Life in the fast food lane hits a few speed bumps

Business

Life in the fast food lane hits a few speed bumps

Famous Brands joins Spur and Taste Holdings in finding the going rather tough ... how they must envy Nando’s

Chris Gilmour

Apart from Nando’s, Famous Brands is probably SA’s most successful fast food/quick service restaurant operation.
But whereas Nando’s rules the UK high street, Famous Brands has struggled in this notoriously competitive region. And in SA, things aren’t going so well either.
The group has closed almost 100 stores in recent times, most in their so-called leading brands of Steers, Debonairs and Wimpy, with Wimpy taking most of the heat. There are also closures in Bread Basket, which is being phased out; Wakaberry; Mr Bigg’s in Nigeria; and Giramundo, the flamed chicken chain, is being wound down as it has never been able to gain meaningful traction.
A sign of the times, surely, as Taste Holdings (owners of Domino’s and Starbucks in SA) and Spur Corporation are also finding the going tough.Famous Brands’s full-year results to end-February 2018 were poor. Group revenue grew by a good 23% but further analysis indicates problems. This figure includes 12 months of trading for the recently acquired Gourmet Burger Kitchen (GBK) compared with only five months of that operation in the previous financial year. Also, with 18% of revenue growth relating to acquisitions, organic growth was only 5%. Turnover growth in the SA business was about 7%, and stripping out the impact of new store space, grew by a pedestrian 3.4%.
Headline earnings per share fell by 8% to 393c. Although the gross profit margin expanded from 48.5% to 53.7%, further down the income statement things weren’t so pleasing. The expense to turnover ratio rocketed from 32% to 41%, resulting in the operating profit margin slumping from 16.4% to 12.7%.
Wimpy in SA is 50 years old and showing its age. Certain sites such as Harrismith and Sandton City pump money, but many are tired and struggle to attract young people. This is problematic for Famous Brands as Wimpy is its largest revenue generator in SA, being categorised as sit-down “casual dining” and enjoying a higher average spend compared to the fast food segment.
The biggest headache for Famous Brands is GBK in the UK and Ireland. Bought from Yellowwoods (part-owned by the Enthoven family that also owns Nando’s) in October 2016 for £120m (at the time R2.1bn), the group took a R340m impairment on GBK in the 2018 financial year. Gearing has also risen sharply, from zero prior to the acquisition to over 126%, resulting in a pass on the dividend. Famous Brands bet the farm and paid a lot for something that is not working out.Despite efforts to differentiate through ingredients and cooking methods and times, burgers are a highly commoditised food offering, and competition is intense in the GBK top-end segment. Famous Brands management calls this “rapid expansion of the competitive set, and between 2014 and 2017, the number of top-end burger restaurants in the UK almost doubled, from 213 to 401. With the entry of new participants, first movers have lost their advantage and market share as consumers seek out new novelty offerings.”
Competitor incursion from the likes of Byron and Five Guys has affected GBK badly. It looks like a war of attrition in this segment of the UK burger industry and already Byron has indicated it will be closing 20 of its 67 outlets in terms of a voluntary arrangement with creditors.
Since peaking at R166 per share in October 2016, the Famous Brands share price has fallen consistently to its current R107, trading at a PE ratio of 27. This is hideously expensive, considering that any recovery at GBK will be relatively slow and the market for fast food/quick service restaurants in SA is in the doldrums.
Famous Brands is a well-managed company with strong brands. However it appears to have bitten off more than it can chew with GBK.
Chris Gilmour is an investment analyst.

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