Retail news. Semester 1 of 2014 table of contents

McDonald's praised for crate-free pork pledge. 14 Feb 2012

WASHINGTON, USA: The American Humane Association, a 135-year-old animal welfare group, has praised the fast food giant McDonald's for pledging not to serve pork raised in tiny crates.

"Millions of pigs spend their lives in crates that are inhumanely small and do not allow them to move freely and express their natural behaviors," American Humane Association President and CEO Robin Ganzert said.

"This leadership on the part of McDonald's will not only advance the welfare of millions of animals but will most likely encourage other food service providers and retailers to follow suit."

The group added, however, that "the adoption of loose housing systems for sows requires not only new equipment but also training of workers and managers to handle animals humanely."

Last November, McDonald's severed ties with one of its American egg suppliers after a video taken by undercover animal rights activists exposed shocking cruelty to chickens at a farm.

McDonald's operates more than 33 000 restaurants in 119 countries, and serves nearly 68 million people per day.

McDonald's to open 25 outlets a year in SA. 15 Sep 2011

As competition in the fast-food sector increases locally, McDonald's SA plans to open 25 new restaurants a year and double revenue in the next four years, MD Greg Solomon said yesterday, 14 September 2011.

"The business is well positioned for growth, the past three years from a business performance perspective have been the best. We have even bigger dreams for the company," Solomon said.

The company had a "beady eye" on African expansion, but would not be first off the mark, he said. "We have strong growth prospects in SA, this would prevent us from entering the African market within the next two years. We do not have an extensive local footprint yet and believe there are still strong growth prospects in SA.

"It is a brave move to not follow the tsunami into Africa, but we need to capitalise on this business first," he said.

Nothing had changed since businessman Cyril Ramaphosa's company, Shanduka, acquired the 20-year master franchise earlier this year to run all McDonald's restaurants in SA, he said.

On the emergence of new players on the scene such as Burger King, Solomon said McDonald's was "studious".

"The South African market is already quite competitive and our existing brands are already strong. We will be watching the competition, but we will also be focused on what is happening in our business.

"McDonald's has always been a trailblazer, from bringing the drive-through model and 24-hour stores to serving breakfast. Now about 10% of our revenue is from the breakfast offering."

Last week, Spur Corporation MD Pierre van Tonder said Spur's breakfast offering had positively affected the business as the company increased revenue 15.9% to R403,4m in the year ended June 2011. It planned to open 15 more stores in the 2012 financial year.

Meanwhile, Famous Brands has embarked on a rebranding exercise for its flagship, Steers. With about 520 outlets across the country, Steers grew sales 6.5% in the year to February, and said it planned to open 20 more stores this year.

As for the bad press that often plagues McDonald's, Solomon said the size of the company made it a target.

"It is about educating our customers. Our food is not unhealthy. The beef patties are made from 100% beef, and so are the chicken burgers.

"It is about giving consumers the choice. We do serve salad you can substitute a Coke with a fruit juice, or corn for chips," he said.

McDonald's SA eyes 8 million customers in December. By: Zeenat Moorad. 24 Nov 2011

Value will be McDonald's SA's competitive edge this festive season, as it sets its sights on serving as many as 8 million customers during December. Analysts predict that South African consumers will shy away from splurging on big-ticket items this Christmas, opting instead for bargain-buys and spending on durable goods like clothing and food.

Consumer sentiment has been dampened by trepidation over the effect Europe's debt crisis will have on the local economy. Local debt levels are also at historic highs.

According to McDonald's SA's MD, Greg Solomon, times are tough.

"The economic challenges are there - you can definitely feel it in the market," he told I-Net Bridge/BusinessLIVE on Tuesday.

The restaurant chain, known for its Big Macs and McMuffins touts the festive season as a "massive" trading period.

"December revenues can be just over 50% over those of a normal month. We really gear up for the season. It's all hands on deck - out of the boardrooms and into the restaurants," Solomon said.

In June, McDonald's SA shifted from a franchise structure to Cyril Ramaphosa, backed by Shanduka Group, becoming the master franchisee.

