Chairman’s statement

Santie Botha

I am pleased to report that we concluded the review period having exceeded many of our benchmarks and targets, learnt vital lessons and emerged a more cohesive team and business – with an even clearer sense of purpose.

The year under review proved to be a thorough test of the Board and management’s resilience, and an intense interrogation of the relevance of our strategies and the depth of the high-performance culture the Group prides itself on.

In the intervening months since the Group’s financial year-end on 29 February 2020, the unprecedented impacts related to the COVID-19 global pandemic continue to overshadow everything before it.

In the interests of accurate and representative reporting, I have confined this statement to the review period and limited my observations on the extraordinary post-year-end events to the commentary on performance subsequent to the reporting date and the future outlook.

SA

In my 2019 statement I expressed the hope that the change of political leadership in SA and the President’s stated commitment to growing the economy and enhancing governance would translate into increased investment in the private and public sectors. Unfortunately, the transformational reforms that stakeholders anticipated did not materialise, and consumer and business confidence remained at disturbingly low levels. Furthermore, country-specific adversities including frequent load shedding, sustained poor community service delivery, and incessant fraud and corruption further exacerbated the negative sentiment.

UK

For most of the year under review, trading conditions in the UK remained coloured by uncertainty surrounding Brexit and the lead up to national government elections in December 2019. The Conservative Party’s subsequent election victory instilled a sense of direction for the country and served to improve consumer confidence over the last two months of the reporting period, notwithstanding generally subdued economic conditions.

Industry trends

The food services industry continues to evolve at a rapid pace and our responsiveness and flexibility to emerging challenges and opportunities are key to maintaining our leadership position in the market.

In line with the trend over recent years, the Quick Service category performed better than the Casual Dining segment, primarily due to perceptions of affordability and value. The expansion of delivery services also fuelled Quick Service growth ahead of the Casual Dining segment. Consumer category visits remained stable during the review period, demonstrating that momentum in the industry is driven primarily by the roll out of new stores into previously untapped markets.

The value offering remained a key driver for consumers facing financial hardship, however, value is increasingly defined as an all-round “experience”, which encapsulates reliability, quality, service and positive brand association. This experiential trend is primarily driven by the widespread increase in social networking via social media, and the rising influence of millennials, whose value set differs from previous generations, and who prize experiences over materialism.

Consistent with the prior year, technology remains a key differentiator in the industry, and participants continued to invest heavily in innovations across the channels.

Delivery offerings gained further momentum during the period, with a proliferation of third-party aggregators investing significantly and competing aggressively for market share. The eating-out-at-home trend, which has emerged recently, accelerated this demand for delivery services.

Growing consumer mindfulness of ESG issues, continues to translate into intensified awareness of health, wellbeing, and general ESG accountability and responsibility. This is reflected in our industry by the demand for ethical and sustainable sourcing and production, and a greater focus on nutrition and health consciousness.

Our Sustainability journey and Better for You reports outline the Group’s ongoing commitments to promoting responsible ESG practices according to clearly defined implementation timeframes. Our sustainability journey and Operational review

Ensuring that our brands remain innovative and relevant to consumers has always been a key driver for the business. In light of the trends discussed above, there is ongoing commitment of resources to:

  • ensuring our offering has a strong value component;
  • ensuring our menus display greater awareness of evolving health and wellbeing trends;
  • investing in our technological capability in the digital and social media arenas; and
  • continuing to upweight our delivery offering, both in-house and via third-party aggregators.

Our brands’ steady gain in market share and the plethora of consumer awards achieved over the year illustrate the support we enjoy from our customers and are rewarding recognition of the work our brand teams do to earn their loyalty.

Operational review: Brands

Strategy: building the sustainability of the business

Vision 2017 – 2020

In 2017 we outlined Famous Brands’ vision: to be the leading innovative branded franchised and food services business in SA and selected international markets by 2020.

This vision was pursued relentlessly over the past three years and it is satisfying to note that the ambitions outlined were concluded in line with the 2020 end date.

The Group’s leading position in the categories we compete in is demonstrated by:

  • a network of 2 898 restaurants across select markets in Africa, the UK and the Middle East;
  • a strategically structured portfolio of brands which enjoy strong loyalty and steadily growing market share;
  • a vertically integrated supply chain which affords franchisees a competitive advantage; and
  • a reputation for innovation, epitomised by our penetration into new and untapped categories and markets, and our leading-edge, consumer-facing technology.

Roadmap 2021 to 2023

Having attained the Group’s 2020 ambition, the Board and management have constructed a new three-year roadmap, which is customer inspired, brand led and supported by the back-end value chain. This roadmap is consistent with the long-standing emphasis on the front-end (Brands) component of the business, but with a narrower geographical focus in terms of expansion into international markets. Our successful “deep but narrow” strategy pursued in the AME region will be applied to all further expansion outside of SA’s borders.

