Through franchising and acquisitions, the company has grown considerably and now has an extensive, vertically integrated business model that includes many established brands (such as Wimpy, Milky Lane, Mugg & Bean and Debonairs Pizza). We explore the outlook for Famous Brands given the impending maturation of South Africa’s competitive fast-food industry.
Franchising fuels growth
Famous Brands was among the first to introduce the concept of franchising to the South African restaurant industry. In contrast to a traditional company-owned restaurant model where company capital is used for set-up costs and to fund day-to-day operations, the franchise model relies on a third-party franchisee, who owns the restaurant, to invest the capital for these purposes. The franchisor (Famous Brands) supplies the established brand, products, marketing, operational training and quality control support. In return, it takes a percentage of revenue from operations.
The predominantly fast-food Famous Brands restaurant portfolio has grown exponentially due to franchising in a capital-light, low risk manner. This is generating significantly higher returns for the group than a company-owned model would have done. Indicated below, consistent operating profits have been generated over the past 20 years and the groups’ return on equity has averaged 30% from 2001 to 2020. 2021 outcomes were a global industry trend resulting from the COVID pandemic and subsequent restrictions on social mixing and restaurant trade.
The restaurant brands are the company’s most valuable assets, with the portfolio divided into quick service (prioritising take away) and casual dining (full service, sit-down) offerings. Retail (associated brand products sold via retailers), manufacturing and logistics complete the pillars of the business model.
Famous Brands sets the benchmark for brand standards and develops sustainable business models for future franchisees through company-owned restaurants. As the franchisor, they remain responsible for growing brand equity, preserving brand value and maintaining consumer expectations. Franchisees pay a portion of their revenue towards brand marketing to ensure that brands remain competitive with enduring value. To date, the group has managed this very well across all their brands – restaurant growth, from approximately 450 in 2001 to over 2 800 today, is an indication of their success.
With over 80% of restaurants based in South Africa, this represents the key market for the group. Their continuous annual restaurant growth rate has hovered around the 9% mark since 2001, but with a noticeable slowing down over the past decade to just over 3% of late. This may be indicating that their existing brands are mature and reaching saturation point across the country.
To offset what appears to be a maturing market in South Africa, the group has sought expansion opportunities across the African continent and internationally. Currently, they have 294 restaurants (company-owned and franchise) in the rest of Africa and the Middle East. They are looking to expand their company-owned restaurants in other markets where they intend introducing new brands, thereby encouraging faster scalability. The eating out trend (as a proportion of total food spend) is at low levels throughout the rest of Africa at present. This presents a growth opportunity, supported by rapidly rising income levels (food convenience becomes attractive and more affordable) as economies develop.
In the UK, the group currently has 67 Wimpy restaurants. While Brexit and the COVID pandemic added significant pressure to the operating environment, this segment of the business remains profitable, with room for footprint expansion.
Supply chain strength
Famous Brands’ supply chain division now supplies and delivers the raw materials and required inputs to all their brand outlets. It also manufactures many of them too. This vertical integration ensures consistency in customer food experience across all restaurants and has been hugely successful. Competitively priced, high-quality products include bakery items, sauces, patties, dairy products, juices, napkins and other branded merchandise.
As the restaurant footprint grows and the number of franchisees increase, the supply chain adapts and delivers to the growing base. This is a strategic advantage, particularly against smaller scale franchisors – further entrenching the success of their brands. Additionally, the supply chain is very lucrative, making up 70% of group revenue and almost half of the profits (charted below). It also sells branded products to the retail market (eg condiments, frozen meat products, coffee, frozen chips etc). This represents another avenue for growth off a low base.
Direct delivery: COVID-related lockdown restrictions very negatively affected the restaurant industry globally. With only delivery or drive-through options allowed at times, third-party online food delivery platforms materially gained market share. Famous Brands was initially reluctant to use these platforms, given the severe hit to franchisee profitability that the large platform commissions cause.
While most restaurant brands have now embraced third-party food delivery platforms, profitability is diluted as some consumers choose to order online rather than dine out. To combat this and to protect franchisee margins, Famous Brands is developing its own direct delivery service platform, focused on additionally enticing customers to dine out (incentivising through promotions and loyalty discount offerings).
Faster-growing economies: Encouraging greater company-owned restaurant growth in certain developing economy regions is another area of focus. The South African restaurant market has continued to grow (albeit at lower rates) and is well represented by Famous Brands’ quick service restaurants in major metropolitan areas across the country. Of the approximately 2 480 Famous Brands restaurants in South Africa, 159 fall under its Signature Brands portfolio, which comprises casual dining, luxury restaurant and captive restaurant (ie NetCafé in Netcare hospitals) segments. These were the hardest hit by the pandemic due to the enforced capacity and alcohol restrictions. These hostile conditions were also unfavourable for attracting new franchisees. While the current positive outlook for this division is buoyed by the relatively low brand penetration in their market, the growth opportunity is lower than that of the quick service brands, given the relatively small upper income target market in South Africa.
Attracting new franchisees: The ability to attract new franchisees in a competitive environment where growth rates are declining is a key challenge for future growth. As shown below, more than 70% of franchisees have been with Famous Brands for over five years (many owning more than one franchise), indicating that the group continues to attract new franchisees and is investing appropriately in support of their restaurant brands.
Check out the chicken
Currently, the Famous Brands portfolio is lacking a chicken brand offering, which represents the largest fast-food category in South Africa and many other African markets. While the high market demand for chicken has been somewhat serviced through the addition of chicken-based menu options across existing brands, a material opportunity remains to incorporate a strong chicken brand into the group’s portfolio.
Additionally, with plant-based meals being a global food trend, Famous Brands has included relevant options on menus and invested in a plant-based restaurant brand. Plant-based foods are expected to constitute 7.7% of the global protein market by 2030 – a potential growth opportunity for the group.
Excellent economics with growth
Famous Brands have grown enormously in South Africa, with representation across multiple segments and exposure to growth opportunities in niche areas like casual dining and healthier food options. They are also exposed to developing nations with fast-growing income levels and an increasing demand for convenience. This, underpinned by a vertically integrated supply chain that will continue to benefit from restaurant growth in a capital-light, low risk and high return manner, supports our view that Famous Brands has strong prospects.