Famous Brands CEO Kevin Hedderwick on brand expansion and beating inflation.

Bruce Whitfield:
Well Famous Brands, which owns a range of restaurant businesses in South Africa, including Wimpy and Steers, reporting solid results for the year to the end of February but the company pointing out in its results announcement that the second half of its year was tougher than the first half and consumers are being battered by, amongst other things ,food inflation and it is also hurting input costs no doubt. Kevin Hedderwick, the chief operating officer of Famous Brands with us now, and Kevin, when you look at the impact of food inflation that must be having a huge impact on your own input costs and everything you produce.

Kevin Hedderwick:
Good evening Bruce. I'm not quite sure that you can say we have been battered but certainly we are beginning to feel it. Our average weighted menu price increase last year has been of the order of 4.5 to 4.8 percent but notwithstanding that our brands are proving pretty resilient in that our average like on like turnover growth has been in the order of nine percent so we have also done some good market share gains in the process.

Bruce Whitfield:
When I was referring to battered I was of course referring to consumers, people who come through your doors, they are the guys who are getting battered on all fronts at the moment. Are you noticing that their spending capacity has been limited?

Kevin Hedderwick:
What we have noticed Bruce and it was more pronounced in January and February when it relatively is a normally quiet part of the year is that the frequency of visits to the restaurants had dropped back a bit but the average spend per head was still standing up nicely.

Bruce Whitfield:
When you look at food inflation and you are saying the average menu cost 4.5 to 4.8 percent up it suggests that you are absorbing a lot of that input cost yourselves. Are you in fact doing that?

Kevin Hedderwick:
We are trying to do some clever things if I can put it that way. I mean we have traditionally done some good work in terms of importing of red meat for argument's sake in order to protect our margins and also our franchisee margins while remaining competitive at the consumer end because as you can imagine red meat in terms of the patties that go into our burgers is a big component of the input costs. Because we are backward integrated our business in terms of owning the supply chain we are continually searching for efficiencies and particularly in our manufacturing business. I mean manufacturing has got to become for us one of the lowest cost producers so we have outsourced some line items that have been non profitable for us so we have rationalised the range and as those efficiencies are beginning to materialise so of course we are keeping the costs down. Another example is that the spiralling price of diesel for argument's sake what we used to do and still are at the moment in fact but that will change quite shortly is we have been delivering baking products to our franchise network six different times a week, what we have done is re-engineered our bread products so that we have got longer shelf life, we are vacuum packing the products now, vacuum sealing, and we are delivering three times a week instead of six so it is all that clever thinking that one needs to apply when you get into this type of environment.

Bruce Whitfield:
Certainly it helps to keep your overheads down but what for example and I don't know if you can tell me this off the top of your head I hope you can is the cost impact of food inflation year on year on like a Steers burger, the regular Steers burger? How much more expensive is it to produce that burger than it was say 12 months ago?

Kevin Hedderwick:
It is probably over the order of about 7 percent.

Bruce Whitfield:
And even though that order of 7 percent increase your menu prices up on average between 4.5 and 4.8 percent so there is some margin squeeze coming through.

Kevin Hedderwick:
There is some margin squeeze; we have taken some margin squeeze in our own business. At the half-year our margins were kind of nudging close to 20, at the full-year the margins have come out at 17.8, 17.9, so consciously what we have done is taken some of that margin and absorb it our self. It is important for us in terms of where our brands are positioned and I think that is why the brands continue to turn in the kind of turnover that they are because of the environment in which we play or trade if you want to is very much in that value for money category so making sure that we keep the price attractive to the consumer is very important for us strategically going forward.

Bruce Whitfield:
One has to ask the question then just how much more margin compression can you take if we do continue to see this sort of food inflation around the globe, it is certainly nobody’s fault locally that food inflation is going the way it is. There comes a point when you can no longer cut out the fat.

Kevin Hedderwick:
I think that is true and I mean you know in our business and the restaurant business per se I think the kind of traditional thinking has been that menu price increases maybe once a year, sometimes twice when you get into a bit of a squeeze and I think that that frequency perhaps has to be upped this year.

Bruce Whitfield:
A slower restaurant roll out but still a 106 new restaurants across your brands, you opened 150 last year but I suppose with the lower retail developments we are going to see even slower growth this year as well.

Kevin Hedderwick:
Well the 106 number was adversely affected to an extent by the fact that some of the shopping centre developments are running late in December, January, February at the back end of the year because of problems with Eskom and developers not getting access to power. So some of those have flocked into the New Year and if you add those back we would have probably ended at 120 new restaurants. In terms of going forward I mean we are still pretty bullish, we are planning to open a hundred new restaurants in South Africa this year and 18 outside of South Africa and those numbers are not numbers we just bandy around we have a development schedule in place which we visit on a weekly basis and of those 118 restaurants there are 74 of them with already work in progress. So you know if we exit the year and we opened another hundred restaurants I think we would have done splendidly.

Bruce Whitfield:
It is ambitious and the 18 outside South Africa, where are those going?

Kevin Hedderwick:
Primarily in Africa but we are also wanting to up our game in the UK. I mean we have consciously taken a bit of a defensive strategy in the UK up to now whilst we have spent a lot of time getting that business into good nick but we really want to take Wimpy out of the rural market now and make some very profound statement in high Street London about the fact that Wimpy is back so we are excited about looking for two very high profile sites in the UK as well.

Bruce Whitfield:
You bought Wimpy UK and it was a fairly soggy and a tired business, you describe it as rural which is another term for it but bringing it into the mainstream, into the city, into sort of central urban areas is one step as well at the last time we spoke you also said you wanted to take Steers into the UK market too. What sort of progress are you making on that front?

Kevin Hedderwick:
Yes I mean our strategy going forward now is the guys in the UK have done an unbelievable job in 14 months in terms of transferring a lot of the good intellectual property from Wimpy South Africa into the UK. I go there every two or three months and I'm sometimes astonished at the progress we have made. The business is looking better than it has ever been, we have got the network re-energised, and so pretty soon we will be looking at seeing whether we can start to use that London office as a beachhead for some of our other brands and the two that excite us most of course is Steers, we get an enquiry about one every two weeks for Steers in the UK and never been able to do it because we have never had an office or a beachhead from which to launch and then of course Debonairs pizza.

Bruce Whitfield:
So Debonairs could very well be on the menu in London quite soon as well.

Kevin Hedderwick:
Yes we believe that Debonairs as a product, as a concept, is exportable globally but I mean we are just too close to it but certainly in the UK, there is definite opportunity.

Bruce Whitfield:
And every six months I have got to ask you the question - what about chicken?

Kevin Hedderwick:
Bruce it is something that occupies a lot of my mind at the moment. I mean we have upped our game in chicken in terms of expanding our repertoire in our existing menus across Steers, Debonairs and even Wimpy but look if you are going to play in that category you have got to be in a mainstream brand because the category in terms of its contribution towards a total business is in excess of 40 percent and let me just say that it is something that is occupying a lot of my mind at the moment. I will be very disappointed if I talk to you next year this time and we haven't done something.

Bruce Whitfield:
Look forward to that conversation then, Kevin Hedderwick thank you very much indeed, the chief operating officer of Famous Brands.