Chief Executive Officer’s report

We performed strongly against our strategy and continued to grow and develop our brands.

The year 2023 was a tale of two halves. A strong post-pandemic recovery characterised the first half as consumers embraced the pleasures of eating out, local travel and attending events. As the pandemic subsided, new variants were no longer greeted with the same level of anxiety. While e-commerce and online food ordering have grown, people still crave meaningful interpersonal connections. They want to celebrate occasions or simply meet up with friends and family.

In September 2022, as we marked our half-year, the incidence and frequency of load shedding intensified. The economic consequences of load shedding cannot be understated. It slows economic growth, diverts funds for growth and investment into operating costs and crushes business and consumer confidence. Few corporates, let alone small business owners, can thrive at level 6 load shedding. For a business, it takes the focus away from growth and opportunity to just keeping the lights on.

Surprisingly, the consumer has held up much better than expected. Despite everything, South Africa remains a resilient nation. For many, there is still room in the budget for the affordable luxury of a take away or meal out. The space is still highly contested, but we ensure our continued relevance by offering value, loyalty programmes, product innovation and marketing campaigns to reinforce key quality perceptions. We also have an experienced management team who has navigated a high inflation environment.

While the world is moving towards a renewable energy future, we increasingly rely on fossil fuels.

Despite the economic challenges in South Africa and elsewhere, there is still room for growth in the branded food services sector. Our franchise partners tend to agree. In 2023, we expanded our footprint by 152 new restaurants. The biggest gainers were once again our Debonairs Pizza and Steers brands, and most of this growth was in South Africa. We also revamped or relocated 176 restaurants, demonstrating our franchise partners’ commitment to reinvest in our brands.

We continued to grow our footprint in Rest of Africa and Middle East through a mix of partnerships, franchising and Company-owned stores. We are bolstering our on-the-ground presence in selected African markets and the Middle East. We opened the first Debonairs Pizza restaurants in Oman and the Kingdom of Saudi Arabia and introduced the Steers brand to the United Arab Emirates. Across several AME markets, Famous Brands and our franchise partners are investing in their own delivery channel. This includes our investments in ordering platforms and our franchise partners’ investments in delivery hubs.

The impact of the local energy crisis

During load shedding at stage 6, some of our Manufacturing plants run more than 40 hours per week on diesel. Not only is this expensive, but it puts a tremendous strain on our generators. It increases the servicing intervals and the frequency of breakdowns and disruptions. We have invested in newer, more efficient generators and have accelerated our plans to install more solar plants.

Famous Brands buys significant volumes of local vegetable and animal products. Here, load shedding creates problems at every leg of the agricultural production chain, from crop irrigation to processing and storage. In addition, if not mitigated correctly, it can also affect food safety and increase food waste. Our procurement team work hard to overcome these challenges by increasing our local and international supplier base. We have protected the cold chain and experienced no material increase in food waste.

Our franchise partners bear the greatest brunt of load shedding in increased operating costs, lost revenue and disruptions. They often cannot provide their consumers with the service they deserve. Restaurant owners deal with countless hidden irritations related to load shedding. We work with our franchise partners to mitigate the impacts of regular power interruptions. Here, our collective intelligence can make a difference in understanding and resolving the most common challenges experienced. At year-end, 81% of our Leading Brands network in South Africa had some access to alternative power.

Read more about how our restaurants mitigate the impact of load shedding in our operational review.

Trade-offs in 2023

Accelerating our solar investments:

While investing in renewable energy was always on the cards, we decided to bring many of these projects forward. While these investments will impact our capital plans in the short to medium term, they will ensure greater resilience and energy independence.

Putting our dough mix plant on hold:

Famous Brands had planned to invest in a new dough mix plant to be commissioned in the 2024 financial year. This project was placed on hold as the weighted average cost of capital did not meet our requirements for the 2024 budget. The Manufacturing management team is working on alternative options to reduce the capital investment required.

Impairing goodwill from our investment in Venus Solutions Limited (Wimpy UK):

We took the decision to impair goodwill from our investment in Venus Solutions Limited due to continued poor economic conditions and constrained consumer spending in that market.

