crossed 1 crore enrollments in the quarter.

Internationally — international business, we see momentum in both Sri Lanka and Bangladesh. In these markets, we are deploying the emerging market playbook for Domino’s with cuisine localization, best value to customers, unmatched delivery credentials and digital channels as our four big pillars. Teams in Sri Lanka opened a record high seven new stores in the quarter, taking the network to 47. The system sales growth was 24.9%, driven by dine-in and takeaways channel growth. In Bangladesh system sales was 44.7% driven by growth in, again, dine-in and delivery channels. We added two new stores, taking the total store count to 13.

New store expansion for Domino’s is on track, adding sales growth and bringing in customers and providing leverage to the P&L. Bringing LFL growth on the back of Domino’s is my top priority. At the outset, we have brought in greater focus by sunsetting two businesses, i.e., ChefBoss and Ekdum!. For Domino’s specifically, we have laid out a detailed growth plan and are executing with rigor.

In the last five months at JFL, I have noted tremendous opportunity and scope to grow even in a soft-demand environment, and we are addressing these areas with urgency. To grow LFL, we believe that dine-in orders have to substantially grow at an accelerated pace.

Our targeted interventions for the same are twofold. Firstly, we are swiftly executing our store reimaging program to convert a new store as per our latest Ace design. Secondly, we’ll continue to bolster on our high value for money quotient with an intent to attract new customers to dine in with unmatched value offering. The launch of Everyday Value at INR49 as a dine-in only promotion is a step forward in that direction.

Helped by the store expansion, our delivery channel continues to grow on a high base as a result of permanent habit being built across cities. To my mind, the launch of 20-minute delivery proposition in 20 zones across 14 cities is a game-changing customer-centric innovation. A series of interventions, which included fortification of stores, extensive and continued training of Dominoids, kitchen re-layout, automating, drive time planning without compromising on rider safety, has helped us take this giant step in the direction of reducing delivery times. Elevated consumer experience through reduced delivery time is globally proven to deliver better customer satisfaction and leads to increased frequency across Domino’s markets.

Now let me turn your attention to my strategy and elite priorities for the business. Over the last four months, I have met more than 500 customers, visited 200-plus stores to meet our frontline teams, obviously taken notes of our service on aggregators and visited our food tech parks. After a deep immersion with all the facets of our expansive business, understanding the inherent strength of operating model while being cognizant of emerging headwinds, I have further sharpened our strategy by reworking on our priorities.

Our first priority relates to customer and market first. Unequivocally, this is the single-biggest long-term value-creating pillar. The underlying objective here is to build a multi-brand multi-cuisine foodservice organization. We endeavor to serve multiple locations, innovate on format, drive engagement and customized menu for local customers. This will allow Domino’s to scale in India, Sri Lanka and Bangladesh where the playbook is being tested.

Group Popeyes address new market opportunities in coffee through Dunkin’ and captured large white spaces that exists in categories like Chinese food through Hong’s Kitchen.

Our second set of priority relates to data and technology forward. Technology and data sciences take customer offerings to beyond immediate — beyond the immediate physical boundaries of our stores. It helps us understand our customers and deepen the relationship with programs like loyalty programs like Cheesy Rewards and makes it easier to order a pizza on a moving train. Equally, we will move forward by embedding automation in our kitchens, commissaries and elite logistics with enterprise-grade processes. Finally, it is about building the future-ready digital and technology ecosystem by combining captive capabilities, winning partnerships and thoughtful investments.

Our third priority is to continue driving operational excellence. We have to be better today versus yesterday and tomorrow versus today. Executing with excellence is a muscle and needs to be worked upon on a daily basis. There are no shortcuts here. From kitchen operations to supply chain and logistics, procurement to project management and last mile operations across brands and countries, we have to have solid execution, i.e., the JFL way of execution.

Secondly, with our scale and scope, we have to manage complexity at lower cost, generate leverage while bringing in continuous improvement in the backward integrated sourcing supply chain with state-of-the-art food tech parks. One critical outcome of this priority will be to continuously improve across cost lines and drive productivity.

Our fourth priority is essential to — essentially a prerequisite for delivering on the first three priorities. It is the foundation of people and culture. Companies that are built to last have a culture and people processes that are homegrown. To succeed, they will — we will — to succeed, we will need to engage and have an inclusive frontline team. We have to become the employer of choice and be guided by a unique JFL culture embedded with values that last beyond us. As we work to execute on each of these priorities, my overarching goal is to deliver sustained and profitable growth that creates greater long-term shareholder value.

With that, now let me turn on to the moderator to initiate the questions-and-answer sessions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from the line of Nihal Jham from Nuvama. Please go ahead.

Nihal Jham — Nuvama — Analyst

Yes. Thank you so much and good evening to the management. Sir, three questions from my side. You’ve alluded to the slowdown in general, but are there any specific issue points either, say, channel-wise or citywide that maybe we feel we’ve seen a deeper slowdown? In your opening remarks, you’ve also alluded to the efforts you’re taking on the dine-in channel. So if you could just give your comments on that.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Yeah. I think to me, Nihal, I see this as an opportunity, in fact. I think as people are becoming more mobile, so take, for example, we see robust demand now in — on moving trains. And to me, it presents an opportunity to double down on our dine-in channel. And that is where I see as an opportunity or not necessarily a slowdown because on the delivery side, right, loyalty, app, TCBs, all of these are accelerating that. I think we need to have a sharper program focused on INR49 menu and a pleasurable and welcoming store experience that we are very rapidly reimaging. So I don’t see it as like a slowdown per se, I think I see more as an opportunity, to be honest.

Nihal Jham — Nuvama — Analyst

Yes, sir. Coming to my second question on the margin. I think it’s been four months where we’ve seen inflation specifically in the key commodities that we’re achieving [Indecipherable]. At this point, do you contemplate taking a price rise to protect margins? Or do you believe that we want to keep a value proposition in place and hopefully wait for the inflation with these commodities to come down?

Hari S. Bhartia — Co-Chairman and Director

So I think, Nihal, I think as Sameer alluded to in his talk, inflation remains at a decadal high. We were actually expecting a softening of cheese prices, which typically happens in the quarter — third quarter of every year. But there were two rounds of milk price increase in this quarter. So the softening that we were expecting has not happened, and that has seen a contraction — that has led to a contraction in the margin.

At this stage, we would not like to take any further price increase, and we would like to continue to drive value proposition because the focus will be more on bringing volume and growth back to the levels that we were anticipating and not really take up prices at this moment.

