When SA actually had money and consumers felt good about the economy and the future, fast-food stocks were the flavour of the month. Succulent growth and profits were the order of the day for many a year.
Investors in listed counters Famous Brands, Spur Corp and Taste Holdings enjoyed the fruits of their ever-extending reach and menu appeal to customers. Aggressive expansion plans were hatched and, in some instances, a big dollop of offshore flavour was added to the recipe.
Consumers wanted new food experiences and new brands, and there was enough capital to indulge management from investors keen to be overweight in the sector.
But things started to get greasy in mid-2015.
Perhaps imbued by too much overconfidence in their managerial skills, executives in some fast-food stocks were probably initially surprised to see their solid operating bases start going soggy around the edges.
The best-documented case was fast-food sector behemoth Famous Brands — the owner of Steers, Debonairs, Wimpy, Mugg & Bean, Tasha’s and Milky Lane. Famous Brands decided SA was not big enough for its already extensive menu offering.
The group had been previously burnt in the 2000s when it brought US chicken brand Church’s Chicken to SA.
But in 2016 it decided to spend a whopping R2.1bn, or £109m, on British brand Gourmet Burger Kitchen (GBK). The seller of GBK was none other than Nando’s — the SA-founded chicken eatery briefly listed on the JSE in the late 1990s. Famous Brands funded the deal principally with debt.
GBK was a fairly well-known upmarket chain of about 75 stores. The Famous Brands marketing machine even trumpeted it had "saved a fifth on the acquisition price" in the wake of a cheaper pound after the shock Brexit vote. That statement would come back to bite Famous Brands.
As the UK economy weakened on the prolonged Brexit uncertainty and consumers lost their enthusiasm for spending on a meal out, sales at GBK tanked. The losses mounted and Famous Brands’ vaunted reputation for smart dealmaking was tarnished.
The group’s share price over the past three years has halved with the effort required to salvage the GBK mess, and the associated debt mountain became all-consuming.
With hindsight, Famous Brands should perhaps have looked over its shoulder before buying GBK, learning from the challenges experienced by Spur in the UK.
Spur, a doyen of fast food with its iconic Spur Steak Ranches, Panarottis and John Dory’s brands, expanded into the UK and Australia on the premise that its brands would appeal in offshore markets, given how many South Africans had moved to London and Sydney. Spur opened its first Spur Steak Ranch in the UK in 2002 — a move that proved a costly disaster. It exited the UK in 2016, about the same time Famous Brands decided to enter that market with the GBK acquisition.
More than a few local companies have learnt the hard way that being great at home does not mean being great offshore.
While recent events at Famous Brands will churn even the strongest investor’s stomach, it was at ambitious Taste Holdings that the bolognaise really hit the fan.
Taste was a small fast-food business founded by the energetic and marketing-savvy Carlos Gonzaga. Initially the group had a tidy little business with some locally created pizza brands, namely Scooters and St Elmo’s. But as it became ambitious, Taste used its scrip to expand and bolt on The Fish & Chip Co for R65m in 2012, then Zebro’s in 2014 for R17m. These were relatively minor, but it showed Taste was a small company with big ambitions.
In a bold marketing move in 2014, Taste announced it had acquired the rights to the world’s biggest pizza brand, Domino’s. The group quickly decided to ditch the well-known local brands and convert Scooters and St Elmo’s to Domino’s outlets. This was a time-consuming and costly endeavour as Taste also decided to build a dough manufacturing plant for the new venture. This was perhaps too big a leap for a small fast-food business. Management time and funds were stretched as Taste geared up to expand.
The strategy started to unravel when it became clear that consumer acceptance of Domino’s was taking far longer to achieve than anticipated. Domino’s operated at below management expectations, while costs spiralled and profits remained well out of reach.
Rather than focusing on fixing up one new international brand, Taste did the unthinkable by taking on a second major international brand in the form of the Starbucks coffee franchise in 2015.
Then CEO Gonzaga — in an immortal line at a results presentation in Cape Town — stated that Taste intended to "double down on fast food".
Taste and Gonzaga would live to regret that bravado.
Of course, one must remember that Taste’s share price was riding high at over 500c in mid-2015, which indicated the market was enthralled at this small company having the chutzpah to land two major international brands.
