By Lito U. Gagni
Jollibee Foods Corp. (JFC) has embarked on an overseas expansion strategy to boost its profitability ratio, which went down when it absorbed higher operating costs and cut its product offerings by up to 10 percent.
JFC bought a 40 percent stake in the US company Smashburger Master LLC that market analysts said would bring additional value to the fastfood firm. The deal amounted to $99 million and priced Smashburger at an enterprise value of $335 million. The US burger market is estimated to be worth $100 billion
Smashburger, a Denver-based fast casual restaurant with 335 corporate and franchised restaurants in 35 states and nine countries, has seen up to 20-percent growth each year since its launch in 2007. The deal would benefit JFC.
Profits have been sluggish for JFC, with its second-half net income at P2.6 billion, up 5.4 percent, but which was mostly due to write-off of other liabilities. In terms of profit margin, specifically its EBIT margin, the profit level was down.
EBIT which is the ratio of earnings before interest and taxes to net revenue, is an indicator of a company’s earnings ability. And
with JFC showing signs of weakness in its EBIT margin, the overseas expansion strategy is seen to pay off.
The first-half financials for Jollibee showed that its EBIT margin went down to 6.1 percent, due to lower profits on account of higher input costs. The EBIT margin rose in the second quarter by 9.7 percent, which indicates a lower profit picture for the company this year.
Market analysts said the disappointing EBIT margins of JFC, which are shrinking due to its failure to pass on its higher input costs, could be one of the reasons for the overseas expansion program.
Also, there is the possibility of synergy whereby JFC could introduce new product offerings in the US outlets of Smashburger Master. For instance, in its Vietnam stores, Jollibee has product offerings that cater to the Vietnamese.
Company officials said earlier that JFC would realize double-digit growth only by 2016 due to the challenging costs of hiking its price offerings.
JFC is seen to fund its acquisition via internally generated cash and bank finance. As of end-June, it had a net cash position of P3.12 billion.
The election spending is seen to result in better profits for JFC as thesame-store-sales-growth, a revenue indicator, is expected to ratchet up in the run-up to the elections next year.
JFC Chairman Tony Tan Caktiong exuded optimism over the Smargurger deal, citing the significant foothold the Philippine company would have on the US burger market.
He said the deal would allow the joint venture to profit a great deal from the huge US burger market, which is “three times larger than the pizza, sandwich or coffee segment in terms of sales.”
“Smashburger is one of the fastest growing restaurant brands in the US and we are very excited to work side by side with the owners and management of Smashburger as we continue its growth,” Caktiong said.
According to Smashburger President and CEO Scott Crane, the deal “will provide additional energy and resources to Smashburger as we expand.”
He also cited that the “team at Jollibee is focused on the same values as our company, which are to serve the highest quality food and provide a great dining experience for our guests.”