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No other fast-food operation in SA has the number and variety of franchises as Famous Brands, whose market value grew 150-fold to R15bn on CEO Kevin Hedderwick’s watch. As rivalry in the sector heats up, the group — now led by Darren Hele — has branched out into the premium luxury segment. Is this a wise move as SA’s appetite for fast food grows?

If Pac-Man could manifest itself as a corporate behemoth, it would be Famous Brands — the insatiable franchise food group that has been gobbling up rivals as if there were no tomorrow.

Rather like rival Spur, Famous Brands has for years been the guilty pleasure of millions of South Africans, who have flocked to its numerous restaurants.

Name the brands, and you’ll have been to one of them: Steers, Europa, Debonairs Pizza, Milky Lane or Fishaways. (Who hasn’t had a breakfast at Wimpy, or been dragged to the Milky Lane by eager children?)

It’s a strategy which, until recently, was driven by Kevin Hedderwick, now 64. It has produced fat returns for its investors too: if you’d put R10,000 into buying its shares in 1994 when it listed, you’d be R1.8m richer now. And that’s excluding dividends.

As this shows, there’s big money in fast food: R32.9bn last year, to be precise, according to research agency Euromonitor. And that was 8% up from the previous year.

Hedderwick, who started his career at Distell, has handed the reins to Darren Hele after a 15-year stint during which Famous Brands’ market value climbed from R105m (R1.69/share) to R15,4bn (R158/share).

The secret has been stealthily buying underappreciated outlets and giving them sizzle. But this year, something changed in Famous Brands’ Midrand headquarters.

Under Hele, Famous Brands’ Pac-Man became even more voracious, gobbling up six new, quite different businesses.

Most notably, it splurged R2.1bn — the largest deal in its history — to buy the 15-year-old Gourmet Burger Kitchen (GBK) in Britain, from a company owned by the Enthovens, the SA family who founded Hollard and own Nando’s in the UK.

GBK, with 78 restaurants in the UK and five in Ireland, has made waves as leader of the "posh patties" burger trend in the UK.

Hedderwick describes the GBK deal as a game-changer, as significant as the 2003 purchase of Wimpy in SA for R125m (when Famous Brands’ market value was R80m).

But the UK purchase also signals a step change in thinking. Until now, Famous Brands has stuck to lower-key purchases — in stark contrast to the glittering deals of its up-and-coming competitor, Taste Holdings.

Taste is led by 42-year-old Carlos Gonzaga, himself a former franchisee of Famous Brands’ Debonairs Pizza — a complication which has led to no small degree of bad blood between the two companies.

It’s a tale of contrasting strategies.

Unlike Famous Brands’ buy local and build approach, Taste has sunk millions into licences to launch superstar brands in SA: Starbucks and Domino’s Pizza, supplementing its homegrown brands, among them Maxi’s and The Fish & Chip Co.

But the cost of launching the US giants has taken its toll. Taste’s share price has tumbled 36% in a year and while its revenue climbed 9% to R529m in the six months to August, its ultimate loss deepened to R34.4m.

Taste has bet the farm on Starbucks, says Chris Gilmour, an analyst from Absa Wealth & Investment Management.

"If it doesn’t come right, they have a major problem; their balance sheet is stretched to the limit," he says.

"I have immense respect for Carlo, but these are very long-term prospects. We don’t have sight of what these international franchises cost but they won’t be cheap."

It will surprise many that the big international brands haven’t hit it out of the park. McDonald’s, which opened its first store in Jo’burg 21 years ago, "hasn’t been a success story at all, I believe," says Gilmour.

The only foreign fast-food brand that has soared is KFC, which opened in SA in 1971. Perhaps that’s because it had "visibility during apartheid because it was here". More people eat KFC than any other fast food in SA, and it’s also the largest, with 828 stores.

Says Gilmour: "Is there an appetite for Starbucks? And Domino’s? I don’t know. They’re gutsy and brave but the jury is out. They’ve approached this from a very different perspective."

By contrast, Famous Brands has steadily built up an organic business, eschewing the glitzy brands.

"No other franchise operation in SA has the depth, in terms of number and variety, of Famous Brands," Gilmour notes. "The only thing missing is chicken and they’ve tried that often but it hasn’t worked. Most of the acquisitions have worked but the problem now is that their critical mass means there’s almost nothing left to buy that will make an appreciable difference."

Simon Brown, investment analyst from Just One Lap, says Famous Brands is unparalleled in SA. "They’re at that point when the dream that Hedderwick and the Halamandaris family had has come to fruition. It’s such a rarity to see that level of success."

However, Famous Brands’ six deals this year reveal a new direction. Besides GBK, it bought 49% of commercial catering company By Word of Mouth, acquired supply chain business Lamberts Bay Foods (a major French fries manufacturer), and also a tomato paste processing plant, Coega Concentrate. The two smaller transactions were controlling stakes in restaurant brands Salsa Mexican Grill and Lupa Osteria.

