BurgerFuel? No, thanks.
Hot on the heels of Xero’s IPO comes another from fastfood franchisor BurgerFuel. Also seeking $15 million in capital, this is, however, a very different proposition.
One of my university student sons had already done the analysis when he came to visit last weekend. His view (and mine when I took a look) was that the rampup is just too big. What’s different, you might ask? Doesn’t start-up Xero need to achieve a big ramp-up to justify its IPO price?
The difference is in the operational and market realities of the two businesses. Attracting, vetting and training many hundreds of franchisees in store operations, establishing all those stores (clarification - even though the franchisees pay for the store setup, a point I didn’t make clear earlier), ramping and running the supply chain, running a high spend perpetual ad campaign, and supporting the franchisees once up and running - that’s a very different operational issue from running a Software-as-a-Service business. They’ll need a lot more than $15 million to do that, even with franchise start fees. And more importantly, the fastfood business is very crowded and fiercely competitive, with some well-established players. Remember the pizza wars? No-one won, except Hell’s founders, who got out before the business got too big (and who I pick will do the same thing again now they’ve taken the idea to the UK).
I’m not saying that BF can’t do what they say they will. However, I am extremely sceptical of the likelihood of them doing so, and I won’t be investing. I’m not the only one. Have a look at Mark Clare’s analysis.
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June 26th, 2007 at 5:45 pm
Jim,
It’s been interesting reading your opinion on things and we (the team at BurgerFuel) completely understand that this investment is not everyone’s cup of tea.
We appreciate your open mindedness in not saying that we can’t do it, but would like to note a few things.
There is no doubt that we are a different proposition from Xero and we definitely take on board what you have said. However, unlike Xero (not to discount what they have done and are doing) BurgerFuel has been trading since 1995 and has huge amounts of brand and customer loyalty. As far as the costs for expanding our store network –well, the store costs are fully paid for by each franchisee – on top of the upfront franchise territory costs they pay us. Meaning that the fit out and construction of a franchisee owned store costs us nothing. Why do we need the capital then? Well, in Australia (and other countries) we need to secure and construct sites for eventual sale to franchisees. In this way we are ‘recycling’ capital, not sinking costs into store construction on a long term basis.
We’re not trying to pretend that BurgerFuel shares are the answer to every investment portfolio. But, for some/many (depending on your point of view) the BurgerFuel IPO presents an interesting and serious proposition for a balanced portfolio.
Either way, please read our prospectus (www.burgerfuel.com/shares) or visit one of our stores to get a real ‘taste’ for this investment opportunity and pick up a hard copy of the prospectus.
Thanks for listening,
The Team at BurgerFuel
June 26th, 2007 at 8:33 pm
Great to see the team at BurgerFuel responding in such a positive way. Sincerely, guys, you have my very best wishes for your success.
Update: Thanks Alexis for your positive (and considered) response to my grumpy post. You were unlucky to be the next one out off the blocks after Xero, where I was accused of being too positive. I do really wish you and the team all the very best, and look forward to having to admit that I was the idiot who missed out on your good fortune. (It wouldn’t be the first time, and certainly not the last).
June 26th, 2007 at 10:58 pm
Burger Fuel IPO: Burger Fool?
Originally posted at Share Investor
By Share Investor
There are many things that are still unclear in the manifold press releases regarding the Burger Fuel IPO.
I understood the 15M from the IPO was for expansion of outlets but then the IPO according to some, is about the royalty revenue from franchising the Burger Fuel concept.
The figures given in the press releases(I havent read the prospectus as I cant seem to download it from the BF website) seem to stress the 3M odd income and 250,000 odd loss for the last 9 months or so.
One might imagine then that BF may want to open some company owned stores with the 15M. Lets face it, to fit out, train staff, leases and the like to start one of those stores is well north of half a mil, so you aint going to get more than 20 stores for that 15M IPO moola.
There is also that key comment that initial shareholders will have the right to buy shares at $1 again in the next 18 months or so.
Another factor is that public holders only get 25% of the action, so that 3M odd revenue mentioned is less than a million for the likes of you and me.
The real money for this company will be in growing the franchise model. As we have seen in New Zealand Restaurant Brands(RBD) is the poorer cousin to its big daddy YUM! the franchisor.
Having said that though, even if BF grew revenue to 500M (picked high just to prove a point) the typical royalty rate of around 8% of the gross would give 40M in gross revenue for the Burger Fuel Franchisor. Only 25% of that 40M revenue would be available to distribute to public shareholders. After tax and costs less than 10M in profit is available as profit to minority shareholders.
Much has been made of the “brand strength” and the “loyalty” of Burger Fuels’ customers but this is typical of niche players in the fast food industry. Once size and scale are increased, this loyalty often wanes as the company culture cant help but change as it grows.
An important understatement by BF management in announcing this IPO is the amount of competition that they face in this sector. New Zealand has some competition but in markets like Sydney, where they have one store, there are several many similar to BF. One also must remember, having success in a market like Sydney is no gaurantee that it is going to work further afield.
It appears that management want to grow this business quicker than they have been and one must ask why, if the business is that good, why they wouldnt get a bank or private equity crew on board to get a little larger, prove their concept has scalabilty, then come out of the closet for some public funds, for goodness sake they are still holding 75% of the company!!
The lesser disclosure requirements due to a listing on the NZAX ,coupled with the bulk of the company still being management owned, mean that human nature, as it is ,favours the dominant player in this scenario and that means the majority of the power and future gain, if any, will be in the hands of those at the top of the tree. Fine if you have full disclosure but here we dont.
The recent Blackstone IPO in the United States is a similar scenario to this one. Public participants hold a minority of shares and management will continue to run the company just like a private one. Both will only want to know you if they want more capital.
Like any investment, before you consider plunking down your hard earned dollars on this one, take a good long read of the Burger Fuel prospectus, then forget it and read the overwhelming negative comment being made about this IPO. If you are still interested after that and are prepared to take a huge risk, go ahead.
It is possible, if you really want to buy Burger Fuel shares, that the SP will adjust to below the IPO price of $1 once the hype of the IPO is over and the reality of the deal sets into the market.
Dont plunk down more than you can afford to lose.
June 26th, 2007 at 11:01 pm
The website where the article comes from is the one attached to this post not the one above.
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