THE SECRET SAUCE

Johannesburg South Africa has had a long run-away success, and what other history of settlers migrating to its sunny businesses could learn and acquire from its coasts in search of its riches and gold. unique business model. Right from the discovery of diamonds under its sandy shores 1867, the city has had a tradition of attracting entrepreneurs Economics; from all around of the world in hopes of Like most consumer-driven businesses in building their own fortunes. the UK, the industry has also The same held true for two Portuguese- taken a beating with the current Mozambicans who had come to the same economic downturn. shores as Cecil Rhodes and Barney A rather non-supportive regulatory Barnato (founders of diamond environment, i.e. stringent employment conglomerate De ) in search of their laws, anti-smoking legislations, growing own fortune. bureaucratic health and safety However as faith had it, their fortune was paradigms, an increase in the VAT-rate not unearthed from diamond quarries or (17.5% to 20%; an increase of 2.5%, in gold excavations, but from a capsicum- 2011), and a “save, not spend” mantra, based sauce, that happened to have the amongst other reasons, have hindered the ingredients to fire-up the taste buds of the growth of the UK casual-dining industry. world, and pioneer the Nando’s brand. The discretionary spending habits of consumers, with the growing preferences towards take-away and cooking-at-home, Right from its inauguration as have all but stunted the growth of the “Chickenland” in 1987, Nando’s has been restaurant sector. a run-away success. Accordingly, the UK restaurant industry has On any high street, or close enough, a shrunk by 4.5% from 2008 to 2013. Nando’s is certain to exist. With its bright However the sector is diverse and interior gleaming from its windows, and the growingly sophisticated in how it caters to conspicuous red-rooster sign, illuminating its wide ranging customers. From the fast- from a distance. (dominated by Mc From its first official eatery in Botswana in Donalds), to the more swanky 1993, the Nando’s brand has been establishments, the industry has matured spreading across the globe, with the to a point where there is bound to be majority of its restaurants located right something for everyone. here in the UK at currently 280 eateries, followed by Australia at 271 stores and Financials; then South Africa at 259 stores. As they say, the numbers never (or rarely)

lie, and they definitely seem to be Still, despite its rather basic and somewhat speaking some truth in Nando’s case. monotonous menu (over 90% being based), and the imaginative use When comparing the gross-profitability of of a sauce that has been around long the four main rivals to Nando’s over the before Nando’s, it still is one of the fastest last five years, interesting trends emerge. growing restaurant chains in the world.

This article aims to uncover some of the reasons that have made Nando’s such a

Gross Profitability 80% further reduction in its direct costs, and an 70% increase in the chains gross-profitability. 60% Nando's 50% McDonalds 40% KFC A similar story emerges when the net- 30% Burgerking profitability is compared with Nando’s 20% 10% leading competition; 0% Net Profitability 2008 2009 2010 2011 2012 20% This is the comparison of what’s practically

Though Burgerking and KFC maintain top- “left10% in the business” after paying all the Nando's

spots in terms of gross-profitability1, mostly main costs, overheads, bank charges, etc. McDonalds due to their almost perfect supply-chain 0% KFC 2008 2009 2010 2011 2012 Burgerking management and effective sourcing of Over Net Profit % this 5-year period, Nando’s main -10% Chiquito key ingredients (for example, Burgerking challenger, KFC, has maintained a has been sourcing its beef-burgers from somewhat steady growth. This seemed -20% Australia for over 22 years), along with also the case for McDonalds, while strong presence in US and Asian markets. However from 2008 to 2012, Nando’s seemed to out-performed McDonalds and Chiquito’s took a huge hit in profitability in Chiquito by a considerable margin. early 2009. Burgerking, though selling the most burgers, has remained at a loss for This could be credited to a number of the entire 5-year span. factors, but mainly to Nando’s strategy of On the other hand, Nando’s had shown to better managing its key logistical activities. have grown in wealth year-on-year, with a Nando’s focus on sourcing one main slight dip in 2009. poultry, i.e. chicken, has led to it developing long-standing relationships This growth in profitability could be with key-suppliers and farmers. Like any attributed to another tactic used by other “B2B” (business-to-business) Nando’s, i.e. the effective management association, over time both parties are set of its key overheads3. to benefit from the long relationship. The Nando’s has cautiously steered clear of suppliers benefits from having regular pricey rental areas in regards to its orders and a lasting customer, while locations globally (for example it has less Nando’s benefit from sizeable trade- branches in the central-London area), discounts and an smooth supply of its key hence avoiding paying high rents and ingredient (chicken). business-rates for its outlets. This effective supply-chain management has allowed Nando’s to keep its main Though it needs kitchen-staff and waiting- costs low, and hence, allowing it to keep staff in all its locations, by keeping its menu its gross-profits up. focused on a single key-ingredient (i.e. grilled-chicken), the need for “specialist” And as Nando’s’ revenues increase every kitchen staff is eliminated. This simplicity of year, economies-of-scale2 would the “kitchen” allows for a delivery of eventually come into play, allowing for a the meals to the table, which in turn result in a higher customer-turnaround rate.