Though Hedderwick has relinquished the CEO role, these are the fruits of a strategy that has made even his rivals envious.

Taste’s Gonzaga told the Financial Mail that Hedderwick has been an inspiration for many entrepreneurship-minded food franchisers. "I’ve only got admiration for what he’s done for Famous Brands in the past 16 years. Of course we have a rivalry, but that in no way takes away the business respect I have for what he’s done."

Now, Famous Brands plans to dive into corporate catering with By Word of Mouth.

"There’s a captive market for commercial catering," Hedderwick says. "When you drive through Sandton and see the big businesses, there are thousands of employees all housed in one place and we know the leaders of those businesses would prefer to keep their staff in-house during working hours."

Corporate catering, he adds, "ticks the boxes in which we have extensive expertise — food, logistics and manufacturing".

Hedderwick says Famous Brands is "not being reckless", but it’s expanding at a dizzying rate. Last year the group opened a store nearly every other day on average; this year, it’s more than four stores a week.

He speaks about his career at Famous Brands as a "fairy tale", but it’s clear he pays almost fanatical attention to detail. He wears his heart on his sleeve, as is evident when he speaks of how more than 2% of franchisees fail each year. And when he talks of how Church’s Chicken failed in SA in 2001, he looks physically pained. But it has brought loyalty. His staff refer to Hedderwick as "hugely inspirational".

Perhaps the most intriguing new deal is that in which Famous Brands bought the licence to bring the French bakery brand, Paul, to SA. Its first restaurant here will launch in February.

"It’s an amazing fifth-generation family business, 185 years old, and they are not demanding an unreasonable number of restaurants in a short time," says Hedderwick. "Maxime Holder, president of Paul International, has been out here and is fanatical about flawless execution."




 

 

 

 

 

 

 

 

It’s an interesting move — tying up with an overseas brand, which is something it has scrupulously avoided until now.

So what changed? New CEO Hele says: "There is a significant opportunity in this premium luxury segment. We’ve seen it with tashas, we’ve seen it with Vovo Telo. We’ve seen it with the competitive set that’s out there. While the mainstream middle-income consumer is under pressure, the upper-income group remains resilient, and Paul is unashamedly premium."

If it doesn’t work, Famous Brands will pull the plug, as it did when Church’s Chicken bombed here in 2001. "We’ve not been successful in the mainstream chicken space so we’re not about to try and do it again," Hele says. "I admire those guys who still think they can take on the likes of a KFC, Nando’s or Chicken Licken."

So did Famous Brands try to buy Chicken Licken, as some thought? "It was a very short conversation," laughs Hedderwick. "It’s a family business, and that’s unlikely to change," says Hele.

But investors, whose faith has been repaid in spades so far, will be a trifle jittery about the GBK gamble — not only because the British economy is going through a post-Brexit slump, but because the value of the deal equals 14% of Famous Brands’ market value. Hedderwick, however, says Brexit helped hugely. He says the pound’s plunge since Brexit has worked in Famous Brands’ favour, saving it about R700m (£36m).

As for fears of a recession, Hedderwick told the UK Evening Standard he didn’t think it would hurt GBK’s prospects. "I’ve been coming over a lot in the past few weeks as you can imagine, and there’s nothing to suggest that people are spending less on restaurants and food," he said.

Analysts are still calling Famous Brands a must-have stock, even though it is relatively expensive on a p:e of 22, which makes it more expensive than the wider JSE.

"The share is pricey," says Momentum SP Reid. "Famous Brands has by far outgrown its peers and we do believe it will grow, but there will certainly be some short-term pressure in light of tightening consumer spending. Over the past five years, it has undoubtedly outperformed the JSE all share index, and remains a leader."

In a shoot-out (or food fight) between all the JSE-listed food companies, Famous Brands comes out on top.

Just One Lap’s Brown says Taste Holdings started out later than Famous Brands and has gone a different route, including selling jewellery, "which is a silly move".

Taste has gone for global brands "which are hugely expensive", while Famous Brands has built its own brands, with a few exceptions, which means margins are higher.

Spur isn’t as expensive (it sits on a p:e of 18), but with restaurant sales up only 12.9% for the year to June, its growth prospects seem more muted.

The sleeper hit may be Grand Parade Investments, which holds the licence for the 90 Burger King stores in SA, plus two other US icons that opened in SA in the past month — Dunkin’ Donuts and Baskin-Robbins. Though Grand Parade made a R202m profit (from a loss last year), Burger King made losses of R29m while Dunkin’ Donuts showed a loss of R3.7m.

While Brown rates Starbucks and Burger King, he isn’t convinced that Domino’s can break SA’s apparent obsession with thin-based pizza.

Still, he won’t write off Taste just yet. "My view is wait and see. They need to start making a profit from the food division more broadly, and in this financial year, otherwise they will need more money, which is a challenge. They probably won’t need to come back to the market to raise cash — but the share is cheap for a good reason."

