BurgerFuel targets 1000 new stores with Subway deal

BurgerFuel hopes to open 1000 new stores over the next eight years and plans to utilise existing franchisees within the Subway sandwich chain's worldwide network as it expands into the United States and other potential markets like China, Britain, India and Latin America.

Shareholders have this afternoon approved a deal that will see Franchise Brands - an investment firm established by Subway founders Fred DeLuca and Peter Buck - purchase a 10 per cent stake in the Auckland-based gourmet burger chain that currently operates 55 stores in New Zealand, the Middle East and Australia.

Franchise Brands has the option to increase its stake in BurgerFuel to 50 per cent over the next eight years.

BurgerFuel chief executive Josef Roberts said the target to open 1000 new stores by 2022 was an aspiration rather than a projection, but it wasn't beyond the realms of possibility.

"That's a big number, but potentially this partnership [with Franchise Brands] could help deliver this to us," he said. "It's certainly possible - if you crack the US market there's a thousand stores right there."

The US fast food market generates annual sales in excess of US$200 billion and is predicted to reach US$237 billion by 2017, according to market research firm Euromonitor.

Roberts said BurgerFuel should open its first US stores within six to 12 months.

California, Texas or the northeastern state of Connecticut (where Subway is based) were possible entry points, he said.

The New Zealand company is targeting existing Subway franchisees in the US - and other markets - who may want to branch out into a new brand and open a BurgerFuel store.

"The whole point of this deal is we can access applicable Subway franchisees who are in a position to grow their business beyond a Subway," said Roberts. "So effectively that's a catchment market worldwide, everywhere."

Subway is the world's biggest fast food chain, in terms of store numbers, with more than 41,000 locations across the globe, compared with McDonald's roughly 35,000.

Roberts said some Subway franchisees may find themselves in a position where they cannot expand the sandwich chain any further and BurgerFuel could offer an avenue for growth.

"That has to be sanctioned by Subway so hence the relationship with BurgerFuel."

Roberts said BurgerFuel could also utilise Subway's existing infrastructure in new markets, such as administration and procurement of food supplies, as well as equipment and building materials for new store fit-outs.

BurgerFuel is also embarking on a major change of its international franchise model.

Until now, the company has granted master franchise licenses for entire countries in its Middle Eastern markets such as the United Arab Emirates, where the license is held by Dubai-based Al Khayyat Investments.

Roberts said BurgerFuel would be the direct franchisor to individual store operators in the United States, where a US subsidiary and office will be established.

The same business model will apply in other new markets the company enters.

"In the future it's unlikely we'll do whole country deals," he said. "We'll adopt the Subway approach, which is territories and individual store franchises."

Roberts said the US gourmet burger market was less developed than New Zealand's and Colorado-based Smashburger would be BurgerFuel's main competitor.

The Kiwi company would also compete against other US fast casual restaurant chains, such as New York-listed Chipotle Mexican Grill, he said.

BurgerFuel doesn't view the major fast food multinationals - like McDonald's, Burger King, KFC and Carl's Jr - as competition as it expands around the globe.

"We call it all share of stomach but in the end we see ourselves, like in New Zealand, positioned away from those big multinational brands," said Roberts.

He said BurgerFuel was interested in expanding to any market where it could sell a $10 burger.

"South America is a key market and obviously the emerging markets like China and India are of interest," Roberts said. "The UK is also a potential market. There are 10 big markets a available that we would want to go into."

He said securing store locations would be one of the biggest challenges of Burgerfuel's US expansion.

BurgerFuel shares more than doubled to hit an all-time high of $3.10 after the Franchise Brands deal was announced last month.

Franchise Brands' 10 per cent stake, at a price of $1.35 a share (BurgerFuel's share price when talks towards the deal began in April 2013), will be made by way of a placement of $5.9 million new BurgerFuel shares and the purchase of $2.16 million shares from the company's majority shareholder, Mason Roberts Holdings.

In December BurgerFuel reported a 35.4 per cent increase in total system sales, which includes sales by franchise stores, to $30 million for the six months to the end of September - a record for the half-year period.

Net profit fell to $95,691 from $308,372 in the same period of 2012. The company said the profit drop resulted from investments the firm was making for future growth.

Operating revenue of the listed franchisor firm rose 25.5 per cent to $6.73 million in the half-year.

 

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