{"id":2970,"date":"2022-06-18T18:35:47","date_gmt":"2022-06-18T16:35:47","guid":{"rendered":"https:\/\/famousbrands.co.za\/iar2022\/leadership-commentary\/chief-executive-officers-report\/"},"modified":"2022-06-23T12:39:38","modified_gmt":"2022-06-23T10:39:38","slug":"chief-executive-officers-report","status":"publish","type":"page","link":"https:\/\/famousbrands.co.za\/iar2022\/leadership-commentary\/chief-executive-officers-report\/","title":{"rendered":"Chief Executive Officer\u2019s report"},"content":{"rendered":"<\/section>\n<\/article>\n<\/div>\n<\/div>\n<\/div>\n
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COVID-19 has been a lesson in endurance. While our divisions recovered in 2022, we are still operating below pre-pandemic levels. With limited government support in South Africa, franchise partners have had to dig into their financial and mental reserves to survive.<\/p>\n

Our recovery was quicker than expected against a backdrop of economic uncertainty. We have a proven business model and the specialist skills required to ensure our recovery.<\/p>\n<\/p><\/div>\n

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The impact of COVID-19\u2019s third wave on trading activity was severe. Then, just as we were emerging from a lockdown in July, many of our restaurants in KwaZulu-Natal<\/keep> and some in Gauteng were damaged in the riots. The Group\u2019s logistics facility in Westmead, KwaZulu-Natal<\/span>, was damaged and closed for three weeks before it became fully operational again. Through the activation of our business continuity plan, we continued to deliver to restaurants in the affected areas. <\/p>\n

In November, the announcement of the Omicron variant made a considerable dent in our traditional high tourism season. International travellers cancelled their trips to South Africa<\/keep>, while anxiety about the new variant reduced local travel. <\/p>\n

Yet, despite the challenges, there were highlights. We grew our footprint by 118 new restaurants, with the biggest gainers being our Debonairs Pizza<\/keep> and Steers brands. The bulk of this growth was from South Africa. We revamped 149 restaurants, showing confidence in our brands and the future.<\/p>\n

We grew our AME footprint, understanding that a one-size-fits-all approach does not work. In some countries, we are building scale through investing in Company-owned stores, while in others, we are pursuing the franchise or Master License model. We are building teams in-country to gain from the on-the-ground experience rather than managing operations from South Africa.<\/p>\n<\/p><\/div>\n

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Key features of 2022<\/p>\n

The restaurant industry recovers<\/b><\/p>\n

Less severe COVID-19 restrictions allowed restaurants to regain some ground. Our Supply Chain performance improved in response to this improved front-end activity.<\/p>\n

Difficult operating conditions<\/b><\/p>\n

Our agility enabled us to adapt to uncertainty and changing customer behaviour. <\/p>\n

A growing footprint<\/b><\/p>\n

We opened 118 new restaurants, bringing our total brand footprint to 2 824. <\/p>\n

An evolution, not revolution<\/b><\/p>\n

We launched our 2023 to 2025 strategic roadmap, demonstrating how our strategy is evolving to adapt to our changing operating environment. <\/p>\n<\/p><\/div>\n<\/p><\/div>\n

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Our Manufacturing and Logistics divisions recovered, thanks to increased trading activities at the front-end. We continue to execute our strategy across the back-end. We closed the Gauteng Bakery, absorbing most employees into other operations. We relocated our Famous Brands Coffee Company to a new, more efficient site, resulting in an instant morale boost.<\/p>\n

Our employees had to make salary sacrifices once again during the hard lockdown in July. In this context, it was pleasing to receive positive feedback from employees. Voice your View is our annual employee survey that polls employees on various aspects, including communication, leadership, happiness and beliefs. In 2022, Famous Brands\u2019 overall engagement score for administration staff increased from 75% to 77%. We saw our happiness score increase from 69% in 2021 to 74% in 2022. This rating puts us in the top company category for the survey.<\/p>\n

Read more about our performance across our trading markets in<\/em> our operational review<\/a>.<\/p>\n

Enduring changes from COVID-19<\/h2>\n

COVID-19 has fundamentally changed our operating environment, and we need to operate differently. Growth in Sub-Saharan Africa has slowed, and while South Africa\u2019s economy has rebounded, it is still a smaller economy than before the pandemic. Both our system-wide sales1<\/sup> and margins remain under pressure.<\/p>\n\n\n
1<\/sup><\/td>\nSystem-wide sales refer to sales reported by all restaurants across the network, excluding restaurants opened or closed during the period.<\/td>\n<\/tr>\n<\/table>\n
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Trade-offs in 2022<\/h2>\n

