The lower LSM market is notoriously difficult to enter. It’s made up of around 17 million people in South Africa, but although it’s a large market, it’s also a low cost market, and so the same question always presents itself: how do you cater to this market, offering quality products that are suited to lower LSM consumers, while still running a profitable business?
It’s a question that Carlo Gonzaga, MD of Taste Holdings, spent two years researching before offering to purchase The Fish &Chip Co franchise. “We did an enormous amount of research,” he explains. “We were looking for a way into the 4 – 6 LSM market, but we needed to do it in such a way that our franchisees would be able to run a profitable business.”
As the franchisor of Scooters Pizza, Maxis, NWJ and St Elmos, Taste Holdings understands running profitable franchises, but Gonzaga did not want to enter the lower LSM market until he had dotted all his Is and crossed all his Ts. “We researched a number of different food sectors, franchise concepts and franchises before making an offer to the founders of The Fish &Chip Co,” he explains. “And even then, my first reaction to the brand was that no one could run a business on R2 000 royalties, which is what the franchisor of The Fish &Chip Co charged. You just can’t run a support office on that, it’s impossible.”
Except it wasn’t. Researching the The Fish &Chip Co model gave Gonzaga and the Taste Holdings team their single biggest realisation about servicing the lower LSM market. “We had been looking for a way to service this market for two years, and if we did enter the sector, we wanted it to be with someone who had a structurally different business model, ran a sustainable business, and hopefully either was already the market leader, or had a chance to be.
The Fish &Chip Co was all of those things. We just needed to get our heads around the fact that we needed to find a way to run a support office on R2 000 royalties a month.”
Finding a Price Point
And Gonzaga has managed to do just that. “This is a really interesting market,” he explains. “The consumers are very opinionated about what they want, and it’s a big market, but we looked at a few businesses and soon realised that although there were a lot of guys servicing the lower LSM market, they weren’t doing it profitably.
Here’s why. Anyone can sell a R20 pizza, but you can’t make a profit if that’s all you sell. You need to offer a range of products. The problem with this market is that R20 is what they buy. You can’t charge more, or they will go somewhere else. Plus, you’re competing with retailers.”
A retailer can sell a 2-litre coke for R12, because they are happy with a 4% gross profit on their products. “In fast food, we’re grumpy if we do less than 60% gross profit, which is the norm,” explains Gonzaga. “Now take this back to servicing a lower LSM market and look at the business model. You need to still be making the right gross profit, while competing with retailers.”
This is when the Taste Holdings team had a flash of insight. The Fish &Chip Co stores were making enough of a gross profit (GP), because the franchisor had kept royalties very low, accepting low profits. “Every franchise makes around 50% GP after royalties,” says Gonzaga.
“Scooters for example makes 63% GP, but franchisees pay 12% royalties, leaving them with around 50%. As long as we kept the royalties down to R2 000 a month, The Fish &Chip Co owners would be making exactly the same GP. The only question was, how did we charge R2 000 a month in royalties, and still offer a support office?”
The answer is through running a low-cost business, and taking over distribution. “Someone has to make money on this,” says Gonzaga. “The business is the same as every other business in terms of GP after royalty. The difference is that we supply the stores with product – we have to, or we can’t run the franchise. But, the benefit of buying from us is that we can offer a R2 000 royalty.
We don’t force our franchisees to buy from us, or charge a lot – we are very competitive – but at the end of the day it’s a win-win situation.”
Once this decision was made, and the business model was worked out, it was clear that The Fish &Chip Co was an excellent fit for Taste Holdings. The former franchisor had worked out how to build a profitable franchise within the lower LSM, and even though there were a number of problems with The Fish &Chip Co systems, this was after all the bread and butter of Taste Holdings. “We knew we could take an already booming business to the next level,” says Gonzaga.
And Taste Holdings has done just that. Launched in 2009, by February 2012 the franchise already consisted of 250 stores. Since February this has grown by approximately 15 franchises a month. Gonzaga is expecting to open 100 stores this year alone, and believes there is capacity for at least 100 more. “At this point we are concentrated in Gauteng. We have a lot of room for growth nationally,” he says.
Choosing a Brand
Step one in choosing The Fish &Chip Co was deciding on fish as a good investment opportunity.
“It boils down to understanding the market you are servicing,” explains Gonzaga. “This is a working class consumer base. They leave home early to catch public transport, and often only return late. They’re in the lower earning bracket, but they are also very particular about what they like and will pay for.”
