Despite a somewhat dismal performance by some of its operations in the financial year ended February 28, branded food services franchisor Famous Brands remains cautiously optimistic about the South African and African landscape, while feeling reserved about its UK operations.
This follows challenging trading conditions which persisted throughout the financial year.
Nonetheless, CEO Darren Hele says that, overall, the company has managed to make good progress in tightening the execution of its vision to be the leading innovative branded franchised food services business in South Africa and in selected international markets by 2020.
Hele highlighted to Engineering News Online that in terms of the company’s current position, the 2020 vision is about focussing on innovation, which he says needs to continue.
“We have successfully implemented opportunities to build scale across our brands and manufacturing divisions; leveraged synergies to contain costs across the operations; pursued constant innovation and improvement to deliver unique customer experiences; up-weighted our human resources capability; and fortified the depth of leadership to achieve our growth ambitions”.
It is not about having an “innovative hamburger, but rather how you get it to the market”, Hele suggested.
He further said the company’s South African operations performed well across the value chain, despite testing trading conditions.
Unfortunately, the same could not be said about the UK operations, which continued to face difficulties, with businesses subjected to notable higher property rates and increased labour and food costs.
Despite the primary challenge of declining like-for-like sales at store levels, Wimpy reported “satisfactory results” while impairments that were recognised in Gourmet Burger Kitchen (GBK) considerably reduced the carrying value of the business.
“The challenges experienced in this economy are mostly centred around the production and the frequency of visits from consumers. You’ve got the same amount of consumers, but they are spending less money and are visiting less,” Hele explained, adding that this has affected the entire industry.
Mitigating factors would be an improving economy, he said.
Famous Brands’ full-year revenue increased by 23% to R7-billion, while operating profit before nonoperational items declined by 5% to R890-million.
The group’s consolidated results for the year are weaker than the prior comparable period, Hele said, noting that its results were negatively affected by an impairment of intangible assets at group level of R304-million; an impairment of property, plant and equipment of £4.2-million, or about R69-million, at GBK; and a provision for property related expenses of £2-million, or about R33-million, at GBK.
Basic earnings a share decreased by 95% year-on-year to 22c, while basic headline earnings a share declined by 8% to 393c.
Cash generated from operations before working capital changes increased to R1.14-billion, while cash and cash equivalents totalled R717-million.
The net debt/equity ratio was 126%, with the return on equity having declined to 25%. Net asset value per share rose 10% to 1 632c.
Famous Brands has not declared a dividend.
Commenting on the company’s brands portfolio, Hele stated that solid results were delivered during the period, with intense focus having been directed at upscaling the delivery offerings both through in-house capability and third-party delivery service providers.
“This delivery offering is really in line with market trends across the sphere, not just in foods,” he tells Engineering News Online.
The division reported a 9% improvement in revenue, amounting to R851-million, while operating profit increased by 1% to R431-million. System-wide sales, which include new restaurants, rose by 8.1%.
The company’s signature brands portfolio, unfortunately, underperformed against expectations.
“This is very similar to what happened in the UK; the like-for-like sales haven’t delivered to the level that we expected them to deliver”.
Famous Brands, however, continued to pursue its deep and narrow strategy in the rest of Africa and the Middle East by continuing to invest in and extend the company’s presence with proven sustainable potential, and having exited those which have consistently underperformed over a lengthy period.
Revenue grew 1% to R253-million, while operating profit decreased by 10% to R45-million.
System-wide sales grew by 10% and the region contributed 9.3% to the group’s total system-wide brands’ division sales.
Meanwhile, Wimpy, in the UK, recorded an 8.6% increase in revenue, while GBK reported an operating loss before nonoperational items of £3.6-million for the period.
System-wide sales in the UK, excluding Ireland, were 4.9% higher, but after consistently outperforming the market since 2011, GBK’s like-for-like sales decreased by 6.8% compared with the previous year.
During the year, ten restaurants were opened in the UK, while two in Ireland were revamped. The total network comprises 106 restaurants.
Hele, however, commented that fundamental operational improvements need to be made to return the business to profitability.
This, he explains, is about ensuring that the company keeps up with consumer expectations and responding to delivery times without compromising quality.
Famous Brands has also simplified some of its menus.
“Remedial measures implemented during the reporting period are expected to deliver improvements in the business, and with new management and intensified oversight in place, we are satisfied that we can reverse recent declines over the medium term”.
The group’s integrated strategic supply chain division comprises its logistics and manufacturing operations, which continued to exceed expectations, with revenue up 9% year-on-year to R4.3-billion, while operating profit increased 12% to R509-million.
“We had a good period of manufacturing, which was largely driven by volume and basket growth. This translates into new products that we brought online, growing the basket,” Hele added.
A further 211 new restaurants and 306 revamps are planned for the current financial year.
“Disappointingly, the weak economic environment in all our trading markets dictated against a robust expansion programme. We opened 182 restaurants during the period under review and revamped 248 sites”.
Additionally, Famous Brands has started developing and will implement a logistics upgrade programme to address short, medium and long-term logistics capacity needs, with an immediate focus on the Western Cape and Free State.
“We will also invest further in out meat, cheese and coffee plants, which is aimed at improving efficiencies and enhancing capacity. Following a successful pilot trial, we will be rolling out a standardised system and approach to managing all facilities, which will leverage additional efficiencies,” Hele commented.
While trading conditions are expected to remain challenging, he says a degree of optimism is evident in South Africa following recent leadership changes in government, the strengthening of the local currency, the decline in interest rates and stabilisation of the country’s credit ratings status.
However, consumers’ discretionary spend will remain constrained with the recent value-added tax hike, and as low wage increases, personal indebtedness and high levels of unemployment persist.
While operational improvements introduced in the GBK business are expected to have a positive impact on performance, Hele adds that the company remains mindful that the headwinds facing the UK economy and category specifically, will remain challenging.
With the company remaining resolute in its growth strategy to focus on its three key pillars –brands, logistics and manufacturing – the company’s strategic intent is clearly defined, says Hele.
“To grow capability, capacity and scale across branded franchises, manufacturing and food services spaces. To achieve this, we will apply an uncompromising filter to unclutter the business and advance targeted growth”.