To understand the benefits of vertical integration in food franchising, it’s worth looking at the latest annual report from Famous Brands.
The group started out with a sprinkling of Steers outlets and was listed on the JSE in 1994 with a market cap of R25 million. Today, it has 25 restaurant brands and 2 853 stores in 21 countries, and a market cap of more than R12 billion. Famous Brands includes franchises such as Wimpy, Steers, Mugg & Bean, Debonairs Pizza, Fishaways, Europa and Tashas.
Vertical integration involves the supply of food items as well as logistics and other supplies, from straws to serviettes and even furniture.
Famous Brands operates ‘centres of excellence’ at six of its nine distribution centres, which also provide training to its employees and franchise partners. The group’s logistics business in SA is supported by the nine distribution centres, enabling it to service its 2 346 store outlets in SA. This is backed by a dedicated fleet of 107 trucks. It also has 15 manufacturing facilities, both wholly-owned and joint-venture businesses, manufacturing a range of licensed products for consumption by its franchise network and ‘non-franchise’ customers.
The SA brands division reported a 9% growth in revenue, though on deteriorating operating margins. This was largely the result of a weak economic climate. The real benefit of vertical integration can be seen in the results from the supply chain, where revenue increased 9% to R4.3 billion (2017: R4 billion), while operating profit increased 12% to R509 million.
There are several benefits to vertical integration:
- Product quality is more consistent
- Delivery is more timely as there is no reliance on external logistics companies
- There is no need to negotiate with external suppliers based on bulk bargaining; franchisors can determine this themselves based on their network and provide franchisees with stock at lower cost
- Listed franchisors are able to expand through vertical integration without shareholder pressure to open new stores
- It makes it more difficult for competitors to compete
- Quality standards and store image can be standardised across the group
- The benefits of bulk buying discounts can be passed on to franchisees
- Delivery and logistics are under group control
- Better head office control of food quality
- The ability to control the entire process end to end
The final point above, the ability to control the entire process end to end, came into its own with the recent Listeriosis outbreak in South Africa. Franchises that were dependent on Enterprise ready-to-eat meats were severely affected by the outbreak. Companies with internal controls such as Famous Brands, however, were able to monitor and implement remedial measures to mitigate the effects.
Listeria is found in uncooked meats, and is eliminated by cooking these meats at high temperature. Famous Brands voluntarily withdrew all ready-to-eat meats (which had not been cooked at high temperatures) from its menus with immediate effect. Thus those franchise groups with their own manufacturing plants experienced only mild disruption due to the Listeria outbreak.
Brought to you by Nedbank Franchising.