Herfy in talks with Asian countries for franchise deals: CEO

Herfy Food Services Co. is in preliminary talks with three East Asian countries to open new branches under franchise agreements.

In an exclusive interview with Argaam, Khalid Al Saeed, the company’s chief executive officer and managing director, discusses how he expects Herfy to resume studies to boost the bakery division’s capacity by adding new production lines while monitoring demand size and the impact of expat departures.

“Herfy’s bakeries and meat units still have a good opportunity to expand,” he said, adding that “the company will keep an eye on new government projects.”

Excerpts from the interview:

Q: How has the company grown since inception?

A: Herfy was established in 1981 in partnership with Panda United Co. under the leadership of Hamud Al-Ibrahim. The company started to witness improvement, when Prince Alwaleed bin Talal had bought Panda United’s equity and held a 70 percent stake in Herfy.  

In 1998, AlAzizia Panda United (formerly, Panda United) was acquired by The Savola Group, and Herfy became part of the group. In 2010, Herfy converted into a public joint stock company. It currently operates 55 restaurants across Saudi Arabia.

Q: What about Herfy’s franchising agreements, especially in Bangladesh? Are there any expansion plans in East Asia?

A: Firstly, Herfy does not own any branches outside the Kingdom and is not planning overseas restaurants. It also does not own stakes in agents’ firms. The company just grants franchisees and currently operates under a franchising system in Kuwait and Bangladesh.

The Saudi-based fast food chain opened its third franchised branch in Bangladesh in almost a year. The Asian country is also eyeing a fourth branch soon.

Herfy has started talks with three East Asian countries to open new branches under franchise agreements, and hopes to achieve satisfactory results.

Q: Can you give more details about Herfy’s franchise deals in terms of support, collection ratio on sales, and expansions? Also, do these deals differ from one country to another?

A: Franchise agreements do not differ from one country to another. Terms are mutually agreed by both parties. In terms of network expansion, Herfy may grant its franchise to several agents if the country spreads on a very large area. The company can also grant an exclusive franchise to a sole agent, if backed by a strong solvency.

Collection ratios on sales are almost similar to those of global peers, standing at 5 percent of daily sales. The franchisors in return offer the franchise, marketing, training and support services in addition to significant discounts on food products, such as meat, bakery, etc. based on quantities and payment method.

Q: Why does not Herfy consolidate its sales from Kuwait and Bangladesh in financial statements?

A: The firm does not have the right to disclose sales of companies operating in other markets, as it does not own stakes in those firms. The company has a share in those sales. These figures are included in Herfy’s budget under other income, in the form of commissions from foreign firms.

Q: How has Herfy secured its raw materials of meat, bakeries and vegetables for its restaurants? What are the current sufficiency ratio and production volumes?

A: All foodstuffs and packaging materials are locally manufactured. The company only imports between 10 percent and 15 percent of potatoes. Hamburger buns, meat and chicken are homemade in the industrial city. Meanwhile, Herfy’s bakery and meat products are sold locally and overseas, including Kuwait and Bangladesh.

Other products, such as rusk, long-life Maamoul and meat products are exported to Arab and European countries. Short-life bakeries, which expire in ten days, are exported to Arab countries.

We secure vegetables for our all 374 branches from Alfadhil Farms in Al Kharj.

Almost 80 percent of meat production is used by Herfy’s stores, with 10 percent distributed locally and other 10 percent for exports. Meanwhile, 70 percent of Herfy’s bakery products are sold in the market, with the remaining 30 percent in its restaurants.

Q: What is the impact of labor fees on the company’s restaurants, as well as the bakery and meat divisions?

A: Over 80 percent of Herfy plants depend on automated production lines. Though a major impact was seen on its restaurants in terms of workforce, it was contained by the company thanks to improved sales. In addition, utility costs in the commercial sector are much lower when compared to the industrial sector. Accordingly, the impact was well managed by Herfy.

Q: How did the company maintain solid revenue and earnings growth in 2018?

A: Our restaurants have attracted more traffic, thanks to good marketing and promotion campaigns, presence in 55 cities across the Kingdom, the introduction of new meals to Herfy’s menus and maintaining high quality of services.

The company also lowered the lease value for its 368 branches, of which it owns 50.

To mitigate murabaha costs, Herfy also cut debts to nearly SAR 330 million by the end of 2017, ahead of reaching SAR 245 million last year. The company has 6,000 employees, and Saudization rate stands at 30 percent in its facilities.

Q: What is Herfy’s current market share in the fast-food chain industry, and the bakery and meat segments?

A: Herfy is the only fast-food chain company in Saudi Arabia, along with three American hamburger firms. The company stands out with the largest number of restaurants and holds a solid market share.

Q: Does Herfy plan to acquire other restaurants or food firms? What about future expansions?

A: In 2018, Herfy studied three investment opportunities in the food sector, but they proved to be unfeasible. We rather prefer to expand our existing operations.

We will continue to open new branches and to penetrate new cities and rural areas. Herfy will also keep an eye on new government projects. The Saudi company is also ready to extend presence in planned projects of the General Authority for Entertainment.