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INTEGRATED REPORT 2017

Passionate people building great brands



Chairman’s and cHIEF EXECUTIVE OFFICER’s report

The challenging economic conditions reported last year carried over into the year under review with GDP contracting in the fourth quarter of 2016 and the first quarter of calendar 2017. Pressure on consumer spend continued.

Spur Corporation traded positively for the first nine months of the financial year. However, conditions worsened sharply from the end of March 2017 following the cabinet reshuffle and downgrade of South Africa’s credit rating to junk status. These difficult trading conditions appear to have affected broader business across the retail sector. The current economic environment is the worst we have experienced and we continue to work with franchisees to review costs and franchise models to position ourselves accordingly.

A positive consequence of the declining economic environment is a renewed focus by franchisees on their respective businesses. Franchisees are being forced by circumstances to work smarter, engage more actively in their communities, and focus on their number one priority, the customer – delivering excellent quality food and service.

The group also had to deal with company-specific issues around the same time, specifically an incident at a Spur in Johannesburg and the resulting social media fallout that led to a further decline in foot traffic. This impacted the last three months of turnover in the Spur Steak Ranches brand. We have taken on board the learnings from this incident, and, in response, implemented specific training programmes on conflict management for franchisees, as well as elevated the importance of appropriately skilled employees serving as Play Canyon Attendants in our restaurants, which will be monitored more rigorously by our operations management personnel. We anticipate that it will take some time to recover from the incident, especially against the backdrop of the sluggish economy.

Several Spur franchisees found themselves under pressure due to prevailing economic conditions and the incident that occurred in Johannesburg. We supported these franchisees financially to get through these difficult times, and will continue to do so going forward, where appropriate, as and when required. Franchisees are the lifeblood of our business and it is imperative that we support and engage with them to ensure ongoing sustainability, both of their businesses and of the group.

Difficult trading in a challenging year

The strength of Spur Corporation’s brands and loyal customer base helped franchised restaurant sales from continuing operations to increase by 4.2% to R7.2 billion (2016: R6.9 billion). This growth excludes the group’s UK operations which ceased trading in the 2016 financial year. Sales from existing restaurants increased by 1.1%.

Franchised restaurant sales in South Africa grew by 4.4%, while sales from international restaurants (excluding the UK operations) increased by 2.4% in rand terms. On a constant exchange rate basis, international restaurant sales increased by 6.3%. The five company owned stores (four The Hussar Grills and one RocoMamas) performed well.

RocoMamas, John Dory’s, and Panarottis produced good sales growth despite the challenging trading environment, and The Hussar Grill performed exceptionally well from both a growth and a contribution point of view.

Eight new RocoMamas outlets were opened in South Africa during the year and the division contributed R16.5 million to group profit before income tax, growing this metric 34.8% on 2016.

The Pizza and Pasta division performed well despite aggressive discounting by competitors in the highly competitive pizza sector. The division maintained its focus on quality and customer experience, contributing R23.0 million to group profit before income tax (an increase of 4.1% on the prior year).

We opened four new John Dory’s restaurants in South Africa and one in Namibia, and the brand’s new look and feel continues to be well received. Despite some continuing issues with securing a reliable supply of seafood at a reasonable cost, John Dory’s delivered a creditable performance.

Spur Steak Ranches contributed R188.0 million to group profit before income tax. We opened a further three Spur Grill & Go outlets locally, the quick and convenient fast-casual version of the full-size Steak Ranch. However, our focus was firmly on bedding down existing outlets and developing our experience operating in new locations.

The group’s upmarket brands – The Hussar Grill and Casa Bella – demonstrated the relative resilience of consumers at the upper LSMs, and we opened four more Casa Bellas and two The Hussar Grill outlets locally during the year.

At the other end of the market it is clear that consumers are under severe pressure and we continue to refine the Captain DoRegos model to reduce operating costs and support our franchisees. Despite these efforts, a further eight Captain DoRegos outlets were closed in South Africa during the year.

 

We will consider compelling opportunities to grow by acquisition, however we have been successful with homegrown brands and will continue to assess new concepts in the areas we don’t already have representation in.

International

The group’s international expansion continues to progress well, despite some delays in store openings and the impact of local currency weakness against the US dollar. The group’s footprint expanded into four new countries – Ethiopia (Spur), New Zealand (Spur), Oman and Saudi Arabia (both RocoMamas) – and we opened a further seven outlets in Namibia, Kenya, Botswana, Zimbabwe and Mauritius. We also closed six international outlets during the year where local economic and political factors were unlikely to improve in the foreseeable future.

Procurement, distribution and manufacturing

Reduced restaurant foot traffic negatively affected revenue growth and margins came under further pressure in our sauce manufacturing facility from raw material cost increases and the strategic decision to support franchisees by not passing on the full increase. We are investigating the possibility of relocating the central kitchens facility to the larger Baker Street premises and upgrading the equipment to increase efficiency and improve margin.

Volumes sourced and distributed through our logistics partner declined marginally and service levels continue to be well managed.

