Spur Corporation retained volumes and market share due to the strength of its brands and loyal customer base. We are confident that the new accelerated growth strategy will enhance the group’s long-term prospects.
The strength of our brands and loyal customer base boosted franchised restaurant sales, which increased by 7.2%* to R7.6 billion. Franchised restaurant sales grew by 6.2%* in South Africa, and sales from international restaurants increased by 16.2%* in rand terms. International restaurant sales increased by 12.3%* on a constant exchange rate basis.
|*||Excluding the Captain DoRegos chain which was sold in
March 2018, but including Nikos Coalgrill Greek, which was
acquired in August 2018. Nikos comprised six restaurants at the
date of acquisition, and the group opened a further three restaurants during the year. The chain contributed franchised restaurant sales of R65.9 million for the 11 months since acquisition.
1 Includes share of profit/loss of equity-accounted investee (net of income tax).
2 Adjusted for one-off and exceptional items that affect the comparability of group profit before income tax and headline earnings per share, as reconciled in the tables here and here.
|% change in
|% change in
|Spur Steak Ranches||4 585 811||299||4 351 067||290||5.4||4.2|
Pizza and Pasta (Panarottis and Casa Bella)
|799 421||91||792 547||92||0.9||(1.4)|
|John Dory’s||474 551||52||453 809||49||4.6||(4.0)|
|The Hussar Grill||209 059||20||184 298||17||13.4||7.5|
|RocoMamas||675 193||72||627 951||65||7.5||0.8|
|Nikos Coalgrill Greek||65 882||9||–||–||–||–|
|Total South Africa||6 809 917||543||6 409 672||513||6.2||2.7|
|International||826 827||77||711 505||62||16.2||4.1|
|Total group||7 636 744||620||7 121 177||575||7.2||2.9|
* Excludes Captain DoRegos, sold with effect from 1 March 2018.
The group’s restaurant base comprises 620 (2018: 575) outlets, including 77 (2018: 62) operating outside South Africa. In South Africa, 39 restaurants were opened (in addition to the six Nikos restaurants acquired) and 15 closed, and 20 restaurants were opened and five closed internationally. The first restaurants in India and Cyprus, both RocoMamas outlets, were opened.
Refer to the operational reports here for performance detail by brand.
South African consumers had no respite from economic headwinds and there is no short-term solution to the country’s challenges. As a result, the main middle-income customer base remains under financial pressure. This highlights the importance of Spur Corporation’s value offering – quality at affordable prices.
The trajectory of the Spur brand, which make up two-thirds of the South African business and approximately 65% of the group’s worldwide business, has been positive.
The group shifted its promotional strategy to decrease excessive discounting at franchisees’ expense, which placed a burden on franchisees. This shift in strategy commenced in 2017 for Spur Steak Ranches and the latter part of the 2018 financial year for Panarottis. It had the predicted impact of tempering restaurant turnover growth in the short term, with an associated impact on the group’s revenue growth. However, this strategic shift enhances the sustainability of the franchise model and bodes well for the longer-term financial feasibility of the franchise business.
Operating margins generally improved across the trading brands as revenues grew and costs were contained. The Spur margin reduced slightly as a result of appointing additional operations employees to roll out the Spur Grill & Go concept. John Dory’s margin declined due to costs associated with new restaurant openings. Unallocated costs were also stringently managed during the year.
|Spur Steak Ranches||13.8||(0.1)||5.9||3.4|
|Pizza and Pasta||1.2||(3.8)||3.3||3.6|
|The Hussar Grill||16.8||11.5||13.8||12.2|
International restaurant sales increased by 12.3%* (2018: 2.7%) on a constant exchange rate basis and improved by 16.2%* in rand terms (2018: 0.7%), largely driven by Africa (including Mauritius).
* Excluding the Captain DoRegos chain, which was sold in March 2018.
Africa (including Mauritius) accounts for 71.8% of international restaurant turnover. This region performed well and benefited from new restaurants, which included eight Panarottis restaurants in Zambia, increasing the number of outlets in that country to 13. We intend to grow market share in Africa where opportunities exist to scale.
The costs of servicing African countries are high, as certain operational costs are incurred in US dollars, and revenue is earned in local currencies.
In India and Cyprus, where new restaurants were opened, the group incurred costs for initial opening expenses and associated restaurant development costs.
Overall, the region improved profitability by 22.0%.
