Chief Executive Officer’s report

Darren Hele

Year in review

In my previous report, I noted that the 2019 financial year had been one of the most difficult in our Group’s history. Little did I – or anyone else – anticipate what would lie ahead.

In terms of timing, the COVID-19 global pandemic effectively commenced after the Group’s year-end and therefore is covered in the commentary on performance subsequent to the reporting date in this report.

Trading conditions across our markets continued to deteriorate over the 2020 financial year, with SA edging into recession in the latter half of the review period. Consumers in all our key jurisdictions faced significant financial pressure and business and consumer sentiment plumbed new depths.

In this context, and operating in an industry which thrives best in a positive mindset, we resolved to overcome the demoralising distractions by focusing on our core task: to continue to win over and inspire customers – both existing and new, through an unrelenting strategy to surprise and delight. Key to this is our strategic intent to improve our competitive posture by delivering unique customer experiences.

 

I am pleased to report that across the repertoire, our brands enjoyed strong loyal customer support, evidenced by the numerous consumer and industry accolades achieved and their growth or retention of market share in the extremely competitive operating environment.

As discussed in the Chairman’s statement, we also successfully concluded the goals aligned to our 2020 vision and have constructed our roadmap for the next three years. This roadmap is customer inspired, brand led and supported by the back-end value chain. We have commenced tackling our new goals with the energy and zeal our business is renowned for.

Notably, we have made a significant step-change in our traditional high-performance culture. Across our operations we are inculcating a better understanding of how to create value: by individual, by business unit and by the Group as a whole. This understanding is underpinned by intensified performance management criteria, with a clear focus on cost leadership and ROI.

Our starting point had been to more appropriately weight the balance of the business with priority focus on the front-end versus the back-end. Commencing with the key contributor, our Leading brands division, we have undertaken an in-depth analysis of how to improve value creation by brand, by format and by channel. Simply by resourcing these brands more accurately, we equip them to compete more equitably in a global brand environment.

This report analyses in detail our scorecard in terms of the actions we took to achieve our strategic objectives, which are at all times centred on creating value for our stakeholders.

Our Group performance

SA

Brands

Our Leading brands delivered solid results, reflecting their leadership of the categories in which they trade. While remedial measures implemented in the Signature brands’ portfolio started to deliver notable improvements, this business unit remains the subject of ongoing review and reconstruction. Our combined SA Brands division reported a 9% increase in revenue to R974 million. Operating profit reduced by 1% to R472 million, while the operating profit margin decreased to 48.5% from 53.2%. The decline reflects significant investment in technology enablers in the Leading brands portfolio, sub-inflationary menu price increases and higher operating costs due to tighter allocation of costs towards Leading brands, as well as the relocation to new offices to alleviate congestion at our Midrand Campus.

Our Leading and Signature brands’ combined system-wide sales improved 6.4% and like-for-like sales increased by 2.9%. Independently, Leading brands’ system-wide sales grew 5.7%, while like-for-like sales rose by 3.5%. Our Signature brands’ system-wide sales improved 10.6%, while like-for-like sales declined by 0.8%.

Supply chain

Our Manufacturing and Logistics supply chain businesses are in service to the front-end Brands division, and their primary function is to ensure they provide a competitive advantage to our franchise partners through efficient and effective supply and margin support. Combined revenue reported by the operations rose 1% to R4.5 billion, reflecting significant pressure on consumer spending in the Brands division, and operating profit reduced 11% to R457 million. The operating margin declined to 10.2% from 11.5%, primarily due to our tactic to contain price increases in the sustained low food inflation environment, downward adjustments to remain competitive in a market where margin was sacrificed to gain volume and the ongoing programme to re-allocate corporate costs to the appropriate business units.

The rest of Africa and the Middle East (AME)

In line with our deep and narrow strategy in this region, we implemented a more direct approach to developing brands in existing markets through establishing in-country teams and investing in Company-owned outlets in key nodes in East and West Africa. We continued to expand strategic alliance partnerships, trial new trading formats, strengthen marketing capability and leverage delivery offerings where appropriate.

Solid system-wide and like-for-like sales were reported for the period, with 12 of our 16 trading markets recording positive system-wide sales growth. Combined revenue for the region grew 15% in Rand terms.

UK

Wimpy UK

Management’s ongoing focus in this business is to ensure the portfolio is optimally structured and appealing to capitalise on growth opportunities in the constrained economic environment. The business reported sound results in the year under review, boosted by an increased contribution from the delivery offering. Sales rose by 9% in the reporting period.

