Paul: new French baker on the block
Famous Brands plans African expansion of café chain
LOCATED where Famous Brands’ coffee house Europa used to be, on the corner of High Street and Crescent Drive in high-end precinct Melrose Arch, there is a new tenant on the block: his name is Paul and he happens to be French.
The 127-year-old familyowned bakery-café brand, whose 10-year South African licensing rights were bought by Famous Brands in November 2015, opened its flagship store this week to a crowd of pastryloving South Africans. And it seems that Paul will let more people eat cake, as it plans to expand its brand.
Paul International chairman Maxime Holder, who first ate at a Mugg & Bean and Tashas in 2012, both of which are owned by Famous Brands, said he was impressed by the consistency of the brands.
“My PA is from South Africa and I said to her: ‘Can you try and find out who is behind Mugg & Bean, Tashas?’ And that was Famous Brands. It took me a few months to be able to get in touch with them.
“We thought it was the right time and this is a flagship for us. Paul could expand in the rest of the continent and there is huge potential,” said Holder.
In Africa, Paul already has stores in Morocco, Réunion and the Ivory Coast.
Worldwide, the group is represented in 36 countries through 673 outlets.
With French jazz playing in the background at the café, IMPRESSED: Maxime Holder Brent Kairuz, managing executive of Paul South Africa, said Famous Brands had signed with Paul International to develop five stores within five years in three trading formats.
“What we want to do is focus on getting the first operation right.
“Spending that type of capex in a restaurant, we need to ensure that we get a viable return on our investment,” said Kairuz.
This first store cost Famous Brands just under R14-million, which includes building costs but excludes capital and stock.
And it seems as though it will have to dig even deeper into its coffers as it plans to expand the model at triple-A-grade shopping centres.
“We’ve been looking at Hyde Park, Sandton, Morningside and Nicolway [in Johannesburg],” ALLEZ-OOP: A juggler at the opening of the Paul outlet at Melrose Arch, Johannesburg said Kairuz.
Another international name Famous Brands recently bought is UK-based Gourmet Burger Kitchen, known as GBK.
Orin Tambo, a financial analyst at Intellidex, said that when GBK was acquired for about R2.1-billion last year, the timing was perfect, as the weak pound meant the group paid less than it would have a year or so ago.
“The price tag is, however, undoubtedly massive for a company with net assets [equity] of less than R2-billion and annual revenue of about R4.5-billion. The acquisition will be funded by cash and debt, but I see the bulk of it coming from debt, which will strain the balance sheet,” said Tambo.
With a stretched balance sheet “we might see the group slowing down on acquisitions and/or rolling out of its own stores”, he said.
Despite this, “we are not overly concerned. While more debt means more interest payments, which will hit the bottom line, Famous Brands is a highly cashgenerative business. GBK is also a highly cash-generative operation, so it will help in paying off the debt.”
Unlike Famous Brands’ other sit-down restaurant, Mugg & Bean, Paul will be corporateowned, meaning that the group will be directly involved in the daily operations of the stores.
Victor Dima, an equity analyst at Dubai-based Arqaam Capital, said it would be interesting to see the effect that the move from franchise to corporate-owned stores would have on margins and returns.
“There’s nothing wrong with it, but it’s just a different approach and requires a different payback and low returns on capital. But this is just a small part of their business, so I wouldn’t be expecting any material impact on the numbers, whether positive or negative,” said Dima.
According to Bloomberg data, revenue from services rendered and franchises was R941.8-million, while the franchise network rose 14.2%, accounting for 2 614 stores.
But for Holder, expansion into the rest of the continent was the main reason Paul came to South Africa.
“This is a flagship for us, for the rest of the continent. Paul is not a luxury brand. We want to be a premium brand, meaning that we don’t want to be seen like a very expensive place for a very small portion of people,” said Holder.
Famous Brands has Steers, Debonairs and Mugg & Bean outlets in Kenya, Ghana, and Zambia.
Kairuz said Ghana was Famous Brands’ biggest market in terms of the rest of Africa.
“Certain markets are good for us, certain markets are not so. From Maxime’s perspective they are good markets, but from a South African perspective what we want to do is test the market first, see how it works and I think we’d first want to roll out [in] South Africa.”
Depending on the market performance, Kairuz would like to see Paul expanding to 15 satellite outlets and at least 10 kiosks in the next 10 years.
Tambo said penetration into other African markets would not be easy.
The markets were not as big as South Africa’s.
“Famous Brands already has a strong presence in the rest of Africa, with representation in 19 countries and over 20 years’ of experience in the region. Operating margins have been good, better than South Africa in some cases.”
But sales from this part of the market still account for just around 10% of the group’s revenue.
“The challenge in Africa is that takeaways are more of a luxury which most people cannot afford,” said Tambo.
“But Famous Brands has been cautious in its approach to Africa, opening a few stores in major cities . . . and not overly committing resources.”
Holder said: “I’m a patient guy and my family, they don’t give me any target. But regarding Africa I receive phone calls from my mother, father, brother and sister because they want to know how it’s going, but I say it’s too soon.”
We don’t want to be seen like a very expensive place Paul could expand in the rest of the continent
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