Supporting franchise partners:<\/b> We decided to continue to support struggling franchise partners knowing that this would affect our profitability in the short to medium term.<\/p>\n

Implementing salary sacrifices:<\/b> In response to the South African alert level 4 lockdown in July 2021, we decided to implement salary cuts again. While this decision supported the sustainability of our business, we understood that salary cuts would have an impact on employee morale. <\/p>\n

Limiting ESG progress:<\/b> Our slowdown in capital expenditure due to an uncertain operating environment meant that progress on ESG projects has also been slow, at a time when we would have liked to accelerate this. <\/p>\n<\/p><\/div>\n<\/p><\/div>\n

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In this environment, category leaders continue to demonstrate resilience at the expense of second-tier brands. While we are not seeing many new competitor brands emerge, existing competitors are well-entrenched, and competition is fierce. Owning our brands and intellectual property gives us greater flexibility than our global competitors, and we can move quickly. This is a significant competitive advantage in a crowded market. <\/p>\n

The customer has also changed post-COVID-19. Customers are looking for simplicity in their lives, and we need to respond with simple, good value offerings. At the same time, they want to try new things, which requires constant menu innovation. <\/p>\n

Social media appears to be driving an increase in environmentally conscious and socially connected customers. These empowered customers are pushing brands to embrace their values. This creates reputational risk when our brand values do not align with our customer values. On the upside, this pushes us to drive our sustainability initiatives harder.<\/p>\n<\/p><\/div>\n

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Staying true to our purpose <\/h2>\n

Our relationships with franchisees have strengthened through the trials and tribulations of the pandemic.<\/p>\n

We never forget that our primary route-to-market is the franchise model and that our franchise partners drive our economic engine. Franchise partner profitability and sustainability are always a core focus, particularly given our exposure to large numbers of small franchisees whose loyalty is key to future growth through opening new restaurants. <\/p>\n

In 2022, we continued to support our franchise partners through reduced franchise fees and marketing contributions. The adjustments we made in 2021 to simplify menus continue to assist franchisees by lowering their input costs. When required, we also assisted franchise partners in renegotiating better rental terms from landlords. In July 2021, Famous Brands stepped in to protect franchise partners affected by the unrest in the form of royalty relief, assistance with insurance claims and bridging finance to help them rebuild while waiting for insurance payouts.<\/p>\n

We are experiencing a tightening of the local franchise market as new franchisees shop around for the best business opportunity. We always need to ensure that our value proposition is well-considered, with more appeal than our competitors.<\/p>\n

The rationale for the Lexi\u2019s acquisition <\/h2>\n

While historically plant-based food was regarded as a privileged way of life, in line with the global trend, there has been a marked expansion of the demographics of Lexi\u2019s customers. <\/p>\n

In April 2022, post our year-end, Famous Brands acquired 51% of Lexi\u2019s Healthy Eatery, giving us exposure to the growing vegan and plant-based market. Lexi\u2019s, whose slogan is \u2018Eat more plants\u2019, offers a full-service, sit-down, plant-based, gluten-free and refined sugar-free breakfast, lunch and supper dining experience at its four restaurants in Rosebank, Modderfontein, Pretoria and Sea Point.<\/p>\n

The deal includes a majority shareholding in Lexi\u2019s central kitchen operation, which develops and produces meals for the restaurants and retails a limited range of convenience frozen goods to a small number of supermarkets.<\/p>\n

The acquisition is aligned with our three-year strategic roadmap, which includes acquiring brands with sound growth prospects and the potential to be category leaders. We believe that the entrepreneurial energy of Lexi\u2019s founders and our infrastructure, industry experience and working capital will be a formidable combination. We plan to grow the brand\u2019s footprint through a Quick Service Restaurant format while exploring opportunities to offer more plant-based options in our Retail range.<\/p>\n

Focussing on the next phase<\/h2>\n

Our focus in 2023 will be operational excellence, prioritising core long-term operations and improving investment returns for franchise partners.<\/p>\n

