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A hunger for success

Feb 12 2016 07:00
Marcia Klein

Grand Parade Investments (GPI) chairman Hassan Adams has kept an edition of finweek from over eight years ago in which he was photoshopped into wrestling gear to reflect his combative mood as he fought off Cape Empowerment Trust’s Shaun Rai for control of his company.

The takeover battle is a distant memory and there is no evident threat looming, but he has retained his feistiness. He hardly allows a word in as he chats effusively about his company and his recent agreement to bring two American franchises to South Africa.

His focus now, as he sits in GPI’s boardroom above the site of SA’s first Burger King on Heerengracht Street in Cape Town, is on his growing list of international franchises and GPI’s intensified focus on its food operations.

Adams has signed a master franchise agreement with Dunkin’ Brands for the development of more than 250 Dunkin’ Donuts restaurants and more than 70 Baskin-Robbins shops in SA. GPI will also get Baskin-Robbins ice cream products into supermarkets and convenience stores. Dunkin’ Donuts, a coffee and bakery company, has more than 11 500 stores in 40 countries. Baskin-Robbins, which sells ice cream, has 7 600 locations in nearly 50 countries.

As it has done with Burger King, GPI will use profit from gaming investments to fund the expansion of its food operations but the aim is to make food an increasingly important part of the group’s business.  

On Burger King

GPI, formed in 1997 as a BEE investment holding company, owns 25.1% of Sunwest (GrandWest Casino and The Table Bay Hotel), and 25.1% of the Golden Valley Casino. It operates over 3 500 limited-payout machines at over 700 different locations in the Western Cape, Gauteng, KwaZulu-Natal and Mpumalanga. It owns MacBrothers Catering Equipment, 10% of Spur Corporation and 51% of Grand Tellumat Manufacturing.

It obtained the Burger King master franchise for SA in 2013 and will now add the Dunkin’ Donuts and Baskin-Robbins master franchises.

The development of these brands comes at a cost. At the moment Burger King is something of a financial drain. Results for the year to June showed GPI spent R231.8m expanding Burger King in the 2015 financial year, bringing the total spent on the franchise to R411.8m. It had 44 stores by year-end.

SunWest contributed R116.7m to headline earnings on the back of significant profit from GrandWest, offset to some extent by losses at the Table Bay Hotel at the V&A Waterfront. GPI Slots contributed R101.7m, R92m of which was from discontinued operations.

But Burger King’s loss had widened to R55.1m, against a loss of R39.9m the year before.

CEO Alan Keet’s focus has been redirected and he has been appointed, in Adams’ words, as “head honcho of foods” as GPI changes tack a little from being an investment company to one with increased operational involvement in its food businesses, “given that the food business is where the activity is”.

Adams says everyone questioned the Burger King investment, saying the market is saturated, “but there will be 100 in three years, and McDonald’s took 20 years to build 200”.  

But at the Burger King downstairs, people are no longer queuing around the corner to get in, as when it first opened, and expansion has been slower than expected.

The expansion is, however, steady and supported by what appears to be a sustainable funding model. Annuity income from largely passive gaming investments underpins the dividend to shareholders and helps fund expansion of food businesses, which Adams believes are the source of its future growth.

Moving further into the food sector

GPI was, however, quite willing to get rid of its gaming investments when it was part of a deal, scuppered by the Competition Commission, to sell its stakes in its casinos to Tsogo Sun.

“We weren’t looking to sell GrandWest, but we were approached, and we eventually got a price we would have been silly not to accept, but it was thrown out,” Adams says.

While it retains its casinos and slots, and is investing in gaming technology, the group will be investing “where there is blue-sky opportunity”, and Adams believes “the J curve is changing”, as Burger King should be self-funding by June, after which its profits should flow. GPI owns all the Burger King stores, a strategy which came at huge cost, but enables it “to entrench quality of product and excellence of service. The profit will be more than what the casino/gaming sides can yield.”

The share price, at R3.74, has lost 38% in a year, which could indicate that GPI’s strategy is either not clear, or its direction not finding favour with investors.

Adams believes he has made some communication mistakes as the shareholding base changed over the years from largely community shareholders to include institutional investors and traders.

Net asset value, he says, is higher than where the share price is trading. “The sum of the parts is just under R8.”He believes the market needs to understand the strategy. The casino business comes off a high base, so one cannot expect it to regain its previous levels, although it is benefitting from increased “middle-income spending”. He adds: “We are not looking for more bricks-and-mortar gambling, and we are quietly getting ready for online gaming.”

But the real growth will come from food. Apart from its stores, GPI also sees opportunities to export. For example, it makes its own patties for Burger King and is looking at supplying other countries with food and equipment.

He will not be drawn on whether other deals are in the pipeline. “As for the next step, I cannot tell you about it, but we are looking at food and beverage. We want to grow it into a company that could be on the stock market on its own. Gaming washes its own face, it is a happy environment to be in and casino and slots do very well.

“We have introduced a policy in the food division where it will only invest in premium brands,” he says, indicating that there are perhaps other big brand agreements to come.

He is eager to get into online gaming but legislation prevents it, and he is visibly irritated by the fact that punters bet across borders, but SA plays no role.

He remains committed to GPI’s original shareholders, who are largely community members who have invested since GPI’s beginnings when they paid 17.5c a share.

“More than 50% have not dematerialised their shares. They are community people who believe in the company. We give a dividend to them and that’s their annuity income, we have created more than 5 000 millionaires.”

This article originally appeared in the 18 February 2016 edition of finweek. Buy and download the magazine here.

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