Impairing the loan advanced to UACR:

We partly impaired our loan in our associate in Nigeria due to a challenging economic environment.

I joined the CEOs of some of South Africa’s largest retailers and consumer goods companies in addressing a letter to President Ramaphosa outlining our concerns regarding the energy crisis and its crippling effect on businesses.

The open letter, issued on behalf of the Consumer Goods Council of South Africa members, noted the consumer goods industry’s significant contribution to gross domestic product (GDP) and position as South Africa’s largest employer. Instead of expanding and creating new employment, the industry spends billions on diesel. This financial burden is unsustainable and will result in higher pricing for consumers, who are already under severe financial strain. We need urgent and decisive action to solve the energy crisis.

As an industry, we advocated for suspending the fuel duty levy and road accident fund for the consumer goods industry for as long as load shedding occurs. We are a critical sector in providing stable food, medicines and other essential goods supplies. As a critical sector, we should qualify for fuel rebates similar to the mining, agriculture, fisheries and forestry sectors.

Thankfully, during the National Budget speech in February 2023, Finance Minister Enoch Godongwana announced a diesel fuel levy refund to food manufacturers for two years, effective 1 April 2023 to 31 March 2025. We have commenced the process to register the relevant plants on this scheme. Unfortunately, at the time of publishing this report we have not been able to successfully register for this scheme.

The Minister also announced a 125% tax deduction on the cost of renewable energy assets for businesses. The incentive, which will be available for two years, applies to assets brought into use for the first time from 1 March 2023 onwards and cover all project sizes. This decision is welcomed and certainly strengthens the investment case for renewable energy.

Responding to the KwaZulu-Natal floods

In April 2022, parts of KwaZulu-Natal were affected by devasting floods, impacting many lives and businesses. In total, 99 restaurants were closed due to damage or poor accessibility to the locations. The floods also affected our KwaZulu-Natal franchise partners as holidaymakers cancelled their Easter trips to the region.

Fortunately, our KwaZulu-Natal Distribution Centre did not suffer any direct damage, although employee attendance and damage to the road infrastructure did create some delivery delays. The Logistics team quickly rallied to ensure that all restaurants were serviced, and none were affected by dropped product deliveries. With the support of TruBev, we assisted our franchise partners with water deliveries of over 100 kilolitres to keep their businesses operational.

The Debonairs Pizza team and our franchise partners wasted no time supporting those in need. The brand donated seven tonnes of food to affected families through its long-standing Doughnation corporate social investment (CSI) initiative. I am impressed by the camaraderie and resilience of our KwaZulu-Natal franchise partners. They have faced several challenges in the past few years, including the civil unrest in July 2021, poor tourism seasons due to COVID-19 and, more recently, the beach closures due to sewerage spills in December 2022.

Read more about our CSI activities in 2023.

Executing our Logistics strategy

The new KwaZulu-Natal Distribution Centre was commissioned in November 2022. The centre offers several advantages over the previous centre, it is larger and has a more efficient layout. In addition, it offers the opportunity to generate up to 334 kWp of our electricity needs from our rooftop solar installation.

In October 2022, we announced our intentions to purchase the Midrand Campus head office. Our head office has been at 478 James Crescent, Halfway House in Midrand, since 1990. The purchase, finalised in February 2023, was for the acquisition of Steers Properties (Pty) Ltd and Halamandaris Props (Pty) Ltd. The properties will be redeveloped and expanded to better align with the Group’s strategy for its Logistics division. This includes investing in new cold storage facilities to allow Famous Brands to relocate its Cold Storage Centre to Midrand from Crown Mines. This purchase is another step in better utilising our head office campus. In November 2021, the Group purchased the adjoining property at 39 Richards Drive.

Midrand is well-suited as the heart of our Gauteng Logistics operation. This transaction paves the way toward a better functioning, bigger, fit-for-purpose campus. It will allow us to consolidate Gauteng Logistics operations allowing for great efficiencies and, ultimately, cost savings. The project team is working towards a deadline of relocating our Gauteng cold storage facilities to Midrand by October 2024.

