Fast food in the slow lane as SA economy gets heartburn
Which quick service restaurants get a junk rating
The fall from grace of the fast food and quick service restaurant sector largely reflects the extremely weak SA economy, and the brutal bouts of load shedding will also likely have a dampening effect on this industry.
Last week’s column looked at the acute meltdown of Taste Holdings, and we now review how three other players in the sector are also taking strain.
Spur’s latest trading update was especially worrying, as its most recent strong growth vector, RocoMamas, has ground to a halt. The upmarket Hussar Grill has fared better than its other brands. According to small and medium cap specialist analyst Anthony Clark of Small Talk Daily Research, the acquisitions of RocoMamas and Hussar were “inspired deals and reinvigorated the business”, but tough times have taken their toll.
“Spur itself was plodding along as a mid-LSM family food chain until the social media storm hit it last year and knocked it for six. Then the economy, followed by load shedding in Gauteng and now nationally, have hit it and many other chains. I can see results from the entire sector being awful in 2019.”
Thankfully, of all the fast food chains in this comparison, Spur has probably incurred the smallest acquisition risk, sticking to brands that most closely resemble the original Spur Steak Ranch formula. However it has been knocked by the extremely languid ambient economy and it is difficult to see what catalyst, other than a profound improvement in the economy, is going to change this.
GRAND PARADE INVESTMENTS
Grand Parade is different to its peers in that it has a much broader base of interests, notably its legacy gaming interests in Sun International. Like Taste, its franchises are US-based but unlike Taste, it appears to have gained some critical mass in one area, being Burger King outlets, which are forecast to reach 80 in number this year.
Its other brands, being Dunkin’ and Baskin-Robbins, are far from reaching momentum. Clark notes that the company intends to withdraw and close them down: “They have never worked, costs are too high, and thus the accumulated losses have drawn shareholders’ ire.”
Clark reckons that Burger King is indeed a good business but requires a lot more investment before it makes real, sustainable returns: “They need over 100 stores to get there, and with plans to have more than 150 in due course, will need much more capital. I fear the returns on what may be a R1bn capital expenditure will be slow, and that is why shareholder activists are shaking the Grand Parade tree”.
Famous Brands’ current problems revolve mainly around the ill-considered acquisition of Gourmet Burger Kitchen (GBK) in the UK in 2015. GBK is now in the British equivalent of business rescue.
And all is not well in Famous Brands’ home market in SA. Clark notes the weaknesses in its offerings: “Wimpy is a ‘tired’ brand, a bit like ‘Spur Steakhouses’ but at least Spur has RocoMamas to tap into the burger hipsters,” he says. “Famous Brands is missing that particular segment; and Wimpy is simply in my mind ‘so last year’ as a brand and you can see it.”
One offering that is conspicuous by its absence in the Famous Brands portfolio is chicken. The group has tried twice with chicken franchises, firstly with Church’s Chicken from the US and more recently with a competitor to Nando’s called Giramundo, but both failed as the three main chicken players in SA, KFC, Chicken Licken and Nando’s, are too heavily entrenched and dominant.
Positively, the highly diversified nature of Famous Brands will probably help it to weather the storm better than most, provided it can organise an orderly exit from GBK in the UK.
With SA GDP growth unlikely to exceed 1% this year, it is difficult to see what would possibly catalyse a turnaround in the fortunes of the fast food and quick service restaurant sector.