GBK UK and Ireland

Remedial measures implemented to stabilise the business and return it to profitability gained momentum during the period. However, year-on-year sales continued to decline, aligned with the general trend across the industry. The strategy to leverage opportunities to expand the multi-party delivery platform progressed well, but while online delivery revenue grew, this solid performance was offset by weaker in-store sales in malls and on the high street. Like-for-like sales in the year under review increased by 2.7%.

On 2 April 2020, the Board announced 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 post 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.

In light of the Board’s announcement to cease further financial support for GBK, the Board of GBK is in the process of considering the options available to the business.

This decision by the Board to not provide further financial assistance may result in the impairment of the full value of Famous Brands’ investment in GBK. This is discussed in detail in the Group FD’s report.

Strategy and performance scorecard

Our performance as a management team and business is evaluated against our success in delivering on our key strategic imperatives. The commentary that follows outlines our progress in the review period.

It is imperative to note that the commentary regarding our plans for the 2020/21 period were committed to at the end of the prior year, being 29 February 2020 and pre COVID-19 global pandemic. Given the severe impact of the pandemic on the business to date and the continuing uncertainty regarding potential future impact, it is anticipated that these goals and targets may have to be adapted and will evolve as the situation unfolds.

Our priority will be to navigate the trading circumstances as dictated by the pandemic and the government’s risk-adjusted economic activity model. Management will continue to monitor and mitigate the risks where possible and adjust our strategies as appropriate.

Our key strategic imperatives

Improve our
operational efficiencies

Enhance our
financial performance

Prioritise our
franchise partners

Lead in the
categories we compete in

Develop our
people; ongoing
commitment to
transformation

Optimise
capital management

Ensure
regulatory
compliance

Achieved

Under way

Not achieved

FY2019/20 what we said we would do Evaluation
Continue to leverage efficiencies achieved and drive profitability and margin growth across the operations.
FY2019/20 what we did
  • Finetuned our priority areas for investment in the business based on appropriate returns, with a key focus on our Leading brands
  • Progressed the programme to build logistics capacity and capability for the next decade with the opening of DCs in the Western Cape and Free State
  • Rationalised a non-core regional meat plant in the Manufacturing business to leverage existing synergies and reduce costs
  • Progressed the goal to streamline the business by exiting non-performing brands and restaurants in weak markets
  • Disposed of the Coega Concentrate business in line with the strategy to focus on core competencies and ensure optimal ROI
  • Critically reviewed the supply chain cost drivers to maintain its competitive advantage
  • Expanded existing in-house capacity to enable the business to serve the retail market directly; this factory-to-shelf strategy is aimed at reducing costs and leveraging value in the supply chain
  • Ended the review period on track with the three-year programme to return GBK to profitability by 2022
FY2020/21 what we will do
  • Commence a programme to reduce excessive corporate and shared services costs
  • Build on the potential offered by direct retail distribution
  • Drive cost leadership across the business
  • Continue to apply a critical filter to analyse the business model with a view to further rationalisation, consolidation and asset sales aimed at ensuring an optimal structure and ROI.
FY2019/20 what we said we would do Evaluation
Improve our measurement and evaluation models and make progress in better identifying key areas for priority and investment in the business.
FY2019/20 what we did

During the review period we made good progress across the following key areas:

  • Prioritised investment in enabling our brands to attain growth targets
  • Embedded new capital allocation disciplines and measures
  • Commenced cost-reduction initiatives to enhance free cash flow
FY2020/21 what we will do

Our key focus will be on capital management and improving returns across the business. We will prioritise the following:

  • Drive cost-reduction initiatives
  • Continue to reduce our net debt:equity ratio
  • Critically review the business model on an ongoing basis to identify non-core, non-performing assets for disposal
  • Progress/conclude future capitalisation of the GBK business
FY2019/20 what we said we would do Evaluation
  • Prioritise profit growth by improving franchisee margins

  • Focus on breakthrough innovation in our consumer-facing technology to ensure long-term growth, aligned with market dynamics

  • Position our Signature brands to penetrate untapped dining occasions

  • Profitably incubate future Leading brands

  • Continue to support our franchise partners
FY2019/20 what we did
  • Our franchise network is stable, and we continue to monitor and support our partners in the testing environment. To ensure that the total value chain delivers franchisee profitability, we implemented a range of initiatives to bring down input costs, including 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 to enable it to remain competitive against peer offerings
  • Our key goal was to improve declining margins in an environment of high fixed overheads through better alignment of our supply chain and cost drivers
  • We focused on positioning brands to deliver like-for-like growth ahead of inflation through cutting-edge innovation, marketing and research and development
  • Our food services capability provides a unique competitive advantage to franchise partners and we intensified focus on operational excellence to leverage efficiencies and benefits
FY2020/21 what we will do
  • Strive to position the Group as the first-choice franchisor for prospective franchisees in a competitive market
  • Franchisee profitability and sustainability will remain a core focus, and are particularly critical given the sustained economic downturn and the impact of the pandemic on the restaurant industry
FY2019/20 what we said we would do Evaluation

Open 187 restaurants and revamp 308.

