Covid-19 and load-shedding have changed the eating habits among South Africans.
Famous Brands and other quick service restaurant (QSR) and fast food operators have adapted to this changing situation very well and have thus managed to turn the business around remarkably quickly. And yet as recently as three years ago, Famous Brands’ continued existence was threatened by strict lockdowns.
It is testament to the resilience of the business case, with the tenacity of management that this company has come roaring back with a vengeance. Over time, if load-shedding ever moderates in intensity, there remains the prospect of more people choosing to use casual dining in the evening again. But while load-shedding remains at such a high intensity, even with greater alternative energy sources for Famous Brands’ outlets, people will probably elect not to eat out as often as they used to when load-shedding was not so intense.
One of the biggest changes in eating habits in recent years has been a far greater reliance on takeaway food. This is good for the low-end, QSR part of Famous Brands’ portfolio, as it has meant that more people are ordering takeaway food from the likes of Steers and Debonairs but fewer people are electing to eat at casual dining outlets such as Wimpy and the niche operations in the group.
This can be seen in recent releases of Stats SA retail sales data, in which food retailers are experiencing lower volumes due to the indirect consequences of load-shedding. Rather than attempting to cook and then have to stop when the power is cut, consumers are thus increasingly buying takeaways. And to satisfy demand, Famous Brands has had to spend much money on diesel to keep its generators supplying electricity to its outlets. In 2023, the group used 648,000l of diesel compared with 87,000l in 2022.
For the year to end-February, group revenue rose 15% to R7.4bn, while operating profit rose 37% to R861m. Headline earnings per share (HEPS) rose 37% to 488c and the dividend was increased 82% to 363c/share.
Found difficulty
Famous Brands’ franchise portfolio can conveniently be divided into leading and signature brands. Leading brands include the long-established, iconic brands such as Steers, Debonairs, Wimpy, Mugg & Bean, Milky Lane and Fishaways.
Signature brands are more niche and include Mythos, Lupa Osteria, Turn n Tender Steakhouse, Salse Mexican Grilll, Vovo Telo, Paul, Europa, House of Coffees, Coffee Couture and NetCafe. It also includes recently acquired Lexi’s, the plant-based restaurant brand.
But while customers have largely returned to casual dining in the leading brands environment, Signature brands have struggled to attract enhanced spending and management has found difficulty in attracting new franchise partners. During the last financial year, 14 signature brand restaurants were opened, four were revamped and 20 were closed.
Signature brands only contributed 2% of operating profit last year. Operating profit margin at leading brands in 51%, while operating margin at signature brands was only 4%. Management is seriously considering its options regarding this division and will “assess the continued relevance of signature brands”.
Another operation they might want to reconsider is Wimpy in the UK, a serial underperformer. Like signature brands, it contributed only 2% of profits last year. Five restaurants were opened last year, two were revamped and seven closed down. Wimpy UK is the rump of the much larger Wimpy, which was sold off in a management buyout in 1990. They tend to be located in less desirable parts of towns and cities where rentals are lower. It is unclear what Wimpy UK’s competitive advantage is, if any indeed exists.
While the Famous Brands share price recovered strongly from the dark days of 2020, it is still far off its peak of R166 achieved in October 2016. On a price-to-earnings ratio of 12.9 times at the present share price of 6,272c, it is not especially cheap.
• Gilmour is an investment analyst.
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