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The proof is in the pudding

Taste Holdings vs Grand Parade.

When judging the quality of a management team, the proof is always in the pudding. Well, this time the proof may be in the pizzas and burgers or, at least, the ability to roll them out across a franchise network…

I was skeptical when Grand Parade Investments (GPL) signed the Burger King (BKSA) Master Franchise for South Africa (among other African countries).

The reason for this skepticism was two-fold:

Firstly, to the best of my knowledge the BKSA Master Franchise had already been passed over by at least one large franchise player I know of in South Africa.

Secondly, GPL’s management team really knew nothing of quick service restaurant (QSR) franchising, had no track record and had never touched anything like this before. QSR is quite a different business to holding a stake in an already-successful casino, upon which GPL has been built.

These two facts meant that not only did GPL have high execution risk on its BKSA roll-out, but I doubted the economics of the Master Franchise as it had (apparently) already been avoided by a much more experienced local franchisor.

Just to add to the latter point, GPL has never yet (to my knowledge) revealed the actual intricacies or basically any details at all relating to this Master Franchise contract that was signed.

Moving on to Taste Holdings (TAS).

When Taste Holdings (TAS) signed the Domino’s Pizza Master Franchise, not only did Taste disclose the length, royalty structures and many other details of this contract, but Taste is an experienced franchisor with a long track record.

I have never understood the market’s skepticism towards Taste’s Domino’s deal, yet its absolute acceptance of GPL’s BKSA deal?

Maybe it is just me, but I prefer backing experienced management teams.

Anyway, fast forwarding to the present and I believe that we are starting to see the asymmetrical nature of these two management teams competing in the Master Franchised QSR industry: GPL has cut its aggressive roll-out of BKSA, while Taste is busy ramping up its initially expected roll-out.

GPL has dropped its 100 store target to about 60 (by the end of June this year), while Taste Holdings has hiked its planned six corporate stores to a total of 25 corporate stores and conversions of at least 30 franchises (by the end of August this year).

Moving focus a little more onto Taste, a key takeaway (excuse this pun!) from the group’s latest update is that sales are better than expected. This is driving store roll-outs speeding up and the increased need for the dough factor, amongst other things.

GPL also speaks about BKSA exceeding sales targets and that the lowering in the roll-out target is due to having to control margin; “GPI’s initial target had been reality-checked and that the roll-out of Burger King outlets was not as easy as expected. GPI had decided to slow down Burger King’s expansion purely from a margin point of view.”

I am not sure that I buy that particular argument…

I’ve been pleasantly surprised by BKSA’s product and it is very nice (better than Steers, in my opinion), but this is a volume game and you do not slow down ramp-up in volume for margin. In fact, you do the opposite, as ramping up volumes drops your fixed cost per unit.

And so, once again, I go back to my view that I’d rather back the roll-out of a Master Franchise by an experience franchising team: Taste Holdings.

The quality of a management team is not based on how bold their plans are, but on how well these plans are executed.

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I am quite surprised by the heading of this article “The proof is in the pudding” One does not expect to see such an error on Moneyweb.

So many people don’t know the correct phrase: “The proof of the pudding is in the eating”

Wikkipedia seems to think that this is an abridged version of that saying… I’m pretty sure that journalists have journalistic licence to use all sorts of clever techniques to make headlines grab your attention…

What I find funny is that neither Domino’s nor BK are known for their puddings…

I tend to agree with your argument although I believe there are precedents for success on either side. In 1992, to keep his airline company afloat, Richard Branson sold the Virgin label to EMI for £500 million. He changed from records to airlines and made a success of it and of numerous other things. (He’s the only entrepreneur to have built eight separate billion-dollar companies in eight different industries.) On the other hand when African Bank bought Ellerines the institutional inevestors warned them to stick to their knitting and how right they were in hindsight. I guess it’s like you say, it all depends on the management.

Steers is way better than Burger King!

End of comments.

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