Know your market

Sorry to my regular readers, this topic is something of an obsession of mine.

The piece that I wrote last week about the failure of Starbucks in Australasia got me thinking about Burger Fuel Worldwide [BFW] again.

Starbucks [SBUX] failed in Australasia partly because the model that the coffee giant has used in the United States and other regions across the world doesn't fit local tastes.

The "coffee culture" in this part of the world, especially in Melbourne and parts of New Zealand, is much more sophisticated than in the United States and we already have our favourite cafe's here, owned mostly by smaller operators who know their market well. They know what to sell them, how to price the product and where to put their stores. Their customers therefore are loyal to their local cafe and wont go within a lattes' roar of a Starbucks.

Consequently Starbucks failed.

Ho does this relate to Burger Fuel?

Well, Burger Fuel has a very strong local New Zealand culture. It also knows its customers very well, they have a strong youth appeal, it is trendy, upper end and loved by those who frequent it on a regular basis.

Like Starbucks though, a question one has to ask if one were to invest money in Burger Fuel shares is, how will Burger Fuel management successfully transport the culture that they have fostered in New Zealand to new international markets that might not fit the culture that has made the company such a success locally?

I mean, that is where Starbucks went wrong. Many other fast food chains that have entered this country have entered thinking they could just import an idea from the USA, without changing it to fit the local market, then expect to see the money roll in.

El Pollo Loco, the US chicken chain, a couple of taco chains and even Wendy's Burgers, who are now doing well here, all entered New Zealand in the 1980s and 90s and failed quickly.

They failed to adapt their franchise model to fit the local tastes. Assuming you know your market is one of the biggies when it comes to starting a business, get that wrong and you might as well forget the rest.

In the case of Burger Fuel, they have a concept; trendy high quality, high priced burgers with an edge.

In their first international market in Sydney Australia though, this concept has been well established for years and those operators have lengthy local knowledge, which as I have said above is all important when transporting a foreign business and expecting it to fly.

What have BF management done to fit local Australian tastes and expectations and how will they change that model to fit in when they begin business in their newest territory, Dubai?

I have previously shown an interest in investing in this company, at a lower than current share price, but given the Starbucks example that I have pointed out above and some more thinking, I would have to now completely ditch any ideas that I had of buying a stake at any price.

What was I thinking?

Its too tough a burger to bite on.


Burger Fuel @ Share Investor

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c Share Investor 2008

Stock's I'd buy, at a price: Burger Fuel

Now I have given Burger Fuel Worldwide [BFW] a LOT of stick over the last year or so about some of their decisions and their initial IPO being way overpriced.

So much stick in fact that one of the directors that I had a friendly acquaintance with and could contact him about company progress no longer returns my calls.

Tough luck, never mind Mr Rickard, get over it!

Well, I don't really have anything to get over, never had Josef Roberts , I really love the concept, brand and company. I just don't like the value that you place on it.

The initial IPO put the capital value of the company at NZ $60 million, it is now worth less than half that at today's share price. I would personally value it at around $10 million, roughly a third of today's value, as a purely speculative play, rather than a solid business investment.

Sales for the franchisee outlets run at approx $20 million of which BFW, as the franchisor, have around a 10% gross cut of that figure, for royalties, group advertising spend ,management and training and other fees. Around $2 million gross.

Company start up costs and early expansion have chewed up a value meal sized portion of that $2 million plus the same sized portion again, making for a just over $2 million loss.

Theoretically these costs should be proportionally smaller as the company grows and so does revenue but if you were looking at putting a value on the company today, you would have to discount today's capital value down from $30 million to $10 million because of uncertainty over those continued expansion costs.

As an investor you would have to ask yourself how much would I pay to get $2 million of gross revenue per year? Personally I wouldn't pay more than $10 million bucks.

Wheres the present and future value of Burger Fuel though?



Burger Fuel: Yummy Burgers, but a highly
over-valued Brand.

Well. I reckon BF management put most of the value in their company in its brand, which is a strong one, and one that management relied upon to get investors interested in the IPO, but as I have mentioned before I think they put too much value in that brand.

Which leaves me with a more realistic valuation based on a dollar return and high risk, rather than possible worldwide domination of Burger Fuel's fast food outlets.

I'm interested therefore at buying at anything around 17c per share, it is at 40c today and its IPO price last July was $1.

