(RFG) Donut King ++ BB's Coffee

[robbo]

HI Tommy,

Good question Tommy.

Interestingly; people buy relatively more "impulse buy"-- inexpensive "feel good" products like lollies, tatts lotto tickets,go to the poker machines, smoke more cigarettes,partake of illicit drugs, watch more hired videos,have more sugar cravings and eat more chocolate,ice creams and donuts and caffeine (coffee). etc etc....

This fact has been well documetned and is covered in most Economics text Books, Sociology texts, and Psychology Text Books.

It is also backed up by research and statistics from the last few recessions ....going back ....say 70 years.

IN the Great Depression of the thirties, for example; more people than ever; went to the Horse Races and to Sporting Events.... to watch Don Bradman play cricket; or cheer on their favourite footy team play; even thought the cost of admission might have been seen as "out of bounds'... But in reality, strangely...>>> not so.

It is basic Human nature to "live for the present".

It is along the same "need for escapism" and human psychology lines; as if there is a predicted "end of the world" event or say when Nazi Germany was facing certain defeat in the Second World War, that more drunken abandon all decorum sex orgies became the norm ......

To the extent; when a certain decadence and "live and let live"-- spirit prevails -- might as well have fun "while Rome burns" as the saying goes ....

Kindest Regards,

Robbo

[tommy]

quote:Originally posted by Halebop

quote:Originally posted by tommy

Why is this category recession-proof?

Donut King are arguably in what some demographers call the "small luxury" consumption category. (In food industry language they would put themselves in something like a "treat" category). Small Luxuries tend to do OK in recessions. When the pocket book is tight and you want to express yourself through retail therapy, buying a $1 or $2 donut is more acceptable than a $100 fragrance or X Box title. Given the purchase is also a tasty food item, it ties in well with other needs too. I won't comment on the downstream impact of all that fat, food colouring and sugar!

Thanks for the explanation halebop,

Good point: "retail therapy"... gee, I love that word! I personally never understood the meaning of spending small amounts though, I'd rather save every penny and then splash out big on a long luxurious holiday!

That said, the current anti-fast-food climate can't entirely be in RFG's favor, as the whole nation tries to blame donuts and burgers for their obesity problem (my opinion: get off your lazy **** and start exercising and eating healthy food you fat slime! hehehe)

Nonetheless, I do like the brand power of Donut King and the fact that it is literally EVERYWHERE... they don't really need to advertise on the media to boost sales because they are already exposed to the masses.

I have never run a franchize business so I don't know the pros and cons of the system, but Donut King seems popular in Australian shopping malls for sure.

[Halebop]

Hi Tommy,

I agree there is reason for pause when considering backlashes against fast food. But despite the hype, this seems a case of follow what people do rather than what people say. Fast food generally has been doing well and I think will continue to do so within the bounderies of economic and demographic performance.

[Halebop]

Hi Davidrob,

I like the look of this company. Was a bit worried about how "recurrent" franchise fee revenue might be and it’s impact on the bottom line. This seems both diverse and recurrent and I was surprised how small this portion of earnings actually was in relation to ongoing franchise revenue over-rides.

While they are a "modest" grower, maybe around circa +10% per annum, I prefer this nature of company for predictability and manageability. The BBs Cafe business looks like a bit of a dogs breakfast but seems a minor component of the overall schematic. I suspect there might also be a speculative upside in taking Donut King into new markets or purchasing other franchise systems.

Because they are essentially an IP company rather than operator, the balance sheet is a bit light but return on assets and equity are outstanding as a result. I don’t like debt on the balance sheets of IP companies but given the maturity of their systems’ cash flow they look more than capable of servicing it (as the almost 11% forecast gross dividend yield attests).

A 5 year 10% growth scenario, with a 3% termination rate and 12% discount rate, would support a value around $1.60. Am a little dubious of retail and the sharemarket right now but that discount to intrinsic looks good. Thanks for posting.

Disc: None but looking.

