It is difficult to launch premium products in the SA market that has low growth and highly-indebted consumers, Mohsin Tajbhai, acting CEO of Grand Parade Investments (GPI) told Fin24 on Monday.
He commented on lessons learnt from GPI's failed attempt to successfully establish the US doughnut brand Dunkin Donuts and ice cream and cake specialty shop Baskin Robbins in SA.
In February GPI decided to put both these assets in voluntary liquidation to cut losses.
According to Tajbhai, other lessons learnt from the Dunkin Donuts and Baskin Robbins investment include the importance of site selection and not to under-estimate the cost of setting up stores – for instance the challenge of high rentals.
Furthermore, exchange rate fluctuations impact imported products.
"It has taken a while to recognise the errors we made with Dunkin Donuts and Baskin Robbins. We went into them too soon," said Tajbhai.
"They are prime products and dessert products. So, with the decline in growth in SA, consumers buy down."
He explained that scale was needed to successfully launch this kind of prime product in SA and this would have taken a lot of capital, which the market was reluctant for the group to roll out on those brands.
The group is now negotiating with landlords and will negotiate the termination of brand agreements.
All the staff impacted - about 100 in total - were either placed elsewhere or received retrenchment packages. Those retrenched will also be considered for future job openings in the group.
According to Tajbhai, there is a party interested in buying Dunkin Donuts.
"If someone else can make it work, good luck to them. Whilst disappointing, it was the right decision for all stakeholders to exit," he commented.
Fin24 reported earlier on Monday on GPI's interim results. The increase in revenue from operations of 28% over the interim period was driven primarily by top line growth in Burger King, which saw its total revenue for the year increase by 37%.
Tajbhai describes the numbers as relatively positive under the circumstances.
"Factors like the increase in the minimum wage and sugar tax influenced margins, but the great thing is that our margins are improving," he told Fin24.
"We realised we could not pass on those increased costs to our customers, so we went to our suppliers to negotiate discounts to grow volume. We also shifted our strategy to be more value-based to drive volume.
He is pleased with the growth in Burger King operations in SA and sees a positive trend in margins.
"We want to focus on improving the efficiency and profitability in our operational businesses and improve our capital structure through the sale of non-core assets," said Tajbhai.
Going forward, the group will continue to look for active investment opportunities by leveraging its empowerment status.