SPUR CORP. LIMITED INTEGRATED REPORT 2015

Chairman’s and chief executive officer’s report

RESTAURANT TURNOVER
R6.2 billion
 12.1%
DIVIDEND PER SHARE
132 cents
 9.1%

The retail market and in particular the food sector, experienced another year of difficult local trading conditions. This was exacerbated by a slowdown in middle-income expenditure on the back of excessive borrowing. A year of social unrest, political turmoil, frequent power outages and other economic headwinds, such as rising fuel and energy costs compounded by the collapsing rand, resulted in plummeting consumer sentiment. The impact on consumer disposable income led to wholesale discounting by many restaurant and quick-service restaurant retailers to attract customers. These factors have created a market where sound operational disciplines and innovative marketing are necessary to remain competitive.

Nevertheless, Spur Corporation delivered another good set of results, growing total restaurant sales by 12.1% to R6.2 billion (2014: R5.5 billion), with sales from existing restaurants increasing by 7.8%. Restaurant sales in South Africa grew by 11.3%, while sales from international restaurants increased by 18.6% in rand terms – applying a constant exchange rate, international restaurant sales increased by 16.5%. Trading conditions were impacted by load-shedding, which reduced local restaurant sales by an estimated 3%.

One of our primary duties as a franchisor is to ensure that our franchisees can earn an acceptable return from their business.

Spur Steak Ranches had another good year in the difficult trading environment and Panarottis repeated its excellent growth of the year before. We refreshed John Dory’s look and feel in keeping with the cosmopolitan nature of the brand. The Hussar Grill performed well in its first full financial year as part of the group as its higher income customer base proved more resilient to the current economic challenges. Two new franchised outlets were opened and plans are afoot to leverage the brand equity to expand nationally in the year ahead. RocoMamas has opened four stores since it was acquired in March 2015 and it contributed R1.4 million to group profit. Response to the brand is encouraging in Gauteng so far, which bodes well for our plans to add new outlets across the rest of the country.

While Captain DoRegos remains small in the context of the group, restaurant sales declined by 13.2% on the back of the closure of 16 underperforming stores during the year, as consumer spending among the lower income target market remains constrained. Despite the disappointing performance, we believe that the brand is starting to take steps in the right direction to improve growth. We have a number of partnerships in the pipeline and continue to receive enquiries to expand the brand in the rest of Africa.

The excellent growth of our outlets in the rest of Africa, and particularly in Mauritius, was a highlight. We sold off the last of the company-owned outlets in Australia and all operations in that country are fully franchised.

The disappointment of the year is Spur UK. The division has been impacted by increased competition in that market, escalating labour, occupancy and food costs, and some operational shortcomings. As previously reported, we are assessing the financial feasibility of each site with a view to dispose of certain of the leases as appropriate. Subsequent to year-end, we disposed of the leases in Lakeside and Aberdeen. The new Spur RBW (Ribs Burgers Wings) piloting in Corby is showing promise and may offer an alternative model for franchising in the UK due to the lower set up costs, focused menu and smaller store footprint, which make the concept more accessible to potential franchisees.

Procurement and distribution had another excellent year and our sauce manufacturing facility showed good operational recovery. Our investment in Braviz, the rib manufacturing facility, is taking longer than initially projected to bed down but we are confident that the model will prove itself in time. We continue to investigate potential new vertical integration acquisitions relating to core products, including the possibility of joint venture investments with our empowerment partner, GPI.

Strategic objectives

Our strategy has two legs: growing revenues and maintaining a sustainable business. We aim to:

  • Grow revenues by increasing turnover at existing restaurants and growing our footprint, adding brands that broaden our market reach and expanding into new territories.
  • Maintain a sustainable business by managing the material risks we face and taking advantage of opportunities where these make sense in terms of our long-term growth plans. These risks and opportunities arise from across the spectrum of economic, social and environmental considerations.

We recognise that good governance is a critical part of executing our strategy and building a sustainable business. Our governance structures align with the recommendations of King III and our board and board committees add value to our business through their experience, perspective and insight.

Material matters

The most significant challenges and opportunities that affect our ability to execute our strategy are listed in the material matters table here and discussed in more detail throughout the report.