According to Gonzaga, fish and chips are an excellent working class meal because besides being tasty, they are a great source of protein and carbohydrates – at a reasonable price. “You can feed two people off a 400g fish and side order of chips,” he says. “But – and here’s the problem – it must be at the right price. You need to be able to sell that meal for under R20, or your consumers will go elsewhere.”
This is where franchising comes in, as well as Taste Holdings’ buying power. Keeping the price low starts with volumes. The Fish &Chip Co serves only SeaHarvest hake, which is caught, packaged and frozen within the hour. It’s fresh, healthy, and as Gonzaga likes to quip, certainly organic.
The question arises though, how can such fresh, unfarmed fish be so affordable? The answer is simple: at R34 per kilogram, Taste Holdings is paying less than you would at a huge retail chain, and it’s all because of volumes. High volumes mean great prices – and since Taste Holdings is the distributor for all The Fish &Chip Co franchises, both parties get to benefit.
Volumes don’t only impact produce purchases, however. “We managed to save 18% per box when we took over because we already do so much business with the company that manufactures the Scooters boxes. We went to our supplier, who manufactures large volumes of Scooters boxes per month, and asked if they would like this business. They said yes, and again the volumes we work in paid off and resulted in a saving for our franchisees. It’s all about keeping those costs low.”
The Art of Low Cost
So, how do you run a low cost business? “It starts at head office level,” explains Gonzaga. “There are a number of small ways to save on overheads. For example, there is a coffee station in reception and all visitors serve themselves coffee or tea. All head office staff stay in Formula 1 hotels when travelling, and we have one project manager who builds 15 stores by herself per month. In other brands this rollout happens in one year with more staff.
“We’ve had to completely rethink the business processes for The Fish &Chip Co. We’ve needed to reinvent the way we do things, finding the simplest, quickest and most cost-effective ways of doing things.”
The Fish &Chip Co outlets are simple. They are reasonably small, their furnishings are simple, and since only fish, chips, russians and calamari are on the menu – and all deep fried – it’s a simple kitchen set-up as well. The magic happens through Taste Holdings’ connections.
“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.”
Ultimately, Gonzaga believes that if these stores are doing the right gross profit with this value proposition, the brand can’t be beaten. “Yes, it’s just a chip store – but we sell a lot of chips, complete with an excellent protein. 20 000 people pass through each store per month, which means this is not a pie-in-the-sky operation.
If we can fix some of the operational weaknesses, which we are already doing, and continue to sell to consumers while maintaining low operating costs, we have the perfect combination.
“At this point some stores turn in an excess of R600 000 per month, and payback is between 12 and 24 months. There are low barriers to entry for franchisees, because it’s a simple concept and cheaper than many alternatives, because we keep things simple, and our franchisees have the benefit of our group expertise and marketing experience.”
A Sustainable Business
Aside from having found a way to realistically and profitably service the lower LSM market, The Fish &Chip Co is focused on creating employment and business owners as well. “It’s very simple to open and run a Fish &Chip Co store,” says Gonzaga.
“It’s a limited, deep fried menu, and we take care of the distribution. We also offer full training, are very involved in store location and set up, and have excellent systems in place. Set-up costs are also extremely low. At R430 000 ex Vat you are getting a fully set up store. There aren’t many other business opportunities out there at that price point.”
For Gonzaga, The Fish &Chip Co is a way of providing an affordable opportunity for people who dream of owning their own business – and each new store means more employees as well. “We will create 1 200 jobs this year alone with the stores opening up. In addition to that, we encourage multiple franchise ownership, and many of our franchisees are very focused on their own community.”
One example is Siphiwe Tshabalala, whose World Cup goal two years ago made him a national hero. Tshabalala is a Fish &Chip Co franchisee who is ploughing his profits back into the business each month so that he can open more stores. His second store will be opening soon, with three more planned for the near future.
“Siphiwe knows that football isn’t forever, and so he’s laying the groundwork for his future now,” says Gonzaga, “But over and above that, we’ve found synergies between our brand and his own personal brand. He understands the market and this product’s place within that market. He also wants to make a difference to his community.
“He, along with a number of other soccer players who are also franchisees, have local community soccer programmes and schools that they support, and which we are assisting them in. It’s this focus on community that we believe will be the lasting legacy of what we’re trying to achieve – true sustainable businesses, products and communities that we can all grow together.”
In fact, according to Gonzaga, The Fish &Chip Co business is about providing blue collar workers with one of the best proteins at one of the best prices in the country, while also creating sustainable jobs and providing franchisees the opportunity to own their own businesses. The direct and indirect impact of the business should have far reaching effects.