Nihal Jham — Nuvama — Analyst

Sure. Final question was that in — for the media interaction, there have been certain comments where we’re looking at Domino’s more on absolute revenue growth rather than [Indecipherable] also. So if you could just clarify that what was — what are the key metrics that we are looking at in this business? Is it the absolute growth to understand what you highlighted also in [Indecipherable].

Sameer Khetarpal — Chief Executive Officer and Managing Director

So, Nihal, if I heard your question right, you were saying what is that we will be focusing more on. Is it going to be absolute growth or like-for-like, is that the question?

Nihal Jham — Nuvama — Analyst

Yes, that is my question.

Sameer Khetarpal — Chief Executive Officer and Managing Director

I think I said that driving like-for-like growth in Domino’s is my top priority. And the reason why I say that is the other part, I believe, is working very well. So we have a completely data and insight-driven way of finding out white spaces in the — in India to expand our network. Wherever we do fortification, it is based upon rock solid signs of how many catchments we have, how the store is doing, how the customer metrics are. So it is — so that piece is working well. So — and like I said, what — where would I have liked my team to double down on is the like-for-like growth. So my priority at the moment is like-for-like growth.

Nihal Jham — Nuvama — Analyst

Sure. Thank you so much.

Hari S. Bhartia — Co-Chairman and Director

Thanks, Nihal.

Operator

Our next question is from the line of Manoj Menon from ICICI Securities. Please go ahead.

Manoj Menon — ICICI Securities — Analyst

Hi, team. Good to see higher disclosures, but allow us to be a little more greedy please. The first is on the loyalty, Sameer. A little bit more color, if you could give, because it’s been almost like now six months of operations. And in a relatively reviews dependent category, the classic marks in text book comment, if you can just comment about what’s your observations on, let’s say, the frequency increases of your, let’s say, reviews or cohort. And also qualitatively, what sort of new consumers would have come in?

Sameer Khetarpal — Chief Executive Officer and Managing Director

Yeah. So I think to me, loyalty should — which will pan out at full year to understand fully. What we’ve learned in six months is, actually, it’s very, very encouraging, Manoj. It is — loyalty is targeted towards repeating — like repeat customers. So it’s not targeted towards new customers. We have other programs that target new customers.

Our high frequency and medium customer frequency base is at an all-time high and growing very rapidly. In fact, it is working quite well. Like I said, the delivery as a channel on app are ordering that continues to be very robust. So that is something that is working well in the engine, and our technology investments are therefore paying off. So absolutely, that is — let me assure you whatever I have seen being in this industry for nearly a decade it’s working quite well.

Manoj Menon — ICICI Securities — Analyst

Understood, Sameer. So basically, if I just to paraphrase, essentially, you’re saying that there is some element of frequency increase, which you’re observing. Quantification, probably we need to wait for another six months.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Absolutely. I think frequency increase is definitely there. We are definitely seeing that.

Manoj Menon — ICICI Securities — Analyst

Okay. Excellent. Secondly, when I try to disaggregate the growth, let’s say, at a product level, is it fair to say that the pain point actually is at the sub-INR100 price point?

Sameer Khetarpal — Chief Executive Officer and Managing Director

Sorry, Manoj, if you can just repeat the question.

Manoj Menon — ICICI Securities — Analyst

Yeah, yeah. When I try to disaggregate the overall revenue growth without really getting the LFL or new store growth, just the growth, is it fair to say that I think from a product segment or a product price segment point of view, that the pain point is actually at the INR100 or below catchment?

Sameer Khetarpal — Chief Executive Officer and Managing Director

Yeah. I think my take on this one is, see, the focus area is dine-in. And customers at this high inflationary environment, they’re making choices. And we do see customers come with a total bill or total amount in a mind and a total quantity, and therefore, they tend to gravitate towards lower price point.

So as we are kind of competing for new customers, we believe the — given our scale, our ability to deploy technology, our reach of stores, we can actually capture that demand if we have a very strong INR49 price point menu, and that is where we are doubling down on. It is not that the customers are — that is a challenge. Again, I’m pivoting and saying that if we are the only ones who can offer a INR49 menu, then we should be acquiring customers at a faster rate, and that is what we are correcting in our marketing communication.

Manoj Menon — ICICI Securities — Analyst

What I was alluding to is that it’s not really any competitive aspect, particularly at that price point. Just the — everything under sub-INR100 is what I was getting at.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Yeah.

Manoj Menon — ICICI Securities — Analyst

Okay. Just quickly, if I may, just jungle up on the third one. Look, you opened 265 stores in the last 12 months. So given the trajectory of revenue at this point in time where there’s not much positive operating leverage is getting accrued, does it really make — or does it make sense to slow down expansion a bit at least for the time being or you kind of wouldn’t really want to change any of those plans?

Sameer Khetarpal — Chief Executive Officer and Managing Director

So I think we debate each store or with giving an approval, we look at each store as an absolute versus chasing the number. So that store has to make sense. It should have the right level of payback for our capital expenditure. It has clear data points and points of interest that you use to calculate what revenue it will have. And if it makes sense from an EBITDA standpoint and ROI standpoint, we approved the store. So there is no per se compulsion to do x number of stores. And all our stores, we believe, are meeting the internal threshold and guardrail. And therefore, to me, it’s not — I’m not wedded to a number that we have to open the x number of stores. Ashish, do you want to comment?

Ashish Goenka — Chief Financial Officer

Just to add, I think we will continue to follow demand because we don’t want to slow down this virtuous cycle of stores, but we will keep recalibrating and evaluating it every quarter, Manoj, in terms of — as Sameer says, there’s no number to chase here, but I think the only thing we will be choosing is demand or following demand. So I think that’s the guiding philosophy or principle that we are operating with.

Manoj Menon — ICICI Securities — Analyst

Okay. Good luck guys. Thank you. Thank you so much for taking my questions.

Ashish Goenka — Chief Financial Officer

Thanks, Manoj.

Operator

Our question is from the line of Arnab Mitra from Goldman Sachs. Please go ahead.

Arnab Mitra — Goldman Sachs — Analyst

Hi. And thanks again for the improved disclosures. My first question actually is a follow-on from what Manoj had asked on the previous question. So I understand you entering new cities, and there is a threshold that is getting mixed. But almost one-third of your stores, new openings from what I understood last quarter was store splits. So in this environment of nearly zero LFL, does it make sense to at least hold that possible store splits, which would increase your fixed cost for the same catchment and put increased pressure on your overall business maybe [Indecipherable] in this kind of an environment? Or do you think it’s not that bad and you could continue with this scenario for the time being?

Sameer Khetarpal — Chief Executive Officer and Managing Director

So I think to me — and I keep on telling this to the team, splitting the store probably is easiest decision because it is a function of the mother store achieving a certain revenue. It is busting at the scenes during peak hours, and customer service KPIs are beginning to deteriorate. So if that is happening, we do — it’s an easier decision to make, which means we are leaving demand on the table and not serving it properly.

