A Closer look: Domino's Pizza Enterprises Ltd

I have always been a big fan of fast food, as a consumer and as an investor.

I used to have a stake in Restaurant Brands Ltd [RBD.NZX], the New Zealand franchisee of Pizza Hut, KFC and Starbucks.

As business these sorts of companies are excellent ones to own, if they are well managed, cost and service levels kept on top of and food quality maintained.

If none of these things are adhered to they can be a license to go out of business. RBD has struggled for years with the operation of its Pizza Hut franchisee, finally relenting and selling the business to owner operators.

Domino's Pizza Enterprises Ltd [DMP.ASX] is the Australian listed pizza chain franchisee that runs over 750 Domino's pizza outlets in Australia, New Zealand, France, Belgium, The Netherlands and the Principality of Monaco of all places and like most other fast food chains is currently doing well, with a huge rise of profit forecast that is to be announced 19 August because of the switch from going out to eat to punching the keypad and settling down on the couch with a pizza and Coke.

Company Profile | Success Factors | Corporate Governance

Webcast Q2 2009 Domino's Inc.[DPZ.NYSE] Earnings Conference Call (Replay) 07/22/09 at 11:00 a.m. ET

To be fair Domino's has been growing outlets, sales and profit for a few years before the current boom and it is a very well operated business, with a focus on the bottomline and customer satisfaction the two main keys to its success and it has ambitious plans to keep growing. It has grown quickly by purchases of other pizza brands, adding sub-franchisees and good old-fashioned organic growth through efficiencies and great marketing.

But beware the fast food business or any food business for that matter can be a fickle one. Pizza, more than any other slice of this market seems to have very big swings in business cycles from boom to bust and they operate on wafer thin margins and high throughput, with constant competition from mum and dad pizza stores to the other large and smaller chains.

Domino's does have an edge though. It specializes in one thing and does it well and its owner operators are the secret to the Australian Franchisor success (Domino's OZ is itself a Franchisee of big daddy Domino's Inc [DPZ.NYSE] in the USA but in turn has franchisees that own and operate individual stores that provide a percentage of their store turnover which is Domino's OZ main form of income-apart from sales from its company owned stores ) driving the Domino's brand, literally, to become the worlds largest Pizza Delivery and sales company.

Domino's Australia seems to be near the top of their current growth phase but having said that there will be more boom times to come and lets hope their good management gets them through the troughs to come.

The ASX listed stock seems fully priced at current levels and is worth adding to your portfolio during its down cycles.

Domino's @ Share Investor

Domino's Australia dominant in Australasia
The Dots get the Hots

Discuss Domino's Pizza Enterprises @ Share Investor Forum

Related Links

Domino's Pizza Enterprises - Corporate Website | Investor Relations


DMP 2008 Annual Report - 10MB PDF

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c Share Investor 2009

Burger Fuel: Running on empty

Listed Franchisor Burger Fuel Worldwide [BFW.NZ] results out yesterday were disappointing for shareholders.

Back in September 2007 directors anticipated NZ$50,000.00 in losses per month but losses of NZ$669,000 in the six months to 30 September 2008 were more than double that figure.

Even more worrying, losses have mounted as 2008 continued. If you strip out 2007 IPO costs the losses for the 9.5 months to 31 March 2008 were $83,578.00 per month. This compares to $111,500.00 per month for this latest reporting period.

Hardly a positive trend.

Lets look at revenue for the company to see if that changes the picture.

Surely if losses are more than double company estimates then revenue should be sharply up when we compare the 30 September 2008 revenue with the previous 3.5 month period in 2007?

Yes it is but sadly not more than double.





Burger Fuel @ Share Investor


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With revenue of $3,518,000 in the six months to 30 September 2008 and $ 2,336,000 for the 6 months to 30 September 2007, it is quite a good lift but hardly the stellar stuff that was shouted from Burger Fuel's advertising pre IPO, because it shows costs have far outstripped income and as I pointed out above these costs appear to be increasing rather than abating.

These revenue figures are based on 4 more stores since listing so this makes income figures look even worse.

Burger Fuel management say the next six months will be about cost containment and they will not anticipate opening any new outlets until well into 2009.

This will clearly be important to stem the franchisors already increasing operating expenses as their franchisees come under pressure from increasing business costs such as labour, ingredients and energy.

