The lower LSM market is booming, highly contested and accounts for 17 million South African consumers, but it’s also notoriously difficult to enter. The same question always presents itself: How do you offer quality products that lower LSM consumers will buy, while still running a profitable business?
According to Carlo Gonzaga, CEO of Taste Holdings Group, the franchisor of the Fish &Chip Co, the lower LSM market is incredibly interesting, not least because it’s made up of consumers who are incredibly opinionated about what they want and what price point they are willing to pay.
This is not a market that simply accepts over-inflated prices – they go elsewhere.
Competing with retailers
When Taste Holdings was investigating the market before it purchased the Fish &Chip Co, it soon realised that, while there were a lot of players servicing this market, few were doing so profitably.
“Anyone can sell a R20 pizza, but you can’t make a profit if that’s all you sell,” Gonzaga explains.
“In most cases, the R20 pizza is supplemented by a range of additional products. The problem with this market is that they will seldom spend more than R20, and if you charge more, they will go somewhere else.”
You’re also competing with retailers who aim for a 4% gross profit, made possible because of the volumes they move through their stores. “In fast food, we get grumpy if we do less than 60% gross profit, which is the norm,” says Gonzaga.
“Now take this back to servicing a lower LSM market. You need to still be making the right gross profit, while competing with retailers.The business model needs to make that work.”
Making the model work
If you want to make a profit in the lower LSM market, you need to run a low-cost business and take over distribution. “Someone has to make money on the distribution,” explains Gonzaga.
“This enables us to charge significantly lower royalties, which in turn helps our franchisees make the same gross profit as any other franchise. The difference is that we supply the stores with product – we have to, or we can’t run the franchise. The benefit for franchisees is a lower royalty fee.”
Gonzaga is quick to point out that the franchisor doesn’t force its franchisees to buy from them, or charge a lot – they make sure they’re very competitive – but at the end of the day it’s a win-win situation.
The art of low cost
So, how do you run a low cost business? According to Gonzaga, it starts with head office saving on overheads. For example, all head office staff stay in Formule 1 hotels when travelling, and efficiency is a must.
One project manager actually builds 15 stores by herself per month. In other brands this rollout happens in one year with more staff. “We also look at the little things. There is a coffee station in reception and all visitors serve themselves coffee or tea. It’s a small saving, but it adds up.
“We’ve needed to reinvent the way we do things for this brand, finding the simplest, quickest and most cost-effective ways of doing things,” says Gonzaga.
This includes keeping outlets reasonably small, their furnishings simple, and menus basic: Fish, chips, russians and calamari are on the menu – and all deep fried – keeping the kitchen set-up simple as well.
“We keep things simple because our consumers want a good meal at a reasonable price,” says Gonzaga. “They don’t care about fancy, expensive store set-ups. What they do care about is how good the fish and batter is, and how much it costs.”