SA Evaluation
  • Focus on improving the total customer experience through optimising home delivery and consumer-facing technology
  • Optimise our portfolio by rationalising underperforming brands and restaurants
AME Evaluation
  • Expand our strategic alliance partnerships, trial new trading formats, strengthen our marketing capability and leverage delivery offerings
UK Evaluation
  • Capitalise on opportunities in the operation and the market to outperform the UK Casual Dining market segment and return GBK to profitability
FY2019/20 what we did
  • Our brands remain number one or two in the categories they compete in, reflected by our market share, which was maintained or gained by Leading brands in the review period, and the vast array of consumer and industry accolades awarded, Operational review: Brands
  • In light of the weak trading conditions, a deliberate decision was taken to scale back on new store openings, and while we fell well short of our target, we believe this conservative approach was prudent
  • A key focus during the year was to enhance in-store technology to drive the customer experience, including digital menu boards, digital payment options and self-ordering terminals
  • Our goal to improve the total customer experience was pursued through optimising opportunities in the online ordering and home delivery space (own and third-party) and improving accessibility to customers through new flexible, convenience-centered trading formats
  • Drove cost leadership to entrench the sustainability of the franchise model for our partners
FY2020/21 what we will do
  • Our ability to innovate in format, category and technology will remain a key driver of differentiation and growth
  • Leverage our business model, which features two distinct brand groupings (Leading and Signature brands) with distinct dynamics, which positions us optimally for growth
  • In line with the consistent historical trend, our Leading brands will remain the key growth driver in the business. We will position them to continue to achieve this role through competitive pricing, authentic brand propositions and operational excellence
  • Further simplify the Signature brands portfolio and invest in those brands that have the ability to achieve critical mass
  • Identify potential SA or AME franchise brand acquisitions
FY2019/20 what we said we would do Evaluation

Monthly monitoring of the BBBEE scorecard targeting level 6

FY2019/20 what we did
  • Emanating from sustained management focus and implementation of meaningful interventions in the SA operation, the Group improved its BBBEE rating from level 7 to level 4, outperforming its stated target of level 6
  • During the review period, an automated scorecard system incorporating the Company values was implemented which enhanced performance management, linking performance to rewards
  • The Exco team has been progressively strengthened in terms of diversity, experience and expertise available to the business. Further detail in this regard is discussed in the Transformation and Governance reports
FY2020/21 what we will do

Strategies are in place to accelerate transformation initiatives in the year ahead and maintain our BBBEE rating. We are mindful, however, that these initiatives may be impacted in the context of the COVID-19 global pandemic.

We will continue to develop and transform our team to build a fit-for-purpose resource to achieve our growth objectives. Developing and retaining depth of talent is a key management priority.

FY2019/20 what we said we would do Evaluation
  • Continue to focus on prudent capital allocation
  • Leverage investment in enterprise resource planning (ERP) to enhance reporting processes and data analysis
  • Embed divisional balance sheet reporting to enhance monitoring of divisional ROCE
FY2019/20 what we did

We continued to tightly control the capital investment programme with focus on a range of key areas.

  • In March 2020, management successfully concluded negotiations with the Group’s primary lender regarding a more appropriate debt finance structure
  • Invested in key growth markets in SA and selected markets, spearheaded by our Leading brands portfolio
  • Invested in key growth brands, while continuing to divest from underperforming brands
  • Invested in consumer-facing technology which enhances the customer experience
  • Prudent investment in logistics capacity and manufacturing maintenance capex
  • Re-orientated the business leadership to focus on working capital management and free cash generation
  • Continued to drive reduction of interest-bearing debt
  • Recommenced an interim dividend
FY2020/21 what we will do
  • Continue to drive cost-reduction initiatives across the Group
  • Continue to rationalise non-performing, non-core brands and plants, specifically in the Signature brands portfolio and Manufacturing business
  • We have advised that no further financial support will be provided to GBK
FY2019/20 what we said we would do Evaluation

Continue to improve our quality of ESG reporting and implement our sustainability policies in line with the timeframes we have committed to.

