Guzman Y Gomez: A convincing growth story from Australia
Positioning themselves as a high-growth QSR business, Guzman Y Gomez is expanding both within their home market of Australia as well as internationally.
Guzman Y Gomez (“GYG”) has debuted on the Australia Stock Exchange with much fanfare on 20 June 2024. Positioning themselves as a high-growth business in the quick-service restaurant (“QSR”) industry, the company is expanding both within their home market of Australia as well as internationally in a handful of countries.
Raising a total of A$335m from the IPO (of which A$180m will be used for business operations), the public offering valued GYG at a market capitalization upwards of A$2b. GYG serves made-to-order Mexican-inspired food, with ingredients freshly prepared each day in the restaurants. There are 210 restaurants as of 31 March 2024, comprising a mix of both corporate owned and operated restaurants as well as franchised restaurants. For now, most restaurants are still predominantly located in Australia.
Investors are likely excited about the growth prospects of GYG, given that they only have one-fifth the network stores of incumbents like Subway and McDonald’s in Australia. By boosting their rate of restaurant openings to between 30 and 40 stores annually, that will make them one of the fastest-growing brands in the QSR industry and helps capture the long runway of growth. Coupled with management’s focus on the Drive Thru restaurant format, that will put GYG real estate strategy more in line with McDonald’s and KFC than strip-format restaurants like Subway and Pizza Hut.
The store economics of each restaurant has been something that GYG management put a lot of thinking into. Ultimately, a high return on capital is key to attracting top quality franchisee into their network. For franchisee, there is typically an upfront fee of A$90k, and an ongoing sales royalty of around 10% of store sales. Apart from that, franchisee will also contribute funds to nationwide marketing campaigns.
Beginning 2021, a new tiered sales royalty structure was introduced, and nearly 40% of the current franchise restaurants are in the midst of transitioning to this new model upon their contract renewal dates. This will be a net benefit for GYG’s royalty income yet still ensuring that there are compelling returns for franchisees. With a capital expenditure of around A$2m for a new store, a franchisee can target to make profit margin of 10%, translating to a return on investment of 30% with A$6m in annual sales.
On the international front, GYG has stated that it has no intention to aggressively expand into countries which they don’t already have a presence in. Currently, they are operating in Singapore, Japan and United States. Apart from United States where they faced some setbacks in penetrating the market previously, both Singapore and Japan run a master franchise model. This means that most of the business expansion will be led by the master franchisee, which has control over all the major decisions shaping the local network of restaurants in their respective country. GYG, on the other hand, receives 3.5% of network sales in Singapore and 3.0% of network sales in Japan as royalty income.
For United States, GYG is developing the growth strategy internally. Currently, the company plans to retain most operational control in this phase of market testing. Even though the United States market is more similar to Australia than the Asian countries, the start-up costs for a new restaurant is higher in United States than Australia.
Lastly, United States is also a lot more competitive, being a mature QSR market. Back in 2022, GYG hired a local team to execute on its United States strategy but the team dissolved in 2023, including having to make litigation settlements. That being said, the potential of the United States market cannot be understated. Any business momentum there can truly be a material growth driver for GYG in the long-term.