So therefore, how do we preserve our capital and make sure that we’re deploying it prudently? We’ll evaluate. Do we need to open a 1,200 square feet store? Can we manage it with that delivery and carry out store? So those debates we have and then. But if the store is not reaching the capacity in the peak hours, then we don’t — we don’t open — we don’t split the store. So the guardrails for splitting the stores are very, very clear.

And we do challenge like why can’t this store do more, why is it reaching a certain threshold of our daily orders, can I do — what can we do to bottleneck, does it need more oven, does it need more bikes? So we take those calls and not necessarily make it easy for the store to split.

Ashish Goenka — Chief Financial Officer

And Arnab, we have also raised the threshold and become more stringent in terms of the way we’re looking at splitting stores. So if you see last year, almost 40%, 45% of our stores were split store. This year, the ratio has already come down to 30%. But I think we’ll be doing a great disservice to the business and taking a very shortsighted view if we were not to split stores, which really need a split and keeping the customer in mind.

And also the financial model works pretty well. Of course, right now, the demand environment is a bit slow, but I think the financial model works well for us, where the mother and child put together, the investment phase back in about three years odd time. So we will be far more stringent in the way we look at splitting stores. But I think wherever needed, we will continue to do that.

Arnab Mitra — Goldman Sachs — Analyst

Sir, I completely understand what you said. My question was also that this target of getting to 20-minute delivery. Is that necessitating store splits in certain areas where your capacity will still be there, but because you want to get to that 20-minute, you’re getting into a store split? And is that something that you want to do in this environment?

Sameer Khetarpal — Chief Executive Officer and Managing Director

No, absolutely not. I think we’ve been preparing for it for last almost three years with the fortifications plan. It’s an outcome — natural outcome of that. Now we have the density, why will we not promise faster speed. So we’ll not open stores just to meet 20-minute demand. Stores are working. I think we have the network. To be in the big cities is what I am convinced of. So we will be in multiple cities. Bangalore, we have the density, Gurgaon we have the density, Delhi we have the density. So why will we not offer better service?

Arnab Mitra — Goldman Sachs — Analyst

Okay. Makes sense. And, sir, my last question actually was on this loyalty program. So if you could just — I think you have explained it last quarter, but just for our benefit. So now that the team is becoming large, how do you account for this additional like three pizzas and go at the end? Does it happen when the redemption happens or from the day the person enrolls you kind of start accounting for something over the life of the time period? And therefore, when does the hit on the gross margin, if at all, the hit comes in the P&L?

Ashish Goenka — Chief Financial Officer

So Arnab, we take the — of course, we follow the accounting norms. It’s accounted as a discount, and we take the impact upfront. So — and not with the time of redemption.

Arnab Mitra — Goldman Sachs — Analyst

Okay. Understood. Understood. Thanks. That’s it from side. All the best.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Thank you.

Ashish Goenka — Chief Financial Officer

[Operator Instructions] Our next question is from the line of Amit Sachdeva from HSBC. Please go ahead.

Amit Sachdeva — HSBC — Analyst

Hi. Good evening everyone. Thank you so much for taking my question. My question is, first, on the shape of gross margin, the way it is evolving. So if I go to pre-COVID period, you were around ballpark 75%. And as COVID happened and delivery was the main value proposition and consumer willingness to pay also expanded for a high-quality food that is coming, and we’re willing to pay a delivery fee etc. But as COVID has sort of receded, and multiple challenges such as input prices have also come. But I see that 75% is sort of coming back for one reason or the other, but also adding to what Sameer was also saying that you want to also push dine-in and with Everyday Value with INR49. I would assume that would also add to some amount of pressure on gross margin, if not anything else. So question is that whether 75%-ish is a new normal as a strategic construct that you put together in consumer value proposition to enterprises, to how you strategically price the products.

And to add to that, I would assume, it would be a lower-margin business. As the Popeyes stores grow larger and larger, that construct will also add to margins not been able to extend. Go back to it. So is it the right thinking? And we should now take 75% is a new normal, or how would you sort of shape our thinking there?

Sameer Khetarpal — Chief Executive Officer and Managing Director

So Amit, as you see, of course, during COVID, we were seeing a highly deflationary commodity environment, and that had the benefit reflected in our gross margin. And of course, now what we are witnessing is decadal high inflation across the key commodities that impact our margins, namely cheese, flour some of the others. So I think gross margin, by and large, are currently governed by the commodity cycles, and we do expect that in the coming few quarters. It should stabilize or start softening a bit. So it will be largely governed by that.

I do not — this — we will not have an impact — adverse impact on margin on account of our dine-in improving or some of the new products that we’re launching because one of the guardrails that we are using in the Company for launch of any new products should not be gross margin dilutive. So I think new product addition at INR49 or even coming back of dine-in channel will not be margin dilutive. I think margins will largely be a playoff of how the commodity cycles were to behave. And as I said earlier, I think at this stage, we are not looking at any pricing interventions because we want to remain high value for money proposition to our customers. And therefore, gross margin would have — would be directly or governed by the house commodity cycles.

Ashish Goenka — Chief Financial Officer

I mean, last point on this one is, see, when customers come in for INR49, their bill value per order is no less. So there, we have an opportunity to upsell, cross-sell. And I think it is a sharp call out. We want to be — to excel on the dimension of value to customers, and therefore, we have a wide range. But that necessarily doesn’t mean that customer only shops for INR49.

Amit Sachdeva — HSBC — Analyst

Got it. So that’s very helpful, Sameer. So what you’re alluding to is 75% and a bit is sort of a bottom kind of thing in very adverse circumstances. And if all things equal, it should sort of jump. It may not go to 78% when commodities were very benign, but it should sequentially move up. Is that what you’re trying to sort of help us think?

Sameer Khetarpal — Chief Executive Officer and Managing Director

That’s right, Amit.

Amit Sachdeva — HSBC — Analyst

And what about Popeyes’ impact, would you also — is it the right hypothesis that Popeyes structurally would be lower gross margin business? And as it becomes larger, it would have at least some basis points drag on gross margins.

Sameer Khetarpal — Chief Executive Officer and Managing Director

So I think the structure for fried chicken is slightly different from what we have in pizza. So in the fullness of time, of course, gross margin could be slightly lower, but we do not see EBITDA to be margins to be indifferent. However, given the fact that Popeyes is right now a very small contributor to the overall JFL numbers, right now being only 12 stores and I think it will take some time before it release scale, it will not have any material impact, I think, at least for the next few quarters on our overall margin profile. And of course, we’ll come back it starts making a more material impact, but I do not foresee any material impact of Popeyes on the overall gross margin, at least for the next four to six quarters.

