JOHANNESBURG- Although consumers’ discretionary income is under pressure, resulting in restaurant spend being trimmed down, fast-food specialist Famous Brands continues to buck the trend.
Famous Brands, with franchises Debonairs Pizza, Steers and Wimpy, has benefited from its diversification strategy of different product categories and exposure to the African and UK market.
Its earnings are a case in point. Famous Brands, with a market capitalisation of R12.6 billion, saw its operating profit for the six months to August 31 2015, notch up 14% to R347 million on the back of revenue growth of 27% to R1.9 billion.
Famous Brands’ decade of acquisitions – building scale in its fast food and restaurant business – continues to pay off handsomely.
CEO Kevin Hedderwick says over the years it deliberately “bought a bouquet of brands catering to a wide range of LSM groups. The bulk of our business is in the middle LSM consumers that are visiting restaurants more frequently than they have done before, but spending the same amount.”
Famous Brands’ focus on higher LSM consumers, through restaurants such as tashas and Turn ‘n Tender, is cushioning the blow from economic downturns, as these consumers are resilient and “almost recession proof.”
It is this spending trend of consumers and management’s efforts to respond to it which saw Famous Brands’ franchise division – with a total of 2 565 restaurants at August 31 – record a 7% revenue increase to R321 million year-on-year. In this division, Famous Brands saw operating profit increase by 4% to R181 million, while sales across its mainstream brands grew by an average of 10% and like-on-like sales by 5.2%. Hedderwick says the like-on-like sales are indicative of the mainstream middle-income consumer being under pressure.
“We are having to work a lot harder to get the consumers in our restaurants and hence you see a like-on-like growth of about 5% across our big brands. There is margin erosion happening from a franchisee perspective and there is margin erosion manifesting itself from the manufacturing business,” he says.
As a result operating margin declined to 17.4% from 19.3% in 2014, due to pressures in its non-franchising business. Famous Brands undertook a range of projects to integrate new high-volume low-margin business into its manufacturing and logistics businesses, which proved more onerous than anticipated and put downward pressure on margins.
Despite this, its manufacturing business saw a 42% rise in revenue to R848 million and 45% rise in profits to R101 million, while the logistics business saw revenue of R1.35 billion (up 29%) and profits of R43 million (up 12%). Famous Brands has over the years diversified its operations beyond the fast food franchising business. From being a franchisor of brands, it is also moving towards company-owned chains.
For the next phase of growth Famous Brands – which opened 75 restaurants during the period under review – is looking to open 139 new restaurants. The bulk of the restaurants to open will be in SA, with three in the UK and 21 planned for the African continent. It recently acquired a 49% stake of UAC Restaurants, which wholly owns Nigerian chain Mr Bigg’s, giving it its first direct stake in the region. It also acquired a 51% stake in Retail Group, which also has the rights for fast-food brands Wimpy, Debonairs Pizza, Mugg & Bean, Milky Lane and Steers.
“This category [fast food] is a phenomenal business to be in. People have been talking to us about how we can continue to open 150 restaurants every year. And we have consistently done so,” he says.
SA’s fast-food industry has seen a flurry of new international players such as Domino’s Pizza, Pizza Hut and Burger King, which Hedderwick says forces Famous Brands to “sharpen its pencil.”
Famous Brands is looking to make a foray into the catering business for corporates and grow its exposure to the niche ‘evening dining’ segment where it is currently underrepresented.
It declared an interim dividend of 190 cents per share.
The share ended the day up 3.06% at R131.00.