With around 90% of its earnings in hard currency, international food services group Bidcorp can be seen as a relatively pure rand-hedge stock. In our view, it is an exceptional business with a significant growth runway – driven by the global rise in dining out, there is substantial opportunity for strong earnings within the food service space. We recently added to the share in our clients’ portfolios.
Bidcorp was ‘born’ in 2016 when trading and distribution conglomerate Bidvest decided to list its international food services assets separately on the JSE. Bidcorp is a geographically diversified group of companies with 21 individual businesses in 35 countries. It operates in both developed and emerging markets, but the majority of its profits come from Australasia, Europe and the UK.
The barriers to entry in the food service industry are relatively low, but this doesn’t mean there isn’t potential for decent returns and margins, and for carving out a niche, as has been demonstrated by Bidcorp. The group’s track record proves this. It focuses on countries with large populations, a fair amount of disposable income, and a tendency towards dining out.
At some point, achieving scale becomes essential for meaningful competition, and the market’s inherent fragmentation presents opportunities as consolidation increases. In this regard, Bidcorp has a significant balance sheet advantage. The group is careful not to rush the roll-up, adopting a measured strategy. During the last big recession (i.e. the Covid-19 pandemic), despite global lockdowns, Bidcorp never posted a loss – its diversification and strong balance sheet provided a buffer.
DINING-OUT TRENDS
Different economies are at different stages of the dining-out phenomenon, but it’s a trend that’s here to stay (barring a severe recession or a pandemic). People increasingly have less time to cook at home and are seeking memorable dining experiences. Among younger generations, there is a clear shift towards eating out. Posting food photos on social media has become a must – if you don’t take a picture, it’s as if the meal didn’t happen. This is a structural trend globally.
There’s a common misconception that the number of restaurant failures is high, but this isn’t actually the case. This belief has been refuted by three credible studies – by Cornell University, Bloomberg and Forbes. Restaurants are more resilient than perceived, mainly because food costs account for a relatively small portion of total operating expenses. Restaurants apply high markups on food and beverages. This means that when consumers face financial pressure, there’s significant menu flexibility, allowing restaurants to adjust prices and maintain customer loyalty.
ENTREPRENEURIAL CULTURE
One of Bidcorp’s key strengths is its entrepreneurial culture and highly regarded management team. All divisional managers have been with the group for at least five years. Bidcorp believes in empowering management on the ground, avoiding interference in day-to-day operations while sharing best practices globally.
At the group level, management meets a few times a year to discuss key strategic drivers. However, accountability lies with the local management, with full transparency, since the clusters are benchmarked against each other. Notably, Bidcorp emphasises that the company culture allows room for failure.
Furthermore, incentives are well-aligned, with managers retaining a minority stake in the underlying businesses. Management incentives are tied to growth in headline earnings per share, flexed in real terms to account for inflation. The group’s DNA is evident and plays a crucial role in shaping the culture across all its businesses.
DECENT UPSIDE POTENTIAL
Despite the group’s acquisitive nature, Bidcorp’s balance sheet is managed conservatively with a disciplined approach. Thanks to its financial guardrails, it is unlikely to make a large acquisition it can’t handle.
In fact, Bidcorp is the largest player outside the US, which is quite impressive. This makes it a potential acquisition target for Sysco, a business five times its size that is primarily based in the US but expanding into the UK and other regions. There will likely always be a valuation floor for Bidcorp. If its stock becomes too cheap, it may be acquired at a premium, which will be obvious only in hindsight – a pattern we’ve seen before in the South African market.
Bidcorp’s positive attributes mentioned above make it a core portfolio holding. The group has decent upside potential across all its regions – Europe, the UK, Australasia and especially emerging markets – which, given the growing dining-out trend in these economies, provides the company with a strong growth runway.
