Food may be more to market Taste

Taste Holdings told the market this week that it would sell off its crown jewels, in a move that many saw as a way of appeasing an investment community that struggled to see the link between a Fish & Chip Co franchise and a Hublot watch that was probably worth about half of the business.

The luxury goods division, made up of Arthur Kaplan Jewellers, NWJ and World's Finest Watches, is being spun off in order to focus management's attention on the fast-food business.

"A recent strategic review by the board has concluded that the group should concentrate future investments and management efforts on rapidly growing the food business, where returns are high and opportunities abound," the company said.

This is very interesting and rather courageous on the part of CEO Carlo Gonzaga and his team, since the temptation could easily have been to stick to luxury goods.

In its 2016 annual results, the luxury business grew revenue 79% year on year and delivered just under R70-million before tax and other deductions.

On the other hand, the food division, which consists of a few rather sizable start-ups, grew revenue by 24% on the back of a roll-out of new stores - but reported negative earnings before tax and deductions of R4.5-million, thanks to some one-off line items related to investments made in this division.

A conservative board could quite easily have settled for the more resilient luxury goods business, and rather sold off the more complex food businesses, especially given the rough time the group had in launching Domino's back in 2014.

However, the group is a far cry today from 2011 when luxury goods made up 73% of its sales.

In 2016 that was down to 54%, thanks to the growth of the food division, although this has not been without its challenges.

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The group's other food brands, such as Zebro's and Fish & Chip Co, could be more sensitive to an under-pressure middle- to low-income consumer segment. The second half of 2016 delivered same-store sales growth of 7.2% for Zebro's, 3% for Maxi's, and a contraction of 12% for Fish & Chip Co.

The company makes a compelling argument that the group has become two businesses in one - and that creates challenges on not only the quantum but also the type of capital one deploys.

"The luxury goods and food businesses are very different in their maturity, capital returns and working capital requirements," said the company statement.

"In particular, the food business, with the recent Starbucks and Domino's investments, looks much like a start-up and therefore requires more equity than debt to grow while the luxury goods division, a mature and established business, requires the opposite to capitalise on its growth prospects."

Basically, this is a rebirth of Taste Holdings as we know it.

The other big factor the board would have considered is the price it could fetch for the luxury businesses.

It is one thing to make the right long-term strategic decision for the business; it is another to fetch the right price in a slow-growth market that is becoming more uncertain for any investor, especially one buying a specialist retail asset.

To always back yourself even when others doubt you must rank as one of the most important characteristics of an entrepreneur.

What Taste Holdings has done here may be counterintuitive and seen as selling the crown jewels and backing the potential rough diamonds.

But it is this resilience and conviction that separates the self-employed from the entrepreneurs.

In his 2016 annual results presentation to investors, Gonzaga opened with a slide that captured the culture of Taste.

It read: "Grow with discipline. Balance intuition with rigour. Innovate around the core. Don't embrace the status quo. Find new ways to see. Never expect a silver bullet. Get your hands dirty. Overcommunicate with transparency. Tell your story, refusing to let others define you. Use authentic experiences to inspire. Stick to your values - they are your foundation. Hold people accountable, but give them the tools to succeed. Make tough choices, it's how you execute that counts. Be decisive in times of crisis. Be nimble. Find truth in trials and lessons in mistakes. Be responsible for what you see, hear and do. Believe."

They say culture eats strategy for breakfast but, as we all know, execution rules them all.

From one entrepreneur to another, I hope the market believes.

Khumalo is chief investment officer of MSG Afrika and presents "Power Business" on Power 98.7 at 5pm, Monday to Thursday. He does not own shares in Taste Holdings.