Warehousing technology has evolved considerably over the years. In 2023, we began to roll out a best-in-class warehouse management system across our distribution centres. We are experiencing the system’s benefits through more business intelligence and better planning and scheduling capabilities. We plan to complete this roll-out across our distribution centres in 2024.

Cultivating the right culture

We are a high-performance team with a unique culture. Voice your View is the annual employee survey that provides feedback on our working environment. Employees provide scores on culture, leadership and communication. In 2022, our score of 77% remained unchanged and placed us in the top company category for the survey.

Based on the likelihood of employees recommending the Company as a place to work, our net promoter score improved from 19.6 to 21.4. The survey, which had an overall response rate of 92% (2022: 89%), indicates that we have created a culture that supports our strategy execution. Importantly, the survey also indicates the areas where we need to improve, and we have implemented plans to address these.

Read more in our human capital report.

Wage negotiations

We concluded our wage negotiations on 31 May 2023 agreeing to a two-year deal.

Looking to the future

We see opportunities for growth and improvement throughout our business. In our Brands division, we will continue to grow our footprint through franchising, licensing and Company-owned stores. We are working on exciting partnerships with retail groups and prominent loyalty programme providers.

In 2023, we opened three drive thru restaurants in South Africa and will focus on growing this format in 2024. The format meets consumers’ growing requirements for convenience and security. In 2023, we trialled a new Steers Fried Chicken as a clip-on, standalone concept on an existing Steers outlet. The consumer reception has been positive, and if the pilot is successful, we will roll it out further.

We are investing in delivery technology to improve our last mile efficiency for own delivery. Partnerships with third-party platforms will remain critical. Here, menu engineering across third-party platforms and own delivery will be essential to deliver targeted gross profit margins. Investing in consumer-facing technology is important in ensuring our relevance and meeting consumer needs.

In our Manufacturing division, we continue to drive operational efficiencies, improve product quality and explore ways to reduce our environmental footprint.

Our Logistics strategy is progressing well with our plans to relocate our Gauteng cold storage facilities to Midrand. We are still investigating potential sites for a cross-docking facility near Mthatha in the Eastern Cape. Increasingly, our Logistics strategy is enabled by technology. Since 2016 , our franchise partners have used an online ordering platform. We have plans to grow our share of the overall basket through an upgraded and improved targeted online strategy.

The Retail division will focus on expanding its distribution footprint, growing volumes and launching new product lines and extensions.

Read more about our investments in consumer-facing technology.

There are many ways to drive innovation through trading formats, technology and product innovation.

Supporting our franchise partners

We never lose sight of the franchise model being our main channel for reaching consumers. The sustainability of our franchise partners is essential for the continued success of our Brands, Manufacturing and Logistics divisions. We always prioritise franchise partner sustainability.

In light of the further weakening of South Africa’s economic prospects and persistent load shedding, we continue to monitor the health of our local franchise networks. In March 2023, we implemented franchise partner financial relief. These financial relief measures include a lower royalty and marketing fee percentage on sales generated during load shedding hours.

Read more about our strategy.

We remain committed to ensuring a profitable and sustainable business model for our franchise partners.

Appreciation

I thank our franchise partners for their tenacity while operating in an increasingly hostile environment for small business owners. Yet, despite these challenges, they continue to invest, employ staff and contribute to their communities. Our franchise partners in smaller towns have to contend with load shedding and service delivery failures by municipalities. We will keep working to ensure our franchise partners’ continued success and sustainability.

I appreciate the commitment from my executive team, and it is an honour to collaborate with you. Thanks also to our Chairman, Santie Botha and our incredible Board members, who are a good mix of long-standing directors and newer faces. Thank you for testing our thinking and keeping us on our toes.

Our continued success is also attributed to our dedicated and talented employees. The past few years have been challenging for our Group, and I thank our employees for their continued faith in the Famous Brands journey. Despite the difficulties, we have made excellent progress in executing our strategy.

I also thank our communities, shareholders, suppliers and consumers for their unwavering support during another difficult year.

Darren Hele

Chief Executive Officer

21 June 2023