Cake Box publishes impressive half year results, but can their growth story continue?

Cake Box Holdings is a franchise retailer of cakes with a growing store base across the UK. It was listed on the AIM on the 27th June 2018.


The Group specialises in making high quality, individually crafted and personalised fresh cream cakes for purchase on demand or ordered in advance in store or online. The Group’s cakes are completely egg free, which allows the Group to service a large potential market, including those customers who are unable to eat eggs for dietary or religious reasons.


The Group released their half year results for the period ended 30 September 2021 on Monday 8th November. Commenting on their strong results, the CEO Sukh Chamdal stated "[w]e were born in the recession in 2008 and this [set of results] proves that we're pandemic-proof. Any crisis happens and you want a cake." But how long can their growth continue, and is this business really future-proof? This article will break down the company's recent results and analyse the investment case.


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History


The egg-free cake was conceived by Sukh Chamdal, the founder of Cake Box, in July 2008. In 2008, Chamdal was a chef working in London's East End. For her birthday, Chamdal’s daughter told her father, “I don’t want eggs in my birthday cake” and so he made it his mission to find, or create, a celebration cake that didn’t use eggs in the batter. After realising this gap in the market, Chamdal received a £30,000 government grant and teamed up with South Bank University, tasking them with developing an egg-free cake. The students were successful. Shortly afterwards, when a shop in the East End fell vacant, Chamdal opened his first egg-free cake shop.


The concept proved extremely popular, and by March 2009, Chamdal had partnered up with family friend and qualified accountant Pardip Dass, who had over 15 years experience in the food & beverage industry working for companies such as Masala Zone, Group Chez Gerard Restaurants and Real Pubs to set up Cake Box.


The Group’s early success arose from their egg-free offering, addressing an unserved market of people who either had an egg allergy or observed a lacto-vegetarian diet. As the Group has grown, the business has increasingly appealed to a broader customer base who purchase the Group’s cakes despite not requiring egg-free products, thus reducing the Group’s reliance on a single demographic. Another factor that makes Cake Box appealing to consumers is the option for instant personalisation. The cakes can be personalised to celebrate any occasion either at the stage of ordering or on collection in the store, a factor that makes them stand out in the celebration cake market.


Business Model


The Group has grown predominantly through franchise expansion and today does not directly own or operate any Cake Box stores (although the Executive Directors have all previously run their own franchise stores). As of the 30th September 2021, the Group has 174 franchise stores in operation, with 20 new franchise stores added in the period Q2’22.


The image shows Cake Box's revenue sources for the year ended 31 March 2018 as a pie chart. Cake supplies accounted for 30% of revenue; sponge sales accounted for 38% of revenue; store fit out accounted for 13% of revenue; franchise fee accounted for 5% of revenue; equipment accounted for 2% of revenue; other accounted for 2% of revenue; and rental income accounted for 1% of revenue.
Cake Box's Revenue Sources; Admission Document 2018

The Group’s revenue is predominantly derived from supplies of sponge and other products to its franchise stores (other products consist of ancillary celebration products like candles and balloons, which are also supplied by the Group); this revenue is recurring in nature as the franchisees require regular supplies in order to operate their stores (see image below). The franchisee is responsible for assembling, decorating and personalising the cakes from the items supplied to it by the Group in accordance with the training and guidelines provided by the Group. The Group manufactures and supplies all of the sponge used in Cake Box cakes from its headquarters in Enfield (South East distribution centre), and its distribution centres in Bradford (North) and Coventry (Midlands and South West). Other revenue is derived from franchise fees, store fit outs (for new stores and refurbishments after five years) and equipment supplies.


The image shows Cake Box's business model. They get their equipment and packaging from the far east and Devon cream and fresh fruit from the UK and Europe. These then travel to their Head Office in Enfield and their distribution centres in Enfield, Bradford and Coventry. From there, these are delivered to Cake Box stores, along with other supplies such as candles and balloons and sponge that has been made in the three distribution centres. Then customers come and collect their cakes from the Cake Box store.
Source: Cake Box's FY'20 Annual Report

The Group also has a well-developed and growing online platform through which customers can order cakes. Online orders are sent through to a store selected by the customer and the Group takes a royalty fee of 7.5% on the order. All cakes are then collected in store. The proportion of online sales is a growing percentage of total sales.


The franchise model enables the Group to expand without the requirement for any external capital and reduces its risk profile, as it does not need to enter into any leases or manage employees at a store level. As store operations are undertaken by franchisees, the Group’s management is able to concentrate on growing the Group’s business.


​​The appeal of the Group's franchise proposition is reflected in the current pipeline of new potential franchisees; in the HY'22 period, the Group had a record 62 deposits held at period end.


Management


The images show photographs of Cake Box's management team. Information surrounding the management team and their share ownership in the company is explained under the image.
Source: Cake Box's FY'21 Annual Report

The image above shows Cake Box's management. Sukh Chamdal, who opened the first Cake Box in 2008, acts as the company's CEO, whilst Pardip Dass, who joined Sukh in 2009, acts as CFO. Both Sukh and Pardip hold substantial holdings in Cake Box to this day, with Sukh holding roughly 32% of share capital and Pardip holding roughly 10%. Dr Jaswir Singh, the company's COO, who joined in 2010, holds 1.39% of the company, whilst Neil Sachdev, n