Deep pockets needed

There is no question that SA's quick service market is sophisticated and extremely competitive by global standards. “McDonald's arrival in SA had a big impact on the local market,” says Franchize Directions director Bendeta Gordon. But McDonald's SA has not become the force people expected.

And now the US giant, which employs 1,4m people in 31,000 restaurants in 118 countries, plans to license its SA operation — not the brand and intellectual capital — to a local partner. The intention is for an “appropriately skilled and financially robust partner” to acquire the current assets, inject capital and grow the business more aggressively than it has to date.

McDonald's has not disclosed what price tag it has placed on the SA operation.

After investing an estimated R800m into the business, the US parent is in search of faster rewards. “The corporation has limited capital and this is being prioritised for the strategically critical large markets,” says regional president Peter Bush

McDonald's operates 123 restaurants around the country. Competitors Wimpy and Steers operate 400 and 476 restaurants respectively.

According to McDonald's SA MD Greg Solomon, the SA business is in good shape. Of its restaurants, 64% are owned by 34 franchisees, the remainder are corporate restaurants. “We have achieved double-digit turnover growth for the past five years,” he says. The chain serves 3m people a month and is growing by 10 restaurants a year. “But we could be growing faster,” he says.

SA's franchise market, in which fast food is a key category, has grown rapidly since 1994. According to Franchize Directions research, the number of franchise businesses has grown from 156 in 1994 to 531 in 2008.

Growth in the franchise market slowed between 2006 and 2008, with just 127 new systems added, as opposed to 154 between 2004 and 2006.

The question a potential developmental licensee (DL) will have to ask is, at what stage of the life cycle is McDonald's in SA? And what are the opportunities for growth, particularly now the economy has slowed?

“Certainly it hasn't grown as fast as it has in other markets,” says Eric Parker, a director of consultancy Franchising Plus “In most countries burgers outsell chicken, but that's not the case here.” South Africans, he says, also seem to prefer flame-grilled burgers, such as those sold by Steers. “McDonald's has not established itself as a trend-setter in SA.”

On the plus side, says Gordon, McDonald's is a high-volume business with above-average margins. Almost half its restaurants operate 24/7.

Speculation is mounting as to exactly who the DL could be. “There is an art to being a franchisor,” says Gordon. “The buyer would need to have the knack of managing franchisees as well as its own corporate restaurants.”

The DL would also need real estate finesse. Local expansion means land acquisition. The McDonald's global business model involves it owning the land that its restaurants are on, whether they are franchised or not. “These are large sites and usually in prime positions,” says Gordon. “I don't think we are looking at the obvious candidates [other players in the quick-service market].”

Certainly Solomon has already dismissed speculation that SA's biggest quick-service operator, Famous Brands (Wimpy, Steers, Debonairs Pizza and FishAways), is a candidate. And with a market cap of R81m, McDonald's may be too big for Taste Holdings, which owns Maxi's and Scooters Pizza.

From July a corporate McDonald's team — supported by independent local advisers First Africa, an associate of Standard Chartered — will begin contacting potential DLs by making available a detailed information memorandum on the local business.

McDonald's businesses in Brazil, Argentina, Mexico, Puerto Rico, Venezuela and 13 other countries have recently been sold to developmental licensees.

Source: Financial Mail

Published courtesy of