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For selfish reasons, I have been thinking lately. What I have been mulling over is Kiwisaver and its relation to the NZX and what it might mean for its future. The stocks in my portfolio and yours are going to benefit.
Let’s get this straight, I am dead against Kiwisaver. It is compulsory, inefficient, costly, enormously complex, will have low returns for its participants and is damaging for business.
The big winners will be the Kiwisaver providers, the IRD, who have hired 400 more drones and other government lackeys and the recipients of our largess.
The NZX could be the big winner if overseas experience has anything to go by.
The US and most recently the Australian stock market have benefited greatly from the retirement schemes that run in both those countries. The companies on those countries listed indexes have performed consistently better than our listed companies simply because of the large amount of retirement money sloshing around with no place to go but investment.
True, a lot of retirement funds will be inefficiently filtered through fund managers before reaching the NZX and much of the Kiwisaver proceeds will go offshore to other exchanges but there will clearly be billions going into our stock market.
In the USA their 401ks have helped push stock fundamentals to levels above the Kiwi NZX and in Australia multiples are similarly higher.
The extent of many countries super funds and its contributions to their local economies cannot be understated but as these funds have gotten bigger they have even stretched their economic tentacles abroad, US funds through private equity have bought companies in Australia and New Zealand and other countries while Australian funds have bought up large in New Zealand. The biggest retirement money buyout in New Zealand being the Canadian teachers fund buyout of Telecom New Zealand Ltd [TEL.NZ] Yellow Pages for over $2 million NZ dollars.
How long it will take for the New Zealand super funds proceeds to have an effect on our market depends on the uptake of Kiwisaver by its citizens of course and the impact will also depend on whether Kiwis who start a new job opt out of the conservative 6 providers that are the default ones and whether current employees decide to open themselves up for more risk and more return by going with a provider such as Fisher Funds which is likely to focus on the NZX and ASX and its smaller growth companies.
Certainly there is already evidence that these types of funds have had an impact on our market. Government and quasi Government institutions through agencies such as the ACC and the Government super fund for state employees have helped bolster our market and its listed companies. Mostly the blue chips but also a few middle to smaller cap stocks have been targeted by these funds.
Our market has mostly been a disappointment over the years compared to foreign bourses and the absence, up till now, of retirement funds bolstering the NZX will put our market on more of an even footing, help stimulate IPO’s and channel funds away from the over inflated and the tax friendly property market.
Even though our market has done well over the last few years don’t imagine that it is overvalued as a whole. When you include the extra funds from retirement money that are to come on-stream over the coming years you could be forgiven for doing cartwheels if you are already in the market at the prospects of fund managers pouring mum and dads money into the NZX.
Kiwisaver isn’t a perfect tool or even close to a perfect tool for helping kiwis save retirement money, tax cuts would be a far better and cheaper solution and then we could put those funds directly where we like.
Having said that there are always winners and losers when it comes to Governments meddling in its citizens business and for those that are already invested in the NZX and its fund managers of course, they are the big gainers.
Kiwisaver @ Share Investor
Kiwisaver mediocre substitute for real saving
c Share Investor 2007
Exclusive Interview with Josef Roberts, a director of Burger Fuel Worldwide [BFW.NZ] pre IPO and listing on the NZAX board of the New Zealand Stockmarket.
Burger Fuel IPO
New Zealand's fastest-growing gourmet burger chain BurgerFuel is putting its customers first as it plans to list on the NZAX after raising $15 million with an issue of 15 million shares at $1 each, with a one-for-five option to buy additional shares at the same price in 18-months' time. Minimum subscription is for $1000 worth of shares and options.
Funds raised from the issue will be used to fund the company's national and international growth aspirations, primarily in New Zealand, Australia, Europe and the United States. BurgerFuel currently has 19 outlets in New Zealand and one in Sydney.
This interview was conducted via email.
The Q & A
Share Investor
What exactly is the money raised to be used for?
Josef Roberts
Primarily securing and constructing new stores and expanding infrastructure to support growth. Although the construction costs of a franchisee owned store are paid for by the franchisee; capital is required to secure leases, make construction commitments and secure prime sites as they become available.
The stores built are then on-sold to franchisees. In this way capital can be recycled. In addition, however, it is possible that BFW could operate some stores until the appropriate franchisees are selected. In this case BFW would collect the revenue from those stores and could also elect to sell those stores on an earnings multiple, as opposed to a set franchise fee – so there are benefits – if a store is held and operated for a period of time by BFW.
Sometimes we have franchisees already signed and no site available and sometimes the other way around. Additional capital allows us to speed up store development by being able to proceed with immediately securing top locations as they become available and even operating them in the short term if necessary. However, we are primarily about franchising; this allows us to achieve much faster growth.
S.I. How was the value of the company at $60m arrived at?
J.R. Firstly, we have to remember that the $60 million valuation assumes a further $15 million in cash is raised in the IPO.
A company like ours is not so easy to value, as you know. A number of factors have to be taken into account such as the company investment to date, future earnings, growth capabilities, scalability, personnel and intellectual property - amongst other factors. The company has been extensively modeled under different scenarios to determine a valuation. Grant Samuel, the independent corporate advisory firm, analyzed the various scenarios and settled on a value that they considered to be achievable, based on our future growth potential and associated earnings.
