Earnings of F&B firms not being eaten away

Q3 results show many still post decent profits and falling rents may help trim operating costs

Japan Foods Holding, which runs the Ajisen Ramen eateries, posted a 36.8 per cent rise in net profit to $1.3 million in the three months to Sept 30.
Japan Foods Holding, which runs the Ajisen Ramen eateries, posted a 36.8 per cent rise in net profit to $1.3 million in the three months to Sept 30.PHOTO: AJISEN

The cashiers' tills may not be ringing as furiously as before, no thanks to a growth slowdown that has kept consumption in check, but people are still flocking to restaurants to fill their stomachs.

Singapore-listed food and beverage (F&B) related stocks have not seen slower growth eating away at their earnings, going by results for the September quarter.

Japan Foods Holding, which runs the Ajisen Ramen eateries, was one clear leader, posting a 36.8 per cent rise in net profit to $1.3 million in the three months to Sept 30.

IG market analyst Bernard Aw said firms like Japan Foods and Old Chang Kee managed to achieve good profit growth in the latest quarter, despite global headwinds and signs of Singapore's economic slowdown, and slower retail sales.

ABR Holdings, the Singapore franchisee for Swensen's ice cream and restaurant, had a 22.6 per cent rise in earnings to $2.4 million. It said operations here had better performance from higher sales and more outlets in the quarter compared with the same period a year ago.

Economists noted that essentials like F&B, telecommunications and supermarket spending are propping up domestic consumption.

And even though BreadTalk was hit in August by a kerfuffle over claims that a China outlet had not changed its doughnut frying oil for years, its food atrium division reported higher sales, up 6 per cent to $46 million, while revenue at the restaurant division was up 11.8 per cent at $37 million.

Its brands include food court operator Food Republic and modern "kopitiam" Toast Box.

But an OCBC Investment Research report noted that BreadTalk faced higher depreciation costs in the quarter, as the firm continued to open new outlets.

Mr Aw said part of profit growth at some F&B firms could also be owing to effective cost control.

Japan Foods has said it has a culture of tight cost control, which has helped the firm tide over "many economic cycles".

Auric Pacific Group's Food Junction Group turned an operating loss of $500,000 to a profit of $600,000 in the quarter, thanks to self-operating stalls and discontinuing non-performing restaurants.

The F&B space here is still highly competitive, with a wide range of options in terms of cuisine and price, noted Mr Jason Hughes, head of CMC Markets Singapore.

Recent retail data showed restaurants had a 7.2 per cent drop in takings in September over last year, and other eating places such as cafes saw sales dip 1.9 per cent.

He said: "If the health of the global economy continues to concern consumers and weigh heavy on many business sectors in general, there's potential that some of the cheaper and more convenient options in this F&B space will remain as the better performers as consumers further rein in their spending."

The number of fast-food outlets performing better underlined this, as sales increased 6.3 per cent over September last year.

Mr Aw said intense competition in the sector and labour reliance may be downside risks to earnings growth, and F&B businesses are vulnerable to various external factors.

To stay ahead, BreadTalk founder George Quek recently told The Straits Times that the firm was undergoing a revamp, including a new digital system to allow customers to buy freshly baked bread at specific times.

Mr Hughes noted: "It's hard to see the F&B sector as a defensive play within your portfolio. If there is a sharper downturn in the local or global economy it is likely to negatively impact the sector further."

Labour and rental costs - which form the largest operating costs - will continue to bedevil eateries, said analysts. This may ease with the softening of the leasing market.

Mr Aw added: "Falling rents may help F&B operators trim operating costs, which would further boost their earnings, provided revenue continues to grow."

Mr Hughes said this would sit well for many F&B operators - large or small - that are often working with relatively tight profit margins, so any reduction in costs will be "gratefully received".

But falling rents may not be much of a relief if they are "unable to boost revenue to stretch profitability", said Mr Aw.

A version of this article appeared in the print edition of The Straits Times on November 23, 2015, with the headline 'Earnings of F&B firms not being eaten away'. Print Edition | Subscribe