Will lo­cal be lekker?

McDis­in­vest

Finweek English Edition - - Openers - BRUCE WHIT­FIELD brucew@fin­week.co.za

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

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