Hilton Tarrant
3 minute read
23 Feb 2018
7:39 am

Spur throws in the towel on Captain DoRegos

Hilton Tarrant

How to turn R34 million into zero.

After seven years, Spur Corporation has decided to exit the low-end takeaway segment and has sold fish, chicken and chips franchise Captain DoRegos with effect from March 1. Trading in this franchise has been brutal almost since it was acquired, with the lower income market under severe “financial stress” since the recovery from the 2007/08 global financial crisis petered out.

Despite opening around three dozen new stores over the last number of years, when taking into account closures, the overall footprint of Captain DoRegos has nearly halved since its acquisition (42 stores, down from 74).

Overall turnover at store level has been on the decline ever since Spur bought the business, with a double-whammy of a stressed consumer segment and soaring input costs (as the rand rapidly weakened against the dollar until 2016), with a most recent decline of 12.2% for the six months to December 31.

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In the last financial year (to June 30 2017), Captain DoRegos stores generated total turnover of R114 million, just 2% of the group’s total restaurant turnover.

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As turnover at the tills declined at store level, so too did Spur’s franchising operations for this unit.

Matters got to the point where Spur reported a normalised operating loss (excluding impairments) of R276 000 on franchise revenue of R2.8 million for FY2017, which is practically unheard of.

Historic operating margins for most of the rest of its franchising operations sit well north of 60%, and once Captain DoRegos fell from its peak of 41.8% in FY2013 (the first full year after acquisition), it simply never recovered. The DoRegos franchise business is now trading on a razor-thin margin of 2.3%.

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* Adjusted, given the impairments booked in the year

At the time of the acquisition, chief executive Pierre van Tonder argued that Spur would bring its franchising expertise to a sector it had no real experience in (quick-service restaurants).

“DoRegos will give Spur Corporation exposure to growth opportunities in the lower- to middle-income market, an area of significant expansion in the current quick-service restaurant market place. DoRegos has a strong brand with solid growth potential in South Africa. We plan to expand the business into a national chain by capitalising on the current brand awareness and extending the footprint into areas such as the Western Cape, KwaZulu-Natal and Mpumalanga.

“There is no overlap with the existing brands in the Spur portfolio. Our expertise lies in managing franchise restaurant operations. We are planning a phased transition with the current owners to ensure we benefit from their expertise in operating quick service outlets and their knowledge of the brand and target market.”

Spur bought the business for R34.224 million (amazingly, it agreed to a single 12-month profit warranty) on March 1 2012. It determined that the fair value of the assets it acquired in 2012 was R37.918 million, which included R39.65 million in trademarks and intellectual property.

It passed the first major impairment (R13.90 million) to these intangible assets in FY2015, resulting in a carrying value of R25.747 million. In FY2016, it wrote off a further R18.969 million of the value of these assets. The final carrying amount (R6.77 million) was then impaired at the end of FY2017.

It will sell the business for R5 million, with only R1 million payable on the effective date (the unnamed acquirer will pay the remaining amount in equal monthly instalments over the next four years).

Not only has it lost R29 million (the R34 million it paid less the R5 million it has sold the business for), but the division has been a costly and wholly unnecessary distraction for its leadership team.

Rival Taste Holdings has had a similar struggle with The Fish & Chip Co, which it also bought in 2012, however, its arguably traded through far better than Spur. The business had 214 outlets as at the end of FY2012 (May), and at the end of the last financial year, this had dropped to 164 stores.

The DoRegos foray not only took Spur completely out of its broader target segment (middle class), but also its circle of competence: sit-down dining and, recently (with RocoMamas), casual dining.

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