Famous Brands: Still in search of its sizzle

Famous Brands owns some of South Africa’s most recognisable casual dining and quick-service brands, including Steers, Debonairs and Wimpy. Despite that, its share price has more than halved over the past decade.

One of the main reasons for this decline was the group’s ill-fated R2.1bn acquisition of UK-based Gourmet Burger Kitchen (GBK) in 2016, a transaction that equated to roughly 20% of Famous Brands’ market capitalisation at the time.

The deal was framed as a platform for international expansion and a way to diversify earnings away from an increasingly mature South African market. In practice, it proved a costly lesson in just how difficult it is to operate successfully in an unfamiliar and intensely competitive foreign market.

Like many South African corporates before it, Famous Brands struggled to replicate its local operating playbook abroad, and GBK ultimately collapsed into administration in 2020, leaving the group with a materially higher debt burden and lasting damage to investor confidence.

That strategic misstep was accompanied by a sustained derating of the group’s earnings multiple. Where Famous Brands once commanded a premium valuation as a capital-light franchisor with a credible runway for expansion, the shares now trade on an earnings multiple of about 10. This lower rating reflects a clear shift in market perception: growth has slowed, expansion optionality has diminished and investors no longer expect the group to compound earnings at anything like the rates achieved in its earlier growth phase.

Commenting on interim results in October, CEO Darren Hele noted that competitive intensity, especially from value-driven offerings, was expected to increase. This would require strategic flexibility to maintain market share and profitability. “This involves agility with menu options, promotions and loyalty programmes. We will leverage our new consumer engagement platform to provide compelling, personalised offers to our customer base.”

Understanding that slowdown requires an appreciation of how Famous Brands actually makes its money. Just more than half of group profits are derived from sales-based royalty income, calculated as a percentage of franchisee turnover. The balance largely comes from the supply chain division, which manufactures food products, provides logistics services and supplies both franchisees and retail customers. In other words, growth is fundamentally volume-driven. If the number of restaurants grows meaningfully, royalties rise and factories run harder. If it doesn’t, profit growth becomes heavily reliant on margin expansion.

That is where the problem lies. Over the past 12 months, Famous Brands has delivered a net increase in restaurants of under 3%. In a weak economic environment, where the scope to drive meaningful price increases is limited, this level of network growth does little to excite investors. By comparison, competitor Spur has achieved a similar pace of restaurant expansion, but stronger turnover growth at store level has translated into better profit momentum and superior share price performance.

Famous Brands’ management has understandably focused on extracting incremental gains through menu innovation, operational efficiencies and selective pricing actions, but these are marginal levers and are no substitute for sustained and meaningful expansion of the franchise base.

Margins, meanwhile, have come under pressure from inflation in key input costs, particularly beef and coffee. Beef prices have been further distorted by outbreaks of foot-and-mouth disease, while global coffee prices have surged. To protect volumes and franchisee health, Famous Brands has absorbed much of this inflation instead of passing it directly on to consumers. The result is a lag effect: costs rise immediately, while price increases are delayed or moderated.

Analysts argue that Famous Brands should simplify further by focusing exclusively on its leading brands in South Africa and Southern Africa

The obvious response to a low-growth, mature domestic market is to look offshore for expansion, yet this is precisely where Famous Brands’ track record invites the greatest scepticism. The UK experience looms large, and the Africa and Middle East region remains subscale and loss-making.

While the group has taken steps to simplify these operations and reduce overheads, they continue to act as a drag on results. The Signature Brands portfolio, which houses more niche concepts, has a similar problem. These brands serve specific market segments and broaden the offering, but they lack the scale to absorb fixed costs efficiently. Until volumes increase materially, they will remain dilutive to group margins.

Retail was meant to be another avenue of diversification. Famous Brands sells branded food products into supermarkets, with frozen potato chips one of the largest categories. But this division has struggled. Competition in frozen potato products is intense, pricing power is limited and volumes have disappointed. The coffee offering has also been pressured by elevated global prices, which have constrained consumer demand and compressed margins. While management remains optimistic about the long-term potential of retail, the near-term contribution has been underwhelming. Hele said there were strong indications that retail performance would improve in the remainder of the 2026 financial year. “We are executing a retail marketing strategy to secure new product listings and promote our ranges to consumers.”

Against this backdrop, the group’s recent move into Malaysia is a noteworthy development. Partnering with a subsidiary of energy giant Petronas to introduce the Steers and Debonairs brands into a new Asian market provides optionality and a materially lower-risk entry model than the debt-funded GBK acquisition ever did. That said, the initiative is still at an early stage and remains immaterial in the context of group earnings. Moreover, without the deep brand recognition it has in South Africa, Famous Brands has considerable execution work ahead if the venture is to become meaningful.

Some analysts argue that Famous Brands should simplify further by focusing exclusively on its leading brands in South Africa and Southern Africa, where returns are highest and execution risk is lowest. Strategically, the logic is compelling. In practice, however, it is far more complex. Franchisees in offshore markets have invested capital, signed agreements and rely on ongoing support. Even underperforming regions absorb central overheads. Exiting is neither clean nor costless.

One area where the group is structurally underrepresented is chicken, particularly chicken on the bone, which remains one of South Africa’s strongest and most resilient fast-food categories. Management acknowledges this gap but has so far opted to address it through menu offerings at existing brands rather than pursuing large acquisitions. Whether that is sufficient over the long term remains an open question.

For investors, the appeal of Famous Brands today is less about growth and more about stability and income. The group continues to generate cash, has reduced its debt from post-GBK levels and offers a dividend yield of about 6%. In a market short of reliable income stocks, that is not trivial. The low earnings multiple reflects tempered expectations, but it also limits downside — provided the core business remains intact.