Famous Brands CEO Kevin Hedderwick says of the interim results to 31 August 2011: “At the end of the prior financial year we cautioned that operating conditions would present challenges. In both South Africa and the UK economic uncertainty and limited disposable income restrained consumer confidence; locally, previously buoyant growth in the volume-based middle class market was curtailed, while input costs including red meat prices and electricity tariffs rose sharply.”
Generally, unprecedented fragmentation was experienced in the marketplace. He goes on to explain: “This disarray was reflected in aggressive price-cutting, divergence from traditional core menu offerings and portion size re-engineering as operators sought to drive turnover. Additional pressure was experienced from retailers intensifying their efforts to gain market share from conventional convenience-centered food services operators.”
Famous Brand’s footprint as at 31 August 2011 comprised 1 982 restaurants across South Africa, 15 other African countries and the UK. The group recently announced the opening of its milestone 2 000th restaurant.
Financial results: Hedderwick says, “Given the adverse conditions and absence of robust Fifa World Cup sales enjoyed in the prior comparative period, the group delivered commendable results, demonstrating the resilience of our business model and strength of our brands.”
Group revenue increased by 12% to R1.013-billion (2010: R908-million), while operating profit improved 8% to R184-million (2010: R170-million) reflecting the deliberate pricing strategy to stimulate consumer sales and protect franchisee margins. Notwithstanding this strategy, and the increase in staff complement to service and reposition recently acquired businesses, judicious cost management enabled the group to report an operating margin of 18.1% (2010: 18.7%).
Headline earnings increased by 10% to R120-million from R109-million, while headline earnings per share and basic earnings per share both increased by 9% to 125 cents (2010: 115 cents).
Capital expenditure of R50.5-million was incurred and includes expansion of the logistics fleet, enhanced capacity in the Manufacturing Division, advance payments on the chicken fillet plant to be commissioned in October 2011, as well as the settlement of R30.9-million for the acquisition of the Milky Lane and Juicy Lucy trademarks in March 2011.
An interim dividend of 80 cents per share (2010: 70 cents) has been declared, an improvement of 14%.
Franchising Division – Local: Revenue increased 13% to R209-million (2010: R184-million), while operating profit improved 9% to R123-million from R113-million. The operating margin declined to 58.9% from 61.4% largely due to softer top-line growth and the cost of bedding down recently acquired brands, which required investment ahead of royalty collections.
System-wide sales, including acquired businesses and new stores, grew by 7.0% (2010: 13.1%). This lower growth rate must be viewed in the context of an approximate 2.8% Fifa World Cup sales boost in the prior comparative period. Like-on-like sales increased 4.1% (2010: 7.4%).
During the period 50 new restaurants were opened. The next six months will feature an aggressive restaurant roll-out, with 90 new restaurants planned for South Africa and a further 30 restaurants for the rest of Africa, 12 of which will be in Zambia and eight in Mauritius. Hedderwick notes, “These 120 new restaurants will be opened over five months, equating to 24 new restaurants per month, and 170 restaurants in total for the year. Famous Brands’ footprint will exceed 2 100 restaurants by February 2012, illustrating the continued confidence in the group’s brand portfolio by consumers, franchisees and property developers alike.”
Famous Brands once again achieved a clean sweep of accolades in the consumer-driven Leisure Options publication, including ‘best burger’, ‘best chips’, ‘best pizza’ and ‘best coffee shop’. Vovo Telo’s recognition as ‘best new restaurant’ and tashas ‘best breakfast restaurant’ awards are positive endorsement of the group’s strategy to continue to introduce innovative offerings across its portfolio.
Hedderwick says, “Good progress was achieved in bedding down our recent acquisitions and integrating them into the group’s business model. Milky Lane has undergone a complete overhaul of its brand identity and menu offering and is ready for relaunch in time for the summer season. The Keg model has also been re-engineered and pending the granting of a liquor licence, is scheduled to launch its flagship restaurant in Johannesburg in the near future. Conservative roll-out of Giramundo, the Group’s flame grilled peri-peri chicken offering proceeded. Consumer response to the product has been extremely favourable and management is quietly confident of the brand’s potential to become a challenger brand in its category.
