The franchise business looks very exciting but the shares have shot up too fast to warrant buying now
Thursday 05 Jul 2018 Author: Lisa-Marie Janes

Shares in franchise group Cake Box (CBOX:AIM) have risen by an astonishing 43% to 154p since joining the stock market last week. Investors may well be hoping the cake seller will be as big a hit on the market as sector peer Patisserie (CAKE:AIM).

Cake Box sells eggless and fresh cream personalised celebration cakes, which can be ordered and collected in an hour. A range of products such as cake boxes, bags and candles are also sold.

It currently has 91 franchised stores and hopes to hit 250 sites in the medium term, targeting high streets in small towns rather than city centres. As of 31 March, 99% of its stores were profitable.

Unlike most franchise businesses, Cake Box doesn’t charge any franchisee ongoing fees such as management service fees or marketing levies. Instead it makes money by making and selling
cake basics to franchisees, such as sponge and cake supplies.

It does, however, charge a 7.5% royalty fee on all online orders. Online orders accounted for 10.7% of franchise store revenue in the year to March 2018.

New franchisees initially pay £125,000 to open a store with this money helping to fund the design and fit-out, managed by Cake Box. The parent also helps franchisees secure bank funding and offers advice for negotiating leases. The franchisees are responsible for hiring staff but they are trained by Cake Box.

The average payback period for a franchisee’s initial investment on a store is 18 months.

Sponges for all cakes and other ingredients are manufactured at Cake Box’s production facility in Enfield, which is sent to franchisees for assembling, decorating and personalisation. Any cost increase is passed on to the franchisee.

Having a single manufacturing site is a clear business risk should there be operational problems. We are therefore encouraged by news that Cake Box is thinking about opening two satellite distribution centres in other UK regions.

Cake Box also bakes products such as muffins and loaf cakes which it supplies to the franchisee who sells the pre-packaged goods in store.

Over the past few years, Cake Box has delivered rising sales and profitability with £12.8m of revenue and £3.3m pre-tax profit in the year to 31 March 2018.

L:S COMPANIES - CAKE BOX

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