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Restaurant Brands

The Jenny Ruth Column

Tuesday 11th July 2006

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Certainly, it's lost a bundle in Australia, just like so many other Kiwi companies, but it's at last starting to cut its losses and exit that market through selling off its Pizza Hut stores in Victoria to owner-operator franchisees.

The company paid $14.4 million in early 2002, buying the Victorian stores out of receivership, and wrote $7 million of that off in its latest result. On top of that, the Victorian stores contributed a $3.1 million net loss to the latest annual result and a similar sized loss the previous year.

But the New Zealand operations appear to be in considerably better shape now than when managing director Vicki Salmon first stepped into the hot seat in August 2003 after the abrupt departure of her predecessor.

Back then, the company seemed to have lost the plot with its main profit engine, the KFC chain, which was showing declining sales and profit margins and the anecdotal noise about basics, such as a lack of restaurant cleanliness, was awful.

The company's coffee shop chain Starbucks, which was supposed to be a growth story, was also reporting successive quarters of declining sales and it was already apparent that the Victorian operations weren't going to produce the expected results.

The one part of the company then thriving was the New Zealand Pizza Hut operations, although there were already signs of increasing competition and of margin erosion.

Nearly three years down the track, KFC and Starbucks seem firmly back on track but that promised competition seems to be biting Pizza Hut hard.

KFC's first quarter sales were up 7 per cent and its same-store sales were up 5.8 per cent after a 5.4 per cent rise in the previous fourth quarter.

The company is working through implementing a "transformation" program of refurbishing the stores with nine completed at the end of the first quarter and another four in progress - the refurbished Ponsonby store opened last week. The company said in its annual report that the seven stores then "transformed" had shown an average 20 per cent increase in same-store sales.

Salmon says that before the transformation program could begin the company had spent about 18 months stabilising the KFC business. "Back in 2003 when we had the crisis in our business, we realised we just had to get back to basics," she says. "You can't implement a strategy on top of a business that's not going well."

Now about 70 per cent of the KFC stores are in positive territory compared to only a handful when Salmon walked into the job, she says.

Just how important that is to the company can be seen in the fact that KFC contributed 54 per cent of sales and 65 per cent of operating earnings in the year ended February.

Starbucks is also back on a growth track having achieved two-and-a-half years of same-store sales growth. Store numbers have increased from 35 to 44 and the chain's general manager Steve Montgomery has set his sights on doubling the initial target of 50 stores.

Salmon says while Montgomery is being "very enthusiastic," other food chains have more than 100 outlets in New Zealand. To begin with, 50 stores had seemed a stretch for Starbucks but now it's nearly there, she says.

With Pizza Hut, Salmon says it's important to note that last winter "we had the best sales weeks in the history of the company" with events such as the Lions tour boosting sales - pizza sales are heaviest when there are rugby matches on. This year, there have been far fewer games and the Argentinian game was in the morning, our time, when people just don't eat pizza.

"You can't always rollover your own success. We know that sales will be negative for a while." But the company is also working on strategies to mitigate that, she says.

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