Like its bigger listed cousin Restaurant Brands Ltd [RBD.NZ] who had a recent poor last quarter sales, Burger Fuel will continue to struggle in the face of increasing competition, fickle consumer tastes and demands for better service and quality fast food.

Its short company history as a listed vehicle have been wildly disappointing and it looks even further away from any tangible success than it was when it listed mid 2007.

As least there is still their bastard Burger.

Burger Fuel shares were at 38c at close of the NZX at 5.00pm Tuesday 9 December 2008.




c Share Investor 2008

KFC finally flying

Stepping away from market turbulence for a while(I have decided ignorance is bliss) I thought I would take a look at Restaurant Brands [RBD.NZ] sales figures for the 16 weeks ended 8th September 2008.

Sales are flattish overall for the last quarter for the 3 brands the company operates-Starbucks, Pizza Hut and KFC-but Starbucks is suffering and Pizza Hut continues to bleed cheese all over their dirty backroom floors.

What I want to look at is KFC because what is happening looks good.

It has always been the strongest of the 3 brands but having said that its sales figures have been patchy over the years but there looks like there is finally some reason for optimism for the revival of the brand and sales. For the year to date, KFC sales were $110.4m, while the last quarter KFC sales increased $2.7m to $63.4m, with sales up 5.5 per cent on a same store sales basis.

Back on December 12 I was reasonably skeptical about the "increase in sales" that management were crowing about:

Management are siting "record" sales at its fried chicken restaurants but the facts are that the year they might be comparing this latest result to, 2002, KFC did $177.1 million in sales. If you add the 2007 cumulative 3 quarter total of $151.8 Million to say a generous $48 million final quarter, you are still just shy of $200 million, an approximate 12% rise in dollar sales since 2002. Factoring in a generous 3% annual inflation since then though and sales are 3% down since their record listed year in 2002.

Lets do a little rough calculation to come up with a full KFC sales figure for 2008 based on the first two quarters of sales.

Lets assume another 5% growth of sales for the next two quarters and the company could be looking at as much as $230 million in KFC sales for the full year. That estimated figure would be around 30% more than their record $177.1 million in 2002. Factor in the 3% inflation rate for six years for a cumulative 18% then we see real growth in sales over 6 years of around 12% cumulative or 2% a year above inflation.

Now I have been watching this company for ten years and this is the best result in sales that KFC have achieved(if the sales figures pan out) so management efforts seem to be working.

It is hard to tell whether it is the better menu offerings and pricing or the store refurbishments that have been the reason, but I would put more emphasis on the menu and slightly better service.

Just one rider on the good news about KFC sales. Like other retail businesses, higher day to day costs like Labour, energy and ingredients are keeping a lid on margins.

KFC looks more promising though than it has for more than 10 years.

Shame about Starbucks and Pizza Hut.


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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

Restaurant Brands consider slicing off Pizza Hut

With a certain sense of satisfaction, the fact that Restaurant Brands [RBD] would consider putting up their loss making Pizza Hut Franchise up for sale is great news for shareholders.

I have been banging on for years about management cutting their ties because of the clear implications of what keeping the brand means for the company as a whole-certain death.

The only mystery to me is that is took Ted Van Arkel, the chairman of RBD so long to even consider making this announcement to the market.

While they are at it they might also like to consider ditching the loss making Starbucks as well. It isn't as bad as Pizza Hut but is doesn't make money!

KFC is the relative star of the show and that is where management and their energies should be concentrated on because I think they lack the management depth to successfully run two major fast food brands.


RBD prepared to quit Pizza Hut

1:30PM Thursday June 19, 2008, NZPA

The Pizza Hut New Zealand chain could be put up for sale if owner Restaurant Brands is unable to turn it around.

Describing Pizza Hut as his company's "Achilles' heel", Restaurant Brands chairman Ted van Arkel today said the board would consider any actions that might end the drain by Pizza Hut on company profits.

That would include its sale if a turnaround was not forthcoming. In the meantime, the company was redoubling its marketing efforts to hold the line in the current economic climate, Mr van Arkel told Restaurant Brands' annual meeting.

He also said Pizza Hut was in a better position than its competitors.

"The pizza market is crowded and price sensitive. Our competitors, all single-brand operators, are also hurting," he said.

"We are increasingly seeing our competitors' pizza franchises on the market, desperately looking for buyers. Several have already gone to the wall."