Amit Sachdeva — HSBC — Analyst

Sure. No, that’s very helpful. And again, it’s a bit of the margin, but just quickly trying to think through the overall EBITDA margin and over the growth construct as well. So clearly, variable cost here is employee cost, which sort of expands as the store expand and some wage hikes happen in between. So that — and you have obviously managed other overheads quite reasonably well. They have grown at least in line with revenues and not expanded much.

So given that construct, would you sort of say that, like a 250, 240 store expansion that are happening in Domino’s? Can that be in a construct of 24% to 25% EBITDA margin, given this is very abnormal quarter with 22% EBITDA margin? How do you think about it? Can expansion happen while maintaining 24% to 25% Ind AS margins? Or it is — there are more variables and it’s very difficult to sort of put together construct to it. Where I’m coming from is, is there a cost of growth and which is sort of offsetting that as well. And where things can be more volatile or at least 26%, 25% is not a normal margin, and it should tailor down or come down lower structurally.

Sameer Khetarpal — Chief Executive Officer and Managing Director

So two things, Amit. One, I think in current uncertain both the demand and cost environment, I think it’s very difficult to give us sort of guidance. So I’ll refrain from that. But having said that, I would just want to give you some color on the new store openings. So I think the store openings that we are doing is having less impact on the Post-Ind AS EBITDA margin. The impact is largely seen in our PAT margins because we’re taking a slightly higher debt charge.

So in terms of EBITDA, the margin dilution, it’s negligible in terms of opening of more stores, and I think we should be able to absorb it. Of course, the challenge remains for us is in terms of how do we step up growth more to start seeing leverage at even a PAT level. So that remains a challenge. But we should be able to absorb 250 to — 200 to 250 store addition without any meaningful impact on post-Ind AS margin.

Amit Sachdeva — HSBC — Analyst

Okay. Okay. Got it. Thanks so much. That’s very helpful and all the best.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Thank you so much, Amit.

Operator

Our next question is from the line of Amit Rustagi from UBS. Please go ahead.

Amit Rustagi — UBS — Analyst

Following up on the last point, which we were discussing about the EBITDA margin. If we see our gross margin decline is close to 2% from Q3 FY ’22. And now we — and the EBITDA margin decline is close to 4.5%, 5%. Can we say that additional 1.5% to 2% decline in EBITDA margin is a function of four new store openings. While I know you have been maintaining this point that they are not EBITDA dilutive at all.

Ashish Goenka — Chief Financial Officer

No, Amit, I don’t think it is attributable to increasing stores. As I said, the new store impact on actually EBITDA margin is negligible. It’s in the zone of 15 to 20 basis points and not more. What has impacted us more is I think, of course, there is a flow-through from gross margin, but also the fact that some of the inflation has also been impacting all the other cost lines. That’s number one.

Number two, we have also stepped up our marketing investments given the slowdown in demand, we actually want to stay relevant, and therefore, we have stepped up our marketing investments.

And third is, of course, we have prepared ourselves for a much higher level of growth. We were not anticipating this kind of slowdown in demand, and that also has a sort of bearing on the EBITDA margins, where we have sort of seen a slightly negative operating leverage instead of a positive operating leverage that we are planning for. So I think a combination of these factors is reflecting in the EBITDA margins.

Amit Rustagi — UBS — Analyst

Okay. But when you’re talking about the reversing [Phonetic] to some previous events or improvement from here. I think mostly, you’re talking about the raw material inflation coming down, but as I can see that raw material has contributed to only 2% decline in the margins in like — so like are we have more levers in hand to improve the margins from here?

Ashish Goenka — Chief Financial Officer

So of course — so one is, of course, as we get more growth, we should also be getting more operating levels. So that should help us in improving our EBITDA margins. The other is a patent organization-wide productivity drive that we are driving very, very hard to extract more efficiencies across all our lines and also reduce wastage across our cost lines. So I think that is a constant endeavor, and we are also mounting a full-scale program right now to take cost out of the system and bring in more efficiency. So that should have a bearing in the quarters to come. But I will refrain from giving any guidance at this stage.

Amit Rustagi — UBS — Analyst

Okay. Thank you. Thanks a lot and best of luck.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Thank you. Can we have the next question, please, moderator?

Operator

We’ll take the next question from the line of Vivek Maheshwari from Jefferies. Please go ahead.

Vivek Maheshwari — Jefferies — Analyst

Hi. Good evening. Again, thank you for the disclosure. My first question is, we have seen pickup in activity on promotion discount subsidies from platforms like Swiggy and Zomato. What is your take on this issue? So both Zomato and Swiggy now going after instant gratification by giving, let’s say, free deliveries or offering all discounts. Whereas, in your case, let’s say, the program that you have is the gratification is more delayed. So how do you balance out in an environment where Swiggy and Zomato are aggressive right now?

Sameer Khetarpal — Chief Executive Officer and Managing Director

Yeah, I think it’s — to me, I mean, we have all forms of levers in our hands, right, from brand marketing to promotions. And also — and also running a sharper marketing call out and event celebration like you saw this in Diwali, we had Diwali Dhamaka.

So I think we — I think we want to stand for value. We want to stand for great-tasting pizzas and fast delivery. Together, I think the value proposition is rock solid. So I am not — I mean they will — I mean aggregators or competition will I’m sure they will double down on their trends. We have to play on these core values. We are still, by far, the most valued in terms of price point in the category or even in the QSR.

So I think customers will look at the — what is the cost to order their meal. And I generally believe we are like supremely competitive over there.

Ashish Goenka — Chief Financial Officer

And just to add to what Sameer said, Vivek, we had also — when we were — we did extensive testing of our loyalty construct before launching it. And we had evaluated an instant gratification program as well, but that did not find favor with the customer, and that’s where we launched Cheesy Rewards, and our response has been very good.

And also, I think any membership or subscription-led program, which aggregators run, actually, brings complementarity to the program that we are running because our customers still continue to earn the points on our program while getting the benefit of the subscription-based program on the aggregator. So we do not see that conflicting. We see it as complementing.

Vivek Maheshwari — Jefferies — Analyst

Interesting. Second, in your opening remarks, you made a comment that post November, there was a deceleration that you have witnessed in your business. Can you just talk about how the exit numbers were compared to, let’s say, quarter average of where November was.

Sameer Khetarpal — Chief Executive Officer and Managing Director

I think we don’t give month-wise guidance. I think — let me just say this, we have tremendous opportunity to kind of — like in that areas of demand and growth. So that is not a concern for me at all.

