Famous Brands: The Hedderwick Hundred Bagger steams into India, Nigeria
The Halamandaris family should congratulate themselves every day for a decision they took in February 2000 to bring Kevin Hedderwick into their business. At the time the company then known as Steers Holdings was battling for traction. After running the Steers brand for a year, Hedderwick became chief operating officer of the then small company in 2001, and immediately set about introducing big company processes into the entrepreneurial business. Over the following dozen years, what has become Famous Brands has achieved compound annual HEPS growth of a staggering 28%. By comparison, Warren Buffett's Berkshire Hathaway is a world beater at 20%. The share price is up one hundred fold and the market cap has risen from R65m to almost R10bn. Hedderwick was promoted to CEO in May 2010 and despite now working off the bigger base, has still posted compound HEPS growth of 18% since then. Investors love the story. As well they should. In today's interview, ostensibly to talk about the interim numbers to end August, we covered a lot of ground. As you'll see from the transcript, Hedderwick gets particularly excited when the conversation moves to opportunities available in the massive Indian and Nigerian markets. At 60, he's fit and looks ready to keep going another 13 years. No doubt the Halamandaris family would want him to stick around even longer. – AH
ALEC HOGG: Joining us now as we unpack the financial results for the six months to end August of Famous Brands, is the company Chief Executive Kevin Hedderwick. Kevin, the numbers are good and the story is good, but isn't it lovely to look back at when the family brought you in? How many years ago would that have been?
KEVIN HEDDERWICK: 13 years ago, now.
ALEC HOGG: What was the market cap at the time?
KEVIN HEDDERWICK: About R65 million.
ALEC HOGG: Nearly R10bn today: I'm sure they must be happy with that decision.
KEVIN HEDDERWICK: Ja, very much so and well-deserved, too. They did the early hard yards and they had the courage at the time to bring people like myself in from the outside, so they're very happy and as I say they deserve every moment of it.
ALEC HOGG: Shareholders who followed you would also be smiling. What's the story for the next 13 years, Kevin? Are you sticking around?
KEVIN HEDDERWICK: There are many things going on with Famous Brands right now. I think we still have runway in terms of growing this business going forward. I think you can see from the data that's in the release we put out today, the food service space has been forecasted to grow at an annual compound growth of 5.9 percent. Africa holds great promise for us. We've been there 15 years. We're going to ramp up our presence in Africa. We're dabbling – as you know – in India, and we're about to open our second one. Steers has come home to roost in a place like the UK where we've done one and we've blown the lights out by our standards. We're looking at a second one in Twickenham in February; lots of opportunity for us to go back up the Supply Chain and build a manufacturing capability, so we're in a great space.
ALEC HOGG: Why are we so good at fast foods when we expand internationally? I ask that with a lot of humility because South African companies have had their butts kicked in many areas when they've gone internationally. With fast foods, we seem to be doing well – Nando's, yourselves…
KEVIN HEDDERWICK: I think we have to be careful in terms of saying we're that good. There are certain markets where the value of entry is just so high that you're going to get your backside kicked. I think the Nando's story is a phenomenal one – a product that completely trades in a space of its own. I think that they also had to work hard in the beginning. I think in the first ten or 12 years, if you asked Robbie they didn't make any money in the UK, so I think what you have to do is pick the markets and pick the moments and I think the one in India is a case in point. I think that India shows us a market that is huge in terms of size, under-serviced in terms of what we call the organised market, a country that is gravitating from the disorganised to the organised market. You have a business there like Domino's Pizza. They have 500 pizza outlets in a place that's the size of India – 1.6 billion people, so that will just show you. In the South African market where we have 25/30 million active consumers: Debonairs, on its own, is nearly 500 restaurants. I think you have to look at the marketplaces in terms of 'are they under-serviced, are they emerging, is it politically stable, is the economy turning?' and those are the ones that you want to get into. I think, to rush to get into the organised sophisticated markets – the Americas of the world, Australia and the UK – it's tough, so you must pick them.