Pizza Hut, on the other hand, had the backing of Restaurant Brands, which had demonstrated that it could manage brands successfully over the longer term, Mr van Arkel said.

Restaurant Brands, which also has brands KFC and Starbucks Coffee, was in a strong position to weather an economic shakeout and continue to build its brand presence, but many individual operators of single-brand franchises were not.

"With lower levels of disposable income among consumers, all three of our brands remain very competitive and offer good value for money to the increasingly selective consumer dollar," he said.

"We see the economy in the next 12 months as being challenging but not dire."

Restaurant Brands' flatter first quarter for 2008/09 was evidence of the more difficult trading conditions all retailers were facing and second quarter sales to date looked to be slightly behind last year.

"However, we do expect our reliable earners, KFC and Starbucks, to buck the national trend, even if sales do ease."

The next 12 months would be critical for the national pizza market. At any one time as many as 40 rival franchises were up for sale and Restaurant Brands expected that number to rise as the economy slowed, Mr van Arkel said.

In the chicken market, three competitor stores had already closed in the past six months.

Restaurant Brands' total first quarter sales across its three brands, for the 12 weeks to May 19, were $69.8 million, a decrease of 0.9 per cent on the equivalent period last year, although same-store sales were up 0.4 per cent.

Restaurant Brands shares closed yesterday at 85c, and today Mr van Arkel said the company's directors did not consider that price to reflect intrinsic value.

Broker analysts considered the stock worth buying up to around $1.25.

He also advised shareholders that directors were proposing to ask for an increase in their fees at next year's annual meeting, subject to a satisfactory result for the year.

Directors' fees have not been increased since 1998 and no longer rewarded board members adequately for their input, he said.

Related Share Investor reading

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c Share Investor 2008

The Dots get the Hots

Dominos Australia wants
a slice of the Global Pizza
Market.

Doing what our domestic Pizza Franchisee with the Pizza Hut license, Restaurant Brands [RBD.NZX] couldn't do, Dominos Australia [DMP.AX]the Australian arm of US giant Domino's is successfully expanding overseas.

It will open at least 35 stores in Europe each year until it reaches 1000 stores, betting on rising demand for home delivered food.

Domino's has a total of 667 stores, with 404 in Australia, 65 in New Zealand and a combo of 198 in France, Belgium and the Netherlands.

Restaurant Brands [RBD.NZX] delivered appalling results when it bought the ailing Pizza Hut chain in Victoria Australia in 2000, with a total of around 60 stores.

Poor management was unable to turn company fortunes around and RBD has now almost finished selling their OZ arm after losing 10s of millions of shareholder dollars.

The pizza biz is a very competitive industry but if Domino's OZ expansion works then their slice of profits will get bigger.

Their approach to the New Zealand pizza market is far more aggressive and competent than RBDs and the signs look good for them to take it to Pizza Hut in a big way.

Domino's Australia is listed on the ASX .


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Domino's Australia dominant in Australasia




c Share Investor 2007

Restaurant Brands: Delivering increased profit in October 2007

The profit season in New Zealand rolls on, and by and large things look good company wise considering the sad state of the economy. One company set to announce their profit in October, Restaurant Brands Ltd [RBD.NZ] the operator of the KFC, Pizza Hut and Starbucks brands in New Zealand looks set to show an increase in its earnings.

Of course this wouldn't be difficult considering the bad results they have been posting these last 24 months.

RBD's KFC unit has shown another re-growth because of vast sums of shareholder money being thrown at it but it is still off its all-time sales figures way back in the 20th century, still, having said that KFC is still the main and only profit driver for the restaurant group and it is the greasy stuff that will give RBD another shot at breaking its $1 share price barrier again-it listed in 1997 at $2.20 and briefly once touched that price in 2002.

The main problem for RBD though, apart from bad management and poor service, is the competition from its smarter and more motivated rivals.

KFC's position as the number one purveyor of chicken product is being plucked at by several rival chains. Red Rooster and Nandos are picking off KFCs customers piece by piece.

Starbucks has always struggled here and is basically a tax right-off for the company and it has never turned a profit since arriving on these shores in 1999. Operating costs are way too high and revenue hasn't yet matched these expenses.

The biggest threat to RBD though and its Pizza Hut brand, are the inroads that Dominos has made on its sales and profit. In a profit announcement by Dominos today its CEO Don Meij stated:

However, New Zealand EBITDA improved, growing from $1.5 million to $2.7 million. "In New Zealand, Domino's Pizza continues to go from strength to strength, with its EBITDA contribution up 80 per cent during the year."