Vivek Maheshwari — Jefferies — Analyst

No, that I completely understand. But anything on how the trend — and you have given, let’s say, monthly numbers in the past. So at least directionally was December better than November.

Ashish Goenka — Chief Financial Officer

Certainly, Vivek, December also had the advantage of, of course, having the big days in the facilities. So December certainly was much better than November. But October was even better. I mean — so we saw a much better October than we saw a bit of slowdown in November. December was better than November, but lower than our expectation.

Vivek Maheshwari — Jefferies — Analyst

Which means Y-o-Y, again, the trends — because given the seasonality over your November, December comparison may not be fair. So on a Y-o-Y basis, December was as much, let’s say, good or bad as November was in a way?

Ashish Goenka — Chief Financial Officer

I would say much better. Yes.

Vivek Maheshwari — Jefferies — Analyst

Okay. Much better. Okay. Interesting. And last one, Sameer, you mentioned about 500 customer interaction, 200 store visits. Can you just talk about, let’s say, a couple of key, let’s say, critical feedback that you received or things that require your urgent attention that’s what you felt after doing these visits or meetings?

Sameer Khetarpal — Chief Executive Officer and Managing Director

Yeah. No, I think good question. So firstly, as you’ve seen in the past, we have taken calibrated price increases. We’ve added delivery charges. So customers do feel impact and our value prop in their mind are the intensity that we are offering the value that perception had come down. So that was the learning where we quickly introduce everyday value or pizzas at 49. So that was one learning.

Second is they gave us a lot of credit for our delivery credentials, but when we realize when they’re dining out, they are not — we are not the first choice, especially in Tier 1 and Tier 2 cities. While Tier 3, Tier 4 cities, we are probably the destination when it comes to Tier 3.

When I looked at the root causes, it goes back to doing appropriate and timely reimaging and upkeep and the using of the stores with the current times. And with competition coming in, opening newer stores, we were kind of saddled with older stores, and that is what we are correcting at a rapid pace.

So two things. One is we stand for value when they want — constantly look for value, double down on delivery, they expect us to deliver faster. And third is they do want to celebrate their precious moments or joyous movements in their life in our stores like birthday or eating out with friends. And therefore, the feedback was very clear, it did take a couple of notches up.

Vivek Maheshwari — Jefferies — Analyst

Got it. Thank you, Sameer and team. Wish you all the best.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Thank you.

Ashish Goenka — Chief Financial Officer

Thank you so much.

Operator

Our next question is from the line of Latika Chopra from JPMorgan. Please go ahead.

Latika Chopra — JPMorgan — Analyst

Yeah. Hi. Thanks for the opportunity. A few follow-ups on your earlier comments. The first one was, clearly, you are targeting to tap into the more value segment and you just alluded to the fact that you want to improve the value proposition to the consumer. Could you help me understand how do — you had mentioned earlier that even at a gross margin level, the INR49 pizzas users are more accretive. But I thought you have brought down the price points from INR59 or INR69 to INR49. So are we changing the — any kind of — the way the pizza is made or anything in terms of ingredients as well where you say that this will not be margin dilutive. So that’s one aspect.

And the second which — related is the spend that we’re doing on reimagining these stores. So today, you have about 1760 of Domino’s stores how many are in new format? And what is the kind of cost that you can incur to turn them into these new reimagined stores?

Sameer Khetarpal — Chief Executive Officer and Managing Director

Yeah, I think the INR49 price point is not dilutive. I think that is the point that Ashish was making because we do want to keep — and we have a hurdle rate in terms of gross margin. So how we are handling it is and if you see the mix and match value, it is — you can get — you have to buy two items, and that’s why you get INR49, number one.

Second is I think, again, there is — in terms of — firstly, we do have the sourcing capabilities and the back-end capabilities, right, which others don’t have that allows us lower cost structure. But more importantly, when we are designing the menu and the recipes, we are innovating so that the margin is not dilutive. It is not — for sure, it is not only just discounting. It is — it is value engineering, and it is leveraging our scale to bring costs lower. And therefore, it is not dilutive.

Ashish Goenka — Chief Financial Officer

Also Latika, we were always — sorry just to add, we were already learning EDV 99 and now, we are saying EDV 49, which you buy two products. So effectively, the put down is the same, and therefore, we are not compromising at all on the product quality, and that is always sacrosanct for us. There is no way we’ll ever compromise and better quality. But we are able to manage to the same EDV proposition just that the value proposition at INR49 becomes far more attractive to the customer than an EDV 99 proposition.

Latika Chopra — JPMorgan — Analyst

So what I wanted to understand is what is your hurdle rate of gross margin in your mind? So do we say that 75% to 76% is the new brand of gross margins you are comfortable as a company. And even if cheese prices are to moderate, this is what we should look for considering the initiations that you have on the dine-in side?

Ashish Goenka — Chief Financial Officer

So as I said earlier, Latika as well on gross margin would largely be governed by the commodity cycle. So if cheese prices were to soften, we should see improvement in gross margin because the hurdle rate that we look at internally is that any product that we launch and any proposition that we launch should not be dilutive to the existing gross margins. So if there is a benefit of commodity, it will flow across all product class.

Latika Chopra — JPMorgan — Analyst

Sure. And I know you don’t want to give guidance on growth per se. But the operating margins in this quarter, of course, are a reflection of operating deleverage as well. And do you anticipate that we have seen the bottom of operating margins in this quarter? Or do you think there is more downside to go till some of these new initiatives on topping up LFL already fructified assuming the external environment remains the same.

Ashish Goenka — Chief Financial Officer

So Latika, I think, again, it will be difficult to give any guidance at this stage given the uncertainty in cost and demand, but I would reckon that we would have pretty much hit the bottom.

Latika Chopra — JPMorgan — Analyst

All right. And the last picture later long term. So what is the target LFL that you have in mind because that’s your images priority that you think this business can sustain over the medium term? And the second bit was from your assessment so far, do you see that the Domino’s format in any way allow you to get up into more consumption occasions in terms of either the format or in terms of menu that, that could be accretive to the growth going at?

Sameer Khetarpal — Chief Executive Officer and Managing Director

Yeah. I think the target LFL is in the range of 6% to 8%, and that’s what we — I think we — I do see that opportunity. And the from your second question standpoint, like I said, there is a huge opportunity for lunch menu, for day part, for evening snacking and it is — and we have like a benefit shift in. Like I said, on one hand, we are launching INR49 menu on the other, we are also launching gourmet pizzas.

So the opportunity to tap into many India multiple price points, multiple customer cohorts. That to me gives me the confidence that this is indeed possible. It is just not an aspiration.