We have moved from a survival phase to a recovery phase, with our eyes on the thrive phase. We expect to see a continued recovery in 2023 as the remaining COVID-19 restrictions fall away. Our short-term focus is to sustain our revenue while achieving positive cash generation, while our medium-term focus is to recover margin. We have reduced our interest-bearing debt in 2022, and plan to continue this trajectory in 2023.<\/p>\n

For the next three years, our strategic focus is generating growth from our existing Leading Brands portfolio through innovation in channels and formats and footprint expansion. <\/p>\n

An example of format innovation is the newly opened Mugg & Bean container in Woodmead. <\/p>\n

While the COVID-19 impact on Signature Brands has been brutal, we see some improvement. As people begin to celebrate their special occasions again, we expect to see them return to these restaurants. <\/p>\n

We will continue to invest in consumer-facing technology. Here, spending time to make the right technology choices is critical. <\/p>\n

In our Manufacturing division, we are driving operational efficiencies through our \u2018manufacturing way\u2019 programme. This programme focusses on the principles of continuous improvement. This includes overhauling our asset care practices to ensure more reliability and uptime from our equipment. We are also working on managing and reducing our environmental footprint. We will invest further into our best-performing manufacturing facilities and divest from selected manufacturing assets if necessary.<\/p>\n

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Quick fact<\/p>\n

As consumers become familiarised with plant-based products and initiatives, Bloomberg Intelligence foresees an evolution in consumer habits over the next decade. According to their research, the plant-based foods market could make up to 7.7% of the global protein market by 2030, with a value of over $162 billion<\/keep>, up from $29.4 billion<\/keep> in 20201<\/sup>.<\/p>\n\n\n
1<\/sup><\/td>\nRead more at bloomberg.com<\/a>.<\/td>\n<\/tr>\n<\/table><\/div>\n<\/p><\/div>\n<\/p><\/div>\n<\/p><\/div>\n

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In Logistics, our next steps are to relocate our KwaZulu-Natal Distribution Centre, move our Gauteng Cold Storage Centre and secure a cross-docking facility near Mthatha. <\/p>\n

We aim to double our Retail business by growing our distribution footprint and expanding our product range. We have ambitious plans to launch a new product every month for the 2023 financial year. <\/p>\n

The high inflation picture is certain to persist with high fuel and commodity prices. We have operated under periods of high inflation before, so we are accustomed to managing inflation. Trading in a high inflation environment has some potential upside for us. <\/p>\n

Extending our condolences<\/h2>\n

The health and wellness of our people are always a priority. Sadly, this year we lost several franchise partners, many of whom have been with us for decades. Their loss has had an immeasurable impact on the Group and is also felt by their employees, business partners, families and communities. <\/p>\n

We were also deeply saddened by the tragic passing of our colleague and friend Andre Piehl, who held several management and executive roles over almost 15 years. We also mourn the passing of colleagues Glen Dembo, Powlan Pillay, Jacomina Engelbrecht, Cecil Mbuthuma, Daniel Manulana and Ayanda Mabizela who are dearly missed at Famous Brands. <\/p>\n

I also extend my condolences to our employees who have lost family and friends to COVID-19. <\/p>\n

Our tributes to our departed franchise partners and colleagues can be found in Tributes<\/a>.<\/em> <\/p>\n

Acknowledging our stakeholders<\/h2>\n

Our resilience in the face of continued challenges is thanks to a significant effort from employees and franchise partners. To our employees, thank you for your dedication to delivering our strategy and willingness to adapt to a different operating environment.<\/p>\n

I thank our franchise partners for their endurance, hard work and continued trust in our brands. Amid tough trading conditions, several franchise partners also withstood the violent and destructive July unrest. The rebuilding has not been easy, and at the time of writing this report, some stores are still not open. <\/p>\n

In April 2022, our KwaZulu-Natal operations were again disrupted, this time by extensive flooding. Our thoughts go out to our franchise partners and employees affected by this catastrophic event. We closed several restaurants which are not able to immediately re-open.<\/p>\n

I am grateful for the support of my executive team who are growing from strength to strength, our Chairman, Santie Botha and our Board. It is a privilege to work with you.<\/p>\n

I also thank our customers, shareholders, suppliers and communities for their steadfast loyalty in another challenging year.<\/p>\n

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Darren Hele<\/p>\n

Chief Executive Officer<\/p>\n

23 June 2022<\/p>\n

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GFD’s report<\/span>
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