1 A company's revenue minus its cost of goods sold. Gross profit is a company's residual profit after selling a product or service and deducting With the constant abundance of college the cost associated with its production and sale. and university students looking for work to 2 An economy of Scale is the increase in efficiency of production as the number of goods being produced increases. In Nando’s case, when the company achieves economies of scale it lowers the average cost per- 3 chicken to Nando’s through increased production since the fixed costs Overheads are the operating expenses of a business, including the costs (i.e. rent, rates, wages, etc.) are shared over an increased number of of rent, utilities, interior decoration, and taxes, exclusive of expenses orders being sold. which directly affect its sales, e.g. labour and materials. secure some spending-money, Nando’s management of its bank and cash has almost an unlimited supply of accounts, indicating how well a company inexpensive and cheerful labour, further manages it cash, and other liquid facilitating it to keep its wage-costs low. resources. By deliberately not offering any delivery- services and proving a standard call-and- In the competitive restaurant industry, collect service for takeaways, any delivery where usually apart from stock and cash, costs (i.e. carrier-costs, order-taking, there are little other short-term assets, as all additional insurance expenses, etc.) are sales are typically made there and then, non-existent for Nando’s. and rarely any credit offered to customers. However suppliers will offer trade on credit, Another key contributor to Nando’s resulting in, especially during busy times growing profits is its almost absent (e.g. seasonal demands), high balances marketing budget, particularly for its UK owing to suppliers. market, where the majority of its branches If the restaurant isn’t able to generate are located. enough cash to pay its suppliers, it could result in the perfect recipe for While the majority of rival chains toil over disaster, as the suppliers may withdraw preparing an effective marketing trade due to unpaid invoices. campaign, that needs to be squeeze into an ever restricting marketing-budget, However on comparing the three main Nando’s has enjoyed extensive advertising competitors reveals how effectively each from indirect sources, e.g. indirect is managing their cashflow. celebrity endorsement (see below). This After trailing for most of the years, has led to it keeping its marketing and McDonalds has improved its bank- advertising costs low, and in turn, profits balances over the 5-year period. KFC’s high. handling of its cash has usually dominated the fast-food chains; however this has With its current cost-structure, Nando’s was been overtaken by Nando’s since 2010. able to overtake McDonalds in terms of net-profitability in 2012; While other chains store a wide variety of and poultry (i.e. burgers, fish, steak, etc.), which at times resulting in higher rates of food spoilage, Nando’s 2008 dependency on one main stock (i.e. chicken), allows it to turnover stock much 2009 quicker and efficiently than its KFC counterparts. If the rate of stock being 2010 Chiquito turned over is high, it is more quickly being McDonalds converted into cash, allowing for quicker 2011 Nando's payments to suppliers, and healthier bank and cash balances. 2012

0.00 0.20 0.40 0.60

Profitability index Apart from financial prowess, Nando’s commercial success can also be attributed to other, intangible factors;