October's announcement will probably see another big dip in sales for Pizza Hut and everything management have done so far to compete with Dominos has been a dismal failure.

Hopefully shareholders will also find out whether the board have managed to find a new head for the company. Vicki Salmon was pushed out at the beginning of the year and the company dearly need a new direction, any direction really so they can move forward and make some drastically needed changes in operations at head office down all the way down to store level.

In a related matter, Burger Fuel Worldwide [BFW.NZ] the recently listed "gourmet" burger maker, has failed to have its shares traded at all for the last 5 days. We wait in anticipation for a movement soon.

RBD shares closed down 1c to NZ 84c today.


Restaurant Brands @ Share Investor

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Stock of Week: Restaurant Brands Ltd
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Pizza Hut sell-off provide opportunities all-round
Danny Diab & Restaurant Brands
2008-2009 KFC sales figures mislead investors
KFC Finally Flying
Starbuck's New Zealand Cup doesn't runneth over
RBD gives KFC a push
McDonald's playing chicken with KFC
Restaurant Brand's Pizza Hut faces increasing competition
RBD sales analysis
RBD saga continues: CEO leaves
The secret recipe is out
2007 FY profit analysis
Delivering increased profit in October 2007
No reason for optimism in latest sales figures

Discuss RBD @ Share Investor Forum




c Share Investor 2007

Burger Fuel: Beefing up store numbers

Your favourite search topic on the Share Investor Blog is "Burger Fuel" and far be if from me to care about being labeled a populist, but never mind I will wear that label with pride as long as the readers keep coming.

Here is a BFW update in week 3 of the companies listing on the NZAX.

Sellers are queuing up now at way below the NZ$ 1 IPO price with sellers at .80c and the first buyer at 60c , although 60c clearly values the company too high. No trades as yet today.

Getting closer to my entry price of below 30c but still no cigar.

News out today also that BFW have opened their 22nd store in Tauranga. Good on them for doing so and I hope the surfies down there get the munchies as often as they can, so as to frequent their local burger bar and boost the BFW share price.

It could definitely use the help.


Burger Fuel Worldwide @ Share Investor

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Discuss BFW @ Share Investor Forum - Register free



c Share Investor 2007

Official Response from Burger Fuel

There has been a response to more information asked from the Burger Fuel Employee and BF itself has responded:

Share Investor

Can you enlighten us further?

The reply was

Darren,

Ok, first things first. This is an ‘Official’ BurgerFuel response. But don’t worry this isn’t a generic response as we’re taking on board what people are saying about our IPO. Neither are we responding to take pot shots at you, we are fully aware that this investment is not for everyone and that all are entitled to their opinion on the BurgerFuel IPO.

Now, down to the numbers (which is what I’m sure you’re most interested in). The press release has some but not all the info contained in the prospectus (which we suggest anyone interested in the BurgerFuel IPO or expanding their portfolio in general should read – hard copies available in-store).

There are a few figures in your post which need to be corrected first to make sure we are all working off the same figures. Our Total System Sales (that is, the total sales of all the BurgerFuel stores) last financial year was $16.4M (plus GST). At the end of 31 March 2007 we had 19 stores. We can’t just divide $16.4M (plus GST) by 19 to get an average as stores open up at different times during the year. Our average sales (not including any stores not open for more than 6 mths in the year) were $20,727 per week (plus GST). So we are way above the $150k a unit turnover (closer to $1M-$1.1M per year as an average). You can see pg 53 of the Prospectus for more info on our averages and sales totals.

The $3.1M you refer to is the revenue coming into Burger Fuel Ltd (for the 9 mth period to 31 Dec 2006), it is not the sales figure for all our stores. BurgerFuel Ltd had an operating surplus. You may argue that the surplus is not a large one, but as we’ve outlined in the prospectus, significant investments have been made into marketing our brand, securing intellectual property, developing our systems and preparing the company to go global. The $250k loss relates to Burger Fuel International Ltd which carries a head office and satellite kitchen infrastructure for our one Aust. store. Essentially, we have already geared Aust. operations so that they are ready for us to start expanding as soon as we’ve raised funds. The site plans for our 2nd Aust. store in King’s Cross have already been submitted to council.

