Fast food industry…not so fast anymore
With a business model that seemingly scares away investors and mounting cost of doing business, the indigenous Quick Service Restaurant (QSR) is facing trying times. Lack of corporate governance, among others, has also been identified as another problem unsettling the sector, which was contributing about N200b annually to the GDP, writes ADEDEJI ADEMIGBUJI
The cozy ambience of their outlets in strategic locations in major cities across the country, series of marketing promos and the aroma and taste of their pizza, chicken and chips give the impression that operators in Nigeria’s Quick Service Restaurant (QSR), more popularly called fast food industry, are having a swell time. Far from that. The “all-is-well smile” on the faces of models on their billboards on major highways is actually a façade for an industry in need of help. The sector is, indeed, sitting on the edge of heavy revenue losses and distress.
A pointer to this emerged a few weeks ago when one of the leading indigenous QSR, Tantalizers, the only locally-owned fast food chain listed on the Nigerian Stock Exchange (NSE), posted a dismal performance in the market. Consequently, the company revealed plans to undertake a sale-and-lease back arrangement on some of its unfettered assets this quarter, with a view to raising about N1 billion working capital. This was after it experienced 86 per cent increase in net loss. It lost N564.82 million last year.
The company’s audited report and accounts for the year ended December 31, 2013, showed that its turnover dropped from N41.20 billion in 2012 to N3.48 billion in 2013. Gross profit declined from N1.9 billion to N1.56 billion, while operating loss worsened from N243.4 million to N395.54 million. Loss before tax doubled from N263.18 million to N598.45 million. Loss after tax rose from N303.47 million to N564.82 million.
Apparently worried by the dwindling fortune of the once vibrant and popular fast food chain and determined to turn things around, the Chairman, Tantalizers Plc, Dr. Jaiye Oyedotun, highlighted the new strategic direction of the company. He said the board and the management were working on repositioning the ailing fast foods company following a critical appraisal of its precarious financial and operational health.
The repositioning is part of a rescue mission to put the company back on the path of profitability.
“Our quarter one 2014 unaudited result showed a better performance, as the loss trend has reduced from N124 million to N109 million compared with the same period of 2013. We expect the performance improvement to continue as we execute the strategic turnaround programme to get the company back to profitability in 2015,” Dr. Oyedotun said, maintaining that for the time being, the company would continue to analyse, identify and shut down stores and institutions that continuously make losses.
Tantalizers is not the only fast food giant whose fortunes have been dwindling. Before Tiger Brand bought equity in the fast food arm of United African Company Nigeria (UACN), Mr Bigg’s, its QSR, was under threat. Even after the intervention, it is not clear whether Mr Bigg’s has returned to the path of profitability, as some of its outlets at some service stations are closing down. For instance, when The Nation visited one of its outlets at a Mobil Filling Station at Adura, Alagbado Lagos, it was closed due to lack of patronage. “We were not making sales and rather than continue to incur overheads, we had to close down, though some other outlets are thriving,” the manager of the outlet who preferred anonymity, told The Nation.
In 2011, when the sale of 49 per cent stake in UAC’s food division to Tiger Brands (TBS) of South Africa was perfected, the Group Managing Director/CEO, UAC Larry Ettah said: “We are delighted to partner with famous brands in this venture. This is a transformative transaction, which ensures UAC has the necessary strategic partner to unlock the considerable value potential in the QSR landscape, which Mr Bigg’s defined 25 years ago and in which it still maintains a leadership position. UACR will be availed of famous brands’ tested and highly successful brand stewardship to enhance and reinforce the Mr Bigg’s brand market power. This deal further reinforces UACN’s commitment to ensure we collaborate and leverage international partnerships to accelerate our strategic growth and progress.”
Indeed, the transaction was seen by analysts as a sign of the inherent value in the company whereby the sum of the individual parts of UAC may be seen by investors as greater than the whole. However, Nigeria’s huge market with an estimated 169 million people, and an economy with annual growth rate of 6.8 per cent appear not to have leveraged the fast food giant and the ailing sector generally.
While the cases of Tantalizers and UACN are easily known because they cannot hide the fact behind the figures as quoted companies, The Nation learnt that other leading QSR are also facing hard times. But it has not always been the case. Some time ago, the sector, according to the Association of Fast Food and Confectioners of Nigeria (AFFCON), an umbrella body of the QSR, was contributing about N200 billion to the Gross Domestic Product (GDP) and paying about N1billion in levies and taxes to various tiers of government. The sector was also a big employer of labour.
The President of AFFCON and Managing Director of Tantalizers, Mrs. Bose Ayeni , disclosed that the industry employs over 500, 000 workers at processing and retail levels. Driven largely by Nigeria’s mushrooming middle class with high spending power, an increasing expatriate community, as well as consumer spending, the sector attracted global QSR brands, such as KFC, Domino, Nandos and Debonairs Pizza, among others.