Board focus in 2020

In my 2019 outlook statement I noted that the Group had committed to improve returns for our franchise partners and restore profitability of the GBK UK operation.

I am satisfied that good progress was made in both regards.

Franchise partner profitability

With the valued contribution and collaboration of our franchise partners, we made rewarding headway in enhancing margins and net operating profit through a range of far-reaching initiatives. Interventions to bring down input costs included menu and product re-engineering (rationalising and cross-utilising menu ingredients), strategic structuring of menu price bands and promotional offers, improved back-of-house operational efficiencies, lower in-house delivery costs and improved efficiencies in the supply chain. In addition, management proactively engaged in negotiations with property owners to secure fairer rental rates to afford overdue relief to our franchise partners.

GBK UK

During the review period remedial measures implemented in the GBK business continued to gain momentum: key areas of improvement included an improved product and customer experience as well as an increase in online sales, which helped to mitigate the industry trend of lower in-store footfall. The year-on-year decline in sales reflects both the economic malaise in the hospitality industry in the country as well as the fact that the GBK business operated with fewer restaurants, which was a deliberate strategy post the CVA process conducted during the prior period.

Due to the COVID-19 global pandemic during March 2020, the respective governments of the UK and Republic of Ireland issued directives to close all restaurants in those countries indefinitely until further notice. While various measures of support were offered to the industry to mitigate the economic impact of this decision, the uncertainty regarding resumption of trading was significant cause for concern in both markets.

In light of this dire situation, the Board reviewed its investment in GBK, and regretfully resolved to not provide any further financial assistance to the GBK business. Accordingly, the Board of GBK is in the process of considering the options available to the business.

Shareholders are referred to the commentary in the cautionary announcement paragraph in this report.

Debt structure

The Board is pleased to advise shareholders that management successfully concluded negotiations with the Group’s primary lender regarding a more appropriate debt finance structure in March 2020. The debt covenants were concluded at the same level as the previous debt structure. Details of the new structure are discussed in the Group FD’s report.

Dividend

The COVID-19 global pandemic and subsequent lockdown measures implemented across the Group’s various trading jurisdictions have had, and will continue to have, a significantly adverse financial impact on the business. The Board has considered the current cash position and facilities available to the Group and is of the opinion that, while the Company will be able to service its obligations in the foreseeable future, under the current circumstances it is deemed prudent to preserve cash to facilitate balance sheet flexibility. In this regard no dividend has been declared for the second six months of the reporting period.

Transformation

We have, for the first time in an IAR, included a dedicated report on transformation in the Group. We view transformation as a social, moral and strategic business imperative and will continue to improve on our disclosure in this regard over time. I am pleased to confirm that emanating from sustained management focus and implementation of meaningful interventions in the SA operations, the Group has improved its BBBEE rating from level 7 to level 4. Strategies are in place to accelerate transformation initiatives in the year ahead. We are mindful, however, that these initiatives may be impacted in the context of the COVID-19 global pandemic.

Corporate governance

Each year we strive to improve our disclosure and report more transparently across a wider range of performance indicators. I am particularly pleased with the enhanced disclosure regarding sustainability and governance measures contained in the Remuneration report, which takes into account the views and recommendations of some of our key stakeholders. There is now greater focus on performance-related measures which are used to drive and evaluate the business, resulting in a better alignment of management incentives with shareholder interests.

Remuneration report

Mandatory rotation of auditors

In respect of the Independent Regulatory Board for Auditors’ 2017 ruling on mandatory audit firm rotation and in compliance with paragraph 3.75 of the JSE Listings Requirements, the Group’s incumbent auditors, Deloitte, have completed the audit for the year ended 29 February 2020 and will retire with effect from 23 July 2020. KPMG has been appointed to succeed Deloitte, subject to approval received from shareholders at the AGM on 24 July 2020.

On behalf of the Board I would like to extend our appreciation to Deloitte for their service to the Group.

Appointment of Company Secretary

With effect from 1 August 2019, Celeste Appollis was appointed Company Secretary. The Board is satisfied that Celeste possesses the competence and experience required to fulfil the role.

Performance subsequent to the reporting date

The period between the Group’s year-end and the publication of this report has been fraught with challenges for the business. Due to the various government lockdowns and related regulations, the Group’s operations have been severely impacted and accordingly, have generated minimal revenue.

In the context of the challenges faced since the middle of March 2020, a range of immediate measures were implemented across the business to protect liquidity through cost reduction initiatives, with cash preservation as a priority. These measures are discussed in more detail in the CEO’s report.

