GBK’s struggles take bite out of Famous Brands
Shares plummet nearly 30% after earnings warning spooks investors
In January this year, Gourmet Burger Kitchen ran a promotion giving away free lunches to celebrate Blue Monday in the UK. A few months later, the chain gave away free cheeseburgers to all London Marathon runners — there were more than 40 000.
In June, it gave away another 4 300 of its Big Mouth burgers nationwide, again for free. And this month, in response to the misery Brexit has caused, GBK will run a special promotion, giving the first 50 people who present their EU passport a brisket burger for free.
As promotional activity seemingly becomes a survival tactic for the burger franchise, its South African parent, Famous Brands, lost about R1.3-billion of its market capitalisation this week. Investors were spooked by a dire trading update that warned that headline earnings per share may fall as much as 63%, mainly as a result of its UK struggles.
Since Tuesday, the group, which owns local mainstays Steers and Debonairs, has had its share price lose almost 30%.
Shareholders exit
While Famous Brands head honcho Darren Hele said GBK had a promotional strategy that was planned at the beginning of every year and was “reviewed during the year in line with market conditions”, it’s clear that this year the market has not been in its favour.
As a result of this week’s update, Hele, who has been at the helm since Kevin Hedderwick’s departure, said “a small number of shareholders have regrettably decided to exit. We retain the support of major longstanding institutional shareholders, who appreciate the group’s investment case.”
Hedderwick was with Famous Brands for 16 years, as MD of Steers in 2000, as chief operating officer from 2001 and as group CEO from 2010.
In that time, to the end of February last year when he officially resigned, Famous Brands stock gained about 351.56%.
Imtiaz Suliman, portfolio manager at Sentio Capital, is one of those departed shareholders and he feels the GBK purchase should never have happened.
Having paid a full price of R2.1-billion for GBK, the margin for error is small, he said.
Sentio Capital sold off its stake as the ac- quisition shifted management’s time from its core operations in South Africa and Africa.
Suliman said the purchase of GBK meant that Famous Brands shifted from its traditional franchise model to corporate-owned stores, which had been a new learning experience for the diner.
Scaling back
“It’s not like there is a lack of competition in the UK. There are quite a few players in the gourmet burger segment of the market, so it’s not like it’s an under-penetrated market where they could just roll out 10 stores a year, and as a result they have subsequently scaled back their expansion plans.”
Hele said the real fault lines of the poor trading period were that sales at GBK had shifted from a positive trajectory to a negative one.
“While the current circumstances don’t make it a lesser business, it does make it a less profitable one than we had planned for in the medium term,” said Hele.
Hedderwick, who now acts as non-executive director to Famous Brands, led the purchase of GBK last year. Only four months after the deal, Britain voted to exit the EU,
Short-term headwinds do not make this a bad business Darren Hele Famous Brands CEO
consumer confidence waned and spending power remained limited.
While John Mercer, a retail analyst at UKbased Fung Global Retail, agrees that the real spending power of British consumers was being squeezed, he felt it had little to do with Brexit.
Confidence down
“Consumer confidence is down, which was hit by the Brexit vote, but there is relatively little correspondence between consumer confidence and how they actually go out and spend.”
Mercer said that people had continued to spend in the retail sector, despite the fact that many had assumed that there would be a curb in spending.
According to Mercer, consumers’ savings ratio in the UK was less than 2%, which he described as “incredibly low by historical standards”.
He said: “British consumers on paper should be cutting back and squeezing their discretionary spend.”
But Hele said: “GBK is not a poor buy and short-term headwinds do not make this a bad business.”
Hele added that he expected GBK to show growth in the next financial year.
But for the group’s local operations, Hele said the current trading conditions equalled the worst in management’s recollection.
“While the local business is in very good shape, it operates in a subdued economic environment. Every effort is being made to capitalise on the limited consumer discretionary spend available in the market and the business is optimally positioned to take advantage of any upturn in the economy, including the peak trading holiday season which lies ahead,” said Hele.
This is not the first time South African management teams have flirted with running offshore operations.
Failed acquisitions
In the early 1990s and the early 2000s, South African companies raced to go into Australia, where Pick n Pay bought Franklins and Truworths bought SportGirl, all acquisitions that didn't work.
More recently, apparel retailers such as TFG (Whistles and Phase Eight) and Truworths (Office) have headed into the UK, but both retailers are seeing muted growth.
“We have seen some sort of scramble and diversification strategy out of South Africa. Why it’s Australia or the UK, I guess it’s just because from a language and culture perspective it’s easier to integrate,” said Suliman. “But it also begs the question: why are those operators selling? It’s always that when someone is selling and someone is buying, the seller knows more than the buyer, so whether South African management can run those operations better I think the jury is still out.”