The unallocated loss before income tax (which relates to shared service support costs) includes a foreign exchange loss of R0.6 million (2018: R0.4 million), and R2.4 million relating to a legal dispute settlement with a former franchisee in Zambia (disclosed in the prior year as a contingent liability). Excluding these adjustments, the unallocated loss decreased by 3.3% in rand terms and by 8.5% on a comparable exchange rate basis, as costs are tightly controlled.
Restaurant trading conditions continued to deteriorate in Australia and New Zealand, and turnover declined by 14.2% following the closure of three restaurants. The high cost of labour in this region affects franchisee profitability. Spur Corporation provided financial assistance to franchisees through loans in previous financial years and temporary franchise fee concessions to ensure the sustainability of the business. However, due to the poor trading environment, impairment losses of R8.7 million were recognised in respect of loans granted to franchisees.
The first RocoMamas outlet in Australia was opened in Melbourne in June 2018. This was a joint venture between Spur Corporation (45%), local Australian entrepreneurs (45%) and RocoMamas founder, Brian Altriche (10%). Unfortunately, the pilot was not successful, and sustained losses by the outlet resulted in a R3.4 million impairment of the group’s investment at year-end. The group is considering its options to exit the venture.
In light of the history of losses incurred in the region, we considered a number of options to disengage. As a responsible corporate citizen, the group has an ethical and moral obligation to franchisees in Australia, many of whom have been loyal partners for many years, and most of whom committed significant personal financial resources to our brands based on Spur Corporation’s track record as a credible franchisor.
The franchising system is highly regulated in Australia. Its franchising code prescribes significant obligations on the part of franchisors, and provides for the protection of franchisees’ rights. Exiting Australia in an irresponsible manner could expose the group to reputational damage and costly litigation in foreign jurisdictions, which will not be in the interests of stakeholders. We are carefully considering ways to minimise costs while complying with legal and ethical obligations. We anticipate retaining the group’s presence in Australia in the medium term, but will not actively grow the business, and will try as far as possible to limit costs.
Although ventures in Australasia did not bear the expected shareholder returns, we implemented learnings gained from their operating standards in the South African operations, thus enhancing franchisee profitability. These include labour efficiencies, smaller restaurant formats and reduced, focused menus.
Our sauce manufacturing facility in Cape Town manufactures 375 000 litres of sauce per month, including certain of the group’s unique sauces. Revenue increased marginally to R88.7 million (2018: R87.4 million) but is under pressure due to the difficult economic climate. Input costs continue to climb and price increases to franchisees have been kept to a minimum over the past four years to support franchisee profitability and sustainability.
The group commenced a R11.5 million renovation and upgrade project during the year, which is expected to reach completion by October 2019. The project was necessary to restore existing infrastructure and it increased capacity. However, it did not alter the production capability of the plant. Investigations into new products are ongoing, in an effort to improve capacity utilisation and profitability of the facility. We continue to assess the economic feasibility of the significant investment required to enhance the capability of the plant.
Procurement of a majority of restaurant supplies is centralised and facilitated for franchisees. This enables the group to negotiate better prices on core items and ensures security and consistent quality of supply. Supply chain logistics are outsourced to a third party distributor. The group increased its standard procurement fee, charged to franchisees on most products sold through the distributor, from 3% to 4% in January 2019. This was due to the continuing improvement in food safety systems demanded by customers and changing regulations.
The procurement department manages the relationship between the outsourced distributor, suppliers and franchisees. It audits suppliers and facilitates third party food safety audits on suppliers and the distributor. Suppliers are monitored and rated, and issues identified during reviews are addressed to improve inventory availability and supplier management.
The centralised procurement basket volume grew by 4% due to improved collaboration with suppliers and strategic bulk purchases.
The group is making continued progress in respect of supply and logistics in Africa, and there is full supply support in eSwatini, Lesotho, Namibia, Zambia and Botswana.
The décor division’s turnover is impacted by smaller new restaurants and fewer bespoke décor items used in the latest restaurant specifications and the division has incurred losses in recent years. In order to reduce costs, we unfortunately retrenched 14 employees at a cost of R1.4 million. We expect to reach break-even going forward.
We are committed to training and developing group and franchisee employees to ensure the long-term sustainability of the group and our brands. Training programmes support the highest standards of food quality and service in our restaurants and contribute to the personal development of franchisee and group employees.