[ohmyme]

I think its funny, if you watch a donought store at a shopping centre etc, you will notice that a lot of parents get ambushed by their kids wanting donoughts from donought king. I am sure the colouring and branding etc has a big part to do with that, because I know that my nephew rates donought king up there with McDonalds.

Another observation is the high levels of signage that these donought stores are starting to put up. So many deals, the other day for eg, they had hot dogs and milkshake for $5.00, I couldnt help myself. I justified is as some market research, I wonder if I could write off the expense against my profits this year

[edison]

Have to say I have never bought anything from Donut King in my life but will probably do it soon to see why Donut King is so popular. After all I do see a lot of it across Australia since I was young, and never see those franchises closing down ... I wonder which is better, Donut King or Krispy Creme?

[soulman]

Wow, this thread is expanding rapidly since Robbo started it.

I know a Donut King franchisee and I can tell you that it's not that smooth sailing. It seems this RFG earn their revenue from the royalties (about 9% to 10% of gross sales) but before COGS from the franchisee all over Australia, just like Janine Ellis with Boost Juice (that's why she is very rich) and Jim's Mowing with the Jim's Mowing franchise name and etc...etc.

Income for the franshisor, in this case RFG is limitless. That is, when someone start a franshise, they will gain from the royalties. And with the coffee factory RFG are setting up, this factory will also earn profits from their Donut Kings and BB Cafe franchise. It's like robbing their own kind. The only loser ----- the franchisee. You don't see D King close down because they are passed from franchisee to franchisee. So when one franchisee isd PISSED OFF, he or she sells it to another would be taker and so on and so on.

This company looks good on growth and yield but the share price IPO was $1 and the first day of trading a few months ago I remember RFG opens at 92 cents (already under water) and drops to the 80's soon afterwards. Now, they are still underwater and I can see that directors are picking them up at these prices.

As to compare RFG to Domino's, possibly, since both are in the food industry. But Domino's earned most of their dough (no pun intended) during the dinner time, when Donut King are already closed in the shopping centre. Domino's target both kids and adults whereas Donut King target the elderly with their coffee and the younglins with those sweet weird looking coloured donut.

[ohmyme]

I personally know one person with a donught king franshise in the north coast of QLD. They use the store to fund their retirement. From the prospectus you can calculate the average sales that one store generates by dividing number of stores by group sales. It comes out at around $500g per year. RFG get 7% of gross sales or $270 per week which ever is higher. I ran some rough figures and its not that difficult to see that a donught king store would generate close to $100g for the operator, which is plenty. Fair enough the yatalla store is going to cost the store operators more money, but the whole point of it, is that it cuts down the time that they have spend in the morning making donughts and stuff like that. I guess it means less time for the store operators, it also means they can control quality better by centralising production of goods and coffee etc.

Anyways if director buying isnt evidence enough for you then I dont know what it. Classic example of this was ANG, directors were buying with their ears pinned back at below 40c, its now 59c. I am a happy RFG holder.

[tommy]

I'm still quite surprised that RFG is still trading at 80c, which is basically little different from pre-announcement levels at a PE of 10, with a thicker sell side than buy side. Market cap is still 60 million!

I've been steadily accumulating but wouldn't mind getting more around 75c. Shame they don't pay dividends, it might have help attract more investor attention... yawn.

[Halebop]

Not a lot of data to attempt trending the share but we can see which way the band is pointing...



RFG is more or less ranging with the rest of the market but at -20%, they are probably being double hit by investors cutting their losses. Unless the Bull emphatically returns to the ALL ORDS, the uncertainty inherent in small companies is likely to be rated lower than the stability of large caps.

I'm happier to wait on this one. If I'm wrong buying at 90 cents on the way up is a small price to pay versus buying at 80 on their way down to 60.

On the question of dividends, the earnings shareholders are now buying will have a distribution componant attached. I think 6.25 cents was the mooted dividend? As a non Australian I could care less but it demonstrates the "prospectivity" of their cash flow.