A report issued by leading accounting firm Grant Thornton (2010) suggested that those “fast-casual” restaurants that offer a Another indicator that helps explain the full-service dining experience, but with Nando’s system is an evaluation of its more competitive prices, will be the main age-groups, who have average growth-areas in the restaurant sector in disposable income, and hence the target- the coming years. market for the restaurants. And a closer look as to how Nando’s has The average meal ranges from £5 to £7, strategically positioned itself in the vast and provides “you-get-what-you-pay-for” array of the eateries out there, this in terms of value. Apart from the order- prediction seemed to sit fairly well for the taking service, and the standard seating restaurant. arrangements, there’s not much else to the value-proposition offered by this If each of the typical restaurants currently sector. The menus have been further operating were categorised into four main diversified to cater for the more health- categories, i.e. fast-food & take-away, conscious consumer; the dominating fast-casual, fast & family orientated and brands in this sector will always somewhat fine-dining, against the standards of value carry the stigma of “unhealthy”. & experience and average-price, one of However the “cheap-and-cheerful” the key factors of Nando’s success approach, predictability of the menu and becomes quite apparent; frequency of locations, is what has kept this sector in high dominance for a long 6 period of time.

5 The fast & family orientated sector is 4 relatively small compared to the previous 3

Value “fast-food & take away”. Chains like - 2 hut, Cafe Rouge and Hardrock Café are a 1 few of the key players. They differentiate 0 themselves by providing a fun and family- -10 0 10 20 30 40 50 orientated experience, with colourful Avg. price per meal seating, loud popular music and a fast

and friendly service. Fast & family orientated This improvement in service comes at a Fast-food & takeaway price though; with average meals costing Fast-casual Fine-dining in upwards to £25.

The prime consumers are the couples and

families who are looking for the “fun-night- The vertical axis of “value” includes all the out”, and are not too concerned with who typical traits associated to the eating-out pockets the bill at the end of the night. experience, e.g. service, atmosphere, Again an overly calorie-conscience menu waiting-time, quality and quality of food. It is not a major issue of this this business is scaled from 1 to 5, with 1 proving the model. least desirable experience, with 5 providing the most. While the horizontal Finally there are the fine-dining echelons axis scales the average price per visit. of the restaurant industry. Though they

won’t mirror McDonalds in terms of The fast-food & take away market is the frequency of outlets, they make up for this biggest sector, and has traditionally with a superior customer service, high dominated the restaurant industry in terms qualities of ingredients, and luxurious of size and revenue. interiors. Of the 19 billion generated in industry- From our own personal experiences, the revenue last year, 11 billion were dispersed numbers of visits to such establishments amongst McDonalds, KFC and are rare; reserved for special one-off (58% of total industry revenue). occasions. These outlets are, and continue to be the “food-of-choice” for the main consumers, with typical demographics of the 16-28

Though the service is exquisite, they have the price to match it, with average spend Product; ranging in the above £40 range. The main product offered by Nando’s is grilled chicken, marinated in its highly reputed Peri-Peri sauce. Then there is a From this brief review, and referring back four-sided menu packed with various to the Thornton report, a gap in this highly combinations and permutations of competitive and matured market begins practically the same core component; to become more apparent. grilled chicken, ranging from various pieces, wraps, , etc. At one-end there are the cheap-and- By keeping its core product constant cheerful retailers, e.g. the Mc Donalds, through-out the menu, and providing offering a predictable, inexpensive service cheap and cost-effective variations, for a below average spend. In simpler Nando’s product is simple and easy to terms, they get what they pay for. familiarise with. With any dish you order, On the other end of the spectrum are the you know you will be receiving some form slightly more experience-based of grilled chicken. restaurants, where value-price proposition When ordering a stake in a traditional is a little more complex. They aim to offer restaurant the options of “rare”, “medium- an exceptional service, for a premium rare” and “well-done” are given, Nando’s price. The target consumer group though allows for a much more commercially- not fully catered for, i.e. you won’t often effective variation to its dishes, i.e. the find a teenager dining with his friends in level of spiciness. The Ivy every week. Whereas fast-food chains are regularly struggling to innovate their menus to cater Hence, either by purpose or accident, for as wide as market as possible, Nando’s Nando’s has very conveniently filled the has focused its products around the same gap between these two conflicting eatery key-commodity; grilled chicken. paradigms. It sits perfectly between the Compared to its established counterpart intersection of the fast-food and KFC, Nando’s menu also effectively caters conventional restaurant business models in to the growing health-conscience market, terms of price, service, quality, and most of as the chicken is grilled; effectively all, simplicity. jumping on the “health” bang-wagon. It provides the health-conscious consumer a fresh alternative to the items offered by the other fast-food chains, and the “all- plastic” eating environments.