In addition to the 14 844 franchisee employees trained during the year using traditional face-to-face training techniques,
16 338 employees are active on our online learning facility, which continues to gain traction.
Following the adoption of IFRS 15 – Revenue from Contracts with Customers during the year, the marketing fund contributions paid by franchisees are now recognised as revenue on the same basis as franchise fee revenue. The franchise fee and the marketing fund contributions are determined as a percentage of franchised restaurants’ sales. Revenue of R252.4 million (2018: R239.7 million), comprising R245.1 million (2018: R231.9 million) in South Africa and R7.3 million (2018: R7.8 million) internationally, has been recognised from marketing fund activities in accordance with the new standard.
The group is contractually obliged to spend any cumulative surplus in the marketing funds on marketing activities for the benefit of franchisees. Therefore, the surplus will not be distributed to shareholders. Where appropriate, in the interests of transparency, the impact of the marketing funds on performance measures have been excluded.
Growth in comparable profit before finance income of 17.4% exceeded the target of 6.6%. This is largely attributable to:
Operating margin and return on equity are distorted because of one-off and exceptional items. The table below reconciles profit before income tax to comparable profit before finance income, with an explanation for these adjustments. The table shows key items included in the calculation of profit and is not intended to indicate sustainable or maintainable profit.
|Profit before income tax||257 077||225 613||13.9|
|Exclude: Marketing funds A||(13 472)||1 344|
|Profit before income tax excluding marketing funds||243 605||226 957||7.3|
|Australia loan impairments and write-offs B||8 686||7 230|
|Braviz C||–||(17 500)|
|Captain DoRegos D||–||(4 750)|
|Foreign exchange loss E||602||401|
|Litigation costs (Zambia and SARS) F||2 436||1 692|
|RocoMamas Australia G||3 357||2 253|
|Nikos/RocoMamas contingent consideration H||1 555||12 745|
|Other IFRS 9 – Financial Instrument impairments I||8 078||–|
|Retrenchment costs J||1 410||–|
|Share appreciation rights cost (net of related hedge) K||–||2 283|
|Spur Foundation L||(507)||907|
|Comparable profit before income tax||269 222||232 218||15.9|
|Net finance income (other than marketing funds)||(33 391)||(31 288)|
|Comparable profit before finance income||235 831||200 930||17.4|
The effective tax rate increased to 32.9% (2018 restated: 29.5%). 2019 includes loan impairments which are not deductible, and 2018 included non-taxable profits on the disposal of Captain DoRegos and Braviz.
The effective tax rate is greater than the corporate tax rate of 28% due to:
|Comparable headline earnings reconciliation||2019
|Headline earnings – as reported||165 110||149 799||10.2|
|Exclude: Marketing funds||(9 957)||1 009|
|Headline earnings excluding marketing funds||155 153||150 808||2.9|
|Financial instrument impairments (IFRS 9) and write-offs||16 717||7 230|
|Litigation costs||2 412||1 218|
|Nikos/RocoMamas contingent consideration||1 555||12 745|
|Retrenchment costs||1 410||–|
|RocoMamas Australia||3 357||2 060|
|Share appreciation rights (net of related hedge)||–||1 644|
|Comparable headline earnings||181 206||155 349||16.6|
|Weighted average number of ordinary shares (’000)||95 065||95 580||(0.5)|
|Comparable headline earnings per share (cents)||190.61||162.53||17.3|
Earnings per share increased to 173.69 cents (2018 restated: 161.81 cents) and headline earnings per share increased to 173.68 cents (2018 restated: 156.73 cents). These increases are distorted by the items impacting comparable profit in the tables above.
