Review - Burger Fuel

Introduction
Burger Fuel is a gourmet Burger chain located in New Zealand. Aimed at the higher end of the fast food market prices for their burgers are typically $8-12, and a combo can set you back $17+. Burger Fuel has become extremely popular and now has 20 stores in New Zealand and 2 stores in Australia.

History
The concept was invented by founder Chris Mason in 1995. The first store opened in 1996 on Ponsonby Road. Soon 2 stores were operating with the second in Takapuna. Steadily they grew and now have 20 stores with at least 10 in Auckland and the rest in the North Island.

Food
While pricey, the food is extremely good. They use quality fresh ingredients and the burgers are a quite large. Generally you will be fine with just a burger. Burger and fries is a big effort. They are based on the Burger Wisconsin style with big buns and salad with relish. They have an extensive selection of Burgers with Fish, Chicken, 1/3 Pound Beef. They also have lots of vegetarian options and even Vegan options. Recently they have added Gluten Free Buns to their menu further extending their appeal.

They use their own special Garlic Aioli in their burgers and also as a condiment along with their chips.

The Business
Burger Fuel is run by the franchise model. Each store is independently owned by Franchisees under the head office. (except their 2 company owned stores, 1 in NZ 1 in Aus) Franchisees pay 6% of monthly turnover the head office and also contribute 4% of turnover towards a company wide marketing fund.

Going Public
Burger Fuel has recently gone public and listed on the NZAX Alternative exchange. Unfortunately their float was not as successful as they had hoped. This is for 2 main reasons.

1. The Shares Were Extremely Overpriced.
They were offering 25% of the company for 15 million dollars, valuing the company at 60 million. With no turnover! I believe the shares were at least 4 times overpriced possibly more. At 15 million the offer is stomachable. They have been singing the praises of it being a long-term growth stock which of course is the answer fools accept. They only managed to sell half of the 15 million shares on offer.

The share price opening at $1 is now around the 60c mark. Burger Fuel aggressively targeted their die-hard customers to purchase shares because they knew real investors wouldn't touch an overpriced risky stock with no earnings guidance. I feel sorry for the loyal "non business thinking" customers who shelled out their hard earned cash - $1000 minimum for 1000 shares thinking they were going to make moeney. Their "investment" is now worth $600. Would they still think Burger Fuel was so great? Its also a shame for the franchisees who independently run each store and of course bear the commercial brunt first hand of any customer backlash. Why rip off your best customers?

2. No Earnings Guidance.
To list they created a brand new company called Burger Fuel Worldwide Limited. This company is the head company that oversees the stores and holds the intellectual property. They do not own the 20 stores or the stores turnover. The directors would not give an indication of either turnover or when they would make a profit. If fact they mentioned that they would not make a profit for several years.

It's interesting because they only receive 6% of stores turnover. System wide sales were only 15 million during the 2006/2007 year so 6% of this figure would net the head company only $900,000 in turnover. Hardly great earnings for a $60 million dollar company as they suggest. These figures would give a Price to Sales ratio of 1.5%. Let alone Price to Earnings. They still need to cover all their costs out of that 900K including staff costs for all the extensive number of head office staff they profiled in their prospectus.

They would also receive a 4% marketing contribution from each store but this cannot be counted as income because a) it is to be spent of advertising and b) they shouldn't be making a profit off the marketing contribution fund. Their accounts would be scrutinised as they will be public knowledge. Not a good idea to rip off or under market the franchisees.

To make an decent money say $15 million in turnover for the head company (not 1.5 million) received from stores the system wide sales would need to be 150 million. And say 200 stores. Its a big jump to go from 20 stores to 200.

Now of course time will tell whether the shares turn out to be successful but I have my hunches the cream has been taken by the directors at IPO already.

Auckland, New Zealand