WHILE the queues for tables at food and beverage outlets are getting rare nowadays with consumers tightening their belts, Berjaya Food Bhd (BFood), however, does not intend to put the brakes on opening more Starbucks stores.
Its plan is to open at least 25 Starbucks outlets a year until the financial year ending April 30, 2019 (FY2019), according to CEO Datuk Francis Lee Kok Chuan.
The coffee chain operator wants to reach out to more consumers, so shopping malls are not the only places for its outlets.
BFood has started drive-through stores, which have the advantage of flexible operating hours, as opposed to those restricted by the hours the malls are open. Longer hours would theoretically mean more sales, depending on the location.
The drive-through concept is also adopted to counter the decline in footfall in shopping malls. “Our returns from outlets at malls are getting lower and lower,” he tells The Edge.
In August, Starbucks rolled out a new fast-moving consumer goods line — two flavours of bottled coffee, or stock-keeping units (SKUs).
“They are doing very well and have exceeded our expectations,” Lee says, adding that the company’s initial expectation was 76,000 bottles a month. “Hopefully, we can increase the range of our SKUs in the next 8 to 10 months.”
In addition, BFood is in talks with Mass Rapid Transit Corp Sdn Bhd on the opening of Starbucks outlets in MRT stations. If a deal is struck, the business model may be adjusted to grab-and-go sales by smaller kiosks.
According to Lee, these kiosks will go towards meeting the group’s long-term target of 500 outlets.
Starbucks has also ventured into the premium coffee segment to cater for coffee connoisseurs.
But as consumers are getting cautious about their expenditure, will they continue to go for a cup of premium coffee that costs the equivalent of a meal at a food court?
“We’ll do a detailed study of the location before committing to open a store. We need to get Starbucks’ approval too. So far, all our new stores have been successful,” says Lee.
He opines that the economic slowdown has bottomed out. “The past 15 months were quite bad. Can it get any worse? Of course, there’s always that possibility, but we hope the worst is over.”
Lee says BFood will be able to cope should that scenario come to pass. At present, he says, Starbucks’ growth has not hit a plateau.
Since the first acquisition of Starbucks Malaysia’s stake in 2011, the segment has been the main driver of earnings growth for BFood. The brisk sales of coffee have helped offset the slowing sales of the Kenny Rogers Roasters (KRR) division, whose pre-tax profit has been declining in the past four financial years.
Starbucks Malaysia recorded 5% same-store sales growth (SSSG) in FY2016 after a flat FY2015, according to the group. SSSG in FY2014 was 16%.
Maybank Investment Bank expects 4% SSSG per annum for Starbucks Malaysia over the next three financial years.
In FY2016 ended April 30, BFood’s core net profit fell to RM21 million from RM26 million a year ago. However, revenue expanded 47% year on year to RM544 million.
The surge in revenue can be attributed to it being the first financial year that enjoyed the full consolidation of earnings generated by Starbucks outlets. BFood bought the remaining 50% stake in Starbucks Malaysia in 2014.
In 1QFY2017 ended July 31, 2016, BFood reported an 18% decline in net profit to RM5 million. Revenue, however, rose 6.7% y-o-y to RM141 million. The group said sales from existing and new outlets were higher but the weaker ringgit trimmed Starbucks’ profit margins. KRR’s contribution was also lower.
The earnings numbers have missed analysts’ estimates. In a Sept 8 note, RHB Research describes the quarterly results as “uninspiring”.
Maybank Investment Bank has cut BFood forecasts, although it is maintaining its “buy” call on the stock. It says the valuation is undemanding, premised on Starbucks’ sustained organic growth and aggressive expansion.
Hong Leong Investment Bank, in an Oct 14 note, says margins for Starbucks will remain depressed until the ringgit strengthens significantly against the US dollar. It downgraded BFood to a “sell”.
Still, Lee is optimistic. “Things are turning around, as seen in some of our restaurants’ sales. Other players are seeing some SSSG as well. The main concern of most players in the retail industry is the weakness of the ringgit against other currencies ... we can’t simply pass on the costs to consumers,” he says.
The weaker ringgit against the greenback has squeezed Starbucks’ profit margin as 40% of its product cost is US dollar-denominated, according to Lee.
The six-month extension of the Price Control and Anti-Profiteering Act 2011, which only expires on Dec 31, 2016, is not helping either. BFood has kept Starbucks’ prices largely unchanged in the past five years.
“This means that the group will be pursuing the volume game for a bigger market share,” says Lee. “We’re still profitable. As long as my stores don’t lose money, I will continue to open [more stores] and employ [more] people. And as long as the top line continues to grow, the bottom line will come.”
Apart from the earnings numbers, BFood’s expansion plan may be a concern for shareholders.
For perspective, a typical Starbucks store in a shopping mall would cost about RM800,000 to set up while a drive-through outlet would cost more than RM1 million, according to the group.
The strain from the rapid growth could be showing now. BFood’s free cash flow was in negative territory in four of the past five financial quarters, according to Bloomberg data.
Lee says this was due to the group’s debt reduction programme. “We borrowed to buy into Starbucks Malaysia. We have cleared about RM120 million worth of debt since we bought it (the remaining 50% stake in Starbucks Malaysia) in 2014.”
The rate of expansion will depend on the cash flow, he says. The cash-based nature of Starbucks’ sales has put BFood in a strong financial position as it does not have to worry about collecting payment.
BFood’s share price dipped to RM1.27 in mid-August — the lowest level since the group owned the Starbucks chain in Malaysia wholly — after hitting a high of RM3.30 in November 2014. It rebounded and closed at RM1.87 last Friday. The downward trend may be an indication of investors’ concern over the softening of consumer spending.
The success of Starbucks Malaysia is one that tycoon Tan Sri Vincent Tan always boasts about. When he started the venture at the height of the 1998 Asian financial crisis, probably only a handful thought that the coffee chain would survive.
Now, Starbucks is facing another slowdown, which some economists think could be a severe one. It will be interesting to see how Tan’s son Datuk Robin Tan (executive chairman of BFood) and his team navigate this challenging situation.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.