|Revenue||Profit before income tax1||Operating margin|
|Manufacturing and distribution||201 934||186 224||8.4||73 360||61 050||20.2||36.3||32.8||3.6|
|Spur||230 522||210 073||9.7||192 361||176 328||9.1||83.4||83.9||(0.5)|
|Pizza and Pasta||37 588||35 578||5.6||23 453||21 732||7.9||62.4||61.1||1.3|
|John Dory’s||21 287||19 714||8.0||9 880||9 409||5.0||46.4||47.7||(1.3)|
|Captain DoRegos2||–||2 526||(100.0)||–||4 604||(100.0)||–||182.3|
|The Hussar Grill||6 879||6 206||10.8||5 664||4 790||18.2||82.3||77.2||5.2|
|RocoMamas||33 685||31 100||8.3||24 380||21 471||13.5||72.4||69.0||3.3|
|Retail||69 753||69 534||0.3||8 576||6 785||26.4||12.3||9.8||2.5|
|Marketing||245 112||231 862||5.7||12 555||(1 237)||1 115.0||5.1||(0.5)||5.7|
|Other segments||51 807||60 284||(14.1)||(6 208)||(4 953)||(25.3)|
|Unallocated||2 319||1 329||74.5||(74 143)||(65 352)||(13.5)|
|Total South Africa||903 546||854 430||5.7||270 657||234 627||15.4||30.0||27.5||2.5|
|Australasia||4 349||6 560||(33.7)||(16 992)||(10 980)||(54.8)|
|Marketing||7 266||7 814||(7.0)||917||(107)||957.0||12.6||(1.4)||14.0|
|Other segments||29 618||22 993||28.8||12 663||10 378||22.0||42.8||45.1||(2.4)|
|Shared services||–||–||–||(8 823)||(6 492)||(35.9)|
|Total international||41 233||37 367||10.3||(12 235)||(7 201)||(69.9)||(29.7)||(19.3)||(10.4)|
|Total||944 779||891 797||5.9||258 422||227 426||13.6||27.4||25.5||1.9|
1 Profit before income tax excluding share of loss/profit from equity-accounted investee.
2 Sold with effect from 1 March 2018.
The Nikos acquisition did not deliver the profit contribution initially anticipated. The current economic climate made it difficult to find franchisees who are willing to invest in a new, niche brand. We believe that there are prospects to expand the brand and are actively pursuing new locations.
Unallocated South Africa loss before income tax includes:
|Net finance income||32 789||30 537|
|Impairment loss – GPI receivable||(6 688)||–|
|Impairment loss – expected credit loss on other financial instruments||(1 443)||–|
|Contingent consideration fair value adjustment||(1 555)||(12 745)|
|Cash-settled share-based payment credit||–||885|
|Fair value loss on related economic hedge||–||(3 168)|
|Equity-settled share-based payment charge||(3 272)||(1 919)|
|Profit on disposal of Braviz funding instruments||–||17 500|
|Litigation costs – SARS dispute||(86)||(1 692)|
|Profit/(loss) of Spur Foundation Trust, all of which is attributable to non-controlling interests||408||(1 040)|
Excluding the above items, unallocated local costs increased by 3.2%. The bulk of these costs comprise:
IFRS 9 – Financial Instruments replaces IAS 39 – Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018. IFRS 9 was adopted without restating comparative information. The reclassifications and adjustments arising from the new impairment rules are therefore recognised in the opening statement of financial position on 1 July 2018.
The fundamental impact on the group of implementing IFRS 9 is in respect of credit losses. The previous standard required impairments to be recognised on the so-called “incurred loss” model, requiring an estimate of a loss that had been incurred at the reporting date. IFRS 9 adopts the so-called “expected loss” model, which requires the group to make an allowance for expected future credit losses based on general market conditions and factors specific to the financial instruments in question. Refer to note 41.2 of the consolidated financial statements.
IFRS 15 – Revenue from Contracts with Customers replaces IAS 18 – Revenue for annual periods beginning on or after 1 January 2018. The group adopted this standard fully retrospectively and restated comparative figures.
In addition to the marketing fund contributions treatment referred to earlier in this report, the other significant change resulting from adopting IFRS 15 relates to the accounting for initial franchise fee income. Initial franchise fee income, comprising a non-refundable payment by franchisees to the group upon signature of a franchise agreement, was previously recognised in the period in which the franchise agreement was concluded. It is now recognised over the period of the franchise agreement. Refer to note 41.1 in the consolidated financial statements.
The dividend per share increased by 10.6% to 136 cents (2018: 123 cents). The group’s Dividend Policy remains unchanged at a pay-out of 80% of headline earnings adjusted for exceptional and one-off items. Spur Corporation intends to maintain this policy.
|Intangible assets and goodwill A||369 092||362 709|
|Interest in equity-accounted investees B||–||3 461|
|Loans receivable (long and short term) C||111 352||130 988|
|Inventories D||10 299||15 702|
|Tax receivable E||36 939||36 197|
|Trade and other receivables F||106 011||99 997|
|Cash and cash equivalents||283 979||253 099|
|Contingent consideration G||1 011||–|
|Contract liabilities (long and short term) H||33 271||32 345|
|Trade and other payables I||66 611||74 438|
The group’s financial position remains ungeared with no formal external borrowings.
|Maintenance||5 442||10 291||10 983|
|Expansion||3 878||–||2 709|
|Total||9 320||10 291||13 692|
Expansion capital expenditure relates to the refurbishment of the group’s sauce manufacturing facility. This project commenced during the financial year but will only be completed in the year ahead. Maintenance capital expenditure relates largely to IT equipment and software.
