Ugodre: Is it time to dump my investment in fast food companies?

In almost every street corner in Lagos and major cities in Nigeria, there is  fast food restaurant. From Mr Biggs to Sweet Sensation to KFC to Chicken Republic etc they are everywhere. Just walk into any of them at peak periods between 12noon to 2pm and you may not get a sit. Go back a few hours later at 8pm and you may not get food to eat because the shelves are empty. Certainly, this guys are getting a lot of patronage which ultimately result to cash. But does this cash transcend to Profit??

The only way one can know if these guys make profit for their shareholders is to look at their financial statements. Unfortunately, only a handful of them are quoted companies making it difficult to analyse them in their entirety. The quoted ones should however serve as a guide as to whether they are making money or not at least theoretically. Like a opined in an earlier blog post, the food business in Nigeria is highly competitive as the barrier to new entrants is quite low. The Fastfood business also face this same problem.

A look at Tantalizers Annual Report for 2008-2011 reveal a startling idea of just how unprofitable these businesses are. Tantalizers for example have made revenues of not less that N4.5b over the years. However, most of it is eaten up by huge cost of sales and admin expenses both taking an average 54% and 45% from revenue respectively . This leave’s the company with little or no operational profit before interest and tax making the business model a cyclical drag on profits. Bigtreat also share a similar trait with an even worse result. In 2009, cost of sale of N2.5b took a huge chunk out of their Revenue of N4.2b with operation cost and interest eating up the rest, leaving a loss position of N441m. Even UAC the owners of Mr Biggs show very low profit margins. Their 2010 revenue of N34b only yielded profit before tax of about N2b (less than 10%).

Could it just be competition ripping into their profits or is just the inability of their management to reign down on cost? Tantalizers for example have a staff strength of over 2000 with salaries and wages taken up about N693m and N648m for 2009 and 2010 respectively. Another cause may also be the huge depreciation cost that these companies incur year after year. With some of them owning Fixed Assets with book values of over N6b its not inconceivable to