2019 INTEGRATED REPORT

Our key business drivers

The following key drivers impact Spur Corporation’s performance and sustainability. They can significantly influence the group’s ability to create sustainable value and meet strategic objectives.

Sustainable local franchise model

Spur Corporation’s business model is critically dependent on the financial success of its franchisees.

The group’s business is predicated on franchise fees and procurement-related income. Franchise fees comprise 38% of group revenue; supporting the collective revenue growth of franchisees thus supports group revenue growth.

Keeping the franchise model agile and responsive to changing market conditions supports franchisee profitability. This ensures the sustainability of their businesses and keeps the group’s brands attractive to potential franchisees.

The success of franchise restaurants depends on various factors, including set-up costs, location, restaurant design, brand equity and, in the long run, the skill of the franchisee. Spur Corporation supports its franchisees to establish successful businesses in several ways, as set out below.

Our development teams support prospective franchisees by:  Our operations management teams provide support to franchisees by:  The group supports franchisee profitability by: 
  • Identifying and securing sites that align with the brands’ target markets – given that occupancy cost is a significant expense and above-inflation increases erode profitability, it is imperative that sites attract enough foot traffic to support feasible restaurants
  • Refining restaurant designs to reduce set-up costs, improve kitchen efficiencies, make effective use of space, and introduce sustainable technologies
  • Providing project management expertise to ensure that set-up cost budgets are achieved, and that development complies with the group’s specifications
 
  • Helping them manage their businesses efficiently and sustainably
  • Identifying training needs and coordinating training with the group’s training department
  • Identifying marketing opportunities and aiding the development and implementation of bespoke marketing plans for each restaurant
  • Upholding brand and product standards through regular inspections and assessments against group operational standards
  • Assisting in identifying and implementing bespoke CSI initiatives in the communities in which they trade
 
  • Frequently reviewing and adapting the franchise model to support franchisee profitability
  • Raising brand awareness and drawing customers to restaurants through innovative marketing initiatives across a variety of channels, including social media
  • Strengthening customer engagement through loyalty programmes
  • Providing training to franchisee employees 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
 


Improving franchisee profitability by reducing discounting

After extensive franchisee engagement, the group discontinued its reliance on discounting to drive restaurant sales at the expense of franchisee margin. This strategy was implemented in Spur Steak Ranches over a period spanning 2017 to 2018 and started being implemented in Panarottis in 2018. It initially tempered sales growth, as expected, but has improved franchisees’ profitability. Margins improved steadily, and franchisees can reinvest in their businesses. This leads to a more sustainable franchise business for the group. Based on the success of this strategy in these two brands, the group is considering a similar strategy in other brands.

Risks and opportunities 
  • Online ordering is a growing trend and there is a perception that most of Spur Corporation’s brands are behind the curve on this trend. However, marketing and technology plans and strategies are in place to improve online and mobile ordering. The group partners with Uber Eats and Mr D Food on activations where appropriate.
  • In future, franchisees’ ability to secure new leases and operating licences, like liquor licences, may be linked to their B-BBEE compliance. Non-compliant franchisees increase the group’s risk of not achieving its strategy in terms of restaurant openings and revenue growth. The group conducts workshops with franchisees to highlight this risk, explain the need to prepare a B-BBEE scorecard and provide practical guidance on measures to improve B-BBEE ratings. The group encourages franchisees to include black equity operating partners.

THE DISPOSABLE INCOME OF CUSTOMERS

Spur Corporation’s customers are the reason the group exists. Their ability to afford the group’s offerings has a direct impact on franchisee profitability and the group’s growth and sustainability.

In an environment of increasing financial pressure, customers’ disposable income is eroded by increasing taxes, and the rising costs of healthcare, education, transport, utilities, property and food. Customers are more discerning about where they spend their money. The group focuses on product quality, value, customer experience and innovation to retain and grow the customer base and ensure the franchise model is sustainable.

Risks and opportunities 
  • Most of the group’s profits are generated from South Africa, and a sustained decline in the local economy could have a detrimental impact on the group. The group needs to ensure operational efficiency and optimise local marketing campaigns to mitigate against subdued consumer activity. Cautious growth plans for diversification into new target markets also mitigate single-country risk.
  • Increased competition in Spur Corporation’s sit-down and takeaway restaurant markets can erode the group’s market share.

