Famous Brands is changing the Wimpy brand in the UK to more closely resemble SA's Wimpy — with the conversion going well, says the CEO Kevin Hedderwick. And next in line for the UK is Steers...

Bruce Whitfield:
Here is an interesting fact for you, which will illustrate not only why Famous Brands is doing as well as it is but also why the whole consumer sector has been performing strongly. In 2003 according to Nielsen just 52 percent of South Africans visited a take-away outlet once a month; that number has now increased to 67 percent of South Africans who go to a take-away at least once a month.

Look it’s an average, not two thirds of South Africans always go to take-aways, but certainly the rate of visits to take-away outlets has risen and Kevin Hedderwick the chief operating officer of Famous Brands and Kevin I guess it goes at least some way to explaining why you have got a 40 percent increase in headline earnings per share.

Kevin Hedderwick:
Bruce yes our business continues to be driven by this concept of out of home consumption and convenience and the numbers that you quote are even more pronounced if one looks at the emerged market amongst black consumers where in 2003 the usage was 43 percent and it has now risen to 59 percent.

Bruce Whitfield:
But those sorts of numbers all translate to growth in your bottom line but also margins are a function of two things I guess; you have got efficiencies and price increases. Your margins grew from 17 percent to more than 21 percent in the six months and you say your price increases were below food inflation, which means there are a lot of efficiencies coming through.

Kevin Hedderwick:
We have worked very hard in terms of the manufacturing side of our business in particular. For the last two or so years we have been investing substantial amounts of capital expenditure into the manufacturing side of the business, all with a view towards extracting efficiency out of that part of the business, increasing productivity, and that has begun to come through.

Also with regard to the franchising side of the business the nice thing about the franchising business model is that your increase in turnover is not necessarily to be supported by an increase in cost to the same level. So once you get economies of scale in your franchising there is good margin growth and good savings to be had.

Bruce Whitfield:
Do you get paid then per burger sold rather than on the profit that is made per burger?

Kevin Hedderwick:
Yes our franchisees are paying us royalties and an advertising levy based on their declared turnover at the end of every month.

Bruce Whitfield:
Again is the vast majority of what you sell over-the-counter manufactured by yourselves? I know you don't grow the tomatoes and onions yourself but the burger patties, the burgers, the drinks that you sell.

Kevin Hedderwick:
We do, it is a combination of manufacturing ourselves and outsourced. What we do manufacture ourselves are our sauce products, most of the meat products, bakery, ice cream, and fruit juices and then the rest of the stuff is sourced from outside distributors or manufacturers but on average what we would deliver to a franchisee’s backdoor we call a loyalty factor is anywhere between 65 and 85 percent.

So essentially what franchisees would be buying from third-party non-franchised brand distributors would be essentially the CSD cold drinks from Coca-Cola and fresh fruit and vegetables.

Bruce Whitfield:
And which goes again to the point that if 85 percent of what is being sold over-the-counter is manufactured by yourselves the more control you have over that manufacturing process the higher those margins which explains the growth from 17 to 21 percent.

Kevin Hedderwick:
And to the extent that we are able to control pricing to an extent to the end consumer. In terms of our business, our value for money proposition across all of our brands, it is important for us to try and wherever possible price our products in terms of menu, our increases which are below inflation which we have achieved in the last six months. Procurement in our type of industry has taken on a completely new portfolio.

In the earlier days it was about sitting across the table from a supplier and saying well you know we represent 1500 restaurants so therefore the price should be x is not that much more to take out of the price. Now what we are doing is we are looking at the total supply chain and seeing how we can take cost out through re-engineering of product, looking at double handling, all designed to try and make us lowest cost producers so that we can pass that on to our franchisee network and keep the price down for the consumer.

Bruce Whitfield:
Is there much more you can do?

Kevin Hedderwick:
There certainly is in terms of the manufacturing and logistics side of the business. I mean what we have done we have taken on a consultant to help us with a project which we call ‘total cost of ownership’.

I think there is still some scope for margins particularly in our manufacturing business, franchising not so much, but in manufacturing and logistics yes I think there is still some upside.

Bruce Whitfield:
What about the Wimpy UK business that seems to be settling down? The turnover there still quite small but you are making a profit.

Kevin Hedderwick:
Yes we are very happy you know I mean to summarise the Wimpy transaction is that we are busy fixing the business, we are servicing their debt, and the business is turning around and we are making a profit. So we are in a very nice place in terms of Wimpy UK. We have just opened a new restaurant in Essex in terms of the new footprint for Wimpy UK.

Our franchise partner is delighted with the result so we have put in a brand-new menu into Wimpy UK, which starts to spread the offering in terms of breakfasts, and coffees, which they never had before, and we are starting to see some positive results. So there is lots of room to be optimistic about our strategy of fixing Wimpy in the UK and using that as a beachhead for our other brands in the United Kingdom.

Bruce Whitfield:
Now is Wimpy UK a lot more like the Wimpy in South African now than it was a year ago?

Kevin Hedderwick:
Not quite. I would say in the last six months we have made some small shifts. One of the things that we have done is that in terms of the brand iconography the Wimpy signage in South Africa if you recall is almost like a Wimpy bun logo, we have adopted that signage in the UK and we have also adopted the coffee line and advertising which is ‘ Enjoy Every Moment’ and that has been run across the total network.

We have also downloaded some of the good menu work done in South Africa. We have downloaded some of the kiddies strategies in terms of marketing for children. So wherever we can transfer intellectual property across we have done that but it is still part of a two-year turnaround programme but things are going well, we are on track, and I'm confident that in two years time we will have a good business over there.

Bruce Whitfield:
Which brand do you anticipate will be next in terms of being able to export what you do in South Africa into that UK market?

Kevin Hedderwick:
It has got to be Steers, Bruce. I mean we get an enquiry probably one every second week from somebody who wants to open a Steers in and around London. I am sure you are aware there is a hell of a lot of expats over there, they miss the Steers brand, they are looking for the Steers brand.

So in the past we have never been able to accommodate those requests because simply we haven't had an office over there and to manage it out of South Africa would be complicated. We now have an office over there, we have an infrastructure that can service that so we will probably be looking to export and install the Steers brand there towards the latter part of next year.

Bruce Whitfield:
So the wheels are already turning on that particular deal.

Kevin Hedderwick:
Yes I mean we are talking about what a Steers could typically look like in the UK context and our year end is end of February so we will go into a new year from the first of March by that time the strategy plan for Wimpy UK will have been signed off and I'm confident that included in that strategy plan will be the export of Steers.

Bruce Whitfield:
You always talk about having exposure to chicken. You have come close to deals from time to time. Any closer there?

Kevin Hedderwick:
We are a lot closer but we are probably more frustrated by the month. I mean it is for us a significant gap in our repertoire. We have pursued a couple of options in the past and they have turned up blank but I must say personally myself and I suppose my board as well are becoming quite impatient about the fear of being left behind.

Chicken is a significant player in the industry growing at a rapid rate and I don't want to be left behind for too long so I think we are going to have to up our ante next year in terms of getting into that category.

Bruce Whitfield:
Kevin Hedderwick thanks very much indeed the chief operating officer of Famous Brands always interesting to listen to him. We are so familiar with the brands that they have got, Debonairs and Steers and Wimpy and Brazilian Cafes and all these other brands that we come across on a daily basis all owned by Famous Brands which has been a magnificent growth story in recent years.