In casual eating, local is lekker
Brands with a legacy in SA are better able to endure lean times
tshandup@sundaytimes.co.za
● In the past five years, the casual dining industry has been caught in an identity crisis, brought on by the influx of US brands to the local sector.
In the past five years, the owners of casual restaurants or diners have been placing their bets on brands such as the 2013 investment in Burger King by Grand Parade Investments, or that of Taste Holdings in Starbucks and Domino’s Pizza.
Famous Brands joined the spree with its upper-crust brand PAUL, later joined by Siyaghopa Trading Group’s Popeye’s Louisiana Kitchen.
Yet in the past year, Taste Holdings lost 58.16% in share value, while the one-time kingpin of the sector, Famous Brands, lost 24.27%, whereas Spur Corporation, which has no exposure to international brands, lost about 21.1%.
For brands such as Spur, which has been around for 50 years, Wimpy for 40 years and Nando’s for 30 years, it seems that consumers are still turning to legacy brands to satisfy their appetite, despite the allure of foreign dining groups.
Anthony Clark, the small and medium market-cap analyst at Vunani Capital, said: “International brands came in and they left, such as Pizza Hut [which later returned through YUM! Brands]. Consumers in this country have only ever known one consistent international brand — KFC.”
McDonald’s is the oldest international brand in South Africa.
Clark said that most of the population had never travelled and had never heard of Burger King, Starbucks, Domino’s Pizza, Dunkin’ Donuts or Baskin-Robbins, “but the aspirational aspects of those brands probably attracts them to those stores, which is why they’ve done reasonably well”.
But Clark said Domino’s Pizza and Starbucks have lost R349-million in the fastfood market in the past two years, while Grand Parade Investments, which bought Burger King, Dunkin’ Donuts and BaskinRobbins, lost R62-million.
Clark said: “Owning an international brand . . . you have to spend heavily on marketing, rolling out new sites, brand perception and a competitive price-point environment. Does a consumer want to spend R50 for a cup of coffee when he can go to Vida e Caffè and buy it for R20?”
But it is the investors that need convincing.
Nolwandle Mthombeni, an investment analyst at Mergence Investment Managers, said such stocks had their own specific problems, in addition to sector-wide challenges.
“Spur and Famous Brands have been around for longer and have been managed well enough to get through cycles and recover. Taste, on the other hand, has multiple structural issues and was effectively rescued by a recent rights issue. Fortunately, Taste Holdings has an investor backing them and the jury is still out on whether the company will be turned around anytime soon.”
Many will attribute the decline of the casual dining sector to the decline in discretionary consumer spend; when the macro environment becomes tough, this is one area in which consumers may cut back.
“Over and above this, the industry has become more fragmented as competition has increased in the last five years, and weaker currency and the drought have all led to higher input costs, creating headwinds for the sector,” said Mthombeni.
While she holds that the sector is worth
Consumers in this country have only ever known one consistent international brand —KFC Anthony Clark Analyst at Vunani Capital
investing in, she said every sector went through cycles and it was in those cycles that opportunities arose.
“Investors need to do research on which companies generate good returns on equity, have sound balance sheets and are cash-generative — these are just some of the key measures to assess. In addition to the above, investors should not overpay and rather opt to invest in companies that trade below their intrinsic value.”
Clark said that the underlying results of the old legacy brands in the past 12 months and what they had done appealed to the consumer. Spur has been able to reinvent itself by creating new menus, new formats, new looks that had had a positive effect on sales.
“Legacy brands in this country have been through a number of cycles; they know what the consumer wants and they have a store base which they can easily adjust depending on the circumstances.”