FY2019/20 what we did
  • Continued to drive our sustainability journey programme across the business to promote greater awareness of consumption of non-renewable resources and the impact of our operations on the environment. Our sustainability journey details our initiatives and measures to mitigate the negative impacts produced in this regard
  • We view transformation as a social, moral and strategic business imperative and have, for the first time in an IAR, included a dedicated report on transformation in the Group
  • We have also enhanced disclosure regarding sustainability and governance measures in the Remuneration report, which now has greater focus on more appropriate performance-related measures which are used to drive and evaluate the business
  • On their first attempts, our SA manufacturing plants and DCs were awarded NOSA grade 3 (good) and 4 (very good) ratings, which is pleasing recognition of the continued focus and improvement on safety, health and environment parameters
  • The COVID-19 global pandemic provided an opportunity to test and assess our risk preparedness and management protocols across the business. Maintaining hygiene and food safety is an integral part of the daily discipline in our business and the Group is accustomed to safeguarding its environments through strong operational and hygiene protocols which comply with industry best practice
FY2019/20 what we said we would do
  • We will continue to improve our disclosure in the Transformation and Remuneration reports and communicate more transparently across a wider range of performance indicators over time
  • Risk assessment and management have become key disciplines in the business over the past two years, which has been of benefit across our operations. We will continue to implement rigorous protocols in this regard; more specifically, hygiene and health and safety controls and regimes will continue to be monitored closely
  • We will strive to maintain and improve on our NOSA gradings (3 and 4) in the year ahead

Performance subsequent to the reporting date

The first quarter of the current financial year, which commenced on 1 March 2020, has been extremely challenging for the business. Negligible revenue was generated in the five weeks of the initial lockdown, when the majority of our restaurants, and all but one of our manufacturing plants were closed. Accordingly, aligned with our three-year roadmap, and accelerated by the pandemic, our focus over the past three months has been to right-size the business and prioritise core long-term operations, reduce costs and preserve cash to facilitate balance sheet flexibility.

In this regard, a range of measures were swiftly implemented across the business. These included a freeze on headcount and operational and capital expenditure; providing franchisees with relief in the form of temporarily deferred payments (for pre-lockdown debt) and reduced royalties and fees post the lockdown; negotiations with landlords; strategic temporary hibernation of parts of the business which are not permitted to operate under current lockdown restrictions; reduced working hours, salary sacrifices and a limited retrenchment programme where all other options have been exhausted and access to the UIF TER Scheme from April 2020. In addition, additional cash facilities were negotiated with the Group’s primary lender.

Management’s operational focus over this period has been on collaborating with our franchise partners to assist them to flex their business models to adapt to evolving restrictions prescribed by Level 4 economic activity (delivery-only services) and subsequently Level 3, (delivery and collect/take-away services).

The severe impact of the pandemic on the performance of the Group’s SA brands over the past three and a half months since year-end can best be analysed in terms of the progression of the pandemic. In the first phase – awareness of the pandemic, commencing prior to 15 March 2020 – our Leading brands’ Quick Service sales declined by approximately 25% while Casual Dining brands’ sales decreased by 31%. Our Signature brands’ sales declined by 22%.

In the second phase – following the declaration of a national state of disaster from 16 March 2020 – Quick Service brands’ sales declined by 15%, while Casual Dining brands’ sales decreased by 48%. Notably Signature brands’ sales declined by 48%.

In the third phase, which commenced with the national lockdown on 27 March and subsequently eased slightly on 1 May with delivery-only sales permitted, only 40% of the brand portfolio was adaptable to trade. Revenue declined by 62% in the Leading brands division, and 72% in the Signature brands portfolio.

With further easing of lockdown restrictions on 1 June to Level 3 in SA which permits delivery and collect/take-away services, it is anticipated that 70% of our Leading brands and 20% of our Signature brands will trade. They are forecast to deliver 35% and 15% of budgeted revenue, respectively.

In our AME operation, year-on-year sales declined by 30% in March and April 2020. In May 2020, 74% of our restaurants traded, achieving 45% of budgeted revenue.

From the commencement of the lockdown in SA to date, our retail operation continued to trade, supplying third-party retailers. Only one of our manufacturing plants, LBF, was permitted to operate given its “essential service provider” status. In Level 4, small scale logistics and manufacturing services were required to support our franchisees’ delivery-only trade. In Level 3, we will continue to ramp up the manufacturing and logistics operations in line with demand from the franchise network.

Looking forward

Our operating environment post the COVID-19 global pandemic will provide unfamiliar and challenging conditions which will need to be navigated. The new normal will also be different and testing, and it is very likely that the business will undergo extensive transformation as we overcome the challenges we face. However, the Board and management are confident that we have a solid business model and the specialist skills in place to guide our recovery. Our strategically structured, diverse portfolio, agility and the ability to innovate across brands and trading formats will be key to driving growth.

