Readers may have seen news about the Quick Service Restaurants (QSR) business (now known as craveable brands) which is contemplating an initial public offer (IPO) in the coming months. QSR/craveable owns the Red Rooster, Oporto, and Chicken Treat franchises in Australia.
Is it worth looking into?
When we see a prospectus we'll write a more in-depth piece, but in the meantime there are a few things that prospective investors should consider:
- It's coming from private equity firm Archer Capital
More-informed sellers (private equity) are selling to less-informed buyers (i.e., you and me). Typically, the intention is for the private equity investor to maximise profit, and unlike buying a lawnmower you can't return your shares if issues with them subsequently become apparent.
- It's a franchise business model
Reportedly more than 95% of restaurants in the business are franchised; typically this means that franchisees wear all the costs of establishing the business and pay hefty licensing fees each year. Checking that the fees for franchisees aren't too onerous should be a mandatory step before considering an investment.
Charging overly high fees could be an easy way to lift profitability pre-IPO. Fortunately readers have plenty of businesses they can compare it to, such as Domino's Pizza Enterprises Ltd. (ASX: DMP), and Retail Food Group Limited (ASX: RFG).
- It's being bagged in the media
There's been a few critics in the media slinging dirt at QSR's 'chicken with peas' business, which I consider a positive. I've had a look at 4 or 5 Red Roosters in recent times as part of my regular dietary intake usual business investigation process and the ones I saw had snappily refurbished interiors, drive-thrus added, and a modernised menu with creations like 'chilli slaw wrap', and 'BLT smash burger', in contrast to media comments.
If it's being trashed in the media and fund managers aren't keen on it, Archer could well have to sell it at a cheaper price which could be an opportunity for retail shareholders.
- It's engaging in a push to win market share
Red Rooster has launched a loyalty club and has started a big push to gain market share with some of its special lunchtime deals and so on. Having a look at some of them, I'm virtually certain that the special offers are loss-making or close to it. Yet if Red Rooster can establish a reputation for 'quick, cheap, and easy', and/or if it can establish itself as a viable lunch/dinner alternative to the likes of KFC or McDonalds, it could benefit from growing sales and growing restaurant numbers, and possibly growing foot-traffic that also buys more high-margin products.