One of our primary duties as a franchisor is to ensure that our franchisees can earn an acceptable return from their business. Franchisees and locations are chosen to increase the likelihood that the restaurant will be well run and profitable. We continually review store design and specifications to ensure that these evolve to meet the changing needs of franchisees and improve efficient use of space and resources. The range of brands and formats increase the likelihood that a strong brand can be matched with a good site, even in smaller locations. We are excited by the potential of the new smaller format Spur and Spur Grill and Go models in smaller towns and transient locations.

Menu engineering helps us to make sure that we keep up with changing tastes and supports sales mix optimisation, maintaining restaurant gross margins and improved kitchen efficiencies.

Our expansion into the rest of Africa and Mauritius continues its positive trajectory, increasing the number of outlets in several of the countries in which we already trade. We have also opened our first John Dory’s outlet outside of South Africa, in Zambia. We reached a notable milestone during this year by successfully executing our plan to have a franchise-only model in Australia. We will assess possible exit strategies for our existing UK company-owned restaurants, while at the same time monitor the performance of the pilot smaller format Spur RBW.

Cost management is a critical aspect of managing franchisee profitability and this includes investigating ways to improve the efficient use of resources including gas, electricity and water. Our centralised procurement model and vertical integration drive also ensure that outlets receive consistent and high-quality food at reasonable prices.

A fundamental aspect of Spur Corporation’s social and legal licences to operate, is ensuring that the group complies with all applicable regulations and stays abreast of developments that may have an impact on the group or its franchisees.

Excellent customer service builds brands and encourages repeat visits. Where we go wrong, we want to ensure that the mistake is fixed as quickly as possible. We invest in training and development initiatives to upskill management in store to better handle complaints. We are proud of the fact that our customer service centre handles more than 7 000 enquiries a month, of which only 6% were complaints in 2015, down from 8% in 2014.

Transformation is something the group continues to focus on. We are committed to transformation and have invested in this through employment equity and skills development. The new B-BBEE codes will set our rating back and we are yet to reach our transformation targets. However, we believe we will get there over the next few years. We are also committed to supporting our franchisees in becoming B-BBEE compliant as they will increasingly be impacted by lease agreements, liquor licences and other regulations that take B-BBEE status into account.

Spur Corporation and many of its franchisees are active in their communities with various corporate social investment (“CSI”) initiatives that aim to make a positive and lasting difference. The group’s CSI activities are managed by the Spur Foundation and the donation of the first 100 000 Spur Corporation shares during the year is an important step on the way to the Foundation’s self-sufficiency.

Our investment in human capital aims to enhance the skills base available to the group and our franchisees, and improve the transformation profile of our workforce.

While the group’s direct environmental footprint is not material, we recognise our duty as corporate citizens to manage our use of energy and water, dispose of waste responsibly and do our best to demonstrate good environmental stewardship. Given the volume of goods that the group’s franchised restaurants acquire and Spur Corporation’s robust relationship with our franchisees, we have an opportunity to influence positive behaviour in the upstream and downstream supply chain.

Outlook

Our focus in the short to medium term will be on continuing to ensure the local franchise model remains profitable across all brands, while developing markets in the rest of Africa to boost revenue growth. We will cement our relationship with GPI and continue exploring opportunities for acquisitions that will add value to the group.

The biggest risks to executing our strategy and achieving our revenue growth goals are a further devaluation of the rand, high food inflation and interest rate hikes that will further constrain consumer spending. Other risks include broader inflation in the economy, rapidly rising energy costs and continued uncertainty of energy supply.

Alongside these risks are a number of exciting opportunities for growth. We aim to increase outlets through an aggressive rollout of RocoMamas stores, the rollout of smaller format Spur stores locally, proving the Spur RBW concept in the UK, and expanding our African business (into existing countries and countries in which we do not currently trade). We believe that there are also good opportunities to progress our vertical integration plans.

Thanks

We thank our stakeholders and our highly motivated and focused franchisees for their support. We would also like to thank our co-directors for their guidance.

We conclude by thanking the management team and all the people that work at Spur Corporation for an extraordinary effort in an extraordinary time – it has not been easy. We look forward to the year ahead and the opportunities it holds.

Allen Ambor
Executive chairman

Pierre van Tonder
Group chief executive officer

Our investment in human capital aims to enhance the skills base available to the group and our franchisees, and improve the transformation profile of our workforce.