Coffee’s about to heat up
UNLIKE many of its listed peers, Famous Brands has had a good year on the market so far, with its shares up about 18% since January.
That’s notwithstanding huge pressure on consumer spend, and the threat posed by the impending arrival of Starbucks under competitor Taste Holdings. BT caught up with CEO Kevin Hedderwick.
You have many coffee offerings within the company — how much of a threat is Starbucks to you?
Look, with regard to Starbucks, it’s a global brand, so there are certainly going to be consumers who will test and try the product, but we think that in terms of our current coffee offering, especially a brand like Mugg & Bean, we’re well positioned to compete and stand our own ground.
You’ve taken Mugg & Bean to a lot of travel-sensitive sites such as airports and petrol stations. Does that offer a bit of a buffer?
We bought [it] from Ben Filmater, whose view at the time was that the brand had been saturated in South Africa because it had a footprint in every major shopping centre.
Our view was completely different — we’ve done some interesting things in terms of fixing the trading format, so it’s not just about a big, 200-seater sit-down; we now do a smaller version in some of the rural areas like Bethlehem and Grahamstown, and then we’ve done a lot of work with the Total petroleum company. Our aim was always to prepare ourselves for global competitors if and when they ever arrived.
Recently, you bought a controlling stake in Retail Group — your master licence partner in Botswana — and you indicated that this would be a test case in taking back control of master licence agreements elsewhere in Africa. Why?
The master licence model, which the Halamandaris family actually installed long before I even got here, is a model that we’re beginning to stand back and seriously question now because what we want to do is be in control of our own destiny.
As we expand more robustly in Africa, we want to put momentum behind our brands in markets without having to rely on a third party to invest.
Why didn’t you opt for company stores in the past?
The business has always been based on a franchise model, and the view always was that the guy who owns the store runs the store better, but I think that as more younger people look towards the food service market as a form of career, I think we can [better] attract, incentivise and retain skills that will run company stores for us.
I think Carlo Gonzaga [the CEO of Taste Holdings] was quoted as saying that running company-owned stores is not a picnic, but we’ve got to a point where we think that maybe we should have done it earlier on.
We think there’s some upside in unlocking value for our shareholders, although we haven’t planned the capital investment.
Tashas is a classic case in point — we rolled out that brand on the basis of franchising, but if we had our lives over again, I think Tashas would be a fully company-owned model.
Would you have to spend quite a lot of money making those franchises companyowned?
Ja. Right now, the franchisee puts up the investment, and if we were to go for companyowned stores, it would be Famous Brands putting up that investment. But we’re highly cash-generative, it’s completely debt-free, so we wouldn’t be putting our business under any extraordinary strain. Do you ever feel overextended? You’ve been incredibly active bringing new brands into the group. Is it manageable? Er, well, yes. [Laughs] Famous Brands has got a lot of moving parts . . . we’ve got seven distribution centres, 14 manufacturing plants, 2 500 franchisees, so it’s a complex model, but I think it’s been held up by the investment community from a food-service perspective as best practice.
In the early days, everybody would say to us: “Why on earth would you want to be in logistics and manufacturing when there are such great margins in the front end of franchising?” Well, our supply chain business now accounts for 40% of our operating profit. So company stores might not be a Sunday school picnic, but the supply chain business is also not a Sunday school picnic.
We’ve taken a lot of time to build capability both in logistics and manufacturing and you’ve seen over the years how those operating margins have improved.
Going forward, for a business like Famous Brands it’s not necessarily forever going to be just about food service and franchising.
It’s hard to get one’s head around that — you’ve been associated with food services for so long.
We’ve certainly got the appetite, and we’ve got a nice skills base. I’m a great admirer of what Brian Joffe’s done at Bidvest in terms of diversification, although perhaps that’s pushing the envelope a little bit too far . . . But the other one that comes to mind is what Simon Crutchley’s done at AVI. I can remember when Simon bought Spitz shoes and everyone thought he was off his rocker, but it’s proved to be a hell of an investment.
How’s business been since year-end? With all the bad economic readings coming through, has it been worse than you thought?
I wouldn’t say it’s getting worse, but there’s absolutely no question at all that the South African mainstream, middle-income consumer, which is where the bulk of disposable income lies, is under serious pressure. That consumer is stressed. But it’s a bit of a dichotomy, because then you look at the consumer in LSMs 9 and 10 and you wonder where all this money’s coming from; they seem recession-proof.