Ayeni said the sector has a massive growth potential and is dominated by some 100 small-to medium –sized indigenous brands with over 800 outlets spread across the country with potential to become bigger given the right environment.
But today, the story is different. The Nation learnt that issues of high operating cost arising from lack of critical infrastructure, particularly power, remains a common thread that runs through most businesses in Nigeria, including the QSR sector. Ayeni said that about 30 per cent of the gross profit made by the fast food companies is used to service power supply. She also raised concern over multiplicity of taxes and levies.
“This is compounded by the overlapping functions of several regulatory agencies. These overlapping functions and a lack of coordination amongst such regulators lead to heavy financial burden on fast food companies,” she said.
Apart from operational challenges, cost of servicing bank loans remains a major barrier. However, the QSR sector faces peculiar challenges: ownership structure and wrong business model.
Some leading stock brokers in the sector and marketing communications experts have expressed concerns over the business model deployed by operators in the fast food industry, especially the local investors, noting that it is one of the factors rocking the sector . As the Chief Executive Officer of Domino Pizza Nigeria, Mr. Eric Andre, observed that the industry, which is still young, is bedeviled by ownership structure, which makes it difficult for them to operate and thrive on the capital market.
The Managing Director of Proshare, Mr. Olufemi Awoyemi perhaps, puts it more succinctly: “The structure of ownership in the sector in terms of corporate governance is that of ‘My husband and I business’.
He explained further: “Tasty Fried Chicken is owned by a family, Sweet Sensation is owned by the Kamson, Tantalizers is owned by the Ayeni’s. For many of them, the husband is the Chairman, the wife is the Managing director. So, as you go along, that model will not work to get them listing on the stock market.”
He lamented that this is despite the fact that “this is a sector that could never go wrong because of how important food is. Patronage is there, is it not ironic that almost all of them are not listed? The problem is the business model.”
An investment strategist and Founder/Chair, Growing Business Foundation, Mrs. Ndidi Edozue, thinks so too. She said the ownership structure adopted by the players could cause a lucrative business to fail.
“In terms of corporate governance and corporate structure, the sector is nowhere to be found. The poor performance of the sector in attracting investors is sometimes an issue of corporate governance bothering on ownership and management style. That will cause even a lucrative business to fail,” she told The Nation.
The President, Chartered Institute of Stockbrokers, Mr. Mike Itegboje, said the challenges facing the operators go beyond ownership structure and business model. According to him, mismanagement of fund raised from the market is also an issue.
“You will observe that Tantalizers raised money from the market just before the melt down. They probably did not invest and manage the proceeds effectively. The result is poor returns. Many failed to render reports as at when due to the market. I am not even sure if they have held AGM (Annual General Meeting) since raising funds from the market,” he said.
But, the President of Public Relations Consultants Association of Nigeria (PRCAN), Mr. Chido Nwakanma, canvassed a different position.
He said the problem is not so much about ownership, but cost of servicing loans borrowed from banks. Nwakanma, who has handled brands’ management for some operators in the sector, said : “Mr. Bigg’s adopted a model called Franchise. Each time it opens new outlet, it’s not UAC that is funding it. It is the Franchisee who brings his money and given some standards to adhere to.
So, for Tantalizers, the cost of roll out was huge. If you look at their book you will realise that a lot of challenges emanate from cost of servicing bank loans, which put lots of pressure on the business and not really the operational cost.”
However, a greater threat to operators in the QSR sector may have been coming from traditional restaurants, more popularly called, ‘Mama Put’ in local parlance. It is a growing trend, which is changing the face of QSR. The traditional restaurants are fast taking over and sharing the market share of the standard QSR. Some of the operators process local soup from various cultural background, which leaves taste of originality in the mouth of consumers. They offer eba, semovita, pounded yam, Ofada rice, and moin-moin, among others.
They also serve different kinds of soup such as efo riro, Edika Ikong, oha soup and so on to lure consumers of standard QSRs. Some of them have also introduced continental/Chinese meals to woo expatriate communities.
“They are facing competition also from our old ‘Mama Put’. There is one in Port Harcourt that has opened about 30 outlets across the country and they are planning to open more. Again, our informal restaurants are upgrading standards now,” Awoyemi said.
As if that is not enough cause for concern, many consumers are increasingly becoming conscious of the dangers of eating processed foods, a development that has put the fast food business under threat.
The fast food industry and its non-stop marketing has been tabbed by many experts as a major player in the obesity and other health epidemic. For instance, a Pediatrician and co-author of a commentary published in the Journal of the American Medical Association (JAMA), David Ludwig, raised questions about whether big food companies can be trusted to help combat obesity.