Latika Chopra — JPMorgan — Analyst

Sure. Thank you so much.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Thanks, Latika.

Operator

Our next question is from the line of Sheela Rathi from Morgan Stanley. Please go ahead.

Sheela Rathi — Morgan Stanley — Analyst

Thanks for taking my questions and thank you for including the disclosures here. So my first question was and, obviously, this has been answered —

Operator

Ms. Rathi, if you are not on a handset mode, please switch it to handset. We can’t hear you very clearly.

Sheela Rathi — Morgan Stanley — Analyst

Is it better now?

Operator

Yes. Thank you.

Sheela Rathi — Morgan Stanley — Analyst

Yeah. So thanks for taking my questions. So my first question was with respect to the demand. Yes, the demand has been lower. And Sameer, you have also mentioned the key reasons why the demand could have been slower. But just wanted to understand that the focus on value proposition — focused on double down on dining channels, is it that there is much higher competitive intensity which is coming back, especially from local and regional players. And that’s the reason why we are focusing more on the dining side or is there any other reason?

Sameer Khetarpal — Chief Executive Officer and Managing Director

I will not — I think the reason to double down on dine-in I think is, one, after pandemic, we see the opportunity, right? I mean the customer habits have shifted to delivery, and we want to use TCB [Phonetic] and capitalize and fortify that. Now we have a great set of stores. We’ve invested in new face design. These are inviting.

And why will we not get the growth when I am a neighborhood store. So whether it’s a delivery or a takeaway. And when we spoke to consumers, it was very clear at this high inflationary environment, they’re looking for value. And therefore, it becomes easy to marry the two — If I have a store, which is next door, on my way going to the home or office, if I have great value proposition, I will go in, either eat or carry it out. Stores are not inviting, which are older, more than seven, eight years old, they do need a refreshed look and I think that’s because — more, I would say, looking at our internal measures and what customers are telling us, less about competition.

Sheela Rathi — Morgan Stanley — Analyst

Understood. And just a follow-up on this is. Currently, as you’ve highlighted in the presentation, the share of delivery is about two-third and dine-in is one-third. Is there an ideal ratio you have in mind which you would like to keep over the long run, whether it’s 50-50? Or is there something else here?

Sameer Khetarpal — Chief Executive Officer and Managing Director

In the short term, I would want the dine-in to get to 40%, right? And then take a stop from there. It also helps, by the way, I think of some of the earlier questions, it reduces the burden on splitting the store, right? Because delivery does become a bottleneck at many stores because this — you can’t add number of bikes or the right time to start increasing. So I think it’s — I mean, in the near term, we do want to get to 40%.

Sheela Rathi — Morgan Stanley — Analyst

Understood. And my final question would be, are we seeing some improvement in the demand trends because we have already done with the month of January. I’m not looking for any numbers, but just qualitatively, are we seeing an improvement with the efforts we have made and the new innovations we have done?

Sameer Khetarpal — Chief Executive Officer and Managing Director

Certainly, the uncertainty continues and where I think what I’m seeing definitely seeing wherever we are focusing on, whichever cities we are focusing on those are sales in the lift. So it is about deploying our internal strategy, that is the only bottleneck. It is not — at the moment, again, like I said, there is so much of untapped opportunity. We need to focus on that versus like only talking about the demand scenario.

Sheela Rathi — Morgan Stanley — Analyst

The demand trend still continues to be weak. Is that what I hear correctly?

Sameer Khetarpal — Chief Executive Officer and Managing Director

Yeah, it continues to be uncertain. — between like December and January, there is not a material change.

Sheela Rathi — Morgan Stanley — Analyst

And versus November? It would be much better.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Yeah. I think like Ashish said, December was better than November and at least, it is definitely, but November seemed like an aberration in the whole when I look at the entire last 24-odd months. November just seem to be an aberration.

Sheela Rathi — Morgan Stanley — Analyst

All right. Thank you. Thank you very much.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Thanks, Sheela.

Operator

Our next question is from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.

Shirish Pardeshi — Centrum Broking — Analyst

Yeah. Hi. Good evening, Sameer. Thanks for the opportunity. Just a quick observation, rather two observations when I look at last two, three years, we built a very solid digital effect. And then we saw the traffic is humongous and then COVID is behind. Now what we’ve seen over the last five, six months, we are now maintaining that traffic and you are building how we can get the debt of the customers. So we started Cheesy Rewards and then now we are saying we will deliver in 20 minutes. So one observation is that we have built a strong traffic, but the retention of the customer is not a visible or rather that is declining. This is just purely an observation while attracting to few stores and on ground.

And then you build saying that we are now offering that instead of INR99, we are giving single serving at INR49. So to my mind, I think the second observation, which is there and having spoken to customers rather in my house also, the price value submission somewhere is raining out — and the retention of customers is one of the big challenge or pain point for us. So is this observation is correct? And that’s why I’m saying that 0.3% LFL growth is going to be very weak and you’re saying confidently 6% to 8%. So these Cheesy Rewards and maybe you can say the 20 minutes delivery and now INR49 is short-term fixes.

But in the long or medium term, do you think really we need to do something better or extra to get that 6%, 8% target?

Sameer Khetarpal — Chief Executive Officer and Managing Director

So I think these are — so let me firstly say that if we deliver a vast majority of our pizzas under 20 minutes, that is a structural advantage. It is not a short term — it takes years of preparation to build the store network and automate the store processes, have the right training and manpower tools to actually deliver on a 20-minute promise.

So first is that it is not a short-term piece. One can argue about INR49 because competition can drop prices and create it, but at INR49 to maintain the gross margin is again structural. I wouldn’t say it is a short-term gimmicky kind of a thing.

Now specifically to your question that there are consumers, maybe like yourself, who are not driven by INR49 price point, they are driven by better experiences of either a wider range, looking for a gourmet pizza or looking for local flavors or something unique. That is the menu innovation that — and that we — I mean, we continuously want to do. And to kind of remind you, we launched Paratha Pizza, then it was the East range with Kasundi, Kosha aar Malai, gourmet pizzas.

So we are also constantly innovating for customers who are more upwardly mobile and looking for a better experience versus value. So I think the — so the beauty of our stores in neighborhood and our digital effects and CRM, we can customize our communication to the cohort that we are presenting or we are targeting.

Shirish Pardeshi — Centrum Broking — Analyst

I think that’s exactly my follow-up question is that we have done the product intervention. So will you be able to share these innovations, what has come after COVID period and specifically over 17, 18 months. Is that new innovation is driving the growth? Because I’m not sure the product intervention what we have done actually is justifying that 0.3% LFL growth.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Of course, there are other factors, too, right? I mean it’s just — so something you see that growth in delivery, right? And you tease out dine-in? And therefore we have to fix dine-in. Would product alone satisfy I mean the answer is no. You have to have been better experience inside the store. Your stores need to be modern and relevant competing with the competition.

