Steers following Nando’s

Despite plummeting sales and falling profits in Britain, Famous Brands [JSE:FBR] remains intent on finally launching its first Steers outlet in that market the moment it can find a suitable site. It’s likely to finally happen this year in a move that could witness the simultaneous entry of South African pizza chain Debonairs into that market alongside Steers in pretty much the same sort of format we’re used to.

The pizza segment is considerably more competitive in Britain than Steers will be offering, but the logic goes that if the economies of scale permit, Debonairs will have a better chance of success teamed with the burger chain than going it alone.

Finding a suitable site is easier now than it would have been three years ago, when this idea was first mooted. Landlords are being more accommodating amid the ongoing recessionary environment. Finweek bets Famous Brands will eye a London site along the District Underground line south of the Thames – anywhere between Putney and Wimbledon – seeking to cater to homesick Saffers in search of a familiar taste.

The group’s foreign sales contribute about 5% of Famous Brands’ total revenues and less than 3% of operating profit. Wimpy UK sales have fallen precipitously to R94,66m from R137m in its 2010 financial year and from almost R180m in 2009. The group has blamed a combination of an ailing consumer economy and a persistently stronger rand. When it bought a controlling stake in the Wimpy UK business there were 194 outlets, plus a master franchise agreement in Ireland over another 20 stores. Just 130 remain in mainland Britain, a fact that doesn’t concern CEO Kevin Hedderwick, who says the business needed a revamp – including closing a number of small outlets located inside bowling alleys that were doing little to enhance the brand’s image.

The South African experience of expansion into First World markets has seen many companies bump their heads and Hedderwick doesn’t want the company’s strong domestic reputation sullied by an ill-considered or badly executed foray overseas.

While the rand translation effect on its meagre offshore earnings is negative, the currency – as with so many South African companies with global operations – is something of a double-edged sword. On the one hand it’s bad news for the translation of the group’s poor earnings overseas; on the other it’s great for group margins, as the stronger rand has helped shield Famous Brands from the worst excesses of food inflation worldwide.

Its British business has an operating margin of 11,7%, which is an improvement but considerably lower than its South African operations, which have the benefit of shared manufacturing and distribution services throughout multiple brands. It’s a model that’s worked locally, where a single vehicle is able to leave a single manufacturing plant and deliver multiple products to several brands in a single food court. These economies of scale aren’t currently viable in Britain, but Hedderwick’s SA Breweries training comes to the fore when it comes to developing efficient operating systems.

This year is also likely to be one of consolidation in SA after a period of active and aggressive acquisitions as Hedderwick mopped up tired legacy brands such as Milky Lane and Juicy Lucy in anticipation of being able to attach them to its current manufacturing and distribution model.

Whether there’s scope for additional brands in Britain beyond Wimpy, Steers and Debonairs remains to be seen.