“Our recently established Creative Coffees Company which specialises in servicing the retail and food offerings in the private hospital industry has advanced its captive market strategy and will be opening House of Coffees restaurants at Life Eugene Marais Hospital in Pretoria and Mediclinic Limpopo in Polokwane,” he adds.
Franchising Division – UK: Trading conditions continued to deteriorate as the UK government’s austerity measures gained traction and consumer disposable income contracted further.
In this context, revenue declined to R42-million from R57-million, reflecting the challenging trading environment, the effect of the closure in the second half of 2011 of a multiple franchisee, and the impact of civil unrest on turnover levels in August 2011. Operating profit decreased to R3.5-million (2010: R4.2-million). The UK business reported an improvement in operating margin to 8.4% from 7.4% based on intensified cost management.
Hedderwick says, “Despite the adverse circumstances, the division remains profitable, is well managed and is not a distraction from the group’s local core business. One new restaurant was opened during the period and one third of the total estate is now aligned with the new Wimpy UK design.”
Supply chain: Combined revenue for this division’s manufacturing and logistics businesses was R755-million (2010: R660-million), an improvement of 14%. Operating profit increased by 8% to R57-million (2010: R53-million), while the operating margin declined slightly to 7.5% from 8.0%, primarily due to margin pressure in the Manufacturing Division.
Manufacturing Division: Revenue increased by 6% to R351-million from R330-million. Operating profit decreased 2% to R35.6-million from R36.4-million, due to the deliberate strategy to support the group’s franchisees by containing menu price increases. Operating margin declined to 10.1% from 11.0%, primarily a function of absorbing red meat price increases and the impact of launching the smaller Steers’ Get Real burger product, introduced to meet demand from price-sensitive consumers for a value offering.
Hedderwick comments, “A further backward integration opportunity will be capitalised on with the commissioning of a R14.8-million chicken fillet manufacturing facility. This plant will enable us to service our own brands, thereby gaining business which was previously outsourced. In addition, the Western Cape soft serve business has been brought back in-house and the group is also set to manufacture and distribute the Milky Lane soft serve product from October, in good time for the group’s peak holiday trading season.”
Logistics Division: Revenue increased strongly to R702-million from R595-million, an improvement of 18%, while operating profit rose 31% to R21-million from R16-million, reflecting a significant expansion of the logistics basket, facilitated by enhancements in multi-temp fleet capability. The division’s operating margin increased to 3.0% from 2.7%.
During the review period the dry basket business of Milky Lane, Juicy Lucy and the Pubs Division was successfully integrated into the supply chain.
Hedderwick says, “The group’s owner-driver pilot project in KwaZulu Natal has proved very successful in terms of productivity, customer service and empowerment. Currently 11 owner-drivers are in the programme and this number will reach 19 by the end of the financial year.”
Prospects: “Our outlook for the forthcoming six months is cautious in the context of prevailing macro-economic factors. The impact of global uncertainty and the weakening local currency will undoubtedly weigh on consumer sentiment. Disposable income will remain restrained in the absence of economic recovery, and intense competition in the industry will persist,” he comments.
Notwithstanding its circumspect outlook, the group is confident that opportunities for growth exist. Management is enthusiastic about potential in the lower-end entry level market in which its participation to date has been restricted; expansion prospects in Africa; and opportunities to further expand its manufacturing capability as part of the Group’s backward integration business model.
Hedderwick concludes, “Famous Brands has traditionally experienced stronger second half trading. This will largely be determined by the success of the December holiday period; however we are optimistic that the group will benefit from its robust marketing and promotion campaigns, high profile brands, and long-standing strategy to ensure widespread restaurant presence at national airports, transient sites on all major motorways, and prime coastal resorts and shopping malls.”
Famous Brands’ portfolio at end of September 2011 comprised: Steers (522), Wimpy including UK (637), Debonairs Pizza (346), FishAways (118), Mugg & Bean (119), tashas (8), House of Coffees (15), Brazilian/Brazilian Cafe (49), Blacksteer (7), Giramundo (8), KEG (24), McGinty’s (4), Vovo Telo (5), O’Hagan’s (19), Milky Lane (85), Juicy Lucy (16), Brewers Guild (1), and Creative Coffees (8). The group also manufactures and supplies its franchisees and the retail trade with a wide range of meat, sauces, spices, bakery, ice cream, fruit juice and mineral water products.