So again, the strategic pillars are very simple. Look at customers what they are demanding. In cohort, they are demanding value, give them the value in cohorts. There are many Indias [Phonetic], which are looking for different cuisines, different flavors, gourmet, innovate on that dimension, engage them with technology. And when the service is being delivered, give a very consistent high-quality service.

So if we do all these 3, Shirish, we will be able to, I think, tap that growth. So I don’t know whether I’ve answered your question or not. It’s not one silver bullet is what I’m trying to say. All three have to come together.

Shirish Pardeshi — Centrum Broking — Analyst

No, I understand, Sameer, and you justified saying, I completely think with, but my industry experience tells me that — and that’s the last question, which I’m asking you. But rather than giving discount and do the customer engagement and if there is a price relevance or price commission in the consumer mind, which is where the customer retention is a big challenge why not instead of drop the delivery charge or give the straight discount or drop the prices and get the traffic back?

Sameer Khetarpal — Chief Executive Officer and Managing Director

So I take that as a suggestion. I think at the moment, like I said, we’ve done extensive consumer research. They look at the landed cost to them, right, for a similar size of meal or a pizza. So if we have to, if we are learning that we will take those calls at the moment, at least this delivery charge, I think, has post — during the pandemic, I think, has become a norm and acceptance. So why disturb your — put pressures on the margin, right, and not innovate on the menu. That is our outgoing approach. If we learn something new, we obviously will look at it, but at the moment, no plans to take out delivery charges.

Shirish Pardeshi — Centrum Broking — Analyst

Wonderful. Thank you, Sameer and all the best to you and the team.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Thank you so much.

Operator

Our next question is from the line of Akshen Thakkar from Fidelity. Please go ahead.

Akshen Thakkar — Fidelity — Analyst

One slightly strategic question, and apologies if it’s going to be repetitive to what you guys answered but just help us set the context of our guardrails to gross margins on your business are? I mean, you had a period where it went up quite a bit with the introduction of delivery charges, etc. And obviously, you facing the pressure, you’re doing the right thing by not taking up prices, so putting pressure in near term. But just tell me when you’re thinking about this business three to five years our maybe on EBITDA margins or on gross margins, whichever way you’re comfortable with? Just help us understand what guardrails are, what is the lower bound and upper bound? That’s sort of the long-term question.

And the short-term question really is how do we look at the increase in depreciation for the quarter significantly more than the increase in the store count. And even if I adjust whatever do some calculation on reinvest depreciation as well. That number seems to have gone up quite a bit over year. Just wanted to understand if there if any onetime items in depreciation or that’s a recurring number that we should be looking at.

Ashish Goenka — Chief Financial Officer

Thanks, Akshen. On gross margin, I think as I alluded earlier, it would be difficult to give near-term guidance. But I think in the medium term, our target would be to be at a range of 23% to 25% on the post Ind AS EBITDA margin. I think that is our endeavor. And if all the things fall in place, as Sameer was highlighting earlier, there’s no reason we should not get to that.

I think your next — second question was on the depreciation. So I think our depreciation has largely three components: almost 70% plus increase attributable to new stores. combination of both the capex and the lease increases. This quarter, I think 20% of the increase is also abnormal because we had a onetime charge accelerated depreciation for some two businesses that we have taken a call to unwind this quarter, namely ChefBoss and Ekdum. So there was an artificial impact also this quarter, but almost 70% of the increase is attributable to new stores, around 10% attributable to the investments that we’re making in supply chain, and about 20% was a one-off charge that we have taken on account of accelerated depreciation.

Akshen Thakkar — Fidelity — Analyst

Thank you, guys.

Operator

Our next question is from the line of Chirag Shah from CLSA. Please go ahead.

Chirag Shah — CLSA — Analyst

Thanks, Sameer, and team for laying out your plan on the business ahead. I have just a couple of questions left. So first on the city penetration. On the store expansion, if I look at, we have practically added 100-plus cities in the last two years. Now if I just try to see in context of what the food aggregators are saying, effectively, 99% of their business is coming from the top 300 cities and then there is a long tail. Given that context, is there much the geographical expansion into newer cities. And you already mentioned about the ROIs and the guardrails that you have, but are the ROIs and payback period in the Tier cities now comparable to what we have right now? And is there a consumer resistance to pay for higher delivery charges?

Sameer Khetarpal — Chief Executive Officer and Managing Director

On the second one, I think — I’ll let Ashish answer the first part, but the second part, on the consumer propensity like in Tier 3, Tier 4. So in Tier 3, Tier 4, the dine-in ratios are far stronger than Tier 1 and Tier 2. So naturally, in many cities, if you take Daltonganj or Karwar or Latur, we will probably be the only organized QSR player. So we become a natural destination for consumers in those cities to come and grab a meal or hang out.

So the dine-in portion is lesser. We’ve not seen — at least from a consumer survey or feedback perspective, we have not seen that consumers are not willing to pay for delivery charges that has not come out. And I think the — and over a period of time, we’ve also seen as consumers get used to Domino’s service they do orders. So in fact, the frequency also goes up. So that’s our answer on Tier 3, Tier 4 cities. Ashish, you can answer the first.

Ashish Goenka — Chief Financial Officer

To add to what Sameer said. And if you look at the growth profile, at least in our experience, we do not see a significant differential between Tier 3, Tier 4 versus Tier 1 and Tier 2.

And in terms of new stores, Chirag, in fact, the paybacks on return on investment are slightly better in Tier3, Tier 4, simply for the reason that the operating costs tend to be much lower. While the ADS in these towns tend to be a little lower than Tier 1 because the operating costs are low we are able to recover our capex in under two years. So the paybacks are less than two years. So the economics work very well for us. And therefore, we do see an opportunity in these towns as we expand.

Chirag Shah — CLSA — Analyst

Sure. To my point that we have already crossed the benchmark that the food aggregators are talking about in terms of the revenue contribution from the cities, is there a long headroom for us to grow geographically?

Ashish Goenka — Chief Financial Officer

So as we have said earlier, Chirag, there are clearly 500 towns that we can go to 500 to 600 towns which have more than 1 lakh population. And to create a profitable Domino’s store, we need a catchment of about 10,000 households. So in terms of macro opportunity if you ask me, there is clearly close to 600 towns in India that we can go to. Of course, we will be very calibrated in our expansion, and we have to make sure that we are getting the payback. So we will keep going to these towns as long as we are able to get our payback within two years. And therefore, I do see significant headroom.