Taste used the market’s appetite to raise pots of fresh cash to fund this grand new vision. Even the enduring empowerment investment company Brimstone joined the feeding frenzy (though it very smartly exited Taste before prospects went completely off).
Investor sentiment quickly evaporated when Taste’s losses soared. There was a series of rights issues, which were pitched as high as 300c a share to the last fundraising effort at a meagre 10c a share.
The scorecard will show that more than R1bn was thrown into a bottomless black hole, with food losses reaching a staggering R600m. The last time Taste’s food business made any sort of profit was in 2015. As operating losses spiralled, the company’s top management departed and a new controlling shareholder emerged in the form of US investor Riskowitz Value Fund.
As recently as early 2019, Taste’s management maintained that fast food was key to Taste’s future, alongside its jewellery businesses, Arthur Kaplan and NWJ.
But in early November 2019, Taste management threw in the towel and announced it was exiting Starbucks and putting the food division up for sale.
The Starbucks franchise and its 13 stores were ignominiously sold for R7m to a related party. Finding a buyer for Domino’s won’t be easy — not with a take-no-prisoners pizza war still raging.
For shareholders it was a monumental meltdown, with 98% of the company’s value shredded.
So one thing has become abundantly clear — fast food is not a quick recipe for fat returns. It took McDonald’s 20 years to get to 200 stores, which required a massive capital spend. Grand Parade Investments (GPI) — which used profits from the partial sale of its cash-spinning casino investments to tilt at fast food — spent about R800m to gain about 100 Burger King stores since 2013, and has only recently started to serve up profits.
Not only did Burger King notch up more than R100m of losses, but GPI was forced (by some really irate minority shareholders) to cease its plans for two other American brands: coffee and confectionery specialist Dunkin’ and ice cream brand Baskin-Robbins.
But it’s not all bad news in the local fast-food sector. There are indeed amazing success stories in domestic fast-food brands. Some have even conquered the world.
Spur took a stake in three-store smash burger chain RocoMamas in 2015, and has bulked up the offering with much relish.
The upscale casual dining brand Tasha’s, a favourite of this writer, grew from humble beginnings in Athol, Johannesburg. Famous Brands acquired a stake in 2008 and allowed the chain to grow — but kept its quality standards. The Tasha’s chain now has 13 stores in SA and is proving a hit in the Middle East.
But the fast-food brand that can crow the loudest is flame-grilled chicken outlet Nando’s, which was founded in 1987 as a single store in Rosettenville, Johannesburg.
Today the brand has more than 1,000 stores in 35 countries and is a multibillion-rand empire.
Perhaps the time has come for investors to start nibbling at fast-food stocks again. People always have to eat. But they can be fickle.
What has been proved, especially in SA, is that a brand may not work or fit local consumers’ tastes just because it is successful internationally.
In the case of Starbucks, local consumers have for long been spoilt by an array of top-notch coffee shops and brands. Developments at Taste might suggest Starbucks had initial novelty value, but coffee drinkers went back to their local favourites.
The same has been proved true when SA executives tried to take their skill sets and brands overseas.
At best, brands such as Spur and Steers have found niche markets in Africa and other selected offshore destinations, but they have certainly not enjoyed the success Nando’s has achieved in the UK.
IM believes the evolution of the sector will continue; no doubt IM will soon be tackling the shakeout in the online food delivery platform, where some aggressive corporate action is under way to secure the biggest bite of market share.
But for now, the local fast-food market remains cut-throat and competitive, and the share prices of stocks have lost much of their flavour.
In the year to date, Famous Brands is down 21% and Taste 36%. Spur is up 20% — but that is explained by the fact that dealmaking doyen Brian Joffe’s Long4Life has taken a 14% stake in the company.
Joffe’s appetite for fast food at this juncture might be instructive. Since retiring from his original Bidcorp empire, Joffe has steered new investment vehicle Long4Life fairly cautiously and recent activity has mostly revolved around buying back the company’s shares.
So taking a decent bite out of Spur might suggest SA’s greatest dealmaker sniffs an opportunity to lock in spicy longer-term returns.
If Joffe does gain enough influence, IM would not be surprised to see Long4Life pushing Spur a little harder in snapping up niche brands that might be taking strain the prolonged economic downturn.
As such, IM reckons that those wanting to fork out for a long-term position in fast food should perhaps consider a starter portion of cash-flush Spur shares.
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