Restaurant design and location

Intelligent restaurant design reduces set-up, running and labour costs. It improves efficiency and reduces restaurants’ environmental impact.

Standardisation of restaurant design and specifications ensures consistent operations in terms of buildings, kitchens, service, food offerings and customer experience. It enables franchisees to maintain the group’s high standards. Operational inspections include an assessment of restaurant facilities to ensure that these continue to meet the required standards.

Updated restaurant designs and equipment specifications support franchisees’ profitability by improving food preparation efficiency and reducing energy and labour costs. Kids’ play areas in Spur Steak Ranches, Panarottis and John Dory’s provide customers with a family entertainment destination.

Regular refurbishments keep restaurants fresh and appealing to customers and have a direct impact on franchisee turnover. Franchisees invested R69.5 million on revamps and relocations during 2019.

Environmental sustainability

Resource efficiency promotes cost savings. The significant increase in the cost of water and electricity has sensitised franchisees to the financial benefits of sustainable environmental initiatives. The group encourages franchisees to install energy and water saving devices like LED lighting, motion sensors, timers and energy monitoring systems, self-closing taps, aerators and water-efficient dishwashers.

The green operations assessment measures franchisees’ environmental performance and, together with the eco-checklist, use environmental key performance indicators (“KPIs”) to monitor and improve the group’s overall impact. Modules covering environmental responsibility and awareness are included in Spur Corporation eco training provided to franchisee management and employees.

The Spur Corporation’s Green Feather Rewards recognise franchisees for improvement in energy consumption, water conservation, waste management and eco procurement of non-centralised produce. The winners and runners-up receive financial support to further encourage their sustainability journey.

More detail on initiatives are in the sustainability supplement online.

Risks and opportunities 
  • Traditionally, most restaurants occupy large spaces in shopping malls. However, as consumers increasingly shop online, malls suffer the consequences. This leads to higher operating expense ratios due to increased rent, landlord operating costs, and rates and utilities – which potentially place the franchise business model under pressure.
  • The group’s experience and clear understanding of what the franchise business model should look like, means the group carefully considers the size of all new restaurants, with a focus on maximising trading densities. To ensure that the group’s brands remain in the best possible location, it reviews its leases in terms of the tenancy rate of shopping malls and the mortality rate of other tenants.
  • Increasingly, group restaurant designs include smaller formats that reduce set-up and operating costs and are better suited to smaller urban areas. Smaller format restaurants increase the range of potential locations available. These include smaller format Spur and Panarottis outlets and the Spur Grill & Go and RocoGo formats, which are suited to high foot-traffic sites.

Menu engineering

Ongoing menu engineering meets customer needs and enhances franchisee profitability by optimising a restaurant’s sales mix and product range, and reducing waste.

The group assesses and refines its brands’ menus to ensure they offer the best quality food at the most affordable prices. The group analyses customer demand, ingredient costs and percentage sales contributions to ensure menus support franchisee profit margins. This includes optimising efficiency in kitchens to reduce waste and consolidating menus by removing under-performing items.

Menu engineering informs marketing and shows which menu items should be promoted. Promotions are priced competitively to appeal to customers and are balanced against profitability.

LOCAL MENU PRICE INFLATION AND FOOD INFLATION (%)

* Source: Statistics South Africa

Menus should enhance the appeal of brands to their target markets by addressing customers’ taste profiles and balancing customer favourites with the latest food trends.

Good presentation underscores the quality of food that is offered. Millennial and GenZ customers want food that is delicious and attractive to photograph. Restaurants consider presentation in terms of the crockery and cutlery they use and the mix of ingredients on the plate.

The group is committed to the undertakings made by the industry to the Department of Health regarding marketing of food items deemed to be unhealthy, and the “Better for You” meals feature on the children’s and adult menus of Spur Steak Ranches, Panarottis and John Dory’s.

