When a restaurant is a logistics business
FAMOUS Brands CEO Kevin Hedderwick likes to talk about keeping the business “fighting fit”. This is especially important when consumer spending is constrained. But looking at Famous Brands’ recent financials — operating profit up 13% — you might wonder where this supposed constrained spending is. Because it doesn’t appear to be in the restaurant sector, given the recent good results from both Famous Brands and Taste Holdings.
The mistake is to think of Famous Brands and Taste as restaurant businesses. Yes, they partly are. But they are mainly logistics and manufacturing businesses.
In its latest results, nearly R2bn of Famous Brands’ R2.5bn in turnover came from these operations.
This allows Hedderwick to take margin pressure in these businesses to make sure the price of the burger it sells out the front remains competitive. And this is exactly what it did in its latest set of results, cutting the overall margin in the manufacturing business to 13.6% from 15.3%. Where Famous Brands gains is from increased royalties from the franchise stores as they sell more burgers to price-conscious consumers.
But how much margin can the business sacrifice? It is something Hedderwick says he and his team constantly debate. Where they have some leeway is that if they get it wrong they can adjust prices in just six weeks, as that’s how often they change menu prices.
It makes for a great business, reflected in its lofty ratings with a price:earnings ratio of 27.5 and dividend yield of 2.2. It’s a pity then that these ratings currently don’t make it such an attractive share. some sectors will still be in serious trouble. One of these is manufacturing, which the National Development Plan specifically targets as a means of denting SA’s 25% unemployment rate.
But so far it is not working — yesterday’s gross domestic product data for the first quarter showed manufacturing shrank 1.2%.
Manufacturing Circle executive director Coenraad Bezuidenhout says this confirms that although a weaker rand presents some opportunities, a cocktail of high domestic costs, supply constraints and low global demand are still holding the sector back. Domestic costs have soared because of bunched-up administered price increases, and wage increases not matched by productivity improvements. Supply constraints have been driven by steel shortages, power outages, water scarcity, the emergency shutdown of a liquefied petroleum gas refinery, and a shortage of tin plate.
Manufacturers also report shortages of high-grade coal, insufficient inbound and outbound railway services, deficient harbour capacity and service delivery constraints, as well as inadequate foundry capacity.
Dave Marrs edits Company Comment (marrsd@bdfm.co.za)