We’re certainly not trying to hide anything from the public, there is a lot of info in the prospectus (including the above figures) clearly set out. Again, we suggest that anyone looking at the BF IPO should get a prospectus and read it – hard copies are now available in-store.

Potential investors should look at the fact that the decision to list has been made in conjunction with Grant Samuel who have modeled the company and its prospects. Potential investors should also look at the Board of Directors (pg 45-46 of the prospectus)– these are not the kind of people that would get involved with a company without a thorough analysis of its potential.

Lastly, we know that the BF IPO is not for everyone. We want people who believe in the brand (and there are a lot out there) to invest if they think we’ve got what it takes to go global.

If you’d like any more info please read the prospectus or, if you’d like, we’d be happy to answer any other questions (within reason) or organise a phone interview for you.

For the many that view this blog, here is some press that will hopefully balance your opinions on things.

TVONE - Brian Gaynor on ASB Business (comments on BF IPO around the 2:20 mark): http://tvnz.co.nz/cda/tvnz/video_popup_window...

In the end, however, just remember that the NZAX is “specifically designed for fast-growing, developing companies” and that’s what BurgerFuel is.

Either way, thanks for talking about us, we appreciate your opinion.
The team at BurgerFuel

www.burgerfuel.com

PS Regarding the ‘Fuel Employee’, we’re not sure that it was one of ours. However, all our employees are extremely passionate about the brand and the company so we know that many of them would want to make sure that key facts were correctly represented.


Should I make a call and let you know more or has the Burger Fuel Correspondent given you enough info?

Any questions you would like to pose should I make a call?


Burger Fuel Worldwide @ Share Investor

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Discuss BFW @ Share Investor Forum - Register free
Download BFW Company Reports




c Share Investor 2007

Share Investor: Takes a Bite-KFC

A very interesting article below about Warren Buffetts approach to brand names got me thinking about its local significance and Restaurant Brands Management of its KFC brand:


Brand names

Commodity companies
Warren Buffet distinguishes between commodity companies and non-commodity companies.

Commodity companies sell products or services that are undistinguishable from the products and services of other companies. Here the customer generally buys on price.

Take soap, for example. Different companies sell soap but their ordinary product is generally the same. The customer will buy from habit or personal choice but can swiftly change brands where there is a price advantage.

This makes the seller vulnerable to the trading practices of competitors and it has a limited ability to increase profits by raising prices. To stay alive, it must respond to its competitors.

Warren Buffett on commodity companies

In 1982, Warren Buffett said this about commodity companies, particularly those in industries that have surplus capacity:

‘Businesses in industries with both substantial over-capacity and a "commodity" product (undifferentiated in any customer-important way by factors such as performance, appearance, service support etc) are prime candidates for profit troubles.’

Non-commodity companies - continuing competitive advantage

Other companies produce a product or service that is so different from its competitors, or so special, that the customer, and the distributor, cannot do without it. This allows the company what Mary Buffett and David Clark call a "continuing competitive advantage". They liken a competitive advantage to a moat surrounding a castle. The moat stops enemies attacking the castle; the brand name stops competitors taking away customers.

Having a brand name is not enough. The brand name, according to Mary Buffett and David Clark, must be lasting – it will go on into the foreseeable future without costly maintenance. There is no real competition for the product. This is a sustainable brand name.

The Coke brand name

A good example of a continuing competitive advantage of this kind is Coca Cola. The customer generally asks for a Coke by name; they do not buy a ‘cola’. Coca Cola is a long time investment of Berkshire Hathaway and one that Warren Buffet has constantly said is never for sale.

Some companies can obtain a continuing competitive advantage by having a monopoly, or being part of a marketing structure that operates as a monopoly. A good example of this is Freddie Mac, The Federal Home Loan Mortgage Corporation, established by Congress to buy and securitize mortgages, reselling them to investors as guaranteed mortgage pass-through certificates. This was an earlier investment of Warren Buffett.

Brand name companies

There are also some companies that market commodity products so well that they distinguish their commodity product from that of their competitors and so put their own special ‘brand’ upon their product. They can achieve this by marketing, continuous improvement, by quality production and service, or in many other ways.

McDonalds sells hamburgers and, if truth be known, their hamburgers are no better than those of their competitors. McDonalds has made itself a brand name primarily through marketing, uniformity of product, and accessibility.

