BurgerFuel may cancel US expansion if backer pulls out, posts loss

BurgerFuel has ended its collaboration agreement with Subway and Franchise Brands.

BurgerFuel Worldwide, the NZAX-listed fast food chain franchisor, says it may ditch its plans to enter the US market and is uncertain of its support from backer Franchise Brands.

Entry into the world's biggest economy has been much more complex than BurgerFuel thought and it expects further delays as it has not had confirmation that US investor Franchise Brands will continue its involvement, the Auckland-based company said in a statement. It will update the market in the next few weeks.

Franchise Brands, which is backed by the founders of the Subway franchise chain, bought 10 percent of BurgerFuel for $5.9 million in 2014, with the option to increase that holding to 50 percent over eight years. It held 10 percent as of June 3.

"Although it could be possible for BurgerFuel to move forward in this market independently of Franchise Brands, we feel the potential support available from a large United States-based organisation is essential to our success in this market and at this stage, we are not prepared to move forward without that support," the company said.

The shares fell 2.7 percent to $1.80.

The news came as BurgerFuel posted a net loss of $1.1 million in the year ended March 31, from a profit of $532,000 a year earlier, it said. The loss was in line with directors' expectations and was largely due to money spent on the planned US entry.

Operating revenue rose 9 percent to $20.3 million, largely comprised of long-term recurring royalties and sales, while operating expenses increased 20 percent to $21.4 million.
Chairman Peter Brook and chief executive Josef Roberts said they understood shareholders would be disappointed at the stall in entering the US, but the company was making good progress in other areas.

"In NZ in particular, we hold a very strong growth position and see great opportunity for continued expansion," they said. "The board will be considering all options for the expansion of the company both in New Zealand and internationally and in this regard, will keep the market informed of progress in due course."

BurgerFuel opened 12 new restaurants in the year but closed four in the Middle East and two in Australia. It now has 78 restaurants, 47 of which are in New Zealand.

Revenue in New Zealand grew 15 percent to $15.9 million in 2016, and the company said it plans to open more restaurants in both the North and South Islands.

"BurgerFuel New Zealand is the third largest burger concept in the market and continues to act as an incubator and testing ground for the global business," it said.

Australia, where BurgerFuel has five restaurants, "remains a challenging and competitive market" due to high operating costs and the time needed to establish the brand to make individual units profitable, the company said.

Revenue rose 18 percent to $1 million in the year, and the company said it will "persist with a responsible level of investment" for the next 12 months before reviewing its position there at the end of the 2017 financial year.

BurgerFuel said it was more focused on opening larger restaurants with higher turnovers in the Middle East than on the number of outlets, as rents are high and markets are volatile. It has closed its two stores in Kuwait but re-launched in Iraq, opening one store in mid-May, and is monitoring the situation in Saudi Arabia and Egypt. Revenue in the segment dropped 16 percent to $3.4 million in 2016.