Oliver's twist

We're more excited about eating Oliver's Real Food than we are about buying its shares.

A road trip along Australia's eastern seaboard encounters breathtaking environmental diversity, from the blustery eucalypts of the Great Ocean Road to the subtropical rainforests of Byron Bay.

Sadly, that isn't matched by culinary diversity with most highway locations dominated by the unhealthy trio of McDonald's, Hungry Jacks and KFC.

Enter Olivers Real Food (ASX:OLI), Australia’s healthy answer to Maccas and Dirty Bird.

Oliver’s sells healthy food and coffee from 26 company-owned stores. Instead of a burger and fries, you’ll find a roast lamb pita pocket and edamame. Would you like beans with that?

Along with its menu, Oliver's secret sauce is its store locations. You won’t find its stores lining city streets, as they’re only located on arterial highways that connect our eastern cities. This helps to avoid intense inner-city competition, much like Sam Walton did by locating his early Wal-Mart stores in small towns.

As most highway rest areas are dominated by the unhealthy majors, Oliver often has a monopoly on healthy alternatives. And just like departees at an airport food court, highway customers are reasonably captive, because continuing on to the next town can be too much for a famished driver.

This puts Oliver's in a strong position to attract a big portion of the healthy eaters that drive past, charge higher prices and ultimately deliver higher sales per store.

The allure of Oliver's model is best described by Peter Lynch, who made ‘ten-baggers’ from both Taco Bell and Dunking Donuts: 'A restaurant chain that succeeded in one region had an excellent chance of duplicating its success in another.'

Companies often list on the ASX when their store roll-out is petering out, but Oliver’s (which listed in June 2017) may still be in its early stages. With just 26 stores sprinkled thinly between Melbourne and Brisbane, Oliver’s could grow for years yet.

Oliver's also supplies its stores from a centralised kitchen that should become more efficient as the business scales.

But with an early-stage rollout come the risks of an early-stage business.

Oliver's is yet to consistently display meaningful profitability, after excluding one-off gains made from the sale of property. Its losses could be the symptom of a good business investing for growth or an uneconomic business that's yet to realise it.

Highway locations also come with their own unique risks. Good locations surface infrequently, which makes growth hard to come by, and they often require signing a 30-year lease, which can be costly to wriggle out of if stores underperform.

Perhaps the biggest risk comes with Oliver's ambitious store roll-out. To meet its prospectus forecasts of $33m of revenue and $4.8m of EBITDA in financial-year 2018, Oliver's needs to open 13 stores this year. That's more than twice its annual openings in the past and, with seven to go, it's looking tight.

Instead of the short-term risk of missing prospectus forecasts, the bigger risk is that the company opens the wrong stores or loses focus on running the existing ones.

So, the jury is still out on Oliver’s. We'll be looking to learn more about the business in its coming half-year results. In the meantime, if you’ve got any thoughts on Oliver's – the food or the shares – we’d love to hear from you in the comments section below.

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