Gillette sells razor blades, not a unique product. It has become dominant in the market, and a brand name, because it markets itself well, continually improves its product – track the progress of the shaving tool) – and its products are reliable.

Warren Buffett on competitive advantage

In 1993, Warren Buffett had this to say about companies with a continuing competitive advantage:

‘Is it really so difficult to conclude that Coca Cola and Gillette possess far less business risk over the long term than, say, any computer company or retailer? Worldwide, Coke sells about 44 % of all soft drinks, and Gillette has more than a 60% share (in value) of the blade market.’ Leaving aside chewing gum, in which Wrigley is dominant, I know of no other significant businesses in which the leading company has long enjoyed such global power.’

Brand name advantages

Time, of course, has moved on since 1993 – market shares change and, arguably, computer companies may have entered the brand name field (for example, Microsoft). However, Warren Buffet’s point is that there are big advantages in having a brand name like Coke, or Gillette:

The customer knows the name and the product that the name represents
Distributors have to stock the product (can you imagine a supermarket without Coke) 

The company can keep pace with inflation (or even jump ahead of it) with price rises; 

The competitive advantage of a brand name company is also enhanced if the product needs continual replacement; food and beverages, razor blades, newspapers.

A brand name in itself is no guarantee of investment success. Conversely, a company can be successful without having a brand name.


May I pull out a paragraph for closer scruitiny that is relevant and an indication of how RBD "manage." the brands that they do:


‘Businesses in industries with both substantial over-capacity and a "commodity" product (undifferentiated in any customer-important way by factors such as performance, appearance, service support etc) are prime candidates for profit troubles.’

I would argue that RBDs brands are not the "non-commodity" businesses that Buffett continues on with in the following paragraph, simply because RBD management are not doing any of the above:


Non-commodity companies - continuing competitive advantage
Other companies produce a product or service that is so different from its competitors, or so special, that the customer, and the distributor, cannot do without it. This allows the company what Mary Buffett and David Clark call a "continuing competitive advantage". They liken a competitive advantage to a moat surrounding a castle. The moat stops enemies attacking the castle; the brand name stops competitors taking away customers.

KFC would sneak in on its uniqueness for sure but its "moatability" (I just love new words) if you like, is countered by RBD managements treating their brands in a commodity type way, that is to say, neglecting them.

It is clear to most what happens when you treat any company in a cavalier fashion and in the case of a "moat" company like RBD and its brands they have managed to break the dam down and the water is rotting those brands from the inside out.

The dominance factor that Buffett talks about really only applies to KFC. Pizza Hut and Starbucks are not dominant in their niche as they have many local and international competitors that consumers will go to. Product isnt that unique to these two food brands.

KFCs dominance though has and is being taken for granted by management. How can RBD let such a global brand with such an ingrained status in New Zealand culture to the current point of diminishing returns. For goodness sake they have a potential cash cow here.

Pizza Hut is sadly going into terminal decline in this country and its competitors look set to cut it into Ponsonby like peices of the pizza it throws at its customer.

Starbucks is muddling along at a snails pace compared to its interantional brothers but seems to be stuck in a rut.

I wont go into those two here.

How does one resurrect a brand?

KFC is currently in the process of being given yet another re-vamp. We all remember the most famous revamp over ten years ago, Kentucky Fried Chicken became KFC and we all forgot about the F word.

We didnt of course but that revamp worked for a time, then logos were changed, stores remodled several times for new "looks" and menus were changed.

My point is these things all worked, for a time, and it is clear they only work for a finite time because the keepers of the brand have had to continue to revamp and window dress.

What I think is lacking though is these things that Buffett talks about:

‘Businesses in industries with both substantial over-capacity and a "commodity" product (undifferentiated in any customer-important way by factors such as performance, appearance, service support etc) are prime candidates for profit troubles.’

Even with a business moat, a dominance in the industry and an identifiable brand in KFC . It just isnt going to work if you run your brand like a commodity product and therefore tarnish its image and therefore its cache.

At present they are focused on everything but the basics of maintaining a brand and in the process slowly killing it. Only KFCs uniqueness as a food product is keeping the punters coming through the door.

Great brands are made but they can also die if they are neglected.

Too much has been taken for granted by those at Restaurant Brands head office and all they need to do to resurrect the KFC brand is to treat it like the brand it is.

Stand behind it and back it 200%


Restaurant Brands @ Share Investor

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c Share Investor 2007