No profit, but much optimism

More store openings, a dedicated production facility and management changes are expected to boost income

Hassen Adams, executive chairman of Grand Parade Investments (GPI), cannot be accused of not thinking big. “We are on our way to becoming a giant in the [fast] food market,” he says.

For the 20-year-old empowerment group, which built its interests in the gaming industry, Burger King will make or break its grandest ambitions.

With the cost of opening a walk-in Burger King restaurant running at R4.5m and an even higher R7m for a drive through, the all-corporate store model represents a huge commitment of resources.

“We have also built a vertically integrated supply chain around Burger King,” says Adams.

Though the allure of international brands attracts local consumers, bringing in global franchises and setting them up is capital intensive — just ask Taste Holdings, the purveyor of Starbucks in SA.

GPI is yet to turn a profit on its Burger King venture since it opened the doors of its first store in May 2013.

In the four years to June the venture ran up total headline losses of over R140m.

“We thought we could reach profitability in four years,” says Adams. “We were wrong.”

Fortunately, GPI does not find itself in the financially embattled position facing rival Taste, which has also taken on heavyweight US brand Domino’s Pizza.

“GPI’S gaming assets generate enough cash flow for it to fund development of its food ventures,” says Anthony Clark of Vunani Securities. “If necessary, assets can also be easily sold.”

GPI has done just that. Sales of a portion of its stake in Sun Slots to Sun International for R262m, and 10% each of its stakes in Sunwest and the Worcester Casino to Tsogo Sun for R675m, have recently been finalised. Grandwest Casino in Cape Town is Sunwest’s key asset.

GPI retains a 30% stake in Sun Slots and 15.1% in Sunwest and the Worcester Casino.

“We needed to de-risk ourselves and use our money to invest in blue-sky opportunities where we saw sustainable growth potential,” says Adams.

He continues: “I have been involved in the gaming industry for 20 years and it has become a lot more punitive.” He describes dealing with ever-changing regulations, separate gaming boards in each province and a multitude of committees as a “nightmare”.

Burger King’s prediction that six years was needed for GPI’S venture to reach profitability appears on track. In its year to June, GPI’S Burger King unit turned in a R10.9m headline loss, R19m less than in the previous year.

Revenue performance was robust, lifting R144m (22%) to R629m. It came with no help from new stores, with four openings and five closures making a total of 61.

Turmoil in top management appears to be to blame for the slow progress. “We fired most of the top management,” says Adams.

“We now have a really strong team in place.” Store openings are set to accelerate in the current year, with a focus on drive-throughs which, says Adams, generate three times more revenue than a walk-in store.

“We will end the current financial year with about 80 stores,” says Adams. “We will achieve critical mass at that number.”

Annual revenue will, predicts Adams, reach R1bn at the 80-store mark. It will also underpin far higher marketing spend, which Burger King dictates must be at least 5% of revenue.

“You will see really big numbers coming through from Burger King,” says Adams.

“There will also be big benefits for our supply chain operations. They all work in tandem.”

GPI’S ambitions in the fast food market do not end with Burger King. In 2016 two other big-name US brands, Dunkin’ Donuts and icecream specialist Baskin-robbins, were added. Adams believes they will be winners despite having chalked up a combined headline loss of R36m in the past year. There were six Dunkin’ Donuts and three Baskin-robbins stores at the end of June.

“We slowed the Dunkin’ Donuts rollout deliberately,” says Adams. It was in anticipation of completion in September of a dedicated production facility. “We were importing all our inputs. With the new facility we will achieve huge cost savings,” says Adams.

Rollout of Dunkin’ Donuts stores should be rapid. They are small, cheap to open and need a staff of only one or two. Under its agreement with Dunkin’ Brands, GPI is committed to opening at least 250 stores.

“They will be a big money maker for us,” says Adams. “To get payback on a Dunkin’ Donuts store takes as little as 18 months, compared with five years for a Burger King.”

Baskin-robbins, he continues, is an equally easy, low-cost model to roll out.

In another key strategic move in the food sector, GPI lifted its stake in Spur from 7.48% to 17.48% in May. “It will rise to 20% soon, with a 25% stake our goal,” says Adams.

“At 25% we will be a serious partner. There is a lot that GPI and Spur can do as a collective grouping.”

The share price of GPI, which turned in a headline loss of 4.49c in its year to June, has been hammered from a R4 high in March to its current R2.50, a fraction of its 698c/share intrinsic net asset value.

For those prepared to back Adams’s enthusiasm, it has the makings of a useful buying opportunity.