A qualitative look at Oliver’s Real Foods

A qualitative look at Oliver’s Real Foods

I recently had a look at healthy food company Oliver’s Real Foods (ASX: OLI). Oliver’s operates fast-food outlets that sell only healthy and organic food. You can read my purchase thesis here but in my view it is the qualitative factors here that will prove make-or-break for this young brand.

These are three key premises (‘beliefs’) that I have for this investment:

• Oliver’s has a semi-moat due to its differentiated offering to McDonalds/KFC, as well as difficulty for new chains to find available leases to compete with Oliver’s
• A meaningful chunk of Oliver’s customers are probably willing to pay a little more for the healthy food compared to McDonalds
• Thus Oliver’s does not need to be ‘the next McDonalds/KFC’ it just needs to provide a ‘viable’ alternative to junk food (by which I mean right price, good service, easy to access, etc)

 

I did an analysis of each Oliver’s location with a view to determining what kind of obstacles a customer might encounter.

Analysis of site locations

Oliver’s has 21 stores and 2 that it recently acquired and is converting. I looked at all 23 stores including the recent acquisitions using Google Maps.  This is a fairly idiosyncratic system and the individual ratings are up for dispute, but I believe the overall picture is accurate:

• 11 stores are metro/12 are rural (refers to proximity to built up areas, but is idiosyncratic. Rural might simply mean 50km out of Melbourne, if there’s not much nearby. Equally some genuinely rural areas got classed as ‘metro’ due to being right next to a town.)
• All 23 are located on a main road
• 13 are on a primary highway (e.g. Melb-Syd) , 9 on a ‘secondary’ (e.g. Syd-Wagga), and 2 I thought weren’t on a highway at all
• 6 restaurants have 0 or 1 competitors close by. 11 stores have 2 competitors, 4 have 3-4, and 2 have 6 or more competitors (average of ~2.04 competitors for every Oliver’s store)
• Competitors are overwhelmingly KFC or McDonalds (more than 90%), very few cafes or Subways nearby, and no Zambreros/sushi restaurants etc
• 21 stores have easy entry/exit access and a spacious carpark, while 1 was mediocre and 1 I thought was poor
• 19 locations have no nearby ‘clusters’ (rival service stations) of competitors. 4  locations have 1 nearby cluster competitor (this is separate from the # of restaurant competitors above).
• 17 restaurants are ‘integrated’ with a servo cluster, i.e., right next door to the servo. 4 are ‘separate’ from the servo building but still within the same parking area. 2 restaurants are not close to a servo. (‘not close’ in both these situations means like, ~1km away).

 

Management also has a solid criteria for restaurant location and I believe they have a good grasp of this part of the business:

There are a couple of restaurants that look like ‘experiments’ e.g. with no service station nearby, or in hugely competitive areas, but on balance, Olivers’ knows how to pick a restaurant location.

Here is an example of one idiosyncratic rating to show the possible flaws in my above methodology. This is the Oliver’s at 1-3 Sowerby Street Goulburn:

 

I put it as having 6 competitors due to the number of nearby choices (even though not immediately adjacent to Oliver’s) and the relatively easy access to them all. I also listed it as having 1 competing fuel station cluster competitor (Caltex Woolworths, above).  This restaurant I classed as ‘not close’ to a servo even though you can see the distance is relatively short.

I also classed it as not being on a highway at all, because it can’t be directly accessed from the main street. However there are other Oliver’s restaurants (in less dense surroundings) that also do not have a direct entry from the highway, that I have still classed as being ‘on’ a highway because they appear much easier to access.

I fully expect that there would be significant disagreement on a number of my individual judgements, however I think the overall picture (competition overwhelmingly McDonalds/KFC, most sites are generally good quality) is highly accurate.

Restaurant reception/reviews

This section contains one of the major risks of the thesis, although I could not verify my research enough to be confident that it is creditable. I have recent anecdotal reports from several of the troublesome restaurants mentioned below that suggest that the negative reviews were overblown or are no longer relevant. This is why I was comfortable enough to invest, although I think this is a crucial area and one to watch closely over the next few years.

I read every review I could get my hands on from the past 12-18mths of Oliver’s operations. However, there were not nearly enough to form an authoritative sample of the whole business, and many restaurants had no reviews at all. This means that this whole section is far from authoritative and is probably pretty close to pure speculation.

So I present this info as is, and you can make of it what you will.

The key driver of Oliver’s as an investment, in my opinion, is the value that the business adds for customers/ how much the customers like it. For example, if Oliver’s has a winning business, it could become much larger over time. If, however, the business model itself (healthy food at Oliver’s prices at highway rest stops) is likely to be unsuccessful (e.g. for reasons of price, lack of demand, poor reputation etc), then a low share price affords scant safety.

