Famous Brands makes U-turn on Gourmet Burger Kitchen investment as coronavirus strikes

Famous Brands, the owner of Steers and Wimpy, will cut
funding to its long-time struggling British fast food operation, Gourmet Burger
Kitchen, due to a deterioration in sales caused by the coronavirus pandemic.

The company bought GBK in 2016 as part of its strategy to
reduce its dependence on South African consumers, who were under pressure, over
the past few years. However, the plan proved costly as the burger chain took strain as a result
of economic struggles abroad post-Brexit. 

The Darren Hele-led Famous Brands said its British operation
was vulnerable to the economic impact of the coronavirus and that a write-off
of the R2.3bn investment was not off the cards.

“The board’s decision to withhold further financial
support for GBK may result in an impairment of the full value of Famous Brands’
investment in GBK,” the company said.

GBK’s UK based website said all of the 20-year old chain’s
stores were closed due to Covid-19. There are 29 474 confirmed cases of
coronavirus and 2 352 deaths in the UK, according to the British
Broadcasting Corporation.

The decision to stop supporting its UK business was well-received
by markets, with Famous Brands shares gaining as much as 8{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}.

Analyst Simon Brown told Fin24 that while the coronavirus
pandemic has made business even harder for GBK, the outbreak was merely the “final
nail in the coffin” for a deal that never worked as well as Famous Brands had
expected.

“It’s never been profitable, but for a while they have
had the TVS (tenant verification services) process where tenants can use the
legal process to get reductions from landlords. Famous Brands have been putting
money into GBK since they’ve owned it and now, they are essentially pulling
back. If you read between the lines, they are abandoning the business,”
said Brown.

Ongoing pressure

Brown said the news that Famous Brands would no longer be
financially assisting GBK was likely well received by shareholders, as GBK
would no longer sap financial resources from Famous Brands without meaningful
returns.

“In essence, they still have GBK debt to pay for. But
at least it does not take company cash any long. The stock is up on the news of
that. The lockdown is not helping Steers and Wimpy, but the signature brands
they have  – Tashas and Turn ‘n Tender,
Vovo Telo (Bakery & Café) – have also been struggling before Covid-19, and
they will see more pressure as the lockdown continues,” Brown said.

Brown said Famous Brands could look forward to good business
once the national lockdown in South Africa ended, as it had a number of
well-known brands that consumers would flock to once their doors opened again.

“Famous Brands itself will survive. Steers, Debonairs
and Wimpy are huge brands and they will bounce back very quickly. These brands
are well frequented and well-known in South Africa. Famous Brands at its core
will ride this out,” he said.

Despite Famous Brands’ stock gain on Thursday, its shares
have plunged about 49{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} since it acquired GBK in September 2016 to the start of
this year. From the beginning of the year, the stock has shed almost 70{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} as a
result of the coronavirus outbreak.