For the General Manager, Camry Security, Atiku Kafaru, the proliferation of fast food outlets, including the growing incursion of ‘Mama Put’ outlets, has eroded standards, which in turn, scare investors from risking their money in the sector whether as franchisees or shareholders.
“A lot of people are coming into this industry and standard has gone down. The issue of franchisee has eroded standard,” he said.
Awoyemi also cited quality control of taste offering of the QSR, which renders to consumers different taste of the same food from different outlets. He said this raises the issue of quality control, which is also putting off consumers.
“You will discover that another major problem is in the taste, which is what they are actually selling. The taste of a particular food from the same brand differs from location to location. As a result, there is question about quality control,” he observed.
With that trend, which has created a perception problem for QSR, Nwakanma said the players must respond to it. He said Tantalizer is the first to introduce African culinary and deserves the credit. “That is growing; the fast food model in Nigeria is different. They are the one that introduced African culinary into fast food, so they blended our local content into what they are offering consumers. They must take credit for it. The QSR in Nigeria is not the standard fast food business you see across the world. Yes, health awareness is growing and people are becoming aware of what they eat. So that sector must respond to that because it’s a perception problem,” he said.
Despite the challenges faced by the sector, foreign investors have continued to express confidence in the sector, insisting that the opportunities are far from being explored considering the population.
“The sector is full of opportunities and challenges. It is full of opportunities because Nigeria is a large market and if you bring good quality products, the people will accept it, thereby guaranteeing the success of the business. It is challenging because there are issues of infrastructural deficit such as power, transportation and access to good and quality materials. But for a serious business, Nigeria is surely a place to succeed,” Andre said.
Andre noted that the QSR industry is young. He said while the latest brand in Africa is KFC, the largest in Nigeria is Mr. Bigg’s.
“But overall, even if you put all the brands together, what you will have is less than 200 restaurants for 180 million people. So, in comparison, it’s a very, very young industry. A country of 180 million people will generally have something like 10,000 QSR and not 200,” he pointed out.
Apparently noticing that lack of innovation contributes to the lull in the sector, telecoms operator Airtel recently stepped in to help operators deploy technology to deepen market penetration. At an inaugural annual national conference of AFFCON, Airtel General Manager, Corporate Small Medium Enterprise and High Value Consumer Sale, Tawa Bolarin, said the telecoms company offered operators in the fast food business opportunities to reduce their fixed cost and add value to their services to customers. The offer, which comes in form of confectioners cost effective communication solutions, which could give added value to their services includes toll free call centres, Close User Group service, Teleconferencing, co-promotion and advertising opportunities and much more.
She explained that fast food owners can actually outsource some of their services, which they are not necessarily good at, like ICT and telecommunications in order to allow them focus on their primary business and this also helps them avoid operation costs.
She said: “We at Airtel have services like Close User Group, Wi-fi and other services that can enhance their services and also reduce their cost of operations. The Close User Community, which some are already using, allows users to call another person who works in the same business or company without paying up to N40. You can get a much cheaper service by having everybody in the Close Users Group. We have the 3G high speed Internet, which you can use. You can put a router in your restaurant, like some restaurants have VIP sections. And the fast food owners can make a lot of money from that.”
Bolarin noted that Airtel could supply and host website for the fast food companies, therefore reducing their worries.
She added: “This means that the cost of providing this service is much lower than you will otherwise pay for it. And you will be able to reach a lot more people.”
The Marketing Manager of Sweet Sensation, Yemi Yusuf, said the products came at the right time because cost-effective strategy is a key factor to driving increase in profit that will eventually sustain the business. “A lot of us here will be interested to see how we can use this opportunity. Most of us are familiar with the CUG product, but I personally tick the one that has to do with co-promotion, which I will like to know more about so that I can use it in marketing,” he said.
Also commenting on the Airtel business solutions, Jimoh Ademola, Manager, Lacuisine Fast Food, noted that fast food operators face many challenges, including high cost of operation, especially running on generator among other issues. Ademola said teleconferencing could be helpful to his company because it would make it easier for him to reach other branches located far away.
Although, Nigeria is an attractive destination for QSRs and future consumer expenditure is underpinned by a range of key drivers, including higher monthly income levels resulting from GDP expansion, an increase in the minimum wage, and a shift in social class demographics, with the middle class (the business’ core target market) expected to increase to 35 per cent of the population in 2015 compared to 30 per cent in 2009, most investors consider the sector as a risk.
Notwithstanding, experts are of the view that the deployment of technology to deepen market penetration, coupled with some kind of ownership dilution and adherence to corporate governance, among others, would help stem the slide in the fortunes of the sector.
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