KFC operator Collins Foods will resist price hikes as it protects ‘value credentials’ for fast food

Drew O’Malley says 12 straight interest rate rises means a dozen letters from the bank warning of higher mortgage bills, with consumers demanding value for money from fast food.

Shares in KFC and Taco Bell operator Collins Foods roared almost 18 per cent higher on Tuesday after the fast-food chain specialist unveiled a full-year profit which although dented by weaker margins caused by inflationary pressures still beat market expectations.

Its network of 272 KFC stores in Australia and portfolio of fried chicken outlets in Europe were sporting the bruises of rising raw commodity prices, elevated energy, wages and other supply chain costs but managed strong revenue growth as consumers stayed loyal to the KFC brand despite cost of living pressures.

Collins Foods chief executive Drew O’Malley said the peaks of crushing inflationary pressures on his fast-food chains were mostly behind him, although there were still “considerable headwinds” coming from areas such as wages and energy.

But Collins Foods was now resisting passing on these cost pressures to customers of his KFC stores in Australia and its network of 64 KFC’s across Germany and the Netherlands, with Mr O’Malley arguing it was crucial for the fast-food chain operator to defend its ‘value credentials’ at a time when the Australian economy could dip into recession.

“We absolutely believe when you look at one of the benefits of the quick service restaurant industry, it is the resiliency. Generally in good times and bad, people find this an affordable treat, and we want that to continue to be the case.

“So 12 straight interest rate rises means 12 straight letters from your bank telling you your mortgage is going up, and we’re very sensitive to that for consumers,” Mr O’Malley said.

Over the last two years Collins Foods had upped prices for its KFC menu items, as it fought inflationary breakouts in everything from energy and labour to the price of chicken and lettuce, but it wasn’t enough to save its profit margins that have sunk.

Collins Foods, which also operates Taco Bell in Australia, on Tuesday revealed revenue for the year to April 30 rose 14.1 per cent to $1.348bn, but full-year net profit dropped 76.7 per cent to $12.746m. The company declared a flat final dividend of 15c a share, payable on August 1.

Margins were crunched by cost pressures, down almost 250 basis points, reflecting the full-year impact of significant cost inflation including 5.2 per cent minimum wage increase, ingredients and energy.

Collins Foods boss Drew O'Malley said the peaks of inflation were behind the business, but there were still economic headwinds such as stubbornly high energy bills. Picture: Supplied

While KFC Australia and Europe posted sales and profit growth, Taco Bell was still a source of pain for the fast-food operator, with the Taco Bell network in Australia booking an impairment of $36.7m.

However, the overall annual profit beat market expectations and triggered an almost 18 per cent rally in Collins Foods shares. Collins Foods later closed up $1.39, or 17.68 per cent, at $9.25.

Mr O’Malley said there were still hot spots of inflation running through the economy and his fast-food chains, which Collins Foods expected to persist into next year, especially as even moderating raw commodity prices would take some time to feed through.

“Cost inflation has been widespread across energy, labour and the supply chain and I don’t think any businesses were immune, we are increasingly confident that the peaks are probably behind us as many commodity prices have stabilised or decreased.

“However, there are still considerable headwinds in areas such as labour and energy and even in cases where we would benefit from lower commodity prices there can be a bit of a lag for those.”

Mr O’Malley said KFC in Australia and Europe needed to remain “great value” in the mind of consumers, and this had focused Collins Foods on cutting expenses elsewhere and resisting hiking menu prices.

“When it comes to that area, we move very cautiously. We are going to continue to be customer led in our approach and ensure that we operate within a customer’s definition of what they consider great value.

“Which is why we’re proud that KFC is leading the pack on value right now in the minds of the consumer. So we think the decision not to seek a full offset of short term cost pressures via menu pricing has been the right decision for the consumer and the long term health of the brand.”

Collins Foods is resisting passing on cost pressures to customers of his 272 KFC Australia stores.

Mr O’Malley said he believed through the “ups and downs” of the economy, fast-food can be resilient.

“Quick service restaurants do tend to be very resilient and certainly KFC within that tends to be the leader, and we are very proud of that positioning given that we are going into what could be a challenging environment for the consumer.”

Turning to the full-year results, sales from its KFC network in Australia surpassed $1bn for the first time, and there was strong sales growth across its KFC stores in Australia and Europe.

“In a year of unprecedented challenges, we are pleased to have maintained our long-term approach to driving sustainable growth for Collins Foods,” said Mr O’Malley.

At its flagship KFC Australia business, same store sales were up 5.8 per cent and revenue was up 10 per cent to $1.051bn. Underlying earnings were down 2.5 per cent due to inflationary pressures.

At KFC Europe, where it has 64 restaurants across the Netherlands and Germany, revenue rose 31 per cent to $249.5m.

Taco Bell sales rose 36.1 per cent to $48.7m, and while same store sales were down 4.8 per cent for the year that was an improvement on the 8.1 per cent same store sales decline for 2022.

Encompassing a network of 28 stores, Taco Bell posted a loss of $1.5m, up from a $400,000 loss in 2022. Collins Foods said it remains focused on returning the brand to growth with newly implemented product quality and marketing initiatives expected to drive brand awareness, trial and sales. An impairment charge of $36.7m was taken to impair the remainder of the Taco Bell asset value.

Mr O’Malley said Collins Foods has been working on stronger value marketing campaigns focused on most-wanted Taco Bell products at value price points, such as its newly launched $5 Chipotle Crunch Burrito, which has outperformed expectations. The food operator has also been helped by direct resource and financial support from Taco Bell International to increase media spend, awareness and drive top-line sales growth.

Collins Foods announced the sale of its Sizzler restaurants in Asia, consisting of 10 sites in Japan and 61 in Thailand, to Minor International for $22.8m. The funds from the sale will be redeployed to its KFC expansion in Europe. The group said the sale would trigger an expected book gain of at least $10.2m which will be reflected in the 2024 financial report.

On Tuesday Collins Foods also announced the appointment of Andrew Leyden as chief financial officer, commencing in early October.