Softlogic forays into fast food biz with Burger King franchise deal

Tuesday, 3 September 2013 00:00 -     - {{hitsCtrl.values.hits}}

Aggressively expanding and diversifying, Softlogic Holdings PLC has picked the burgeoning fast food industry as the latest to explore its own taste of success. The company yesterday announced it has struck a deal to roll out world famous Burger King restaurants in Sri Lanka. To undertake its foray Softlogic has floated a fully-owned subsidiary, Softlogic Restaurants Ltd., which is the master franchisee. It has entered into a master franchise and development agreement and a company franchise agreement with BK AsiaPac Pte Ltd. of Singapore to develop, open and operate Burger King Restaurants in Sri Lanka. BK is a subsidiary of Burger King Worldwide Inc and the master franchiser for the Burger King system in the Asia Pacific region. Softlogic Restaurants has been granted the exclusive right by BK to develop, establish and operate direct-owned Burger King Restaurants in Sri Lanka. “BK has agreed to provide services and operational support to Burger King Restaurants operating within Sri Lanka,” Softlogic Holdings Chairman Ashok Pathirage said. According to him, Softlogic Restaurants Ltd. plans to open three restaurants in the coming months. “Burger King is a strong competitor in food franchise business with a unique taste and value proposition and will be a solid contributor to the group’s future growth,” Pathirage added. The announcement did excite an otherwise dampened investors in the beleaguered Colombo Bourse but failed to boost Softlogic share price at closing. It hit an intra-day high of Rs. 8.90 but closed 40 cents down to Rs. 8.50 with 138,400 shares traded. Though highly geared, Softlogic is regarded as one of the fastest growing newly-established conglomerates with growing interests in retail, ICT, healthcare, financial services, automobiles and leisure. In its portfolio are some world-renowned mega brands. The group now provides employment to nearly 6,000 individuals, generating a turnover of more than $ 190 million. The formal entry of Burger King is expected to lift Sri Lanka’s lifestyle profile as it joins other world famous fast food brands such as McDonalds, KFC, Pizza Hut and Domino’s Pizza. A new entrant shortly will be TGI Friday’s by Cargills which also handles KFC. Whilst most analysts see future promise in the food business owing to rising per capita income, improved lifestyles and influx of tourists, existing players have faced tough times of late. For example, according to Cargills, the restaurant sector sees exciting medium to long-term growth potential with an increasing demand from both urban and semi-urban markets attributed to growth in per-capita income, lifestyle change and a growing tourism industry. “However rising input costs and higher electricity tariffs are having a direct impact on the sector, with the higher price points leading to a marked drop in frequency of patronisation as well as a greater demand for ‘value’ meals. Steps taken to maintain the KFC value proposition amidst escalating costs have resulted in a substantial erosion of margins,” Cargills said in its 2012/13 Annual Report. As a result, whilst revenue from its restaurant business has grown by 41.4% to Rs. 1.95 billion for the year, operating profit has declined by 3.55% to Rs. 190 million while PAT saw a decline of 26.1% to Rs. 139 million. However, Cargills expects the second-half of the new financial year to see the sub-sector’s diversification into the entertainment-dining segment with the launch of TGI Friday’s. Despite tough times, Cargills had invested Rs. 385 million in capital expenditure in FY13, up from Rs. 241 million in the previous year. It added five new restaurants to the KFC network, taking the total to 23 and retaining its leadership in the Quick-Service-Restaurant (QSR) category. New Restaurants in Wattala, Galle, Ratnapura, Peradeniya and Marine Drive have reported an excellent response from local clientele. Softlogic Group’s business sectors in the 1Q of FY14 has demonstrated strong revenue growth crossing Rs. 7 billion, up b 17.4% and the company expects this upward momentum to continue in the next quarters. Gross profit of the group improved by 12.2% to Rs. 2.2 billion. Results from operating activities however declined marginally by 2.8% YoY but remained strong at Rs. 682 million amidst the group’s rapid expansion. This shows that the group’s operational model is working well but due to the high finance costs of Rs. 677.8 million (up 10.4% YoY), it requires serious addressing at all levels going forward. The group made a PBT of Rs. 217 million (up 2.2%) during 1Q. Profit after tax for the quarter amounted to Rs. 184.8 million (up 19.1% YoY) whilst profit attributable to the equity holders was up by 38% to Rs. 39 million. Group short borrowings as at June 2013 were Rs. 8 billion, up from Rs. 5.8 billion a year earlier. Current portion of interest bearings borrowings was Rs. 3.8 billion as at June 2013. Long term borrowings were Rs. 10 billion, up from Rs. 9.2 billion in June 2012.