RBD - Restaurant Brands

[Snoopy]

Snoopy, could RBD just be upping the ante to secure more favourable franchise terms for Pizza Hut when it comes time to renew the agreement in 2010?

I hope so Steve! RBD have been pretty weak negotiating with YUM before I think. Partly their own fault through using the KFC franchise as a cash cow to fund other expansions while neglecting KFC franchise development in its own right in New Zealand. This has been turned around with the KFC refurbishment program showing promise. Hopefully that will also strengthen RBDs negotiating position!

Pizza Hut in New Zealand is not alone in being a 'problem child'. YUM have recently taken back fully in house their Pizza Hut business in the UK, after reacquiring the 50% they didn't own by buying out their joint venture partner. It is YUM's intention to refranchise 300+ of these 500+ stores when market conditions permit.

In the US, Pizza Hut is (in market share terms) much weaker in the Pizza market than KFC is in the chicken meal market and Taco Bell is in the Mexican restaurant market. YUM are trying an interesting dual brand strategy with Pizza Hut in the US by launching 'Wingstreet' , a boneless and boned chicken wing and sauce offering that is projected by the end of 2009 to be America's largest wing chain.

YUM's strategy when deciding whether to own a store outright or on sell it as a franchise is as follows:

"If we can run our stores well and provide great returns for our shareholders , we'll own the restaurants ourselves. If our company operations are not getting margins that well exceed our cost of capital, we'll sell our restaurants to franchisees who can do a better job of running them." (page 7 YUM 2007 Annual Report)

then they go on to say

"We will be taking total US ownership down from 22% to possibly less than 10% by owning fewer Pizza Huts, KFCs.."

You can read into that how well Pizza Hut in the first world is doing in general. Of course in China, Pizza Hut is going great guns.

SNOOPY

discl: Hold RBD, YUM (U.S.)

[E C K Witty]

A small but significant thumbs up for RBD on Fair Go tonight.

Their corporate response to the effective wage rates being paid by a third party to those "contractors" that distribute RBD flyers on their behalf was top notch. A good many other corporate citizens declined to comment, which won't do them any favours in the short term.

disc - normally don't have much time for Fair Go as they tend to sensationalise a good number of their stories, but IMHO this one struck the right note.

[BRICKS]

RBD has pick up in the last week to 87 cents and still CUM DIV, BRICKS is contemplating going to this years Annual meeting if they would state where its to be Held but over all now with the departure of Mr Chips Co, RBD is the only place to Sell them CHIPS..

[Steve]

Interesting to see that they have made note of the contraction in retail spending, which is continuing to decrease...

[BRICKS]

Interesting to see that they have made note of the contraction in retail spending, which is continuing to decrease...

SO what are you saying or how much DECREASE...

[Snoopy]

Steve wrote:
"Interesting to see that they have made note of the contraction in retail spending, which is continuing to decrease..."

SO what are you saying or how much DECREASE...

The decrease in sales is because of the closure of several Pizza Hut outlets. On a per store basis RBD sales are still increasing. OK the increase isn't great, and much (all?) of it is probably due to inflation. Nevertheless in relative terms, RBD is performing better than most retailers. Can you name a better performing NZX retail share this year? Off the top of my head I can't. Shareholders are getting an apparently sustainable yield of 11% gross and the share price has climbed back to the 87c or thereabouts it was at the start of the the year.

I'm not saying it is all plain sailing from here. Like most (all?) retailers, RBD still has issues. Overall I think the food sector will suffer less than many others. While top line restaurants might have a hard time the hard wiring of the 'convenience food culture' coupled with the surprising number of people that don't know how to cook means that turnover at the cheaper end of the restaurant trade is safe. Safe doesn't mean I'm predicting a quick further recovery in share price to $1. Nevertheless for the investor that values dividend income and wants a significant boost over what the bank might give them, I think they would be hard pressed to argue for 'no RBD' in the portfolio starting from this point.

SNOOPY

discl: hold RBD

[Deev8]

BRICKS is contemplating going to this years Annual meeting if they would state where its to be Held ..

The annual meeting will be at Ellerslie Events Centre, Gleenlane, Auckland - 19th June at 11am

[BRICKS]

I notice that the Johnsonville Pizza Hut has reduced its hours to from 4pm to 10pm.
hiawatha

THEY should shut the small Para store as well its a total waste of TIME..

[lakedaemonian]

I usually don't post in the RBD thread, but I've been following the company a little bit in recent years as well as the pizza market in NZ after having followed it in North America for some time.

It's my understanding that the pizza business in North America was always considered to be somewhat recession proof with enough room for national franchised low cost players(Dominos, Pizza Hut, Papa Johns, and Little Cesaers), national gourmet players(California Pizza Kitcken, Bertuccis), regional franchise players, and privately owned units.

In my opinion, the NZ pizza industry has gone from being quite under-developed as little as 5 years ago, to becoming quite competitive quite quickly with the existing Pizza Hut chain, Dominos very rapid expansion, rapid expansion of Hell Pizza on the higher end of the pizza food chain, and the entry of low cost private players like Big Pizza.

The serious concern I would have as an investor in RBD's Pizza Hut business is that profitability at the franchisee level is probably quite poor at the moment for the following reasons:

1.) Cheese prices...even bulk purchasing and hedging by a franchisor present a real problem.

2.) Rent...retail rents are only going in one direction.

3.) Staff...increased minimum wage, very low unemployment.

4.) Competition...market has gone from underserved to excess capacity in many regions eliminating any retail pricing power Pizza Hut once had when they were the only big player in the market.

Anecdotally, there are quite a few Dominos and Hells Pizza units for resale in a couple of the bigger markets.....if biz were that good, owners wouldn't be looking to leave.

It's analogous to the Subway franchise system..........Subway is very successful in NZ, but the franchisor has a habit around the world of putting Subways on every corner......increasing overall franchise system sales, but lowering average franchisee unit sales. When Subway opened in NZ, you had to pay BIG money to buy a resale unit......now that Subways are nearly everywhere, buying one isn't so expensive anymore.

And while looking at things from the coal-face franchisee's perspective may not be analogous to looking at thngs from RBD's perspective, those that ignore it for too long, do so at their peril.

Just my opinion on the Pizza Hut portion of the RBD business....I suspect Pizza Hut is going to get worse before, if ever, it gets better.

[Snoopy]

The serious concern I would have as an investor in RBD's Pizza Hut business is that profitability at the franchisee level is probably quite poor at the moment for the following reasons:

1.) Cheese prices...even bulk purchasing and hedging by a franchisor present a real problem.

I made a jumbo sized pizza myself last week complete with mozarella cheese as part of the topping. The 100g of cheese I used on its own cost more than $6, just to do a single pizza!

2.) Rent...retail rents are only going in one direction.

Yes I agree, although if there is a bit of a retail downturn it might help in renegotiating some of those Pizza Hut delco leases. The largest number of Pizza Hut franchise ten year renewals happen in 2010. I have no idea if the actual shop leases contracts correspond to the franchise renewal dates though. But if management were any good, they should.

3.) Staff...increased minimum wage, very low unemployment.

4.) Competition...market has gone from underserved to excess capacity in many regions eliminating any retail pricing power Pizza Hut once had when they were the only big player in the market.

Anecdotally, there are quite a few Dominos and Hells Pizza units for resale in a couple of the bigger markets.....if biz were that good, owners wouldn't be looking to leave.

Yes, Pizza Hut isn't the only one 'feeling the competition'.

And while looking at things from the coal-face franchisee's perspective may not be analogous to looking at thngs from RBD's perspective,....

It is analagous. RBD are the franchisee

SNOOPY