#12: Oliver’s Real Foods – The Repurchasening

I’ve re-purchased Oliver’s Real Foods (ASX: OLI) after my prior sale. The primary reason I sold is that I didn’t have confidence that there would be action on what I perceived to be the company’s problems. The then-CEO is a founder and major shareholder and I considered it unlikely that he would step aside, which would make it hard to see from the outside if there would be any change.

However, he has stepped aside and an experienced replacement with a background at Subway has been appointed. This has given me confidence that management & the board are actively working to improve and gives me more confidence that the issues I was concerned about – which I mentioned in my sale thesis – will be addressed.

It is irritating to sell a company at $0.24 only to buy back at $0.29 a month later, but if Oliver’s works I think today’s price is reasonable.

With the company apparently being proactive, I also intend to make an approach to Oliver’s to encourage them to implement several simple changes to social media and in-store advertising that I think would lead to a modest improvement in the business for virtually zero extra investment. I am preparing a detailed piece on that separately and I am almost finished, but I will send it to Oliver’s first and give them the option to comment (if they wish) before I publish.

The thesis:

The thesis is the same as it always has been: Healthy food at highway rest stops with minimal healthy competition. The business is small enough to become larger over time and as it is already cash flow positive, I think Oliver’s should basically be able to self-fund from here.

I track all of Oliver’s restaurants, and the company is excellent at selecting site locations. There are 27 currently and will be around 32 by the end of the year as there are a further 5 in pre-opening stages.

There is a kicker that brings additional risk or reward. Oliver’s will buy a site, say for $0.8m, lease it to itself for 10-15 years (possibly increasing the rent; not sure on that part) and then the lease and guaranteed tenant effectively revalues the property, which Oliver’s might sell for say $1.8m. That extra $1m gives it enough to open ~2 new stores or buy a new site. That’s great as long as the stores are profitable but it gets extremely ugly if businesses start to falter, because the lease liability is massive. It’s a high risk but potentially high reward strategy.

I recently conducted a site visit in the east of Melbourne which has given me additional clarity on the business.

Site visit

I visited Oliver’s along with TheIPOReview, a blogger and fellow OLI shareholder I ‘bumped into’ online during the course of my OLI research.

I stress here that this research has no immediate impact on my investment thesis. The value of one visit to one site is more for generating detailed hypotheticals about the business – why isn’t Oliver’s doing X, does Y work, etc. I was pleased to see that my impression of Oliver’s after eating there was almost exactly the same as the one I held before I visited a store ; this suggests that the research I’ve been doing has been fairly effective. Some brief comments:

Oliver’s has ‘cafe’ prices. It’s not cheap, some things like the Red Dragon Organic beverages are fucking expensive ($5.95 for a 300ml drink), however the main foods like the pita pockets, rice nuggets, toast etc I thought were either fairly or reasonably priced – but they are cafe prices, not KFC/McDonalds/Subway prices. There is also a nice range of desserts and some ancillary products (nut mix, organic bread, alkaline water etc), although I doubt the ancillaries sell well.
I had buttered spicy toast (an organic raisin-style toast) and potato nuggets with some sort of mustard(?) sauce – both delicious. I tried a Red Dragon lemongrass lime and bitters(?) drink which was very tasty, I would go out of my way to drink one. I also had a turmeric ginger beer (!) which was very funky but grew on me after awhile. Turmeric doesn’t belong in ginger beer though, just sayin.
Service was fast although I can very easily see it slowing down in peak hour. This is partly because the store I visited was quiet. The staff there told us that they were one of the quieter stores and only employ two staff as a base – most other stores have 3. However the food service area is also fairly spread out, so time is lost by staff walking from the coffee machine, then to the toaster, to the fridge, etc. I think in the next couple of years time could productively be spent plotting the most sold products and developing a standardised layout to minimise the staff walking time. Time was also lost as staff members would serve a customer, then walk around the kitchen to make the food for that specific customer, so sometimes after two of the more complicated orders, both of the staff would be busy and customers would have to wait at the register. I thought the staff were great, friendly and worked quickly, but fundamentally there may need to be a switch to having one staff member run the register while the other/s do the legwork. The two-staff store may be challenging as a result unless foot traffic and SSS can grow to allow a third person. Hard to say from just one visit, but that’s something I’ve been thinking about.
Both TheIPOReview and I thought that the Oliver’s menu was too large. IPOReview felt that it may have confused customers while I thought that it would make supply difficult. Oliver’s has to keep something like 15 fresh fruits/veg in stock for use in smoothies, for example. I think that’s great, but surely every additional product on the Oliver’s menu adds to the difficulty. We both agreed that if we were to simplify the menu we would cut the curry dishes, however the staff told us that they were selling around 10 curries a day which seemed a decent number – perhaps suggesting under-served demand. I have no firm conclusions but I would guess at this stage that there is an opportunity to improve inventory performance and working capital modestly by focusing on and promoting the most popular items while culling the least popular.
Oliver’s has added two new feedback methods since I first started investigating – they have a feedback form and also a “smiley push button machine” (where it has a range of smiley/sad faces and you push the face that correlates best with your experience) which sort of added to my theory that Oliver’s is being responsive to feedback.

