Skyrocketing insurance costs hit Famous Brands

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FIFI PETERS: If you think you are paying an arm and leg for your insurance, I get it. Famous Brands told us today that its insurance costs had soared 470% to R22 million in the six months to August. The restaurant group and franchiser said that this was partly due to the fact that risk perceptions around food facilities had increased. In the same report Famous Brands did publish other numbers pertaining to its financial performance, which showed a 10% increase in revenue across its restaurant network in South Africa, the rest of Africa, the Middle East and the UK – although profits over the period were lower.

We have Darren Hele, the CEO at Famous Brands, for more on the numbers. Darren, thanks so much for your time. An eye-popping increase in your insurance bill this time around. Just talk to us about that and whether this was specific to Famous Brands, or whether this is the entire industry being perceived as riskier to protect.

DARREN HELE: Good evening, Fifi. Thank you. Look, we don’t think it’s specific to us. We obviously are part of the sector and this does relate to the backend part of the business in terms of the supply chain. So it’s not necessarily related to the restaurant, so to speak. We do think that others are in a similar space.

However, everyone does have their own insurance mechanism. We typically haven’t been self-insured. We’ve relied on the market and it’s been a relatively affordable cost to us. It’s possible that others are experiencing it differently because they may have cover. But certainly as you go up the chain in terms of the underwriters, the same problem is going to occur.

So our understanding is that post the riots and looting in KZN two years ago this is a big challenge, and this is really what’s filtering through to the network now. And also there’s again fire risk associated to that. So our understanding is it’s a broader challenge.

FIFI PETERS: And so you talk about affordability. This time last year you reported R3.9 million [or] around that amount as what you were paying for your insurance costs. Now it’s gone to R22 million. Can you sort of afford that? Is that cool?

DARREN HELE: Look, it’s a cost that we have to manage, and I guess like anything in life something else has to give. So we’ll have to try and find cost savings in our own business, try and be more efficient to absorb those costs.

There’s always a choice, I suppose, to not be insured. We felt that, given some of the risks, it was still a worthwhile investment given what it offered. But it is a hard pill to swallow for any business.

Once it’s in the base we’ll have to manage it and we’ll obviously try and manage it downwards through mitigating risk – and that’s one thing you can do with insurance costs.

But yes, it certainly is a difficult pill to swallow and it was not easy at the time to manage. Paying is one thing, but actually being insured was quite challenging in some respects, particularly around frozen food facilities.

FIFI PETERS: Let’s talk about the broader dynamics in the industry now as Famous Brands is experiencing them. A 10% increase in revenue, but you go down to the bottom line with some pressure there. Take us through the period under review.

DARREN HELE: I think it’s always important to point out that the revenue was there, and the drop in profitability really relates to once-off income from last year. So if you strip that out to the Gourmet Burger Kitchen [GBK] liquidation dividend, the operating profit will look a lot healthier than it does.

But be that as it may, there are still cost pressures, and some of that revenue has come from new business such as in our retail division and work we’ve done in the supply chain.

So there is pressure on the front end around restaurant sales, and some of that driven around the fact that at times our restaurants are not trading because of load shedding where there hasn’t been an investment in alternative power solutions for a variety of reasons.

So that is putting pressure on the front end revenue despite the 10% growth.

FIFI PETERS: There has been a slight reprieve in the intensity of load shedding that we have experienced in the recent while. I do note that in your restaurants around 90% of the businesses have alternative power solutions. So have you seen a bit of relief from less intense load shedding filtering through your numbers?

DARREN HELE: Look, for the reporting period which we are talking about at the end of August, no – roughly 18% of sales at restaurant level would generate during load shedding. That number would be lower in September and now in October, given the relief you’re talking about. But we have seen that during the period too, where there’s been relief and it picks up. But we’d love that number to drop significantly. So if in H2 we have a much lower percentage of sales generated during load shedding, we’d be extremely grateful and our franchise partners even more so. So if that number drops it would be fantastic.

FIFI PETERS: Sure. Darren, also just give us a bit of a flavour of your various consumers in different parts of the world, and how they are showing up, particularly at the front end of the business right now, the restaurants. Everywhere in the world they are facing the fact that food costs remain pretty high.

Although we have seen them come down everywhere in the world, most people are paying more for their various debts or loans as a result of interest rates in their parts of the world having gone up.

So this cost of living crisis, this economic squeeze or financial squeeze as it were, how is it impacting your various customers in the different geographies and how are they doing anything different? Are they eating less? Are they showing up to your restaurants less, are they are buying less stuff? Can you just give us that detail?

DARREN HELE: Well, it is a universal problem, it’s not unique to South Africa, although South Africa does have some unique challenges and that is our primary market.

But broadly speaking what we are seeing is that people are spending less when they spend.

So they’re trying to keep their frequency and trying to meet the occasion, but typically sit-downs are spending less so that they may, instead of having – I’m using an example – two drinks, just have one, but still have the same amount of food. They are also certainly shopping specials regularly. That’s not a new phenomenon, but they are certainly focusing on those specials – the likes of a promotion that we might be running on a pizza or on a burger; that insight would be universal too.

We’ve also seen that home delivery and takeout is dropping in terms of its contribution.

People are probably thinking more around the occasion, cooking back at home if that is the case – if that’s being substituted.

And generally also people are not eating out as late at night on the fun-dining side of the business. That also seems to be fairly universal. So they are making a lot of daytime occasions and spending more time in restaurants and making more of the occasion. And the smaller indulgent items like an ice cream, as an example, would be less frequent than they have been in the past.

We’re also seeing how these people are not moving around to the same degree that they would be – i.e., travelling away for the weekend. That has picked up since Covid, but it’s not back to the levels pre-Covid.

So now I think people are changing the way they spend their money; still managing to spend money on food and going out, but something else is being sacrificed in the basket.

FIFI PETERS: Sure. Just a last question. We are monitoring the headlines now as to what is going on in the poultry industry with the avian flu – the impact it’s having on the supply of poultry, and the supply of eggs in the system as well. Any impact on Famous Brands thus far?

DARREN HELE: There’s definitely an impact on eggs as the initial challenge – more on pricing initially than availability.

I’m sure that the challenges are going to filter through all the way in terms of chicken supply. We haven’t necessarily felt all of that because we do have stock.

So we are well aware of the problem and it’s a very fluid situation right now, so it’s always difficult to make a call on it. We’re not chicken farmers, but definitely pricing on eggs is very, very high relative to what it has been. But there is still relative availability. I suspect that’s probably because demand is dropping as pricing is increasing.

FIFI PETERS: Darren, I will leave it there for now. Thanks so much for your time. Darren Hele is the CEO at Famous Brands.