Unfortunately only 5 stores had a list of reviews long enough to consider representative (reviews were from TripAdvisor and Zomato). On a scale of 1-5, Terrible to Outstanding, Oliver’s restaurants in Officer and Ferry Park generally cluster around a 3 – Average, although not all Officer reviews were scored. Geelong and Gundagai were skewed towards the Outstanding end of the scale, while Wyong looks terrible.

(another weakness in the data: It’s unclear if the reviews refer to the southbound or the northbound version of these locations. It is also important to remember that reviews can tend to be skewed to the negative, because happy customers have no real reason to write one.)

However, there are persistent complaints even in the positive ratings – coffee is too expensive, food portions are expensive/too small, food is ‘limp’ (old veggies etc), service is slow. There were also a few comments made on general uncleanliness of the restrooms, a concern given that the restrooms are a key attraction in a business like this (on the highway).

It’s possible to argue that management bought back its franchises to enhance control and improve cleanliness and implement coherent staff training and so on.  However, the average to poor rated stores above were not franchises (I think), except for Wyong. Management states that it bought back the franchises because they were the most attractive businesses, but if franchise stores perform way better than corporate stores, one has to ask if it’s the ‘corporate’ part that’s a problem.

Were they the most attractive because they were franchised, or because of their location?  My research suggests at least part is due to location, and at least one store (Wyong) I would expect to perform better with some love + attention from management, at least if the reviews are a fair judge. Still, if food businesses are being criticised for lack of cleanliness and poor service, that is a risk. I have formed no concrete opinion on this either way. There is plenty of anecdotal evidence to suggest that people love Oliver’s.

I currently think Oliver’s offering + service is good enough to be investable.  I just mention this so that you can see my thought process and the things that I have considered and looked at.

As an aside, note that the CEO below also comments on the supply chain challenges of running a fresh food restaurant, which I touched on in my thesis and remain a key risk as the business expands.

Thoughts on food prices

CEO Gunn has a solid rebuttal to food price complaints in this interview, courtesy of The IPO Review’s interview with him here:

“Good question, but realistically no, (prices) wont come down. In fact I do not believe that we are expensive, it just seems that way to some people. It seems that way to some people because we have all been conditioned to think that food is cheap, when it is not. What is cheap, is highly processed food that is full of artificial colouring, flavourings, and preservatives. This is not actually food. We should stop asking why REAL FOOD is so expensive, and start asking, “How can this cheap food be so cheap?” I think it is also worth mentioning, that being the worlds first certified organic fast food chain, we face many challenges around supply chain management that traditional fast food business’s do not have to overcome.”

Be that as it may, it is a good point. In fact a key part of my thesis is that Oliver’s will benefit from price elasticity if it is able to expand in a way so that its only competitors are KFC/McDonalds.  Put this way, if you are health conscious either voluntarily or forced (e.g. you are gluten intolerant), would you pay $14 for a popcorn chicken combo, or $16 for a gluten-free chicken salad/sushi? Chicken salad is the likely answer and many people will happily pay that bit extra. The real question then is, ‘how elastic are prices?’ and the answer also is “probably not that elastic”. You might pay $16 or even $18 for a chicken salad, but $21 (50% more than competitors) might be a tough sell. These are not Oliver’s prices, I am just talking in general terms. Likewise people may pay more for a ‘real’ coffee (i.e., not McDonalds) coffee, but how much more?

Conceptually, I have thought of the Olivers’ demographic something like this:

25% (ish) of customers might typically prefer a healthy restaurant if available

25% (ish) of customers probably won’t eat healthy at all either for preference or reasons of price

The remaining 50% can probably afford to eat either or, and will likely make a idiosyncratic choice based on a composite of preferred food/brand, service, taste, etc.

The numbers are just conceptual but I believe Olivers’ likely has a fairly reliable but small core demographic of chia-seed munching Melbournians, and a larger opportunity in the market that will need to be convinced, which means price and service will be key.

Based on this picture (and other similar pictures) of the menu from Google, Olivers’ food does not appear overly expensive:

However, this is offset by reviews like:

“Not cheap, $34 for two coffees, a beef pocket and chicken pocket and some soybeans or edamame.”

“The pumpkin soup at $12.90 was very bland and EXTREMELY overpriced for soup, the minestrone was similar as well. “

(there are numerous comments like this, I have not cherry picked the only two negative ones)

Just negative reviews? Or fair criticism? I don’t drink coffee, and I am a KFC popcorn chicken chomper from way back. Plus I don’t have an Olivers’ near me (yet) to go and sus it out, so I don’t have a personal judgement of its premise yet. There is also plenty of positive anecdotal evidence in favour of Oliver’s.

That is what I think of Oliver’s so far. If you have some additional input or disagree with the way I view Oliver’s (and I’m particularly keen to get some anecdotal reviews if you visit their restaurants in Wyong or NSW) please leave a comment so other people may benefit from your thoughts also.

I own shares in Oliver’s Real Food. This is a disclosure and not a recommendation.