Following the easing of lockdown restrictions from Level 5 to Level 4 on 1 May 2020, delivery-only trade was re-introduced in our industry. With the support of our franchise partners and by flexing business models, we succeeded in adapting approximately 40% of the brand portfolio to offer delivery-only services, which generated approximately 20% of budgeted revenue. Subsequent to further easing of restrictions from Level 4 to Level 3 on 1 June 2020, delivery-only trade was expanded to include collect/take-away services.

We anticipate that our operations will only return to some degree of normality once all trading restrictions are lifted in all of our markets.

Cautionary announcement

In the cautionary announcement published on SENS on 2 April 2020, the Board advised that regretfully, the GBK UK business would henceforth no longer receive financial assistance from the Group. This decision followed the deterioration in GBK’s store sales in the UK after year-end due to the COVID-19 global pandemic, and the subsequent directive by the governments of the UK and Republic of Ireland to indefinitely close all restaurants in those countries. While various measures of support were offered by the respective governments to the industry to mitigate the economic impact of this decision, the uncertainty regarding resumption of trading was significant cause for concern in both markets.

The cautionary announcement was subsequently renewed on 20 May 2020 as deliberations in respect of the matter were still in progress.

The future

At the close of the review period on 29 February 2020, the Group was on track, following a year of intensified focus on the core components of the business and our unwavering goal to align investment of resources with returns. Our success in this regard was exemplified by the solid results reported by the Leading brands in an extremely difficult environment and our streamlined business model reflected by the disposal of the non-core Coega Concentrate operation and exit of non-viable brands, including The Bread Basket and Catch.

At that point, it would have been a simple task to outline our plans and targets for the year ahead and our strategies to achieve them.

However, with the onslaught of the COVID-19 global pandemic across the world, we have been overtaken by an unprecedented event and all our future strategies and plans had to be reworked. In the initial stages of the pandemic our focus was on managing business continuity and providing an uninterrupted service to our customers, while safeguarding our people and ensuring the wellbeing of the communities we trade in. Following the various restrictive measures implemented to curb the spread of the pandemic by governments in all our trading markets, we, along with other companies across the country and the globe, have moved into managing the impact of the crisis and pre-empting potential business risks, with strategies centered on recovery, rehabilitation and re-invention. The reprioritisation of digital initiatives and innovations has also been expedited.

In the forthcoming months and possibly years, we anticipate that public and private sector focus will be on restoring the health of economies and the wellbeing of populations. In SA and AME specifically, we foresee greater financial hardship for consumers due to stagnant economic growth and higher levels of unemployment and indebtedness. Inevitably, the business landscape will alter dramatically with the downscaling of large enterprises and the closure of smaller independent businesses.

Going concern assessment

Our finance, audit and risk teams have committed extensive time and resources to assessing the past and projected future impact of the COVID-19 global pandemic on the business, and our Audit and Risk Committee has opined that the going concern assumption is considered to be appropriate for the preparation of the Group’s AFS for the year under review. In this regard, key assumptions were made in respect of the Group’s outlook regarding trading conditions that will persist, the easing of lockdown restrictions in the future, the Group’s debt service and covenants requirements, working capital requirements, access to short-term funding and COVID-19 global pandemic related relief measures enacted by various governments.

The Committee’s review is discussed in detail in the Audit and Risk Committee report.

We have communicated regularly and responsibly with the market since the President declared a national state of disaster on 15 March 2020. Given the continued fluidity of the situation we will continue to do so.

Message of condolence

The COVID-19 global pandemic has had a devastating impact on the countries in which we operate, and tragically taken the lives of many of their citizens. On behalf of the Board, I would like to extend my deepest sympathy to those of you who have lost loved ones during this unprecedented time. Our thoughts and prayers are with you.

Appreciation

Over the past year the business has endured among the most difficult trading conditions experienced in our lifetimes, and subsequent to year-end, the COVID-19 global pandemic has tested us all in a manner that no one could possibly have imagined. I would like to extend my sincerest appreciation to the Group CEO, Darren Hele and the Exco team, our franchise partners and all our people across the Famous Brands Group for their commitment, resilience and resourcefulness during this time.

I would also like to thank our wide range of stakeholders who contribute valued support to our business.

My fellow Board members have provided constructive and sage counsel throughout the year and I am grateful for their continued support and commitment to the Group.

Invitation to attend the AGM

Shareholders are invited to attend the 26th AGM to be held on Friday, 24 July 2020 at 14h00 via electronic format as outlined in the notice of the AGM.

Santie Botha

Santie Botha
Chairman

29 June 2020