ECONOMIC MATERIAL MATTERS
Franchise fees comprise 51.9% of group revenue. Spur Corporation’s business model is therefore critically dependent on the financial success of our franchisees. Supporting the collective revenue growth of franchisees across the group supports group revenue growth.
Sustainable local franchise model
Supporting franchisee profitability by keeping the franchisee model agile and responsive to changing market conditions ensures the sustainability of their business and keeps the group’s brands attractive to potential new franchisees.
The success of a franchise restaurant depends on a range of factors including set-up costs, location, store design, franchise model and, ultimately, the skill of the franchisee. Spur Corporation supports its franchisees to establish successful businesses in a number of ways:
Support prospective franchisees by:
- Ensuring they have the necessary skills, commitment and capital to succeed.
- Identifying and securing suitable sites that align with the brands’ target markets and will attract sufficient foot traffic to support a viable outlet. This is particularly relevant given that occupancy cost is a significant cost and above-inflation increases rapidly erode profitability.
OPERATIONS MANAGEMENT TEAMS
Provide support to franchisees by:
- Helping them to manage their businesses effectively.
- Proactively identifying marketing opportunities and offering assistance in developing and implementing bespoke marketing plans for each restaurant.
- Upholding the brand and product standards through regular inspections and assessments against operational standards.
ONGOING GROUP SUPPORT
- Support ongoing franchisee profitability by:
- Continually reviewing the franchise model to support franchisee profitability.
- Refining store designs to reduce setup costs, improve kitchen efficiencies and flows, make effective use of space, and introduce energy-efficient technologies.
- Raising brand awareness and drawing customers to outlets through innovative marketing initiatives across a variety of channels, including social media.
- Strengthening customer engagement through loyalty programmes, including the Spur Family Card and eGift Card, John’s Club Card and the Panarottis Rewards loyalty programme.
- Providing training to franchisee staff to ensure high standards of food quality and service.
- Supporting consistent food supply, excellent quality and competitive prices through the group’s centralised procurement strategy.
- Offering a range of restaurant brands that meet the needs of consumers across LSMs.
Group restaurant designs include smaller format stores that reduce set-up and operating costs, and are better suited to smaller urban areas. These include smaller format Spur outlets and Spur Grill & Go, located in high foot-traffic sites. The group opened three Spur Grill & Go outlets locally, and one internationally, during 2017.
|2017 target||Achieved||2018 target|
|Number of local outlets||The decline in the local economy and the uncertain political environment resulted in reduced demand for franchises during the year.|
|Spur Steak Ranches||291||289||293|
|The Hussar Grill||13||14||17|
|Existing restaurant turnover growth percentage||All brands were impacted by the generally weak state of the economy. Turnover at Spur Steak Ranches was also negatively impacted by the incident in a Johannesburg restaurant, as well as the strategic decision to halt the discounting strategy previously embarked upon in an effort to restore franchisee margins and ensure franchisee sustainability. Spur Steak Ranches’ restaurant turnovers are anticipated to remain under pressure for at least the first half of the 2018 financial year. Panarottis and John Dory’s performed relatively well. Captain DoRegos continues to feel the effects of the extreme financial pressure on its lower-income target market. The Hussar Grill and Casa Bella’s higher-income consumers appear to be relatively resilient to the economic woes of the country. RocoMamas performed well in a competitive market despite the subdued economy.|
|Spur Steak Ranches||5.9||(3.4)||(9.9)|
|The Hussar Grill||27.9||25.2||7.3|
|Total restaurant sales (R’m)|
|Spur Steak Ranches||4 870||4 478||4 091|
|The Hussar Grill||145||148||176|
|* Casa Bella traded for the first time in March 2016.|
Store design and specifications
Standardisation of store design and specifications across each brand ensures consistency across all operations in terms of buildings, kitchens, service, food offerings and customer experience. This also supports the ability of franchisees to maintain the consistently high standards required by the group.
Operational inspections include an assessment of restaurant facilities and finishes to ensure that these continue to meet the required standards. Regular revamps and refurbishments upgrade outlets to keep them fresh and appealing to customers, and have a direct and demonstrable impact on franchisee turnover. Franchisees invested more than R68 million on revamps during 2017.
New store designs and equipment specifications support franchisee profitability by improving food preparation efficiency and service to reduce energy and labour costs. The roll-out of kids’ play areas in Panarottis and John Dory’s outlets continues to increase family appeal.
Menus across the brands are continually assessed and refined to ensure that they address customers’ taste profiles, balancing “customer favourites” with the latest food trends. In the context of rapidly rising food costs and a highly competitive food retail sector, promotions are an important mechanism to attract customers and support franchisee revenues. While promotions must be priced competitively to appeal to consumers, this must be balanced against the need to support franchisee profitability. During 2017, the group’s approach to promotions was refined to ensure that these effectively promote customer loyalty.
Ongoing menu engineering aims to optimise sales mix, food cost and product range to enhance the appeal of brands to their target markets, while supporting margins. A further goal is to support kitchen redesign and improve process efficiencies. Menu engineering also reduces wastage, controls food costs, and reduces unnecessary labour costs, which becomes even more important in an environment of high food inflation, increased competition and financial pressure on consumers.
Efficient use of resources to reduce costs
Energy costs represent an increasingly significant proportion of total franchisee costs due to the rising price of electricity and gas. Increasing energy efficiency reduces costs, supports franchisee profitability and reduces the group’s broader carbon footprint.
Concerns around water supply infrastructure and deteriorating water quality continue to increase, particularly in smaller towns.