I must note the share price has been down to a low of 11 c.

Are we friends again Josef? I love your Bastard Burger.

Burger Fuel @ Share Investor

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c Share Investor 2008

Burger Fuel leaves investors hungry

Burger Fuel's gourmet burgers are delicious, ample, fresh and have plenty of filling. It is a shame that its latest profit results are meagre, lacking in substance and leave investors hungry.

Too negative?

Just look at the revenue for the last 9.5 month reporting period. Around NZ$4.7 million. This is derived from a 10% cut out of Franchisee's turnover, which probably totaled around NZ$15 million for that period. 4% of that revenue was used for marketing of the company. The balance of the revenue comes from a construction management fee, a franchise territory fee, a franchise training fee and revenue from company owned stores.

On this revenue Burger Fuel Worldwide [BFW] reported an audited loss of $2,149,067 for the nine-and-a-half month period to 31 March 2008.


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The IPO raised around $8 million dollars cash in July 2007, with $3 million contributed from the company founders because the IPO flopped, and as of 31 March 2008 it had chewed through almost $5 million of it. Granted there have been costs involved in opening a company owned store in Sydney and costs establishing the company as a franchisor to the chain of owner operator stores but as a franchisor Burger Fuel's store opening costs should be largely covered by franchisee fees and contributions as outlined above.

What it looks like is that there will be more capital needed in 12-16 months to continue company expansion.

As an investor and business owner myself, I like to be making money from my enterprise from day one. Of course there are capital costs in a "start up" such as BFW but as the listed life of this company is now almost a year old, the promise of profit doesn't look good as the company expands.

The company should be making a small profit already, excluding the almost $1 million cost of the IPO, but one of the answers why they might not be could lay here:

This included an additional elected marketing spend in NZ of $339,304 over and above the franchisee marketing budget for the period.If the franchise model is a sound one as the company expands then why would the franchisor spend money above and over the amount the franchisee pays to do the marketing? Should the marketing fee be bigger given that $339,304.00 is not a small amount of money when you consider the small revenue base and small number of stores at present?


A big worry is the progress of the brand in Australia


BurgerFuel Australia unaudited system sales for the period 1 April 2007 to 31 March 2008 are $1,453,892.


With two stores opened in OZ, one in Kings Cross opened since October 2007 and an established one in Newton, the revenue of the two combined of only $1.45 million is tiny.

An outlet based in Sydney's Kings Cross should be doing well north of A$2 million per year to cover the high costs of being based in that area. Rents are high and as this store is company owned it will have to do much better as to not continue to be a drain on franchisor company profit.

All is not lost though!

One small promising light shines from the deserts of Dubai where BFW signed a Master Franchisee agreement in May with Al Khayyat Investment Group Investments LLC to open a store there latter in the year.

The financial details of that deal are sketchy but we all wait in hope for good sales figures for the first few months to help give investors an indication if the concept will fly in a market already saturated with manifold more times competition for the disposable entertainment buck than the company faces in Australasia.

Burger Fuel reminds me of the 42 Below Vodca company, which was listed a few years back. It had a very strong brand and loyal following and struggled initially because it didn't have the funds or systems to take the company and its product to the world. It never made money but was eventually sold to Bacardi for NZ$138 million in 2006 and they had the backing and moola to take the brand somewhere.

Is Burger Fuel destined to be bought up by a YUM! or one of the many worldwide operators of fast food brands?

You never know, Josef Roberts, a director of Burger Fuel, did just that when he started up the Australasian Red Bull company and then sold it to the parent .

Judged by the latest profit announcement this could be Burger Fuel investors only hope for a return on their money.


Related Links

Burger Fuel website



c Share Investor 2008

Burger Fuel cooks up a Dubai deal

They will be eating Burger Fuel burgers in Dubai soon, thanks to Burger Fuel Worldwide[BFW] management signing a Master franchise agreement with Dubai based Al Khayyat Investment Group Investments LLC - a holding group with diverse business interests ranging from multinational companies, automotive, retail, schooling, leasing and real estate interests.




Related links

Al Khayyat Group
NZX Announcement NBR: Burger Fuel signs franchise deal in Dubai YAHOO:Burger Fuel moves to Dubai
Burgerfuel website

It will be interesting to see the terms of the agreement, presumably it will be similar to the individual franchise agreements operated in New Zealand, Burger Fuel's home. If the Arab franchisees plunck their oil money down and really go for it, then possible investors in Burger Fuel here may get a better picture on how successful the Burger Fuel Franchise operator will fare.

