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Famous Brands posts headlines loss on adverse impacts of Covid-19

1st June 2021

By: Simone Liedtke

Creamer Media Social Media Editor & Senior Writer

     

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African food services franchisor Famous Brands reported a headline loss a share of 86c, and a basic loss a share of R12.37 for the financial year ended February 28 – largely owing to the adverse impact of Covid-19, which saw the food industry being among the worst hit sectors.

CEO Darren Hele says that while the company is accustomed to trading in tough conditions, “nothing in [the company’s] history compares to the hardship as a result of the pandemic”.

For the full-year, the group’s trading markets in South Africa, the Middle East and Africa and the United Kingdom, experienced the worst negative financial impact, as lockdowns and trading restrictions were severe.

However, the gradual easing of restrictions in South Africa and the UK in the second half of the reporting period enabled the business to improve performance, while complying with regulations.

While trading conditions remained tough throughout the year, franchise partners embraced delivery across third-party platforms and own delivery services,” comments Hele.

Revenue for the period declined by 35% to R5-billion, attributable to poor trading conditions across all markets, while operating profit before non-operational items dipped to R193-million.

The group’s operating profit margin declined to 3.8%.

“We quickly implemented several measures to reduce cash outflows. We also stepped up support of our franchise partners to get through the toughest months. This meant that our plans to expand were swiftly replaced by plans to survive the worst of the crisis,” says Hele.

REGIONAL OVERVIEW

The South African restaurant industry was affected by the Level 5 and Level 4 lockdown restrictions and decent trading conditions only restarted in July 2020. The South African Brands division reported a 42% decline in revenue to R567-million, while operating profit fell by 64% to R169-million, and the operating profit margin dropped to 29.9% from 48.5%.

Leading brands delivered weaker results where system-wide sales declined by 28.6%, while like-for-like sales decreased by 29.1%.

In this region, consumers changed their shopping and travelling habits, and this has had a negative impact on sales in major malls and transport routes, Hele notes, adding that leading brands strengthened existing strategic partnerships with third-party delivery platforms to maximise on delivery opportunities.

Casual dining experienced a much slower recovery owing to seating capacity restrictions, reduced trading hours as a result of the curfew, as well as consumer nervousness around eating out.

“Consistent with recent years and in line with general market trends, the Quick Service brands, being Steers, Debonairs Pizza, Fishaways and Milky Lane, outperformed the casual dining brands, namely Wimpy and Mugg & Bean,” says Hele.

Meanwhile, signature brands, which operates in a competitive and difficult dining market was greatly affected by the alcohol bans and curfews. To assist restaurants, menus were streamlined to simplify restaurant operations and manage gross profit margins, as restaurants had to quickly adopt delivery platforms to capitalise on revenue where possible.

Operating margins declined to -41.1% and only 69% of Famous Brands’ overall target to roll out new stores was achieved. Store closures increased to 14 stores from 7 stores in the prior year. Signature brands' system-wide sales deteriorated by 53.7%, while like-for-like sales reduced by 52%.

In the context of less stringent Covid-19 trading restrictions, the Africa and Middle East region delivered solid results, Hele reports, noting that system-wide sales in this region declined by 22.9%.

Combined revenue reported for the region was R316-million, operating profit declined to R30-million and the operating profit margin was 9.5%.

“Thanks to an agile response to consumer demand, we saw a significant increase in home delivery sales across Quick Service brands in Botswana, Ethiopia, Kenya, Nigeria and Sudan. Operational efficiencies were achieved by leveraging strategic alliances, specifically petroleum partnerships and by developing localised supply chains,” comments Hele.

Further, the UK experienced severe economic hardship as lockdown restrictions were only lifted in August 2020 with certain restrictions still in place.

During 2020, the Famous Brands board decided to cease financial assistance to the Gourmet Burger Kitchen (GBK) business and, in October 2020, the GBK business was placed under administration in accordance with UK insolvency legislation.

The group’s investment in GBK was impaired in full, at R1.5-billion, net of tax. The group currently awaits the finalisation of the administration process by the administrator, but confirms that there are no further operating losses impacting the group’s results from the date on which GBK entered administration.

Wimpy UK’s turnover was down 8% with revenue in rand terms at R112-million. Operating profit declined by 38% to R14-million and the operating margin for the year was 12.8%.

Additionally, the group’s vertically integrated supply chain comprises manufacturing, logistics and retail businesses, which are managed and measured independently. While most manufacturing plants are wholly owned, the group also operates certain joint venture (JV) partnerships.

This division serves the front-end brands division and provides a competitive advantage to franchise partners though efficient and effective supply and margin support, the company notes.

The retail business, meanwhile, which produces condiments, coffees and frozen meat products, has operated for a full financial year as a standalone business unit with sales of R151-million.

This business unit experienced an increase in sales during the year as consumer demand for at-home consumption increased.

Total volumes across both manufacturing and logistics declined owing to lower demand in the front-end brands division. Combined revenue of R3.3-billion was reported, while operating profit reduced to R169-million.

The operating profit margin declined to 5% owing to rising food inflation and a decision by the group to partially absorb price increases and not pass these on to franchise partners immediately.

Franchise partners had to be responsive to consumers facing financial stress, Famous Brands says, noting that capital expenditure of R24-million was employed on plant upgrades, machinery and equipment.

OUTLOOK

Looking ahead, Famous Brands says it anticipates that operating conditions will remain challenging across all geographies and that the certainty of a third wave of infections and the possibility of new virus strains could potentially lead to tighter lockdown restrictions, resulting in further revenue pressure.

Effective vaccine roll-outs, however, will prevent the need for stricter lockdown regulations.

The company predicts its revenue recovery to be slow, with incremental improvements as consumer confidence returns to the markets wherein it operates.

Hele notes that focus for the coming year will be centered on creating further operational efficiencies, prioritising core long-term operations, optimising investment returns for franchise partners and preserving cash.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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