SPUR CORP. LIMITED INTEGRATED REPORT 2014

Strategy, risks and key performance indicators (“KPIs”)

Sustainable local franchise model

Financially successful franchisees keep their customers happy, contribute more to group franchise fee income, build our brands and make them more attractive for future potential franchisees and landlords. We focus on maximising the proportion of our outlets achieving model cash flow margins and increasing the number of smaller format outlets.

Model cash flow margins under pressure

Rising administered costs such as property rates and taxes, electricity and fuel costs are a concern for all businesses in South Africa. Employment costs are rising due to the implementation of minimum wage rates and sectoral determinations above inflation. Food inflation has consistently run ahead of overall CPI figures and where our brands use imported ingredients, these have been affected by the weakening of the rand. Certain of the above factors have contributed to increased occupancy costs as landlords look to pass on these increases to their tenants. The net result is a squeeze on franchisee operating margins.

With these trends also directly affecting consumers’ discretionary spending, consumers are increasingly focused on quality and value for money. This makes it difficult to pass on increasing input costs to consumers without affecting our competitive advantage and value proposition. While it is unavoidable that some of these costs will be passed on to consumers, we try to minimise menu price increases as much as possible. To reduce the impact on franchisee margins, it is necessary to work smarter to improve efficiency within the franchise system.

We work closely with our franchisees to ensure their financial sustainability. Franchise financial models are reviewed and revised on at least an annual basis to ensure that franchisee cash flow profit margins are maintained. Our operations management teams regularly review restaurant financial information to identify potential inefficiency and proactively work with franchisees to address these.

We review all aspects of the franchise model to manage costs as effectively as possible to ensure that our franchisees can continue generating a reasonable return on their investment. Areas of specific focus include:

  • Designing restaurants to keep set-up costs as low as possible while maintaining high standards.
  • Managing gross margins to compensate for the medium-term trends we anticipate in utilities, labour costs and occupancy costs.
  • Expanding the outsourced distribution model to facilitate obtaining the best pricing of raw materials, while maintaining consistent quality and ensuring sustainable supplier practices.
  • Menu engineering to optimise sales mix, food cost and product range, which can help to reduce labour and occupancy costs and increase energy efficiency.
  • Developing training material and delivering training to franchisee employees and management to ensure efficient use of employees and human resource planning.
  • Implementing lessons learned from the higher labour-cost models encountered in the UK and Australia.
  • Assisting franchisees in negotiating with landlords to manage rental escalations and related costs as much as possible.
  • Investigating and communicating ways to manage electricity, gas and water usage to franchisee employees and management. Efficient use of these costly resources also helps to reduce the environmental impact of the group.

Smaller format restaurants

Smaller format restaurants allow franchisees to set up in areas where the demographics might not justify a standard format outlet. This mainly applies to Spur and Panarottis. While these smaller outlets generate less turnover than a standard outlet, the set-up costs are lower and operational efficiencies better, which translate into good returns on investment for franchisees.

We rolled out two smaller format Spur outlets and opened one Panarottis Pizza Express outlet. We are refining our business models and identifying good sites for the potential expansion of these formats. We have found that some Panarottis Pizza Express outlets become so well established in a particular market that they justify conversion to a full sit-down Panarottis restaurant. We will be converting three such Express outlets in the 2015 financial year.

With the imminent entry of international brands into the local takeaway pizza market, we expect competition to increase significantly. Therefore, we have decided to take time to evaluate the risks and opportunities arising from this development before actively rolling out more Panarottis Pizza Express outlets.

TARGETS for 2014 Achieved in 2014 TARGETS for 2015
Open three smaller format Spur outlets Two smaller format Spur outlets opened Open a further two smaller format Spur outlets
Open two Panarottis Pizza Express outlets One Panarottis Pizza Express outlet opened No new Panarottis Pizza Express outlets to be opened in 2015, while three existing Panarottis Pizza Express outlets are to be converted to full sit-down offering