Will local be lekker?
CAPITAL-HUNGRY McDonald’s Corporation appears to have lost its appetite to put more of its own money into South Africa, seeking instead to sell a 20-year operating licence to a local investor within the next six months and repatriate its money. It plans to deploy its scarce capital resources in what it calls “strategically critical large markets”. SA is not one of those.
It’s not a withdrawal, insists Greg Solomon, GM of McDonald’s in SA. The McDonald’s brand will stay. The only difference is that an SA partner is being sought to run the operations with a view to at least doubling its presence here as one of the world’s biggest franchise businesses. It’s seeking what it calls a “Developmental licensee” (DL) with sufficiently deep pockets to not only fund a buyout but to drive the brand’s growth. It operates in South America, Turkey, Thailand and Indonesia using the DL model.
McDonald’s growth in the SA market has hardly been stellar compared with some of its other global rollouts. It won’t discuss details of its profitability (due to regulations imposed on it by the Securities and Exchange Commission in the US) but independent research puts its market share at just 3%, with just under 130 outlets dotted countrywide.
To date, McDonald’s claims to have invested R750m into SA’s economy. “We’re very profitable,” says Solomon. “We’ve had double digit sales growth over the past five years.”
First quarter global results for McDonald’s Corporation show the group saw comparable sales up 5,1%, with the fastest growth – 7,6% – coming in Europe, dominated by Britain, France, Germany and Russia, while US sales grew just 2,8% and Asia/Pacific, Africa and Middle East growth up 6,4%, mostly due to outperformance in Australia. But China seemed to struggle.
McDonald’s opened its first outlet in SA in 1995. At one stage it opened 30 outlets in 23 months, with 10 of those ready for business in 78 days. However, its growth rate has slowed dramatically, hence the search for a credible SA operator.
Co-incidentally, McDonald’s announcement came on the same day a cautionary was issued by Famous Brands, the SA Quick Service Restaurant (QSR) group that owns Steers and Wimpy, but advisers to the US chain quickly poured scorn on any connection between the two. Speculation is rife about who would be in a position to drive McDonald’s in the SA market.
AVI and Bidvest spring to mind as possibilities. However, private equity isn’t an option for McDonald’s. Previous DL examples show the company likes to have a country champion for its brand – someone with whom McDonald’s can liaise directly on matters of concern and strategy. Besides which, the 20-year time horizon for the licence means private equity will not get the return it needs quickly enough to satisfy investor needs.
“There’s not a huge pool to draw on in SA,” says Solomon, who declines to say whether he might put together his own consortium and stump up more than R500m required to get the licence. He says: “Price is a really difficult thing to talk about, because it depends on what royalty structure we have in place. The new owner will not only be expected to stump up cash for the business but will also need to maintain 100% brand affinity as well as invest in its future, while paying the US corporation anything between a 5% and 10% royalty. The lower the buying price, the higher the royalty will be over the next two decades to compensate.”
McDonald’s is regarded by many of its investors as being as much about its property assets as its food operations. For example, in SA it owns around 60% of the sites its outlets stand on. Sites in malls have long leases, typically five-year contracts that roll over for 20 years.
Selling to an SA partner poses a potential risk for the McDonald’s brand, which the corporation treats as sacrosanct. “If McDonald’s thought its brand was going to be compromised at all, it would simply close the stores. There are about 130 in SA out of 33 000 worldwide – it’s not a huge number. But we’re sure we’ll find the right person to head this for us,” says Soloman.
Selling to locals. Greg Solomon