Cash generated from operations increased by 21.5% to R244.9 million (2018 restated: R201.5 million). Operating profit before working capital changes increased in line with the improved trading performance, and excludes the significant impairments taken during the year which are non-cash flow items. Investment in working capital increased in line with the increase in revenues.
The group acquired 853 000 treasury shares at an aggregate cost of R19.6 million during the year. Repurchasing of shares will continue in the year ahead, provided these are earnings enhancing.
During prior years, SARS issued the group with additional assessments in respect of the 2005 to 2012 years of assessment totalling R22.0 million, following the disallowance of a deduction claimed in respect of the 2004 share incentive scheme. The assessments were settled in cash in prior years.
Following failed alternative dispute resolution proceedings, the matter was heard in the Tax Court in February 2018. The Tax Court found in favour of the group, but SARS appealed the ruling. The appeal was heard by a full bench of the Tax Court on 29 July 2019, but no judgment has been issued as at the date of this report. The board, in consultation with its tax advisors, remains confident that the probability of SARS’ appeal being successful is low. Consequently, no liability was raised for the assessments issued to date and the payments made to date are accounted for as prepayments of income tax.
In 2015, shareholders approved two share schemes, a forfeitable share plan retention scheme and a share appreciation rights incentive scheme, to replace the previous cash-settled share appreciation rights employee retention scheme. Both schemes are equity-settled, have an initial three-year vesting period, and a subsequent two-year lock-in period during which participants are restricted from trading in the vested shares. The vesting of the share appreciation rights is subject to performance criteria linked to return on equity and growth in headline earnings per share, relative to inflation.
The schemes are aligned with the remuneration practice recommendations of King IV. The first tranche of awards was granted in April 2016 and vested in April 2019 – although all share appreciation rights awarded lapsed as the share price on vesting was below the exercise price. The second tranche was issued in April 2017 and will vest in April 2020 – while the forfeitable share plan shares will vest, the share appreciation rights are expected to lapse as the current market price of the share is below the exercise price. The third tranche of awards was issued in November 2018, after certain amendments were made to the vesting criteria following stakeholder engagement sessions with key shareholders.
Further details of all share schemes are included in the remuneration committee report here.
It is critically important that we apply a diligent, measured approach to capital allocation. The group maintains a balance between local and offshore expansion. Spur Corporation’s focus remains on South Africa, since we are a home-grown brand, and will consider local acquisitions if they can scale in the competitive environment. However, there is going to be a saturation point locally. Given lessons learned in the United Kingdom and Australasia, the international expansion focus will be on the Middle East and Africa.
We are assessing the financial impact of investing in more company-owned restaurants across our brands locally, as these have proven to be a consistent profit contributor. This will give us the opportunity to experiment with innovative restaurant design, menu engineering and other technologies, without affecting franchisees’ businesses.
We will invest in new technologies to improve efficiency, reduce costs and drive franchisee profitability and group revenue.
Outlook and appreciation
In tough trading conditions, Spur Corporation maintained volumes and market share. This is testament to our resilience and we congratulate the management teams and franchisees for these results.
Technology continues to disrupt our industry and we are pursuing several opportunities within our digital transformation strategy. In response to the significant demand by customers for cost-effective convenience, the group is planning to launch its own click-and-collect service in the year ahead to complement the services currently offered by third party service providers. The group’s model will be more cost effective than outsourced channels and more customer-centric, ensuring a better service to customers while maintaining a direct relationship between the group’s brands and its customers.
The current pressure on consumer discretionary spending is expected to persist in the year ahead as the country’s economic prospects remain weak. This is likely to be compounded by rising utility and living costs. We will continue to do all we can to support franchisees so they can prosper under these circumstances.
To ensure we can maintain a sustainable business, we will continue to be responsibly cost-conscious in the year ahead, balancing the need to grow profits with the need to retain and attract key skills.
Most of all, we will do what we do best – provide our customers with quality, value and innovation.
Pierre van Tonder