The financial performance of the rib manufacturing facility in which we have a 30% interest, Braviz, declined further during the year, due to operational challenges that we could not have foreseen. As a consequence, we have had to recognise an impairment of our full investment in the venture. We still believe that vertical integration of value added products is an important strategic goal, specifically for those core products (high volume or high value goods) that require processing before preparation. This will enable the group to secure quality and supply of these core products at a reasonable price for franchisees.

Strategic objectives

Our strategy is discussed in detail here and has two pillars – growing revenue and maintaining a sustainable business model. While revenue growth remains an important consideration, with some of our franchisees operating under severe strain, we made a strategic decision to support the sustainability of the business model through temporary concessions on franchise and marketing fees for certain of our franchisees in the fourth quarter of the financial year.

Cognisant of the fact that it may negatively impact franchise revenue in the short term, we moved away from discount-based promotions, such as the Monday night Burger at Spur Steak Ranches, which supported revenue growth at the cost of franchisee margins. These were replaced with value add promotions that better reward customer loyalty and support franchisee margins. The prices of some Spur customer favourites are being reduced to increase the value we offer and reward loyalty. We reviewed the menus of all of our brands to ensure that we continue to give consumers consistent value while managing franchisee margins.

Towards the end of the financial year, the preparation of certain products was moved in-house and Spur desserts are now being baked in the restaurants again, re-emphasising the homegrown values and authenticity our business has been built on. We are in the process of employing an executive chef to drive innovation and menu engineering across all our brands.

Spur continues to be well-received by customers and was voted the “Coolest eat out place” for the fifth year in a row in the 2017 Sunday Times Generation Next survey of South Africa’s youth. Spur also made the top 5 for “Coolest brand slogan”. Equally gratifying is that, with the strong showing by RocoMamas, Panarottis and John Dory’s in the survey, Spur Corporation this year has four brands in the Top 10 for “Coolest eat out place”.

We continue to review all costs that have an impact on franchisee profitability and sustainability. Store sizes have been reduced and specifications refined to bring down the investment and thereby ensure return on investment. New store formats are being trialled in the Australian market to reduce occupancy and labour costs, and could hold valuable learnings for our South African operations as well.

We will consider compelling opportunities to grow by acquisition, however we have been successful with homegrown brands and will continue to assess new concepts in the areas we don’t already have representation in.

Doing sustainable business

Developments since March have clearly demonstrated the significant financial impact that non-financial aspects such as a negative assessment of a business can have. This emphasises the importance of managing environmental, social and media risks and opportunities, and demonstrating good corporate governance and ethical business practices. It also shows the importance of regular engagement and clear lines of communication with key stakeholders – particularly franchisees and customers – especially in challenging times.

The material matters table lists the group’s most significant challenges and opportunities, and these are discussed in more detail in this report and in the online supplementary sections.

Transformation

Spur Corporation is committed to the principle of transformation and this continues to be an area of focus for the group. It is extremely disappointing that we fell from a Level 5 B-BBEE Contributor under the previous dti Codes to being non-compliant under the revised Codes as certain of the subminima were not achieved. What is perhaps more frustrating is that many of our excellent initiatives, particularly in skills development, corporate social investment and the Spur College of Excellence, are not recognised in the assessment. We have nevertheless put in place plans and are committed to improving our score over the medium to long term.

We also established a financing solution with an external financier to assist franchisees to improve their B-BBEE ownership credentials, which we believe will become increasingly more critical to their long-term sustainability. This structure is currently being presented to franchisees around the country, with an emphasis from a franchisor perspective of the necessity for franchisees to commit to making progress in terms of B-BBEE.

Outlook

The 12 to 18 months ahead are likely to remain challenging, given the socio-economic and political climate. This requires a period of consolidation to enable us to position our operations so that we can take advantage of the upswing when the economy turns. We will continue to focus on refining menus and focusing on franchisee operating and marketing strategies to attract consumer foot traffic.

It remains critically important that our guests get nothing but an outstanding experience by ensuring that the food and service they receive is outstanding, and that it is served in a happy family environment that remains true to the values of the group. We will continue to support our franchisees through training, marketing and operational initiatives, as well as ongoing menu engineering to ensure sustainable franchisee business models. These initiatives will also ensure that the customer value proposition is kept consistently high to attract repeat business and increase customer loyalty.

We plan to open at least a net 20 stores across our brands locally and at least nine stores internationally, with the focus mainly on Africa where new outlets will be opened in Nigeria (two), Namibia, Kenya, Zimbabwe and Swaziland. A further two outlets will be opening in Saudi Arabia and one in Mauritius. We are also actively pursuing a smaller footprint store model in Australia that offers ribs, burgers and wings, and we plan to pilot the concept in the new financial year.

Thanks

Our sincere thanks go to the hardworking employees of Spur Corporation in the many functions they fulfil. We appreciate and thank the operational teams for their commitment to supporting the group’s franchisees. We acknowledge and thank our franchisees for their commitment to further enhancing the brand experience of our customers through their dedication to food and service excellence, and to creating an enjoyable family experience.

We thank our board for their valuable input and the Spur Corporation executives and brand heads for their hard work and support. It goes without saying that a special thanks is due to our loyal customers who continue to visit our restaurants – thank you for your continued support in difficult financial times.

Allen Ambor Pierre van Tonder
Executive chairman Group chief executive officer