Forum Archive Index - September 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi winner69,

>Snoopy wrote:
>
>>Snoopy asked: Is the value of goodwill on the RBD books BS? 
> 
>Answer - depends on how you look at it.
> 
>What the goodwill in RBDs books is what RBD have already paid 
>for the right to use these concepts in NZ. 
>

The way I read the annual report, the goodwill on the books from 1997 
is only from acquiring the Pizza Hutt New Zealand businesses.   There 
was/is no goodwill on the books at all for using the KFC concept.  Or 
have I got it wrong?

>
>That cost is being 'amortised' 
>over the time period RBD have the right to use these concepts. So it
>is not bullshit - just accounting for the cost of doing business.
> 
>At the end of the periods these are being amortised this goodwill on
>the balance sheet will have been reduced to zero - reflecting the
>economic reality that the ownership of these brands rests with Yum!
>

Appreciate the 'correct' accounting answer Winner69.

I've had a few more thoughts on this.    Very often the most important 
asset of a company is its people.    Good people might be worth paying 
over the odds for.    So did RBD get lots of lower level management/ 
ground floor expertise by taking over Eagle Boys?  I don't remember 
them crowing about it.

What about superior technology?
Did RBD gain access to some whizz bang pizza production 
techniques?   No.

Did they adopt any lessons from the Eagle Boys menu?   To an extent 
they did.    But $477,000 seems one hell of a price to pay for a couple 
of bottles of swirly sauce.

>
> If one thinks that this
>goodwill is the value of the KFC and PH brands that RBD owns (ie 
could
>they sell them) than it is bullshit because as you say Snoopy the
>ultimate 'ownership' of the KFC and Pizza Hutt concepts rests with 
YUM
>in the USA.
>

Exactly.

> 
> Snoopy also mentioned the one off franchise payments that must be made
> to YUM when new restaurants are opened. These are called 'franchise
> costs' in RBDs books. These are paid when new stores are opened and
> amortised over time as well.
> 

Yes I understand this.   But franchising fees pay for someone else to 
do the research on store concepts and locations, advertising 
strategies, menus strategies etc. etc.    In other words RBD is getting 
something for the money they are forking over.    I have no quarrel with 
the RBD accounting treatment of franchise fees.

My question is,  what do RBD actually 'get' for all that goodwill on their 
books?   I understand your accounting explanation Winner69.   But if 
RBD paid well over asset backing to get those Eagle Boys assets, they 
paid a high price for a reason.  They weren't just throwing money 
away.   (Or were they! - this is the question I am trying to sort out in my 
own mind).

Perhaps that goodwill represents the market power of 'now' having 
70% of the fully prepared pizza market in NZ?    Does anyone have 
updated market share figures for Pizza Hutt BTW?

There is certain intangible 'value' in having a very strong market 
position.    But what happens if that market share shrinks again?    
What happens to the goodwill then?

>
> Snoopy - maybe you are saying in a round about way that the real
> winners here are Yum! and Starbucks. They get cash up front for the
> master franchise (the right to use the KFC/Pizza Hut/starbucks
> systems) and for each new store and then collect not an insignificant
> amount on each dollar that goes through the till.
> 

'Money for nothing' or at least 'money for not much incremental cost' 
(sitting back and collecting franchise fees) is to me intuitively 
attractive.    However, I would have to do more work to know if that 
translates to 'Yum' and 'Starbucks' being the more attractive 
investments.    I believe that 'Yum' is 'mortgaged to the max' at the 
moment, for example.

>
> RBDs short term value driver is what they can make out of selling
> these products. Long term are they building up anything of value that
> can be of benefit of shareholders? Interesting question.
> 

Or, another way of looking at it.    If you consider RBD as a pure yield 
play, do RBD *need* to build up anything of long term value for 
shareholders?

SNOOPY



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----------------------------------
"Sometimes to see the wood from the trees, 
you have to cut down all the trees."




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