Valuation ties into forecasts and as you know we are not providing those. Why? Well for a growth company like ours it is very difficult to confirm exactly where we will be in 12-months from now. As outlined on page 15 of the prospectus – there are 3 possible scenarios for expansion. Each would provide different financial outputs. If we were to make early predictions now and not achieve those predictions this could seriously impact on the company’s future share price. Accordingly, it is the most responsible approach to gain investment on the clear understanding that no projections are being provided.
Whilst we knew that this could make it harder for us to raise capital, we also believe in the fairness it gives investors up-front in accepting the terms we offer. We want them to assess the value and potential for themselves; which is what you guys are doing – even if this means they say “no thanks”.
The company intends to rely on continuous disclosure reporting to keep the market informed of key developments – such as yesterday’s announcement about our growth - already up 41%. Imagine what that would have done for our share price had we been listed?
We will have plenty of announcements to make in the future – because we are a high growth company and we operate very visibly. People can see progress and performance and this is what drives a share price – right?
To those who say the company is over-valued – they are entitled to their opinion. We know the value of what we have and we are confident in our ability to not only grow the company but also its share price. We have come to the market with an offer. If our offer is not acceptable – so be it – we stay private.
S.I. If you are opening company stores initially, how long do you intend to keep those stores?
J.R. As explained in question 1. However, in general only until the appropriate franchisee is appointed
S.I. The market is confused about what sort of company they might be investing in. Is it principally a franchisor or an owner of actual stores?
J.R. Principally a franchisor as explained in question 1, however, it is our view at this stage, that we should always own and operate at least one store long-term, in each country like we do in New Zealand and will do in Australia. This keeps us in touch with the reality of operations as well as providing a valuable training ground to personnel and franchisees in each local market.
S.I. Will stores be leased or owned outright?
J.R. Leased
S.I. Long-term, is the bulk of company revenue going to be based on royalty fees or revenue from store sales?
J.R. Answered in Q1. Also, please refer to page 54 of the prospectus – this sets out our revenue income. Clearly, you can see that royalty fees are the major on-going component, but up-fronts, transfer fees and income from our satellite kitchens also make substantial contributions.
S.I. There is similar competition from such outlets world-wide, most notably GPK in the UK, how well do you think you and/or your franchisees will do against this competition?
J.R. GPK is essentially a Wisconsin model. We think our track record in NZ in competing against Wisconsin speaks for itself. But we do not underestimate competition here or in other countries. In the end we are confident in our ability to compete with any gourmet burger offering.
What you have to understand with BurgerFuel is that we have strong operating systems that are scalable. We also have a strong brand that represents more than the sum of its parts. That is to say we have a defined culture – we don’t just make burgers – people eat BurgerFuel for the experience as well as the product and our culture. Once again, that’s either understood by investors or it isn’t.
S.I. It is nice to see owners retaining a stake in the business, so firstly why not float a larger stake if your intention is to expand quickly, wouldn’t it have been better borrow from banks, keep the company for yourselves if it is only a small 25% of the company going public?
J.R. We think that being listed will greatly assist us in expanding overseas as well as attracting franchisees – it’s as simple as that. Credibility toward securing leases, supply lines, staff, franchisees and other associated stake holders becomes easier if we are publically listed.
If people don’t want us listed here in NZ – I think you can work out for yourself what will happen. We will most likely continue as a private company and list further down the track in a different country or we may never list.
In respect of the 25% for $15 million, we have the ability to re-cycle capital (as explained in Q1). The options also provide for some future capital, as well as giving investors an incentive to invest now. If we asked for more now we would just be sitting on your cash – and you wouldn’t like that either Darren!
S.I. A related question to the above, why is the sunset clause on directors and founder owners for selling their shares such a brief one?
J.R. Yes, it could have been longer. Having said that, our aspirations are all about building a global brand. We are committed to doing that – I am personally doing this because I enjoy it and am passionate about growing BurgerFuel, just as I did with Red Bull in NZ and Australia. However, unlike Red Bull, this is a NZ brand. We feel it too can go global. It is my intention to be there when we open stores in the US, whether its next to the Viper room in LA, on the strip in Las Vegas or in Times Square I can’t say, but I want to be there for it. Chris is also a very passionate guy – he created this company and he loves it – it’s his life. We have everything to gain by building this up to be a huge company and increasing our own value as well as those of our partners (shareholders).
S.I. The decision to list on the NZAX instead of the NZX, why was that made when the disclosure rules of the NZX would give possible investors more confidence in their investments because as we know knowledge in investing is what it is all about?
J.R. The NZAX is designed for companies with high growth potential like us. They are not required to publish forecasts due to the fact that they are in a high growth phase and actual results could vary considerably.
We have come to the market with an offer on terms that we knew would not appeal to all investors – but they are our terms. We could have made grand projections now to attract investors (like other companies you know have) – but that is not how we do things.