Veganism and vegetarianism are not trends, but a way of life for many consumers. It is likely that some members of the families who visit the group’s restaurants will be vegan or vegetarian. Therefore, although we have some options on menus across the brand portfolio currently, the group’s offering will be expanded to accommodate these consumers going forward.

Risks and opportunities 
The group has the opportunity across the brand portfolio to address customers’ needs for healthier options and transparent sourcing. The rich supply of customer data sourced from the group’s current and future investment in business intelligence infrastructure will enable the group to customise restaurant offerings to meet customers’ individual needs and preferences.


Product responsibility

The group’s value proposition is to provide the highest quality meals at the most affordable prices. This depends on the produce the group can source. The group’s commitment to responsible and sustainable practices means it only accepts the highest quality and uses the same produce across its brands. The group sources products from suppliers that share its aspirations.

Franchisee employees receive extensive training in food preparation and food safety. Kitchen and front-of-house employees are trained in the “clean as you go” principle. Every day, before restaurants open, the prescribed opening checklist covers food safety and hygiene. Kitchens have trained quality coordinators, who check meals before delivery to customers. Managers in each restaurant conduct food quality and hygiene checks several times a day.

At least every two months, corporate operations managers conduct detailed food, hygiene and safety audits on-site at restaurants. Regular service and standards audits are also conducted. CCTV cameras are in place in many restaurants to monitor front-of-house and back-of-house kitchen adherence to strict hygiene standards.

All major hubs servicing Spur Corporation brands at the outsourced logistics partner are ISO 22000 certified, and environmental management programmes align with the ISO 14001 standard. Four of the hubs are accredited under OHSAS 18001, the health and safety standard.

Spur Corporation sources seafood through responsible suppliers that comply with South African Sustainable Seafood Initiative (“SASSI”) and Marine Stewardship Council guidelines where possible.

Risks and opportunities 
  • Non-compliance with food safety standards at franchised restaurants and the group’s manufacturing plants could harm the public, which would expose the group to financial liability and reputational harm. A range of initiatives aim to ensure high standards in the group’s supply chain and sauce manufacturing facilities, including:
    • Suppliers are independently reviewed through specialised food safety audits.
    • All suppliers undergo a capability assessment process that includes a Hazard Analysis and Critical Control Points (“HACCP”) and/or ISO 22000 (Food Safety Management System) review component.
    • Major suppliers are regularly audited against HACCP and/or ISO 22000 standards, and all suppliers are encouraged to achieve compliance.
    • Environmental sustainability assessments are conducted at certain suppliers.
    • Three qualified food technologists monitor quality control in the sauce manufacturing facility.
  • The impact of climate change on natural resources could have severe consequences for the group’s long-term sustainability. Unavailability of natural and other resources will adversely impact short-term franchisee profitability. The group is confident that for the foreseeable future it has food security. However, this is a potential risk of which the group is cognisant and it engages with other industry players on mitigating actions.

Brand equity

Increased competition and limited disposable income mean that brand equity is central to customers’ purchasing decision-making processes. Loss of brand equity could cause significant financial harm to franchisees and the group.

While brand equity is intangible, its advantages are not. The value that strong brands bring to the group translates to real business benefits. Spur Corporation’s brands are its most important assets. The group invests in marketing initiatives that include strategies to build a strong positive brand equity. Good corporate citizenship, a visible commitment to sustainability and CSI initiatives and sponsorships also give credibility to the group’s brands and encourage customer loyalty.

Risks and opportunities 
  • Inadequate restaurant management skills at middle management could damage the reputation and public perception of the group’s brands. A lack of core literacy and numeracy skills at emerging restaurant management level could lead to mismanagement and underperformance, jeopardising the future integrity of the group’s brands. Therefore, the group invests in training franchisee employees and makes training more accessible to, and less costly for, franchisees.
  • The proliferation of social media and the speed and reach of potentially damaging content could damage the group’s brands. Spur Corporation employs dedicated, competent people to monitor all online references to the group’s brands. They provide timely, well-considered responses to potentially viral comments, after consultation with brand chief operating officers. The group has strict policies and processes to limit restaurant-managed social media accounts and manages interactions between the group and media.

 

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