This simplicity in product definition and extension, has allowed Nando’s to differentiate its menu in a cost-effective and simple manner.

Price; Another reason why Nando’s fits so effortlessly between the void created By using a standard marketing model, between the fast-food and traditional (“5p’s of marketing”), how Nando’s was restaurants sectors is also due to tis pricing able to find this gap in the fast-paced strategy. restaurant market could be better As fast-food chains retail at approximately understood. £5 -£7 per meal, and traditional restaurant from anywhere above £30 per meal,

Nando’s retails at an average of £10 per atmosphere to that found in traditional meal. fast-food and restaurant outlets. As trends have shown, an average The system of being allocated a table- consumer is more than willing to pay a number before placing an order greatly slightly higher price than a fast-food outlet, saves on delivery time and prevents provided there is something more on offer. wastage from orders getting mixed up. It This is clearly the case with Nando’s as it is also allows for better table administration; currently enjoying more repeat business as available seating is more carefully and more customer-loyalty than any other managed, allowing for a quicker customer eatery brand. turnover. The seating system also caters for a sense of satisfaction for the customer, as being escorted to a specific table number Promotion; on entering the premises provides a sense In the UK, there has never been a Nando’s of privilege and acceptance. advertisement aired on television, nor a This streamlining of operations though on mention on the radio. surface may appear insignificant, saves Apart from the standard loyalty-card the restaurant significant time and method, Nando’s advertising campaigns resources in the long run. have been modest, at best. Despite this, it still is one of the fastest growing in the country. One of the key catalysts to bring about People; the awareness of Nando’s has been One of the key resources utilised by effective transmission of word-of-mouth. Nando’s is its work force. With a simple yet While eating at McDonalds is considered affective file and rank system, right from “fun”, eating at Nando’s is now the regional to store levels, as is usually considered “cool”. This is further amplified evident by the different coloured shirts with pictures of celebs like David Beckham seen in any of its branches. seen visiting Nando’s on a regular basis. It effectively employs younger individuals This inadvertent endorsement of the from diverse backgrounds, which not only Nando’s brand has led to the creation of enhances its image as an exotic eatery, a positive “marketing-bubble” for the but also mirrors the diverse backgrounds of chain, which is growing with further the customers that usually visit it. indirect endorsements. To coincide staff-goals with corporate- This has obviously borne well with Nando’s agenda, Nando’s offers a share-ownership management as while the competition is scheme to its staff; a strategy rarely used in contemplating large advertising budgets, the UK restaurant industry. Nando’s is very effectively capitalising on This evidently brings about better its word-of-mouth and indirect advertising employee loyalty and brand support, in-roads. which is clearly reflected in its low staff turnover, and high staff-retention rates.

Place; After visiting any Nando’s outlet, it is quite In a nut shell, Nando’s has attained a fine clear as to how the brand has set about in balance in providing a quality “product” differentiating itself from its main rivals. which is reasonably priced, healthy, with It has aimed at staying close to its good service and a refreshingly different Portuguese-Mozambican routes, in terms ambiance to match it. of the colours, design, layout and music; providing a refreshing and contrasting It has even attempted to be a good “corporate citizen” by embracing

corporate social responsibility (“CSR”) principles. For example using paper-bags for all its take-away orders.

Regardless of whichever industry or sector a business operates in, there are definite lessons to be learnt from how Nando’s operates and manages it business. Particularly more so by being in the highly competitive and saturated restaurant industry.

The Nando’s system is a further example of how a business can flourish even during tough economic times, by better focus and management of its core product and service.

J Khan, Esq. Tax & strategy Editor

M Wandycz

Assistant Researcher

(The opinions expressed in this article are the editors own, and do not reflect the views of Klarmans & Co)