As already outlined there are a range of scenarios for the way we can roll out and this goes to the heart of any projections we would have committed to. We want to be upfront about that. “Invest if you believe in us” – that is what our message is. People don’t have to invest. We would rather know that we have a certain style of investor. Like the franchisees that we select to become our partners – we want to attract investors who are there for the same reasons we are – because they are passionate about the company and believe that we can do it – (I can hear some of you laughing!!).
We’ve been criticised for targeting so called “naïve” investors. This is not the case at all. We want a big spread of investors including those who eat at our stores and take part in the ownership. Although these people may not be seasoned investors like yourselves, they should not be underestimated. They are the opinion leaders, they understand what makes a brand.
Our IPO advertisements are all about light hearted communication, boosting awareness and a bit of fun. This is who we are and this is how we do things. We polarize and we think that is important to build any strong brand or culture. It’s a mistake to try and be all things to all people.
We want a base of NZ investors who will review our business on a daily basis and tell us where we can improve. We think this is very important to our future. In this way, we have a constant R & D base assisting our international development. However, this offer is also for other serious investors who may not yet eat in our stores. We can see that by some of the larger amounts that are being applied for that also carry CSN numbers, that clearly, our growth potential and ability to drive the share price by announcements of progress and performance, is understood by some seasoned investors.
S.I. Finally, what or who was your inspiration to start the Burger Fuel company and did you intend to "go global" initially and where do you see your company in 10 years?
J.R. Chris knew he could make the world’s best burger and he knew he could come up with a scalable business model that could grow fast. He always wanted to take BurgerFuel global. For me; I invested for this reason. If you read the prospectus thoroughly you should get a strong sense of this. Just look at our trademark protection programme. This alone, demonstrates our vision in thinking global and acting to secure our intellectual property over the years.
Page 67 of the prospectus – clearly sums up where we see our company in the future.
S.I. Thanks for your time Josef and good luck for the future of Burger Fuel .
Burger Fuel Background
BurgerFuel started in 1995 when Chris Mason opened the company's first store in Auckland's Ponsonby Rd. It is the brainchild of founder and director Chris Mason, who met Josef Roberts when Roberts owned the Red Bull brand in New Zealand, and wanted to sell his drinks through Burger Fuel shops.
Roberts took Red Bull to Australia, and after selling the Australasian Red Bull franchise back to its original European owners, decided to join Mason and work to expand the business. He said both businesses were brand-driven. "But with Burger Fuel there is the prospect of exporting a Kiwi product globally."
Roberts said Burger Fuel eschewed private equity raising in favour of public listing because that would add to its credibility as it sought to roll out overseas.
Currently BurgerFuel serves over 35,000 burgers a week and has 20 outlets, with three more scheduled to open soon in New Zealand, including one in Queen St Auckland, and one planned for Kings Cross in Sydney.
Additional info from Josef Roberts unrelated to questions posed by Share Investor but furnished to us by him
This whole process reminds me of when I started Red Bull in NZ in 1996 and then Australia in 1999. When many laughed and mocked us for trying to sell a small, unusual tasting can of drink for an “outrageous” wholesale price of over $2.00! I was told “only Coca Cola can do something like this. Red Bull will never make it, it’s a fad drink that anyone can produce. This is destined to fail.”
Hmmmm!
Investors should look at the strong corporate governance and the people behind BurgerFuel. The advisors, the independent directors on the board – these are highly respected and experienced individuals who have chosen to join BurgerFuel. They did not need to. They have assessed the company’s prospects for themselves. Investors should take this into account.
We respect your community. We know that you guys carry huge influence. I bring you back to the fact that we have come to the market with an offer. Saying “here’s our price and terms”. If they are accepted – great we know we have the kind of partners (in the shareholders that buy in) that we want. If not – we will continue as a private company and still be successful.
Take a look at the total system sales growth figures from yesterday’s press release. Last year’s first quarter was a weekly average of $276,403, same period this year $390,379. Last week - $445,011.
We are growing anyway, but the IPO process alone has totally enhanced the value of the company even more. No one in New Zealand has not heard of BurgerFuel as a result of it. Remember, we’re a marketing company. Our campaign is all about growing the brand and selling burgers, as well as shares - and that’s what we’re doing.
Darren, best regards and thanks again for the time you have given us. We know this may not be everyone’s kind of investment and we respect that. We also respect you and your community’s views.
I would like to say one last thing though – if NZ continues to criticise companies and publish material so quickly before thoroughly assessing the offer – aren’t we somehow killing our own country? It’s amazing what gets published in the media without the prospectus even being read. There is in fact a lot of information in our prospectus for potential investors - it’s not just a pretty document.
New Zealand needs higher risk growth stocks (which is what we are) just as it needs the kinds of stocks that are like “watching paint dry”.
Would the last entrepreneur in NZ please turn the lights off when you leave? Australia, UK, USA – here we come!
Josef Roberts
Director
BurgerFuel Worldwide Limited
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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?
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c Share Investor 2007
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%
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For selfish reasons, I have been thinking lately. What I have been mulling over is Kiwisaver and its relation to the NZX and what it might mean for its future. The stocks in my portfolio and yours are going to benefit.