Spur Corporation’s direct environmental impact is relatively small and is discussed in the environmental supplement to this report available online, here.
The group however acknowledges its responsibility to drive resource use efficiency at franchisee restaurants, which together have a significant combined environmental footprint. The group continually identifies ways to improve energy and water efficiency at franchisee outlets. Redesigns of back-of-house layouts and the use of innovative technology offer solutions to improve energy and water efficiency and reduce oil usage. An example of this is a new self-filtering energy-efficient fryer that is being trialled in several Spur Steak Ranch outlets. Certain franchisees have also invested in environmentally friendly solutions to reduce energy costs in stores with favourable returns on their investments. Several outlets in these areas have installed water tanks to ensure a reliable supply of potable water.
Extending the group’s brands into new territories allows the group to grow revenues in areas with strong growth potential while diversifying geopolitical risk. Entering and developing new markets requires a long-term view to establish supply chains and logistics, and achieve economies of scale. However, where local market developments or dynamics make a region unprofitable, the group is committed to decisively exit these operations to support group value creation.
Trading conditions in the developed markets in which Spur Corporation has historically operated – the UK, Ireland and Australia – continue to be challenging, particularly due to high occupancy and labour costs. The group exited the UK market at the end of 2016. The restaurants in Australia are now all fully franchised and traded profitably in 2016 and 2017. We believe that Australasia has good potential in the medium term.
The group’s brands are well suited to the developing and higher-growth markets of Africa, Mauritius and the Middle East, and have been well received. Trading in Africa has certain challenges, including securing suitable sites at a reasonable rental price, placing skilled employees, ensuring consistent supply of quality ingredients and managing currency fluctuations and foreign exchange repatriation. However, the long-term characteristics of selected African markets show excellent potential where these challenges can be addressed successfully. In 2018, the group will continue to expand into existing markets in Mauritius, the Middle East and Africa, including Nigeria, Namibia, Kenya, Zimbabwe, Swaziland, Mauritius and Saudi Arabia.
The group’s international footprint is shown in the diagram here.
|2017 targets||Achieved in 2017|| 2018
|International revenue 5.0% of total group revenue||Revenue from the international division was slightly below target due to delays in the openings of new outlets, and weaker than anticipated economic growth on the African continent.||4.9%||5%|
|International profits 3.5% of total group profit|| This target was achieved, although the profits recognised on the liquidation of the UK subsidiaries that ceased trading in the prior
year offset the lower performance in Australia and Africa.
| 65 international
| The weak economic growth and political instability on the African continent has resulted in delays in certain of the new stores that
were planned for the year.
The great tasting food we are committed to serving our loyal customers requires a consistent supply of the highest-quality ingredients. Our commitment to responsible and sustainable practices means that we aim to ensure that we source products from suppliers that share these aspirations.
Franchisee employees receive extensive and ongoing training in food preparation, customer service, food safety and other relevant areas. Restaurant managers in each store conduct food quality and hygiene checks several times a day. At least every two months stores have detailed food, hygiene and safety audits conducted on-site by corporate operations managers. Regular service and standards audits are also conducted.
All kitchen and front of house staff are trained in the “clean as you go” principle. Every day the opening checks deal with product food safety and hygiene prior to the store commencing trade.
CCTV cameras are in place in many restaurants to monitor both front of house and back of house kitchen adherence to strict hygiene standards. All staff are thoroughly trained to the highest health and food safety standards. Managers based in kitchens include trained quality coordinators who check meals before delivery to our customers.
The group has a range of initiatives that aim to ensure high standards in our supply chain and sauce manufacturing facilities, including:
|Supply chain||Sauce manufacturing|
An addendum to existing supplier agreements has been created wherein suppliers warrant that they do not conduct any unethical business practices and that they comply with applicable legislation.
Spur Corporation’s ethical sourcing policy encompasses the principles of the Ethical Trading Initiative Base Code as well as the international standards set out in the International Labour Organisation (ILO) Conventions. The policy commits suppliers and licensees to adhere to guiding principles that cover human rights issues, labour practices, health, safety and environmental practices, business ethics and intellectual property rights.
All major hubs servicing the Spur Corporation brands at our outsourced logistics partner are ISO 22000 certified and partner environmental management programmes align with the ISO 14001 standard. Four of the hubs are also accredited under OHSAS 18001, the health and safety standard.
The group aims to source seafood through responsible suppliers that comply with South African Sustainable Seafood Initiative (“SASSI”) and Marine Stewardship Council (“MSC”) guidelines wherever possible. In practice, securing a reliable supply of seafood is becoming increasingly challenging. Certain fish supplies are secured from Namibia, which currently does not follow sustainable practices. Our procurement team and SASSI continue to work with the Namibian authorities to help them achieve Aquaculture Stewardship Council certification that would result in the products procured complying with SASSI requirements. During the prior year, the Namibian fisheries industry underwent the MSC pre-assessment process and SASSI is satisfied with the progress made to date.
We are committed to the SASSI “Seafood Promise” and anticipate that full compliance will be attained in 2018. In all cases, Spur Corporation only procures and supplies seafood products (species) that are not SASSI red listed.
The group is committed to providing healthy options for our customers, including reducing monosodium glutamate (“MSG”) in the food we serve. While MSG was removed from all Spur Corporation products in 2015, a significant number of customer complaints led to the reintroduction of nachos and boerewors products that include MSG.
Spur Steak Ranches’ menu includes CHOW (Choose Healthy Options Wisely) accreditation for healthier menu items and “Better for You” options on the kids’ menu.