SPUR CORP. LIMITED INTEGRATED REPORT 2014

Operational reports

Manufacturing and distribution

Manufacturing

The secret sauce manufacturing facility in Cape Town produces in excess of 400 000 litres of sauce per month. This includes many of the group’s unique sauces and sauces for external parties under licence. The manufacturing division was affected by a significant increase in raw material costs, including the impact of the weaker rand on imported materials. In an effort to protect franchisee profitability and maintain competitive pricing, the full extent of these price increases was not passed on to franchisees and indirectly to customers, which has resulted in a decline in margins.

The factory was audited for HACCP compliance in May 2014 and its certification has been renewed. Ongoing training programmes are in place to ensure the facility retains its HACCP certification. We continue to invest in the maintenance and upgrade of these facilities.

The facility intends expanding the range of sauces manufactured for external parties under licence in the year ahead. A key focus will also be on increasing our retail sauce sales.

Distribution

The group outsources its supply chain logistics. The outsourced distributor handles transactions between suppliers, our manufacturing facilities and franchisees. This approach frees the group to focus on its core competencies, including ensuring security of supply, consistent quality of products, enhanced operating standards and improved efficiencies.

Volumes through the outsourced distributor increased 13.5% to R1.1 billion for the year, benefiting from new outlets, an increase in the size of the basket of goods supplied, and increased franchisee participation. Industrial action during the year interrupted service to franchisees but contingency plans were implemented and the impact on franchisees was contained.

The group charges franchisees a margin of, on average, 3% on the volumes sold through the distributor. This margin is referred to as the Cost of Integration (“COI”) and contributes towards the costs of:

  • Managing the relationship between franchisees, suppliers and the outsourced distributor
  • Negotiating the best price for the best quality materials with suppliers by exploiting the group’s national purchasing footprint
  • Performing quality and food safety audits on suppliers and the outsourced distributor
  • Sourcing and investigating new, sustainable products and suppliers

Supplier audits are executed by our procurement team and food safety assessments are conducted by a third-party service provider.

The Captain DoRegos distribution centre was acquired as part of the acquisition of the franchise company in 2012. Warehousing and logistics is a specialised field that is not a core competency of the group. In order to maintain these operations, the group would have had to commit significant resources to recapitalise the distribution fleet and expand capacity. Consequently, the group made the decision to close the distribution centre in November 2013 and incorporate the operation into the group’s existing centralised distribution model.

Manufacturing and distribution revenue decreased by 17.4% to R176.6 million. Excluding the Captain DoRegos depot, manufacturing and distribution revenue increased 9.0% to R153.9 million and contributed R59.9 million to group profit before income tax, an increase of 4.0% on the prior year of R57.6 million. This resulted in a decline in operating profit margin, excluding the impact of the Captain DoRegos depot, from 40.8% in the prior year to 38.9%. The Captain DoRegos depot generated revenue of R22.7 million for the year (2013: R72.7 million) and incurred a loss of R1.4 million before income tax (2013: profit of R1.9 million). The current year Captain DoRegos depot loss includes one-off closure costs of R1.3 million.

The group continues to identify alternative suppliers of core products to minimise potential supply disruptions and invested in additional resources to strengthen the functioning of the central procurement team during the year.