Since the listed company will derive its income from ongoing royalties, currently too small to make any profit on overheads, the development of a larger group of stores will be a good indicator of the company and its long term future.

Personally, I'm still a little skeptical as to why Josef Roberts, executive director of Burger Fuel, and his fellow directors may have leaped so far across the world with their concept before developing it more fully and profitably in Australia.

Two company owned stores in Sydney just isn't a good indicator for future success outside the Australasian market.

I have so many questions about this move I have made a request to Josef ,via email , to flesh out some of the detail of today's announcement. I'm curious as to whether the Dubai company made the first move or if it was Burger Fuel's initiative.

I know there is plenty of interest about this company because every bit of news about Burger Fuel is googled incessantly, this site got alot of BF related traffic today, including a handful from Dubai, possibly kiwi ex pats.

Save for more positive concrete numbers or an indicator that things are improving financially and that the Franchisor business model will work with this type of high end food business, I clearly remain negative on the company when it comes to its present valuation of just under NZ $30 million.

Some questions need to be answered to reassure investors that management are heading in the right direction, given today's surprise announcement.

Hopefully, even though I have been critical of his baby, Josef will return my email. He has been great so far.

Burger Fuel shares were untraded at closing today, which isn't unusual. They last traded April 29 @ 45c.


Burger Fuel Worldwide @ Share Investor


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Discuss BFW @ Share Investor Forum - Register free


c Share Investor 2008

Burger Fuel and Coke

I and many others have been critical of Fuel Worldwide [BFW.NZ] and their appallingly bad IPO but the company has today announced some positive news.

I will quote the press release directly release from Burger Fuel:


BurgerFuel opens flagship Sydney store. 

BurgerFuel has taken its international expansion programme an important step
forward, opening its second Australian store yesterday.

Located right under the iconic Coke sign at the entrance to Kings Cross,
Sydney, the landmark store is a key element in BurgerFuel's global expansion
plans.

BurgerFuel founder, Chris Mason, says this store represents a foundation
stone for the company's overseas development and its high-traffic location
will not just generate interest in the brand in Australia, but further afield
as well.

"Kings Cross is very much a tourist Mecca, so this new store will be a
showroom for our brand and the BurgerFuel formula."

"The Australian market poses some challenges for us, but the growing sales
and great response from the locals to our Newtown store, which opened last
December, shows there is a market for us across the Tasman."

He says the company will continue steady expansion in New Zealand, while at
the same time building the brand in Australia.

The new Sydney store is the 23rd BurgerFuel store to open, with a further one
opening in Napier, New Zealand, later this month.

The Kings Cross store is employing the proven parts of the BurgerFuel
formula. Its menu, which comprises high-quality burgers that are big on
flavour, is consistent with that enjoyed by its New Zealand customers.

"Our distinctive in-store design, which is a strong aspect of the BurgerFuel
experience, is also being used in Kings Cross. After 12 years of development
we have refined our approach to the brand, the stores, and the products to an
international level.

"We intend to build a successful operation in Kings Cross and use that to
offer franchisees in Australia the opportunity to be part of the BurgerFuel
system".

The Kings Cross store will be company owned. All BurgerFuel's New Zealand
stores are franchised, other than the company's first ever store in Ponsonby
Rd, which opened in 1995.


Conclusion
The area of Kings Cross where BF have sited their new store is, as Mason says a "tourist Mecca" and concepts like BF do well in areas such as this because much of the human traffic passing through like to spend money on food while being entertained in the 24hr sex and nightclub centre that is Kings Cross.

Living in the cross during the late 1980s(ahh those were the days) there were many new food outlets of concepts that were tried there first.

I remember one of the first Mc Cafes' being tried out there and look at them now.

Mason and BF have certainly come to the right place to get exposure.

I wish them luck.

BFW Shares closed even today at NZ .61c


Burger Fuel Worldwide @ Share Investor

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Burger Fuel share price out of gas
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Director explains share price drop
Burger Fuel slims down in value
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Burger Fuel results and commentary

Discuss BFW @ Share Investor Forum - Register free





c Share Investor 2007