That’s roughly what I thought of my brief visit. I’ll have further commentary in the near future as I think there are several things Oliver’s can do that may add value for minimal extra investment.

I recently met with some sophisticated investors who researched Oliver’s (including site and kitchen visits etc) pre-IPO before ultimately declining to invest. They were:

Uncertain that the proposition was working/hitting the spot with customers
Doubtful that OLI had the ability to scale due to kitchen facilities and also due to the challenges of delivering fresh food to a growing number of restaurants
Thought that the most likely customers of OLI (e.g. truck drivers, travelling tradies) are not its target demographic.

These are concerns that I’ve spoken about previously on the blog as well and I’ll address them briefly here.

Having visited an Oliver’s now, I have more confidence in the propositiow, but with the new CEO and evidence of management’s responsiveness (e.g. the feedback mechanisms) I also believe the proposition will sharpen over time. Oliver’s has several simple things it can do to increase appeal for minimal extra cost. As I mention below, I believe OLI doesn’t have to be the duck’s nuts of restaurants, it just has to be decent in order to be effective, as it has minimal healthy competition.
The distribution concerns are real. I haven’t visited the OLI kitchen but I trust the insight of the investors that I spoke to, and the challenges of sourcing (and selling, before it goes off) fresh food shouldn’t be underestimated. I think there’s a decent chance the company may have to spend $$ on an upgraded kitchen facility or distribution.
I think the concerns of Oliver’s customer demographic is overblown. Sure, a truck driver and a tradie are stereotypical KFC/McDs customers. But Oliver’s isn’t trying to service every customer – it only needs to attract a fraction of total customers to be viable, and these customers currently have no other choice if they want healthy food. I personally live in an area that is noted for its unhealthiness, and even so I think it’s nearly impossible that an Oliver’s would be unviable here due to lack of customers or wrong demographic. The idea that there would insufficient customers to support an Oliver’s (or Oliver’s-like) restaurant in regional areas on the primary highways outside of Sydney or Melbourne is nearly inconceivable to me. I see the Oliver’s proposition as fundamentally being a viable, healthy alternative to KFC, not attracting every customer that might conceivably want a bite to eat.

Oliver’s is still early in its business journey. It is a higher risk company and I certainly don’t think it’s a slam dunk. But it does have an interesting proposition and I think it has a good chance of generating at least an adequate outcome.

So I’ve repurchased Olivers. With any luck I won’t be shaken out so easily this time – and hey with any luck, maybe I’ll make some money too.

On 23/04/2018 I purchased 1800 Oliver’s shares for $518.95 after brokerage, or $0.288 per share.

I own shares of Oliver’s. This is a disclosure and not a recommendation.