Restaurant Brands learns from its roller coaster ride

By Peter V O'Brien

Friday 11th June 2004

All investors and directors and executives of listed companies should read the addresses of Restaurant Brands chairman Bill Falconer and chief executive Vicki Salmon at the fast food operator's recent annual meeting.

They were factual, sometimes blunt, explanations of what can happen to a company's profitability if basic matters are overlooked and controls allowed to slip in an apparent "she'll be right" atmosphere.

The issues that Falconer and Salmon discussed were not confined to Restaurant Brands nor was the company singled out for special attention. They can arise anywhere if the seeds of corporate weeds are allowed to sprout in a favourable environment.

Falconer said the board did not regard as satisfactory a 27% decline in net profit for the year ended February 29. A 23.7% drop in New Zealand earnings resulted principally from reduced performance in KFC (Kentucky Fried Chicken) and "the causes transpired to have been within the company's control."

Falconer cited a badly timed maintenance programme, over-ordering of a product line and inadequate responses for two successive product promotions, which failed to meet target.

"While each event is explainable, we should have done better. Fortunately, these were one-off incidents from which we have learnt and there is no reason to assume they will recur."

Falconer said the board's immediate objective was to stabilise the company's operations to produce reliable earnings growth from incremental sales and careful margin management. "We want to exorcise the company's roller coaster reputation."

Other companies should learn from Restaurant Brands' experience and reject any "it can't happen here" attitude. Their executives and directors could also learn from Falconer's and Salmon's candour, rather than fudging bad news in corporatespeak.

Falconer made a comment that should be in every company office, despite its reference to fixing Restaurant Brands' mess.

"It is constant attention to detail in every fact of the business from ingredient procurement through operational management to sales."

Salmon's exposition of the company's troubles obviously was intended to be serious, but some events bordered on slapstick, worthy of TV's Are You Being Served? She said KFC's one-off costs included a major programme of maintenance expenditure, the benefits of which were significant.

"Product quality has been enhanced and we now have a nationwide cooker replacement programme under way which will bring further improvements."

Unsophisticated observers of the fast food business world might think maintenance of cooking equipment and cooker replacements were integral parts of the planning and asset investment programmes.

Silly them. Salmon said the drop in sales was largely due to two promotions which failed to produce the expected sales results expected and also led to stock write-offs.

Fair enough, promotions can be a gamble, but one successful promotion became a disaster. "In addition, the mashies promotion last Easter while giving KFC one of the highest volume sales weeks in Restaurant Brands' history also gave us a problem.

"They were so successful that we ran out of supply and then subsequently ordered too much." She said the quick action to move the surplus stock reduced KFC's margin.

The mashies saga was an example of what happens when Falconer's call for "constant attention to detail" goes out the door.

Salmon considered KFC was back on track and remained a core part of Restaurant Brands because it was a profitable operation with "fantastic" cashflows.

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