Fast food stocks hungry for more

ABI, which distributes Coca-Cola in Gauteng and is owned by SAB, experienced a healthy 9% growth in volumes in the last quarter of 2010. Yum! Brands, which owns KFC, recently told investors it was growing significantly in Africa, with 44% market share in SA alone. And, according to a Famous Brands trading update released last week, its retail sales in December were 13.3% higher than in December 2009. Like-on-like sales (which exclude new restaurants) across the franchise network were 7.8% up on the previous year.

Similarly, the Taste Holdings food division, which consists of Scooters Pizza, Maxi's and St Elmo's, grew sales by 30% compared with December 2009. But much of this was driven by franchise expansions. Same-store sales grew by 6%, which seems low because of the price reductions at Scooters.

According to Famous Brands CEO sumers' return to fast food and quick-service restaurants began in April last year, continued through the soccer World Cup, dipped in August and September and then moved back up in the Christmas holiday period. "I was petrified. We thought it would be hard work to make December's figures equal those of the World Cup," he says. "Yet the World Cup was 70% of December sales."

Famous acquisitions

Last year Famous Brands acquired Blacksteer restaurants and Bulldog Pubs (though Bulldog has already been sold to its management), as well as Keg, McGinty's, O'Hagan's, Giramundo and Vovo Telo. The group established a pub-andrestaurant division to drive growth in this category. "We are about to sign off on design plans that are 360° from the current look and feel, and 180° from the current offering. The category needs repositioning," says Hedderwick.

Famous Brands' supply chain division was supplying 64 line items to the Keg and McGinty's chains within two months of the acquisition. This illustrates the speed at which the company can integrate a new brand into its portfolio. "This is key to its success," says Julian Wentzel First South Securities "Famous Brands' strength lies in its ability to replicate systems across its various franchises."

However, with six acquisitions under its belt in 2010, Wentzel believes this is the year to consolidate and focus on the brands at hand. "Each segment of the market requires a different skill."

Hedderwick agrees. "We are maxed out in terms of capacity. We did a lot last year and now we will consolidate."

There is plenty to do. Giramundo, the flame-grilled chicken company, is another growth prospect. The flame-grilled category comprises about 40% of the market, dominated by Nando's. Prices, he says, will be 10% lower than at Nando's.

Keeping up

Though consumers may be more buoyant, no brand can afford to relax.

The sector remains highly competitive. "It's likely there will be further rationalisation of brands and operators lacking strong consumer equity over the next six to 12 months," says Hedderwick.

Famous Brands' financial year concludes at the end of February. The group remains on track to meet its target of opening 110 new restaurants in the current financial year, bringing the total franchise network to 1883.

Breaking borders

It also plans to introduce Steers and Debonairs Pizza into the UK. "We have to have the courage of our convictions this year. It's time to be bold and take a ticket in this lottery."

The rollout of outlets in Africa continues, with the second and third Debonairs Pizzas having opened recently in Nigeria and the full range of brands expanding in Mauritius. Similarly, KFC's parent, Yum! Brands, is eyeing Angola, Ghana, Nigeria and Zambia. It plans to operate 850 KFC restaurants in SA and 350 stores elsewhere in Africa by 2014.

On a p:e of 17.04 and a dividend yield of 3.53 Famous Brands looks a little pricey. But it has consistently achieved returns on equity in excess of 30%. Growth is likely to be slower, but the company has a clear vision for long-term growth. And it appears to be executing it.

Source: Financial Mail