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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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%


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c Share Investor 2007

Burger Fuel IPO: Burger Fool?

There are many things that are still unclear in the manifold press releases regarding the Burger Fuel IPO.

I understood the 15M from the IPO was for expansion of outlets but then the IPO according to some, is about the royalty revenue from franchising the Burger Fuel concept.

The figures given in the press releases(I havent read the prospectus as I cant seem to download it from the BF website) seem to stress the 3M odd income and 250,000 odd loss for the last 9 months or so.

One might imagine then that BF may want to open some company owned stores with the 15M. Lets face it, to fit out, train staff, leases and the like to start one of those stores is well north of half a mil, so you aint going to get more than 20 stores for that 15M IPO moola.

There is also that key comment that initial shareholders will have the right to buy shares at $1 again in the next 18 months or so.

Another factor is that public holders only get 25% of the action, so that 3M odd revenue mentioned is less than a million for the likes of you and me.

The real money for this company will be in growing the franchise model. As we have seen in New Zealand Restaurant Brands(RBD) is the poorer cousin to its big daddy YUM! the franchisor.

Having said that though, even if BF grew revenue to 500M (picked high just to prove a point) the typical royalty rate of around 8% of the gross would give 40M in gross revenue for the Burger Fuel Franchisor. Only 25% of that 40M revenue would be available to distribute to public shareholders. After tax and costs less than 10M in profit is available as profit to minority shareholders.

Much has been made of the "brand strength" and the "loyalty" of Burger Fuels' customers but this is typical of niche players in the fast food industry. Once size and scale are increased, this loyalty often wanes as the company culture cant help but change as it grows.

An important understatement by BF management in announcing this IPO is the amount of competition that they face in this sector. New Zealand has some competition but in markets like Sydney, where they have one store, there are several many similar to BF. One also must remember, having success in a market like Sydney is no gaurantee that it is going to work further afield.

It appears that management want to grow this business quicker than they have been and one must ask why, if the business is that good, why they wouldnt get a bank or private equity crew on board to get a little larger, prove their concept has scalabilty, then come out of the closet for some public funds, for goodness sake they are still holding 75% of the company!!

The lesser disclosure requirements due to a listing on the NZAX ,coupled with the bulk of the company still being management owned, mean that human nature, as it is ,favours the dominant player in this scenario and that means the majority of the power and future gain, if any, will be in the hands of those at the top of the tree. Fine if you have full disclosure but here we dont.

The recent Blackstone IPO in the United States is a similar scenario to this one. Public participants hold a minority of shares and management will continue to run the company just like a private one. Both will only want to know you if they want more capital.

Like any investment, before you consider plunking down your hard earned dollars on this one, take a good long read of the Burger Fuel prospectus, then forget it and read the overwhelming negative comment being made about this IPO. If you are still interested after that and are prepared to take a huge risk, go ahead.

It is possible, if you really want to buy Burger Fuel shares, that the SP will adjust to below the IPO price of $1 once the hype of the IPO is over and the reality of the deal sets into the market.

Don't plunk down more than you can afford to lose.



Burger Fuel Worldwide @ Share Investor

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Discuss BFW @ Share Investor Forum - Register free
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c Share Investor 2007

Sky City CEO resigns

Sky City Entertainment Group Limited (NS) SKC 25 Jun, 2007, 09:40 OFFICE SKYCITY Managing Director to Stand Down

Full Text of Announcement

The Board of Directors of SKYCITY Entertainment Group Limited announced today that Evan Davies will stand down as Managing Director and a director of the company effective immediately.

SKYCITY Entertainment Group Chairman Rod McGeoch recognised the leadership of Evan Davies over the last eleven years.

"Evan Davies' vision for SKYCITY has played a pivotal role in the development of this business. It has seen the company grow from a single site in Auckland to a truly diversified trans-Tasman entertainment company. This has allowed us to maximise SKYCITY's scale, assets and brand. He has delivered market leadership, market reach and market brand which provide a sound base for future growth," said Mr McGeoch.

Mr Davies said "In the last eleven years SKYCITY has grown to a business with a market capitalisation of around $2 billion. Without doubt the last 12-18 months have been challenging. However, in my view the initiatives announced to the market on May 22 will ensure SKYCITY is positioned for long term sustainable growth to deliver shareholder value".

Mr McGeoch said a search for the new Managing Director would begin immediately and candidates would be sought from New Zealand, Australia and globally.

"In the interim, director Elmar Toime will step into the role of Executive Director." Formerly Chief Executive Officer of New Zealand Post, and credited with leading New Zealand Post through its transformation into one of the top rated postal services internationally, Elmar will be based in Auckland to undertake the interim Executive Director position.

"Elmar's extensive international experience at both management and board level will provide the company with sound guidance while the global search is undertaken."

Mr McGeoch said the board and management of the company remain committed to delivering on the restructuring and operational initiatives designed to increase revenues, reduce costs and maximise margins to improve underlying business growth, particularly in Auckland.

An update on the search and on developments in the business will be given at the annual result announcement on August 20th.


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