ALEC HOGG: It's a much better idea to go to India. Debonairs in Mumbai: just tell us a bit firstly, about the decision to go there and secondly, what the reaction has been.
KEVIN HEDDERWICK: It was never on our radar screen. In fact, the family pitched up and said they'd been scanning the horizon and they've done some work looking at potential partners in America and Australia and they found a South African business called Famous Brands. The spent seven days with us, they loved what we did. They're a business that's primarily logistics and freighting but they wanted to get into the food service space because they see the potential. They did a phenomenal amount of work in terms of the potential of that particular market and I must say I was ambivalent. They said, "You have to have a look yourself" and when I went out there I had a look at the marketplace, and the thing that got to me was the fact that the market was under-serviced and that there was a movement towards pizza as a product and a brand, so we've done it together with them. We've opened one and there was a lot of hype to the first one. Obviously, it has settled down now.
ALEC HOGG: Where in Mumbai?
KEVIN HEDDERWICK: Andheri West: that's what the neighbourhood is called.
ALEC HOGG: What I'm getting at is, is it in the city centre or in one of the suburbs?
KEVIN HEDDERWICK: It's sort of outside the suburbs, but very close to one of the major rail stations. There are many feet everywhere in Mumbai and they're serious players. They're a family business and they've been around for 50 years.
ALEC HOGG: Who are they?
KEVIN HEDDERWICK: Diwa Hospitality – they trade as the Parekh Group, but their hospitality business is called Diwa. As I said, it's a family business, which has been around for 50 years. They're serious players. When I went out to the opening of the first restaurant, they built a state-of-the-art central kitchen, which is astonishing and I think that's just an indication of their commitment to taking the business and growing it. We're about to open a second one in November, even though the first one has quietened down a bit. Going into markets like India is like playing Test Cricket. It's not a one-day game. This is a Test match, so we're ready to go and bat in a Test match.
ALEC HOGG: It does potentially have a huge upside.
KEVIN HEDDERWICK: Yes, if you get it right the numbers are astonishing.
ALEC HOGG: Are there, apart from Dominos, no other major pizza concerns there?
KEVIN HEDDERWICK: No, there's a local pizza business but very geographically confined to a specific market. You do find other global brands like KFC and there are a few MacDonald's, but generally speaking, a marketplace that's very unorganised: eating from the street, almost.
ALEC HOGG: What about Nigeria? Last time you were in the studio we spoke about Mr Bigg's: how's that going?
KEVIN HEDDERWICK: It's early days; we've been in there for three weeks and so we're all over them like a rash as only Famous Brands do. We're hoping to transfer some of our intellectual property as quickly as we can. We have a person on the ground there who has worked with them and we're teaching him the Famous Brands way. We've quickly done a budget for next year because their financial year starts on the 1st of January and we've given them quite an extensive to do list of things we want done. What I will say is that last week they opened a new look/new feel Mr Biggs in Ikeja Shopping Centre in Nigeria and it looks sensational and it's doing well. We're excited about the relationship with UAC. We think that we can use that as almost a beachhead to launch some of our other brands. They're great people to work with so we're very optimistic.
ALEC HOGG: Are you going to change the menu?
KEVIN HEDDERWICK: No, I think you have to be very careful. I suppose people like you who know me very well in terms of my SAB Miller background. If you just look at the way, SAB Miller people do… They'll go into a country like Africa. The temptation must be for them to charge in with their own brands like Castle, but what they don't do…they don't do that. They go in there and they pick up the local brand. They make sure that the quality is right, that the service is right, that it's cold, that the packaging is good. We're going to do the same with Mr Biggs. We're going to take what we think is a bit of a rough diamond, polish it, and take it to market. We think that the Mr Biggs product offering: there's a lot of space for that in the Nigerian Market. What we are going to look at is retail in terms of property and say, "Well, that piece of property would far better be serviced as a Debonairs, so let's put a Debonairs in there", because Mr Biggs does service rather the bottom end of the market in a place like Nigeria.