The safety of our customers, staff and the communities in which we operate is of paramount importance to us. Over the past few months since the declaration of a national state of disaster, we have prioritised the wellbeing of our employees and their communities through comprehensive work-from-home arrangements where practicable.

Going forward, as trading restrictions are eased, we will be extremely mindful that our business needs to continue to play a key role in curbing the spread of the pandemic. Hygiene and food safety are integral daily disciplines across the Group and we are experienced at safeguarding our workplace through strong operational protocols which are compliant with industry best practices. I am therefore comfortable that our business has the ability and flexibility to ensure we will meet the required risk-mitigating measures to re-open our operations fully, efficiently and safely.

Prospects

Our concerns regarding the future centre around how long lockdown regulations will remain in force, and the long-term impact of the pandemic on consumer behaviour and spending in the hospitality and travel industry. Our Signature brands are firmly positioned in the Casual Dining category, which has remained closed since the start of the lockdown. We anticipate that this segment of the market will only re-open once the pandemic has subsided, and thereafter, will recover very slowly. We are also preparing to navigate the potential decline in foot traffic in malls and the restrictions on local and global travel, which will affect our restaurants situated on transit routes.

With regard to the forthcoming period, parallel to the remedial and revival activities discussed, we have absolute clarity of purpose in terms of our three-year strategic roadmap, which we will continue to roll out. We have identified the following opportunities.

Expansion programme

  • Our Leading brands are strong and agile and our goal is to reinvigorate them to gain market share. This is exemplified by our traditional Casual Dining brands, such as Wimpy, Mugg & Bean and Fego Caffé, flexing their models to expand their delivery offerings.
  • Albeit restricted, our AME business continued to operate during the lockdowns in our various territories, and once restrictions ease further, should perform well. Our goal is to grow the Group’s presence in the AME region by leveraging our footprint in existing markets with the same portfolio of brands.
  • The intention is to expand our current retail offering by leveraging our owned route-to-market. The retail business continued to operate during the lockdown, and has confirmed its potential for scalability.

Consolidation programme

  • Our goal is to grow selected Signature brands which have potential for scale and exit non-performing brands and non-viable sites. Our ongoing programme to optimise the structure of this portfolio will be determined by the nature of the recovery of the Casual Dining segment, which is expected to be protracted and unforgiving.
  • Our intention is to exit non-core manufacturing activities and intensify investment in core facilities. Our Manufacturing division was streamlined during the review period and is structured to outsource business in future where volume does not deliver efficiency at historical levels.
  • Capex incurred in the Logistics business in the review period was well timed and further spend has been halted until there is more certainty in the operating environment. In line with our programme to restructure and right-size the business which commenced during the year, two logistics centres have been identified for closure over the forthcoming year.

Capital management and allocation

  • Cash generation is a core strength, notwithstanding a reduced business.
  • Our overhead cost structure is low; which positions the business well for recovery. Focus will be on generating free cash flow through improved working capital management and limiting non-essential capex.
  • While our current debt levels are high, they are manageable. Our goal is to drive cost leadership including reducing corporate costs and shared function costs.
  • The Board has resolved to not provide further financial assistance to the GBK business.
  • We will continue to align the supply chain and cost drivers to afford our franchise partners a competitive advantage while maintaining ROCE targets.

We fully endorse the decisive actions taken by the respective governments in our various trading jurisdictions to contain the spread and impact of the COVID-19 global pandemic and are committed to ensuring that all of the Group’s re-opened operations are managed responsibly and in compliance with risk mitigating regulations. We remain optimistic that government’s risk-adjusted strategy in SA will enable the economy to re-open in a considered manner to the benefit of all stakeholders.

Appreciation

Thanks to the sheer determination and perseverance of our management team, our franchise partners and everyone across our Group, we delivered a commendable set of results for the review period – for which I would like to extend my sincerest gratitude.

Subsequent to the year-end, the COVID-19 global pandemic has impacted on our economy and our society, how we live, interact and work, and it is likely that life will never be the same as before. But “before” is in the past and we need to move forward. We need to learn important lessons and build a better future.

I would like to thank each one of you for the sacrifices made to curb the spread of the virus, thereby ensuring the wellbeing of our Company, our customers, our communities and our country.

My thanks also go to our stakeholders who support us and contribute to the success of our business: our customers and the broader communities in which we trade, our investors, strategic alliance partners and business partners.

My fellow Board members have provided steadfast guidance over this time and I appreciate their dedication.

Darren Hele
Chief Executive Officer

29 June 2020