Under this structure, Shanduka has a master franchise licence for 20 years to run and operate the entire business - which consists of a 60/40 split between franchises and wholly owned businesses.

The company has ambitious plans to double its footprint over the next five years, as it takes its famous burgers and shakes to urban areas and smaller towns.

McDonald's SA will open between 20 and 30 new outlets in 2012.

Franchise proves winning formula. 20 Jul 2010

Richemont opened nine more franchises last year. The world's largest producer of luxury products, with brands such as Cartier, Jaeger LeCoultre and Montblanc, also opened 20 more company-owned retail outlets.

The move, which brings the company's total of franchises to 582 and stores to 817, came as it cut sale agreements with third-party retailers in an effort to gain better control over the sale of its goods, a spokesman said last week.

Franchise works well in retail, whether the product is a high-end watch or a basic burger. It works in any operation where a formula can be replicated easily. As with Richemont - which has seven franchised stores in SA and one company-owned store - many companies have a mix.

All of Famous Brands' 1779 stores - including Wimpy, Steers and Mugg & Bean - are franchised.

About 60% of McDonald's 135 stores in SA are franchised and 40% are corporate-owned.

Scope for growth

Companies change the mix according to their needs. Franchising carries its risks, but offers rewards. In SA today, however, it remains small. Just 12% of retail sales here go through franchises. In the UK, the figure is 30% and in the US, 52%.

"We obviously still have scope for growth," says Anita du Toit, of First National Bank's franchise lending division.

Franchising allows cheap expansion. Franchisees, rather than companies, bear the costs of new stores. Companies often go for franchises in marginal areas, opting for a lower, but guaranteed return from franchise fees, rather than a return on the store itself.

Supermarket chain Pick n Pay opens its first store in Zambia, a franchise, on Thursday. It has signed up franchise partners for its planned expansion into Mozambique and will expand into Mauritius in the same way.

Profitability

Taste Holdings, the listed company behind Scooters Pizza and Maxi's restaurants, owns just four of its 190 food outlets. The mix has changed from the early days, when Taste owned 13 of its 40 stores. Back then, it needed the store revenue.

"Franchising is only profitable when there are a number of stores. If you only have franchise royalty, the breakeven is a good two to three years away," Taste CEO Carlo Gonzaga says.

Importance of marketing

In the food business, marketing is crucial. An advantage of franchising, Gonzaga says, is that the marketing fee each store pays allows a bigger promotional spend than would otherwise be possible. It does not just apply to food. Taste also owns 21 of SA's 80 NWJ jewellery stores, while the rest in the chain it controls are franchised.

"We are the only franchised jewellery chain. We spend more than double our nearest competitor in marketing, because we've got more money," says Gonzaga.

Still, his goal is to reduce the overall proportion of franchises.

"We will probably in a couple of years start buying back stores."

Different strategies

McDonald's is going in the opposite direction. The McDonald's pattern in the US and Australia is 70% franchise, 30% corporate and as the number of stores in SA grows - with a 10%-15% increase in store numbers a year - that ratio will change, McDonald's SA MD Greg Solomon says.

There is a different pattern at Roman's Pizza, a Centurion-based family company with 116 stores. MD John Nicolakakis says 8% of stores are corporate, 48% are franchised and 35% are joint ventures between the company and partners.

These hybrids give head office more control in an operation that is strategically important, or run by someone who may not have had the necessary start-up capital. This model, rather than franchise, is Nicolakakis's preferred way of growing.

Brand damage

While a good franchise is the biggest asset to a business, a bad one is the worst asset you can have. "It can do a lot of damage to your brand," he says.

The quest for control in the food industry, where the potential for damage is great, leads to much tweaking of the ownership model. Another Roman's strategy is to have stores run by "operational partners". These are managers who benefit directly from the store's profit but do not have equity. Taking a different line, Taste, in an effort to retain control of key sites, keeps the leases and sublets the site to the franchisee.

"I don't think there's one right answer," Gonzaga says. "It depends on your strategy."