The Secret Sauce
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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 restaurant 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 Beers) 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. food restaurants (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 chicken 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% Chiquito 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 quick 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 quickly 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 foods 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.