ALEC HOGG: Is there scope for the other brands?
KEVIN HEDDERWICK: One of the more exciting brands for us in our stable in the African context is Debonairs Pizza. It is becoming phenomenal, even in the South African context. We have five on the ground now and we've done that literally by slow burn, trying to do it out of Midrand, which is really slow burn. I think having an infrastructure on the ground in Lagos is certainly going to give us traction very quickly and pizza as a product and Debonairs as a brand in Nigeria is being raced…it's astonishing.
ALEC HOGG: Overall, this is a business, that's worth almost R10bn. I'm sure you're looking forward to celebrating when that day arrives. It's just around the corner though – 43 percent up in the past year. Shareholders have been supporting you aggressively. Kevin, does that worry you sometimes when you see the way the share price has been moving?
KEVIN HEDDERWICK: I must say –personally, I don't pay much attention to the share price. My view of the share price is that it will sort of take care of itself. We're in the trenches every day, doing what we ought to do. We're building a wonderful business. It's about building brand capability, logistics capability, and manufacturing capability. The business model is rock solid. For as long as we've seen it, for as long as we're building brands at the front end of the business, the logistics business works well. The manufacturing business works well and we're in a great space. If you think about food services in South Africa, I don't want to say that we're recession-proof, but turning these types of numbers will give the market some sort of idea about what this business is about. The more time that I have to spend talking to the marketplace, the investment community and the analysts, the more they're buying into the story and I think that the story has been reflected in the price, and the ratios that you see.
ALEC HOGG: When are you going to get to saturation? One of the points you make in your Stock Exchange News Service announcement today is that 65 percent of South Africans over the age of 16 bought from a fast food outlet in 2008, and now it's gone up to 78 percent. Surely, you wouldn't expect it to get much higher.
KEVIN HEDDERWICK: I think what we can do though is…there's still lots of work to do in terms of taking our brands into even the unorganised market in the South African context. There are many markets in South Africa where we still don't have a presence, and when I say 'we', I'm talking about the industry – the category. We're about to open a restaurant in a remote place called Flagstaff one of these days in the Eastern Cape. If you'd said that to me four years ago, I would have said you must be crazy.
ALEC HOGG: People in Flagstaff must be excited.
KEVIN HEDDERWICK: They're very excited – especially about Debonairs. I think there are many opportunities still in the South African landscape to make our product available, affordable, and accessible and when that happens – people embrace it. In the South African landscape, there are still lots to do in terms of growing some of our smaller brands. In Africa of course, there is huge potential for us.
ALEC HOGG: Kevin, just to close off with: it's always a lovely story but it was interesting to see that you are now internally providing the coffee – only now – for some of your brands…Mugg and Bean/Figo/Europa… Why has it taken so long to do that and what is the impact?
KEVIN HEDDERWICK: We think it's happened very quickly because what we would do is… We acquired this little coffee company last year…great operator who is as passionate about coffee as a winemaker is about wine and one of the things we did was we went for low-hanging fruit. Of course, a big piece of low-hanging fruit had to be Wimpy, so we went in, got the Wimpy recipe right, and started delivering coffee to Wimpy franchisees out of our own coffee company. Once we had ticked that box, we started to work on some of the recipes of things like Mugg and Bean and so I think we've done very well in terms of getting all the brands in the coffee business.
ALEC HOGG: That's your business – supplying your franchisees.
KEVIN HEDDERWICK: That's what I think the Famous Brands model is. What's attractive about this model – and it has to be attributed to the management of the place – is that we have the ability to integrate these other parts of the business into our core business very quickly. Right now, as I speak to you, only this year we acquired a business called Turn & Tender, which had a very small meat processing plant on the side of it. Within the next week, we'll be using that facility to provide choice meats to some of our other restaurants. The bakery business, which we bought in terms of the Bread Basket already, as I speak to you, is providing bread products to some of our other restaurants. We do that and we think we do it quite quickly and that's what you see coming through in our results: our ability to integrate businesses into our own happens quite quickly, and you're seeing it in results.