Jean Pierre Verster of Fairtree Capital says Taste must begin successfully growing its brands. "Taste is just a local representative of global brands such as Starbucks or Domino’s while in Famous Brands’ case, these are home-grown brands that they own. That’s why the partnership with Paul is interesting."

So why is Famous Brands a better bet for investors? Why has it done better?

"To a large extent, it comes down to management. The role Hedderwick has played should not be underestimated and should be emphasised," says Verster. "You look for these diamonds in the rough — operators who are great capital allocators and strategic thinkers."

Verster says Famous Brands has made savvy acquisitions, then made sure the assets worked. "It’s a business with a high-performance culture and they’re not satisfied with the status quo. It’s a business in almost continuous transition — they’re ambitious, they don’t rest, they are always looking for the next opportunity."

However, Taste’s Gonzaga says his company isn’t just about bringing in the mega-US brands like Starbucks. Where the brand matters to the customer, he says, the strategy is to own and license the best. But where distribution and price is more important, say in the lower-income category, then Taste creates its own brands.

"In jewellery, we want to appeal to the lower end as well as the upper end like Rolex, and with food it’s similar with Domino’s and Starbucks catering to the higher-income, with The Fish & Chips Co and Zebro’s Chicken for the lower end."

The other part of Taste’s strategy — "and this might be where we’re different," he adds — is that in instances where it licenses the overseas brands (like Starbucks, Rolex and IWC) it owns those stores. Famous Brands largely franchises its stores.

"Those relationships are important to maintain and we have a greater level of control where we own those stores," says Gonzaga. "Where we own the brands like NWJ and Maxi’s we’re happy to franchise those, because we own the intellectual capital." He defends signing up the US brands, as they bring in new skills, levels of quality and new thinking about fast food.

Few would disagree. The issue is, at what cost?

Today, with Domino’s tussling with Debonairs, Steers with Burger King, and Starbucks with Seattle, the rivalry has reached fever-pitch. Yet Hedderwick has only praise for his rivals, who are doing a "phenomenal job".

"Recently we’ve seen a lot more activity from Spur. Three, four years ago they said they were going to get in here and do things differently and they’ve done a very good job. I’ve got great admiration for what [Spur CEO] Pierre van Tonder does. And Nando’s is just phenomenal," he says.

When Hassen Adams of Grand Parade launched Burger King in SA, Hedderwick made a point of going to see him and wishing him well. Hedderwick’s view is the more competition in the market, the better for everyone. He is fond of quoting his former boss at SA Breweries, the late Graham Mackay, who used to say South Africans have an inferiority complex.

"One of the best compliments we’ve ever received was when (Paul Bakeries CEO) Maxime Holder visited SA and looked at our brands — the whole repertoire — and said: ‘tashas, you can take anywhere in the world. Mugg & Bean? I don’t know why you’ve been so slow to get out of the blocks because that’s another offering you could export.’"

At the core of the issue is whether the market is big enough for everyone. In other words, is SA growing as a fast-food nation?

It’s difficult to gauge because companies don’t share their data. But Famous Brands, using All Media Products Survey (Amps) and its own study called "The hunger games", says the overall pie is growing.

A decade ago, the Amps data showed 68%-70% of people went to a restaurant or bought fast food. Today it’s around 82%.

Hedderwick says: "In terms of the food service space, there is no question about it: it is a significant growth category. Because it’s all about convenience, it’s all about double-income families, it’s about people being cash-rich and time-poor." Meal times, he adds, have become blurred. Convenience is now a priority.

Compared to other countries, it would also seem there is scope for growth in SA. In some developed economies and rapidly emerging countries like India, about 80% of all meals are bought or consumed outside the home. In China, 59% of people eat fast-food weekly.

Yet Euromonitor puts this number at just 18% for South Africans — implying real growth potential.

"But we have to make sure we’re fit for purpose every day. I came out of SAB where, at one stage, we had 97% market share and people used to call us a monopoly. But the late, great Graham Mackay drummed into our heads that we were simply ‘a temporary sole supplier’, which meant we had to be sharp every day of the week."

Having said that, Famous Brands, Taste, Spur and Grand Parade are all hostage to the wider economy, which won’t break even 1% growth this year. Once that improves, the food companies could be in for a serious lift.

"It’s a truism to say that for every 1% growth in a country’s GDP there’s normally a 2% growth in food services," says Hedderwick. "So when the economy goes to work, this category works hard."

Though his contract ends next February he’s unlikely to retire entirely, given his emotional attachment to the business.

"Famous Brands was never a job for me. It was never simply a career. This has been my life for 16 years, so even if my contract specifies 10 days a month at the office from March until February next year, if I end up coming here more than 10 days a month it’s not because it’s a grind. I just love the business," he says.

It’ll be a big ask for Hele to ensure Famous Brands replicates its bullet speed of the past 15 years.

Just One Lap’s Brown says it is practically impossible for Famous Brands to continue growing as it has. "The UK operation will take a lot from them and they need to make it work. Can they survive without Kevin? I think they can. We’ve seen it before."

Investors will be hoping that after 15 stellar years, the recipe still works.