Famous Brands' UK burger flop
Uncertainty over Brexit is one of the many challenges responsible for the poor performance of Famous Brands' UK investment, Gourmet Burger Kitchen (GBK).
In a trading statement for the year ended February 28 that was released on Monday, Famous Brands reported a 7% decline in sales at GBK, citing political and economic uncertainty, as well as constraints in consumer spending, as the biggest problems.
Famous Brands, which locally owns Debonairs Pizza and Steers, acquired GBK in 2016 for £120m (about R2.3bn) shortly after the Brits voted to leave the EU.
This was the biggest transaction in Famous Brands' expansion strategy and it has taken steps to halt the losses, slimming down the business and cutting marginal costs. It has closed 24 GBK outlets and said in October last year that it would restructure and negotiate its property portfolio with creditors.
Management expressed optimism that the turnaround strategy for GBK is gaining momentum.
The uncertainty over Brexit has had an impact on consumer spending, which has widely affected the quick-service restaurant industry in the UK as consumers are under immense pressure.
Stagnant wage growth amid a weakening pound and rising inflation has forced consumers to rethink their spending, said Anthony Clark, an independent analyst.
"The underlying inflationary cost for consumers has risen quite sharply but underlying wage inflation has not improved. There's a cost squeeze, which means they have to allocate their money into areas like mortgage costs. Fuel has gone up, [as have] rates and taxes, electricity and gas; wages in real terms have not gone up that much at all," Clark said.
Even without Brexit's bite on GBK's performance, the acquisition was considered a risky move as the chain struggles to make headway in the UK's competitive fast-food market.
"In retrospect, Famous Brands overpaid for this acquisition," said Keith McLachlan, a fund manager at Alpha Wealth Management.
"They overestimated their ability to extract growth and underestimated the competitiveness of the market. Both of these things, timed with Brexit driving soft consumer confidence in the UK, combined to make it particularly toxic.
"Large acquisitions often do not work. The odds are stacked against you. This was definitely, in Famous Brands' case, a very material transaction. Unfortunately that comes with risk, and the risk has materialised," McLachlan said.
Finding its feet in the UK fast-food industry and securing its market share have been an uphill battle for Famous Brands, with like-for-like sales having decreased 6.8% in the the previous year.
This week, Domino's Pizza UK reported a stronger performance for the year to December 30 for its UK and Ireland outlets. The franchise managed to thrive in the same tough conditions, which CEO David Wild said in a statement was a "challenging environment for casual dining".