The giant fast food brands, such as McDonald’s and Yum! may live on Wall Street but the ASX is home to Collins Foods (ASX:CKF). It’s a major franchisor of KFC and Taco Bell.

Collins Foods has operations in five countries: Australia, Germany, the Netherlands, Thailand and Japan, and has a market capitalisation of nearly $1.6 billion.

Yesterday Collins announced a deal with Yum! that would see it up its footprint in the Netherlands by 25% to 44 KFC restaurants – more than half the market. It will pay €10.25 million ($16.09 million).

The company managed to grow its revenues, profit and store footprint in FY21, with the performance of KFC Australia making up for the difficulties in the European market. It was nonetheless forced to retire the Sizzler brand in Australia.

But with vaccination rates going up, is the worst of COVID-19 behind it?

Stockhead asked Collins Foods CEO Drew O’Malley.

 

How has the last 18 months been for Collins Foods as a company?

“Overall as a company we’ve been really happy with the resilience of our brands during the COVID period,” he said.

“Australia’s certainly had a lot of really positive tailwinds from some of the consumer behaviour off the back of COVID.

“Europe was a different story given that the restrictions we saw in Europe – especially last year – were quite strict and really impeded trading.

“It was a bit of a mixed picture, I think the most recent last trading result we shared for Europe was encouraging. I think the restrictions being eased on dine-in is encouraging.

“Overall, we’re happy with how the business has weathered COVID but certainly still a mixed picture.”

 

What were those “restrictions in Europe?” Did these involve even shutting down takeaway food outlets?

“We’ve never had to shut entirely – we have more food courts in Europe than we do in Australia so when severe restrictions were in place they [European food court outlets] were impeded.

“Where we were particularly noticing an impact were in some of our inline locations. We had our flagship restaurant in Amsterdam – that is our biggest volume restaurant in the market – lose all of the tourist trade and foot traffic on the high street during the COVID period when people were at home.

“Takeaway channels were quite resilient – as in drive-in and delivery – but when you think of channels like food court and some of the inline locations, those would be impeded by decreased foot traffic and evening curfews we saw throughout the year.”

 

Is it fair to say Europe is closer to getting back to normality than Australia, Thailand and Japan?

“I think from a vaccination perspective Europe had a bit of a jump on that and so is further progressed.

“Unlike in Australia where we were almost at a zero COVID scenario, that was not possible in Europe, so I think they learnt to live with it earlier.

“So vaccination rates have been higher and easing restrictions off the back of it and combined with the approach of ‘we won’t eradicate it, let’s live with it’ – there has been acceptance.

“Once we get vaccinations go up a bit more in Australia we’ll start to see the easing of borders restrictions etc.”

 

How do you choose these new locations and franchisees? Do you start a new shop from scratch or get one from existing franchisors?

“This is second largest franchisee in the Netherlands and I think from a strategy perspective we’ve always felt there’s an opportunity to help consolidate the market.

“The Netherlands has for some period of time been fragmented with smaller franchisees.

“We’ve believed the opportunity to acquire KFC franchisees – particularly the second largest franchisee in system – was good for us.

“So we’re delighted with these restaurants. They’re extremely well run, they’re in the same neighbourhood where our stores are, makes it easier for us to navigate the market from a development perspective and just from a franchisee consolidation standpoint.”

 

Do you see Collins Foods expanding into more countries or perhaps even into new brands?

“There are opportunities that’ll, we think, come out at some stage.

“I think we want to make sure we’re focused on providing ourselves worthy as a corporate franchisee for the Netherlands.

“We’re not about planting flags in a lot of countries. We think if we build in the Netherlands, we bring the market to scale, execute on the agreement, other opportunities will emerge out of that.”

 

Tell me a bit about your company’s history? Is it the case Colonel Sanders was involved when the firm was set up in the 1960s?

“That’s correct.

“Jim Collins – who the company is named after – did his deal with Colonel Sanders himself and the company has a long history and deep roots with the KFC brand and we’re very proud of that.”

 

How did you end up at the company?

“My background is in Europe. I’m American by birth but I moved to Poland in the early 1990s and helped develop the KFC brand for the company that became known as Amrest which is the largest franchisee in Europe for Yum!.

“So after 20 years of that, as you might imagine, having visited Australia in the warmed climates my wife and I thought ‘this is an interesting place to live’.

“A few years later we had the opportunity to move so I joined in 2017 as Chief Operating Officer and took over as CEO last year.”

 

You retired the Sizzler brand. Why was it hit more by COVID than KFC and Taco Bell?

“Sizzler is a brand we operated for quite a number of years and it’s a very different type of restaurant experience – casual dining.

“And it was a brand that even before my time Collins Foods decided strategically to start winding down. We’d been closing stores for a number of years.

“The team had done a wonderful job of keeping the restaurant operating well and we had been extending leases.

“But when COVID hit, Sizzler is, let’s not forget, a casual dining brand that is centred around a salad bar.

“When you have a salad bar in the middle of COVID fears and COVID concerns, we saw early in the pandemic sales volumes drops of up to 95% and it just made it very difficult to sustain that brand indefinitely.

“So we did make the difficult decision to close, but it’s different with quick service restaurants brands or fast food – it shows the resilience during COVID.

“Even if you lost dine in sales the customers would access through drive through and through delivery and that allowed us to thrive despite some of the challenges of that period.”

 

How have delivery services impacted big food companies like yours?

“Delivery is the biggest disruptor the industry has seen in at least a generation. When we look at the positioning of our brands, particularly KFC, we think there’s an opportunity in delivery.

“We can get our food out the door quickly, we are designed to expedite transactions in two-and-a-half minutes and in busy times like weekend nights where smaller operations hit bottlenecks, we’re fast food, we are designed to accomodate volumes.

“And when you add on original recipe chicken travels well, we think it’s an excellent sales channel for our brand.

“What’s interesting with the aggregators: one benefit is because of KFC’s size and scale we can negotiate competitive commission rates with some aggregators and that’s something that’s enabled us to see this longer term as a very attractive segment we can do well in.”

 

And what do you think is to come for Collins Foods the next 6-12 months? Is it simply a case of consumers coming back and more stores being opened?

“We’re excited about our pipeline, we’re certainly excited to ramp up Taco Bell.

“We’ve never had a better pipeline that we ever had to build new restaurants.

“But what’s exciting is the new franchisee agreement with Yum! to effectively run the Netherlands and we think that’s something that provides us with a unique strategic opportunity.

“It’s never been done before by Yum! with the KFC brand anywhere in the world. And we’re proud of Collins, we’re the first franchisee they’ve done agreements with, that gives us a lot of opportunity for growth in the years to come.”