In terms of contribution to business, of course, Tier 1 and Tier 2 will contribute bulk of the business given the density of stores that we have in Tier 1. For example, our top 10 cities alone would contribute to bulk of our stores. But in terms of penetration and presence, I do see an opportunity to keep expanding into Tier 3, Tier 4.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Most of these cities are single cities, single store single cities. So even I would say, even some of the larger towns — we’ve seen many towns where the store does exceedingly well and in third year, fourth year there is a pressure to add another store.

So again, guided by the economics of that individual unit that is being put in and the only reason to expand should be that we have strong demand signals.

Chirag Shah — CLSA — Analyst

Got it. And when I look at the capex numbers that we are talking about for the next two years, there has been a significant increase. Now of course, you’re also speaking about — or talking about improving in-store experience. So is there a large component that we are now placing in terms of capex for improving the in-store experience? And then there is a INR500 crores to INR600 crore number that we have put for the digital initiatives. Can you just explain where this amount would be going in?

Ashish Goenka — Chief Financial Officer

So Chirag, bulk of the capex would still go in our store expansion because as you would look to expand Domino’s and Popeyes. So bulk of our capex will still go into store expansion. Relatively smaller contribution, of course, is going to reimaging. We have been reimaging our stores in the last few years, but of course, we’ll step up the pace of that reimaging.

Also, a sizable chunk will also go into creation of some of our new commissaries because as I had said in the past, the last commissary we opened was in Greater Noida and that was in 2018. Since then, we have significantly expanded our network. And therefore, we will need to keep creating back-end capacity as we expand our store network. So the first commissary, which is going live next year is Bangalore that itself will entail an investment of about INR250 crores. And then we would look to expand footprint or make further investment in some of other commissaries like Mumbai, which may come in next year.

So there is a full road map that we have of expansion that we have planned out for the next two to three years. So we will see a slightly elevated level of capex as we invest in creating this back-end capacity. But these are typically step investments because once you invest, then you don’t need investment for the next two to four years. So these will not be like recurring investment every year. They will be coming — this will be like more like step investment where we will see a slightly higher capex cycle over the next two to three years before it normalizes.

Sameer Khetarpal — Chief Executive Officer and Managing Director

And also on reimaging, see, you are reimaging the customer area, right? And you’re not reimaging the kitchen because the oven, the make line, the refrigeration, the chillers, those are reuse. So it is only the front of the house, which is typically being reimagined or reimaged. And in many cases, also it is not the entire front of the house. So I think we look at the store and then design. So it is not as capital intensive as opening a new store.

Chirag Shah — CLSA — Analyst

Got it. Very clear. Just one last question on the Cheesy Rewards Program. Can you just help me explain, I mean, the cumulative membership that we now have on the Cheesy Rewards Program, is 10.6%, practically touching the MAU numbers that we have. So how much more can we extract from the Cheesy Reward membership program. That’s number one.

And number two, when we launched this, we were very clear that it should — it would not lead to margin dilution. Now given that we are now two, three quarters into this, what is — I mean, is there a margin impact? And if not, is it because of the higher frequency that is now driving it? Or is it because we are replacing other discounts with the Cheesy Rewards spend that we have?

Sameer Khetarpal — Chief Executive Officer and Managing Director

I think on the — I will not compare 10.6 million to 11 million MAU for the very simple reason that customers come back and shop multiple times in a year. And the total customer base, I should compare it to total customer base, which we don’t disclose, but that number is materially higher than the MAU. So therefore, to kind of — and we are acquiring customers, right, at a fair clip. So I think there’s huge headroom. what I’m delighted is the engagement of loyal remember that they find this enticing enough to come back and give their share of wallet to Domino’s. So that bit is exciting, and the headroom is huge. I will not compare this to MAU at all.

Ashish Goenka — Chief Financial Officer

And then just to answer your question on margin. So A, I think this program is more cost effective because you give a product free and that is also on a redemption based ratification, which comes in after almost six orders. So if you see the overall discount that we have actually putting down in this team is not very high. That’s number one. And number two, we are substituting it with other discounts, and therefore, it does not have a negative impact on margins.

And third is that we have also been able to calibrate and make it more targeted, Therefore, keeping our overall impact on margin minimal, and it also pays back because we get higher frequency.

Chirag Shah — CLSA — Analyst

Got it. Thank you very much and all the best.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Thanks.

Operator

Ladies and gentlemen, please note, we’ll be taking our last question now. That’s from the line of Avi Mehta from Macquarie. Please go ahead.

Avi Mehta — Macquarie — Analyst

Hi, sir. Thanks for the opportunity. I just wanted to clarify on the capex a bit. You had indicated last time that you’re doing about INR650 crores, INR700 crores in the next 12 months and then there was subsequent release about INR900 crores in the next 12 to 18 months. Could you just elaborate what is the capex plan? And help us understand that more.

Ashish Goenka — Chief Financial Officer

Avi, I think in line with what we said. I think for this year, this fiscal, we will be in that zone of INR650 crores to INR700 crores. And as I just explained, we will have probably a similar level of capex in the next financial year as well. If you put the two together in the next 12 to 18 months, we are looking at the number of INR900 crores.

And as I explained earlier, I think bulk of the capex would be attributed to higher store openings, followed by investment in our commissary, followed by investment in digital and followed by some of the store reimaging that we will do.

Avi Mehta — Macquarie — Analyst

Perfect, sir. That’s clear. The second is I wanted to kind of just understand the comment that you made about increasing marketing intensity to drive demand. Just wanted to understand if this is something that you are also seeing across the industry, say, from aggregators or other brands? Or is this something that is just that you have done? If you could help us understand that from an industry perspective.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Yes. I can’t comment about the — I can’t comment about the aggregators or competition as I’ll be very anecdotal, at least for us, from a communication standpoint towards dine-in, we have not done that for the right reasons because of the pandemic. So now taking that as a communication targeting towards dine-in, I think it’s more channeling more marketing dollars towards that particular format.

And overall level where we do, we had cut back on few expenses. We will make sure that we do — we remain relevant as customers are mobile, they order everywhere. So we will invest in. But it’s not something that is going to be materially that we were not doing a quarter or two ago. It’s more channeling and slight uptake in —

Avi Mehta — Macquarie — Analyst

Okay. So it’s not promotions, it’s more marketing. That is what is —

Sameer Khetarpal — Chief Executive Officer and Managing Director

That’s right. That’s correct. That’s correct.

Avi Mehta — Macquarie — Analyst

Perfect, sir. That’s all from side. Thank you very much, sir.

Sameer Khetarpal — Chief Executive Officer and Managing Director

Thank you, Avi. Thanks.

Operator

[Operator Closing Remarks]