Spur Corporation

In assessing our current investment view of Spur we believe it is important to start with our revised view of the restaurant sector’s macro dynamics.

We believe that there are positive trend dynamics relating to the substitution between eating out‑of‑home and cooking at home.

National data released by Statistics South Africa shows that the total nominal sales of Restaurants & Coffee shops and Take-away & Fast‑food outlets were just under 8% of the size of the total nominal retail sales of food and groceries (General Dealers & Specialised Food, Beverage & Tobacco stores) in 2008. This number had grown consistently to almost 13% by 2019. Following an understandable dip in 2020 amid the Covid-19 pandemic trade restrictions on restaurants, January 2022 statistics show a return to the 2019 peak of just below 13%.

Based on these statistics and the clear role that out-of-home and take-away dining plays in modern lifestyles, we are less concerned now than we were previously of the substitution of out-of-home and take-away dining by ingredient shopping at supermarkets and home cooking, especially during periods of consumer spending pressure. Put another way, it appears that the demand for eating out and take-aways is not as elastic or discretionary, and so the restaurant sector is more resilient, than historically believed to be.

However, even against this positive background, we believe it remains beholden on restaurant sector participants to ensure that they continue to offer customers compelling value, convenience, dining options and/or experiences relative to the alternatives such as cooking at home. Furthermore, the relative attractiveness of these offerings and locations between the respective restaurant brands will impact their relative market shares.

In this context, we are positive on certain recent developments by the sector participants, but here we’ll outline some of Spur’s positive initiatives in recent years.

• • The group has potentially protected/raised its earnings growth trajectory by diversifying its business away from almost exclusive exposure to the relatively price sensitive middle income family segment to include/upweight, its exposure to the less price sensitive and more resilient adolescent and upper income segments through the acquisitions of Rocomamas, The Hassar Grill and Nikos. It also exited the Captain DoRegos brand, which targeted the treacherously difficult low-income market.
  • The group has also driven harder on the supporting role played by and improving the efficiency of its supply chain and manufacturing operations, extending the sales of branded products such as sauces to franchisees and supermarkets.
  • Spur’s initiative and innovations such as launching a number of virtual kitchen brands, which leverage off the kitchens of existing franchisees, and plant-based concepts and menu items.
  • However, it is also worth noting that while take-aways are growing and now account for almost 20% of Spur’s sales, the group remains weighted towards sit-down formats versus the faster growing take-away and fast-food segment.

Having said all that, we remain hesitant to add investment exposure to the SA consumer in the current economic environment. This position is based on a couple of factors, including: 

• • • The outcome of a recent study where we show how SA consumers are collectively spending less, in real terms, on the food and groceries (including takeout and restaurant sales) as the GDP per capita has declined since 2014, and
    • Given the poor economic and employment outlook, and hence dim prospects of a medium-term reversal in the declining consumer wealth and the abovementioned trends.

Therefore, at this stage and until we observe a return to growth in the middle class population in South Africa and improving consumer wealth trends, we favour the food retailers over the quick service restaurant sector given the former’s greater optionality in terms of diversification into potentially margin enhancing avenues such as value-added consumer services (financial and travel services for example) and horizontal diversification into other higher margin retail categories such as apparel.