Exciting small cap with the recipe for success

Franco Manca’s low price and superb reputation should help Fulham Shore survive restaurant sector shake-out
Thursday 20 Apr 2017 Author: Daniel Coatsworth

The casual dining sector is going through a period of turbulence with a much-needed shake-out of weaker players. Only the best will survive and we believe that includes Fulham Shore (FUL:AIM), better known as the owner of the Franco Manca pizza chain.

Less successful restaurant companies have been left behind for various reasons. It could be their proposition wasn’t unique enough, their prices were too high or they grew too fast.

Many of these firms also chose the wrong locations for their restaurants; they couldn’t pass on rising input costs to customers; or they had an offering that was perhaps too unusual for the public to immediately embrace.

Fulham Shore doesn’t believe it has any of those problems with its flagship brand, Franco Manca.

Why is it different?

Chairman David Page says the pizza business has two unique selling points, namely the product and the price. Franco Manca uses sourdough which has a different flavour to the pizzas most people eat, and it only has a limited range of toppings – all seasonal.

Perhaps the real ‘game-changer’ for the business is its pizzas costing significantly less than every other major eat-in pizza chain.

‘Our cheapest pizza is only £4.95 and our highest price pizza will always be 50p cheaper than a Pizza Express Margherita,’ reveals Page. At the moment the top priced item on its menu is a pizza costing £7.55.

‘We think other players in the market are ridiculously expensive. They have big debts to pay off; we started the business with no debt and kept the menu simple to avoid wastage and having money tied up in stock.’

Page knows all about Pizza Express as he used to be chief executive and then chairman of the business. He also ran former AIM-quoted Clapham House which owned Gourmet Burger Kitchen before its acquisition by Nando’s parent company Capricon Ventures.

Francomanca_Northcote-5879

Does it make any money?

With Franco Manca’s pizzas at bargain prices and customers given free chilled bottles of water as soon as they arrive, it’s almost like Fulham Shore doesn’t want to make any money.

Page disagrees, saying the business does very well. Stockbroker Allenby forecasts £0.9m pre-tax profit for the year to March 2017, rising to £2.8m next year.

‘Our cheaper pizzas help to drive up sales volumes. Prezzo was doing about 1,300 covers (per restaurant) a week when it was taken over. We’re doing more than 2,100 covers.’ The term ‘cover’ refers to a customer who eats a meal that is served.

Fulham Shore presently has 32 Franco Manca sites and expects to open a further 13 sites over the next 12 months. It recently lifted its banking facility from £6.5m to £15m to accelerate its expansion and push for a nationwide presence in the UK.

‘You should never increase your estate by more than 50% in a year. When my previous firm owned Gourmet Burger Kitchen, we doubled the sites to 48 in one year; it was a mistake.’

Hit the ground running

Franco Manca may not be a national household name but it is well known in London and can get cheaper rent by going for more unconventional locations rather than only look for prime sites. ‘We can get secondary or tertiary sites (i.e. in walking distance of a high street or on the outskirts of towns) and people in London will come to us.’

The chairman says London sites tend to trade almost instantly at full capacity. ‘You therefore won’t see like-for-like sales growth in the future for those sites (unless prices go up).’ Outside of London and Brighton, Page says he expects new sites to do less volume initially but still grow fast.

Franco Manca’s first overseas site will open on the island of Salina, near Sicily under a franchise. That’s a one-off which has been done for strategic regions. It doesn’t signal overseas expansion.

Fulham Shore has very strong ties with Salina, as that’s where it buys all the tiles, tables and chairs for its pizza restaurants. Franco Manco founder Giuseppe Mascoli lives on the island for part of the year and wanted to have a seasonal restaurant and increase the company’s ties with the locals.

There will be no franchising for this brand in the UK as ‘you lose a lot of control’, remarks the chairman.

francomanca_belsizepark-6165

Other growth drivers

Elsewhere in Fulham Shore’s portfolio is The Real Greek, a profitable chain of 12 restaurants which have been given a new lease of life over the past few years.

A recent opening in Southampton has seen The Real Greek become the second best performing restaurant in the whole leisure complex, taking more money than established chains Bill’s and Wagamama, says Page. ‘People like it because it offers something different; most of the other brands are too samey.’

Fulham Shore’s shareholder register is a who’s who of successful people in the restaurant industry. Page owns about 14%, similar to Sami Wasif who was one of the original backers of upscale Chinese restaurant chain Hakkasan.

Nabil Mankarious owns just under 20%; he used to oversee operations at Gourmet Burger Kitchen and ran 120 Pizza Express sites. Many Franco Manca employees are also shareholders. (DC)

Buy Fulham Shore at 21.25p.

‹ Previous2017-04-20Next ›

Important information:

These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell Youinvest.

Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.

Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.

The Shares team
Disclaimer

Advertising feature

The value of your investments can go down as well as up and you may get back less than you originally invested. We don't offer advice, so it's important you understand the risks, if you're unsure please consult a suitably qualified financial adviser. Tax treatment depends on your individual circumstances and rules may change. Past performance is not a guide to future performance and some investments need to be held for the long term.