Thursday, June 12, 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

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