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Low food inflation and Brexit uncertainty weigh on Famous Brands

Although CEO Darren Hele is pleased with ‘solid’ interims.

NOMPU SIZIBA: Famous Brands, a leading restaurant chain operating with brands under its name like Wimpy, Mugg & Bean, Debonairs Pizza and more came out with interim results today [Monday, October 28] for the six months ended August 2019. The company has described its results as “solid”, adding that its brands did well – in some instances gaining market share. Headline earnings per share declined by 15% to 159 cents, while operating profit before non-operational items was down 4% at R405 million.

Well, to break down the results for us, I’m joined on the line by Darren Hele, the CEO at Famous Brands. Thanks very much for joining us, Darren. Why don’t we take a closer look at your numbers? We see that your restaurant-brand businesses recorded revenue of R481.1 million, which is up 11% on the year prior. To what do you attribute this growth, when it’s no secret that the South African consumer is under pressure?

DARREN HELE: Well, to be honest I think the numbers are slightly distorted because we’ve had two investments in signature-brand company stores, so the number gets inflated. But our system-wide restaurant sales are up 6%, so I think in the current climate that’s pretty good. We’ve just been focused on trying to drive value for consumers and trying to get the offering right, and making sure that we are offering value in tough times with the right messaging. But yes, it hasn’t been an easy six months to get those numbers.

NOMPU SIZIBA: What consumer trends did you observe in the South African market? And presumably you had to temper any price increases, given the sensitivity of the consumer.

DARREN HELE: Pricing has been tempered anyway because of the low food inflation, which is why we’ve taken some pain on the supply chain. I think that’s been a given, so less pressure on that side across the board. The digital migration is still a growing trend in the high-end consumers. People do seem to be going back to shopping centres a little more than they used to, I think. We saw the trend dropping off and I think also because there’s been no new shopping centres come online, so I think feet are increasing again. People just generally are seeking convenience – whether that be food at work or  just food within arm’s reach, generally cooking less, so eating out more.

NOMPU SIZIBA: You touched on the supply chain division not having done so well. Your revenue was down about 1% there. What were the problems? Tell us what your supply-chain division is about, and what the issues were.

DARREN HELE: We are a manufacturing business with a number of manufacturing parts, as well as a logistics business which supplies all of our franchisees countrywide around the whole of South Africa. The manufacturing business primarily supplies the franchise network, but not solely. It does supply other products. So really the tyres come on the logistics side where it’s been a perfect storm of some reinvestment into the business, so obviously we’ve taken some pain there.

But we are also in a low food inflation environment, where you are carrying in the same products for less money, in effect, and your costs are rising. And we’ve also had some once-off reallocation of costs and some once-off issues in the business. So, all those things having come together unfortunately at the same time makes it look worse.

We’ve had one manufacturing plant where we’ve reduced the revenue, so the impact on the overall business, and that’s our Lamberts Bay Foods business, where we had a reduction of a key customer.

NOMPU SIZIBA: So, what’s your debt picture looking like these days, and are you confident it’s manageable?

DARREN HELE: Yes, we are in a much better place in terms of our debt. We were never really in a tight spot. That was always uncomfortable when an acquisition wasn’t performing. So our debt level is down to about R1.9 billion now, which is a lot more manageable and hence comfortable to reinstate the interim dividend.

NOMPU SIZIBA: You operate in some 16 countries in the rest of Africa and the Middle East. How did your various brands do in those markets? And I see while revenues were up your profits were actually down.

DARREN HELE: The profit is always impacted by the exchange effect. You’ve got lots of moving parts between markets. Typically the SADC countries did fairly well, and generally all markets aside of the 15 markets have shown volumes of growth. So, generally a good performance, but the exchange-rate conversion, which is always a challenge across different markets, has suppressed profit a bit. And also we are reinvesting in the business in terms of going on a strong drive, and that’s taken some of the margin away.

NOMPU SIZIBA: In the UK you’ve got the Wimpy and Gourmet Burger Kitchen brands. Of course, we heard that the GBK brand did cause you quite some strife in recent years. Are you winning with the Gourmet Burger Kitchen brand? You put in place a strategy to try and improve efficiency there – are things coming around?

Read: Famous Brands sees R874m impairment as UK burger business struggles

DARREN HELE: I think we are winning in the context of the market. If you’d owned GBK all this time and you looked back, I think you’d say we are doing a good job. Clearly we have to deliver returns out of this investment. I think that’s were the “strife”, as you call it, has come from, and rightly so. But in terms of the actual business and competing on the street relative to others, I think we are holding our heads up high. But of course that doesn’t necessarily help to tailor the group’s income statement.

NOMPU SIZIBA: How has the whole drag of Brexit affected the consumer psyche over there?

DARREN HELE: Look, it’s definitely had an effect. I think it’s probably worse now than it was, because it has dragged out so much. I think people are getting Brexit fatigue. Generally things have settled down on the labour market. I think there is stability. But it’s just generally not bringing confidence. There is not a lot of investment into the high street, which is partly impacted by the online retail business. Generally people don’t have the kind of confidence to go and put new bricks and mortar into shops on the street, because they are not quite sure what’s going on. We feel the same. But I think it’s dragging on in terms of that issue, and people are holding back major investment.

Read: EU nations agree Brexit delay until January 31 as Johnson seeks election

NOMPU SIZIBA: Just in terms of your outlook going forward for all your operations, and of course especially here in South Africa, what’s your feeling?

DARREN HELE: Well, we are cautiously optimistic. For us December is a key period in South Africa with the summer holidays. Last year was really tough with the shorter school holidays. And of course Black Friday is ever-evolving. That’s one day that seems to suck a lot of money out of the economy with a backlash in December.

So we are cautiously optimistic. I’m hoping for a better trading period than last year because of some of those factors, but we need to be mindful of what’s happening in the SA economy – the kind of retrenchments that have been spoken about will end up not translating into 13th cheques, and a few other things. So, yes, cautious but optimistic versus last year.

NOMPU SIZIBA: Thanks very much, Darren, for your time.

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