This article first appeared in The Edge Malaysia Weekly on June 27, 2022 - July 3, 2022

BERJAYA Food Bhd (BFood) is likely to avoid any pricing actions this year despite rising production costs in an inflationary environment.

The franchise operator of Starbucks and Kenny Rogers Roasters (KKR) is managing input costs fairly well and this could future-proof its businesses, CGS-CIMB Securities analyst Khoo Zhen Ye tells The Edge.

Despite the inflation headwind, the group has recently announced the latest addition to its retail business — Paris Baguette, a 50:50 joint venture (JV) with Paris Baguette Singapore.

Brands like Starbucks, Khoo says, have managed operational costs effectively due to the fact that most of their raw materials such as coffee beans are procured directly from the US via long-term contracts.

“Starbucks negotiates long-term contracts and sells the products at very favourable and competitive prices in Malaysia. As for dairy products such as milk and cream, these are mostly supplied by local suppliers at a similar rate and quality that help Starbucks keep the selling prices stable to end consumers,” Khoo explains.

It was reported early this year that Starbucks in the US would increase prices in 2022 due to supply chain disruptions and a sharp rise in labour costs, following price hikes in October 2021 and January 2022.

“It is unlikely to happen here because Starbucks Malaysia’s gross margin is about 50%, which is an indication of strong sales in outlets.

“Starbucks also enjoyed higher transactions on improved mobility after the resumption of domestic tourism and further relaxation of the Covid-19 standard operating procedures [SOPs],” he observes. “It almost doubled its transactions among consumers as soon as the SOPs eased. Starbucks will continue to grow because some of the stores are open 24 hours, with good traffic.”

Meanwhile,  AmInvestment Bank Bhd analyst Muhammad Afif Zulkaplly tells The Edge that BFood will continue to prioritise a high-margin product mix to withstand inflationary pressures.

“We believe the company will do its best to avoid passing on the higher costs to end consumers. To protect its margins, the group’s focus will likely be on internal operations such as reviewing cost optimisation exercises as well as pushing for higher-margin products to improve its product mix,” Muhammad Afif opines.

Both analysts view BFood’s latest venture into the bakery business as a positive strategy for overall growth, particularly in the exclusive food and beverage outlet space.

“We are positive on the development, which could add a potential new income stream to the group. It would be able to leverage its expertise in managing food and beverage chain stores while riding on Paris Baguette’s strong and proven track record,” says Muhammad Afif. He notes that earnings contribution will be insignificant this year, given that the first Paris Baguette store will only be opened at the end of the year.

“The new business will likely go through a gestation period. Therefore, it may be a while before it would contribute materially to BFood’s bottom line,” Muhammad Afif adds.

South Korea’s SPC Group owns Paris Baguette, currently the top bakery chain in the country. The brand has over 3,400 stores in South Korea, and more than 440 outlets across the US, China, France, Vietnam, Indonesia, Cambodia and Singapore.

In April 2021, SPC announced that its top officials had held talks with Malaysian government officials regarding investments, which include building production facilities in Malaysia.

Paris Baguette Singapore is setting up its first halal-certified Paris Baguette bakery manufacturing and distribution centre in Johor — which will produce 100 items of bread, cake and dessert to its Southeast Asia outlets — slated to be operational in June 2023.

According to BFood CEO Datuk Sydney Lawrance Quays, the JV aims to open five such stores per year in Malaysia.

“We are of the view that this is a positive development for BFood to expand its brand portfolio and provide additional revenue streams. However, we keep our earnings forecasts unchanged pending more details — we also expect minimal contributions from the JV in the short term,” CGS-CIMB’s Khoo and fellow analyst Walter Aw wrote in a research note recently.

Paris Baguette positions itself as both a premium and health-conscious bakery brand that aims to appeal to upper-class consumers, with outlets typically located in prime commercial areas, as well as upmarket residential estates and shopping malls.

“Its wide range of products is normally priced 10% to 20% higher than local bread/pastry brands via unique offerings of its own proprietary dough and higher-quality ingredients, with at least 20% of its menu tailored to domestic consumers’ preferences as part of its localisation strategy,” said Khoo and Aw.

CGS-CIMB reiterates an “add” call on BFood with an unchanged target price of RM5.50.

“We continue to like BFood as a solid defensive play due to the strong brand equity of Starbucks and its inelastic demand, robust earnings growth profile (three-year earnings per share compound annual growth rate [FY2021-FY2024] of 30.5%), and the sustainable turnaround of its KRR operations,” they noted, adding that stronger-than-expected same-store sales growth across Starbucks Malaysia and margin expansion on higher economies of scale are the recurring catalysts.

Having said that, an analyst who spoke on condition of anonymity tells The Edge that some of BFood’s operations are likely to be minimally affected by the government subsidy and ceiling price removal on chicken that will come into effect in July.

In a statement earlier this week, the Domestic Trade and Consumers Affairs Ministry said that the removal is to ensure adequate food supply in the market and stability of prices in the long term.

“If the selling price of chicken drastically increases in July, then KKR management may have to look into price adjustments for end consumers. But then again, KKR is an old and very established brand in Malaysia with strong and stable suppliers. If there’s any sharp increase in raw material, which is the chicken, it will be given due diligence,” the analyst says.

He also warns that weaker consumer sentiment in the second half of the year — due to higher impending inflation — could affect spending on dining-out activities.

“As inflation hits, consumers usually tend to save up for a rainy day and won’t be allocating much for discretionary items. This could weaken sales for KKR, which is highly and solely dependent on consumers’ disposable income,” he highlights.

Shares in BFood, which recently proposed a four-for-one bonus issue, have surged 93.5% year to date to close at RM4.16 last Thursday, valuing it at RM1.5 billion.

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