Famous Brands navigates tough trading conditions despite some product price decreases

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SIMON BROWN: I’m chatting now with Darren Hele, CEO of Famous Brands. Results for six months ending August saw revenue up 2.3%, Heps down 3.2%, and a dividend up 4.9%.

Darren, appreciate the time. Let’s start with the dividend. As I said there, Heps down, operating profit also down, the dividend up; also 57 million of shares bought back.

You are obviously happy, confident with both cash flow and the state of your balance sheet.

DARREN HELE: Yes, particularly. We’ve been through obviously quite a robust period of reinvestment in the business, and we know that trading is challenging right now. But with our capex number we’re through the worst and life’s a little easier in that sense; and we are in good control of our debt and are absolutely confident around the cash generation.

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SIMON BROWN: You mentioned the tough period, and this obviously would have been kicked off on the 1st of March. April then saw fuel price increases. We’ve also had inflation higher; we’ve had prime rates up.

It’s been a tough six months for the consumer and, in many senses, I thought there would have been a tougher sense in the numbers because, if I take Botswana out of the numbers, the consumer is actually there.

DARREN HELE: Yes, correct. Botswana – there’s a big kind of overhang there, so you’re quite right. It’s not booming, but the consumer, we’ve been surprised, month on month is holding up.

It’s not booming, but if you think about the cost that’s been passed on around fuel and how people must be mitigating that, they’ve certainly still got an appetite to spend on food.

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SIMON BROWN: I’m thinking here of your Leading Brands, which is your casual sit-down, you QSRs [quick-service restaurants]. I can’t help thinking that to some degree these are time-pressed consumers – and that’s been a Famous Brands story forever and a day.

I also can’t help thinking that your QSR is almost a treat these days, whereas before it might have been a staple – and that keeps it going a bit.

DARREN HELE: Yes, you’re quite right. We prefer it when people are kind of time-poor, cash-rich – and then you’re part of the eating segment. But I do think that the indulgent part is there and people will still use it for that. They’re not going to cut it out, but you may not be doing as much home meal replacement as you would have liked in a growing economy.

But then I do think it’s a matter of people balancing their time but, as you say, also treating themselves. Look, cooking at home is not cheap either. I think with the energy prices, et cetera, it’s not as easy as it used to be.

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SIMON BROWN: It certainly isn’t. Sixty60 must be a competitor of yours to a degree, because it is to a degree that convenience. And I take your point absolutely on price, but there is a convenience aspect as well.

DARREN HELE: Absolutely. All of these home-delivery players are competitors. I suppose with some of the aggregators we are what we call frenemies – we compete and we’re friends – but things like Sixty60 or Spar or Woolies are definitely cutting into the convenience space.

We’ve seen that and we saw that from the beginning. I think we’re trying hard to compete. We don’t compete head-on around the occasion, but we do compete around the convenience aspect, there’s no doubt.

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SIMON BROWN: Your Signature Brands – your sort of more fancy sit-down – are hurting. A lot of that seems to be poor.

DARREN HELE: Yes, but it’s interesting. It’s the brand that seems to have been the hardest hit with the downturn. I think because it has a luxury connotation we’ve seen that sort of spend contract quite quickly. There are always some things where I suppose we look at ourselves and could do better. But it has been quite interesting.

We’ve obviously got a strong Joburg bias and that has been interesting too.

So obviously a very competitive space too, and not necessarily our core space that we trade in. But there’s definitely a link to the consumer and the spend side.

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SIMON BROWN: Your supply chain – which is manufacturing, logistics, retail – collectively had not a bad period at all. Profit up 13%.

You talked around capex; you talked around efficiencies. I imagine a lot of this is coming out of the supply-chain part.

DARREN HELE: Yes, some of it has been masked with a bit of extra volume that we’ve had with basket growth – so that that has come at the right time. We’re very grateful for it. Volumes typically haven’t grown to the sense that they were versus the 5% that we’ve put up there – which has largely been around growing the basket.

And in particular we have brought a big beverage basket into the business to make our one-stop-shopping to franchisees better, and we have improved service level. That really has helped us in a difficult time.

SIMON BROWN: This is where I imagine you get hit on the fuel bill. Much as my diesel cost is up, I imagine your fuel bill in the supply chain must also be taking pressure.

DARREN HELE: Yes, significantly. We have been able to recover some of that from our franchise partners through a mechanism that we agree jointly; so some of it we have recovered because they understood and there was some margin there in terms of food pricing that had come down.

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You know, food pricing has been a little slower on inflation that we all anticipated, so we actually recovered some of that early – and it has definitely helped us in these results. But it’s purely a temporary relief because none of us really knew how long this would go on for. We took the pain in April and May, and then we introduced the levy from June onwards – and that has definitely softened the blow.

SIMON BROWN: What about two of the big costs – beef and coffee? I watch the prices both as someone interested in markets, but someone who likes a steak and likes a cup of coffee. Those have been massively volatile. How are those holding up, or perhaps improving for yourselves?

DARREN HELE: They’ve definitely come down from where we were  probably when we last spoke, but not to the degree we would have liked. Beef is quite stubborn, but it stopped that rampant rise that it was on.

Coffee has come down notably, and of course there’s some exchange-rate benefit there because virtually all coffee is imported. So the exchange rate helped a little too.

Beef has definitely stabilised, but it hasn’t reverted to the levels that we would have hoped, and in fact currently there’s some increase that’s coming through – which normally happens pre-Christmas.

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But it seems to be a bit early this year. We are hoping that it’s going to stabilise a bit, and it helped in this reporting period too. We have had some deflation on both beef and coffee.

SIMON BROWN: Obviously Famous Brands is well known for the brands out there, the QSRs, the Casual, the Signature.

But you’ve also a lot of tech. You talk around tech at your point of sale, you talk around using AI as well. Both of these are helping to grow revenues, streamline business, and take out some costs, I imagine.

DARREN HELE: Definitely. We’d like to do more and do faster, as you’re seeing in the marketplace, but it’s an investment our franchisees need to make alongside of us.

We can only do so much, but the uptake has been good and as we get a singular system it’s really helped and we took the initiative to invest. I think it will accelerate even more and there are definitely efficiencies that can be gained.

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But most important is just providing a better experience to the consumer. The consumer has become used to it, and there’s no reason why they would not expect it in every channel of their life – as you said in banking, et cetera.

SIMON BROWN: It is, I suppose, just where it is – and we see it everywhere. And I suppose, yes, we kind of expect it everywhere.

Darren Hele, CEO of Famous Brands, appreciate the time.

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