Taste Holdings (TAS) is a young group with a stable of fast growing, vibrant Quick Services Restaurant (QSR) brands, and a rather opportunistically acquired jewellery segment, NWJ, all wrapped into a franchise business model.
While NWJ offers exposure to a valuedriven jewellery offering, the Jewellery segment is a slow grower and offers limited to no synergies with the rest of Taste’s group.
So, ignoring NWJ, Taste’s investment case really revolves around its food segment; both the franchises and its development of a supply chain and product offering in its franchisee network (the ‘Food Services’).
While holding different brands that are targeted at different markets and different LSMs, Taste’s food segment follows a similar styled business model to Famous Brands (FBR). This is true even to the extent that Taste has recently established a Food Services division, which is essentially similar in operation to Famous Brands’ Manufacturing, Logistics and Supply Chain divisions.
The theory of this business model is simply to sell product to your franchisees.
This not only allows you to manage product quality, stock levels and build greater trust and sustainability in your franchisee base, but you essentially have a captive client-base (the franchisees) that earns you manufacturing and supply chain margins.
A decade ago, these ‘Food Services’ revenue streams contributed around 81% of Famous Brands food-related revenue and around 56% of the Group’s operating profits. This has crept quietly up to around 90% of revenue and about 69% of the Group’s operating profits (this style of business model has large operating leverage). This is a massive Cumulative Average Growth Rates (CAGR) of 38% year on year (y/y) for the last 10 years. In many senses, Famous Brands is a food manufacturing and supply chain business with a franchisee route-to-market.
Ten years ago Famous Brands’ franchisee network was approximately 500 stores, which is basically comparable to Taste’s current network of around 524 stores. Also, Taste’s Food Services only started in the last year or so, made a small loss during the last financial period and contributed only around 58% of the food segment’s revenue during the period.
So, not only is Taste’s size comparable to Famous Brands’ a decade ago, but its ‘Food Services’ drive is going in the same direction and from an extremely low base.
Taste also announced a funding deal with Nedbank and Brimstone to help finance new Fish & Chip Co. franchisee (financing of new franchisees is often a bottleneck in rolling-out new stores). Founder and CEO of Taste, Carlo Gonzaga noted that “it is a better deal than it sounds as we really have many guys that get turned down at commercial bank funding stage”.
So, add a fast growing franchisee base (‘captive client-base’) to a rising percentage of the menu being manufactured and supplied by Taste (positive operating leverage), and the exponential upside growth of Taste starts to become quite apparent.