In its sector briefing titled ‘Singapore Downstream F&B‘, DBS said that the mass-market F&B in Singapore is set to sizzle. In referring to Euromonitor, DBS said Singapore’s F&B food service market is worth about S$8.3bn and is expected to grow by 2.1% CAGR by 2023 led by cafés/bars, limited service restaurants, and street stalls/kiosks.
DBS said that from 2008-2018, the F&B food service sector grew by 2.4% CAGR driven by the above mentioned formats, whereas the full-service restaurants expanded by a much slower 0.8% CAGR over the same period and is projected to grow at an even slower 0.4% over the next five years.
It added that the F&B food service sector is expected to be driven by higher F&B spent per transaction, and growth in number of transactions, accounting for 1.2ppts of Euromonitor’s 5-year 2.1% growth projection. This underscores the bank’s belief that the mass-market F&B segment (defined by per head spend of S$20 or less) remains a highly viable segment with an estimated total market size of S$6.2bn (75% of Singapore’s F&B market).
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It urged operators in the slowing higher-end full-service restaurants segment to operate with caution, but said companies in the mass-market F&B segment will continue to grow through acquisitions such as NTUC Foodfare’s acquisition of Kopitiam and BreadTalk’s planned acquisition of Food Junction.
The research said that consumer behaviour and busy lifestyles are driving a trend towards frequent eating-out, convenience, quick-service formats, and faster payment/checkout modes including cashless and online transactions. Higher-productivity initiatives are propelling companies towards adopting more self-service features with less reliance on manpower at mass-market F&B outlets.
It acknowledged that opportunities aside, Singapore F&B players are operating in a competitive environment with costs challenges especially labour and rents. Rental costs especially in malls are expected to be higher in 2020 as property supply peaks in 2019 and is expected to fall from 2020 onwards.
It noted that the impact following the tightening of foreign labour dependency ratio (DRC) from 2020 is small at less than 2.5% negative swing on earnings based on our estimates. DBS believes such costs can be overcome if operators are able to extract higher productivity over time especially in the areas of implementing technology.
The bank also believes that the mid-range mass-market D&B segment will continue to be viable compared to niche high-end low-turnover dining concepts. With cost challenges, the mass-market F&B segment will be able to extract higher productivity by implementing more self-service initiatives more easily than high-end full-service formats, as foreign worker dependency ratio is being tightened. DBS believes companies will need to continuously find ways to innovate processes to improve productivity and profitability.
Beneficiaries are mass market segment F&B players with clear regional growth strategies
“We believe mid-to-large sized mass market F&B groups (defined by companies who are already profitable and no long trying to be viable as a start-up) are key beneficiaries in the current F&B foodservice environment, as they morph into multi-format, multi-cuisine, multibrand F&B companies.
“Larger players have scale, which would enable them to 1) introduce foreign brands, while exporting their own brands overseas for regional growth; and 2) implement technology to deliver operational efficiencies. Smaller companies would seek to increase their operational scale to take advantage of cost benefits via outlet expansion, building central kitchens, and eventually tapping capital and debt markets to fund growth.”
The bank said that it believes demand in F&B continues to be in the mass-market segment with the market moving towards accommodating a more convenient, and self-service lifestyle due to 1) increase in operating costs especially labour and rents; and 2) integration of technology and online platforms into F&B businesses.
It noted that while food remains a staple for consumers, the preference for convenience and online purchases is starting to kick in.
“Reaching out to consumers now entails more online channels (discount codes/coupons, payment systems, reviews, etc.). By the same token, the internet facilitates a convenient lifestyle which complements mass-market to-go value food.
“The market has seen niche players such as higher-end Michelin Star restaurants giving up their status due to high operating costs. Going forward, we expect to see outlets adopting more technology with reduced manpower, while requiring more self-service from consumers to counteract labour cost challenges. Despite these cost challenges, the players in the market are still seeking expansion via acquisitions, bringing in new brands or new players coming in with new brands, products and concepts. F&B firms in Singapore are still keen on growing market share. Seeking growth from overseas markets continues to be a trend. A few listed companies on the SGX have sought funding to grow overseas.
“Firms can remain profitable and growth can be sustained if companies get their products, food quality value and brands, and cost structure right. For larger F&B groups, higher manpower costs can be mitigated by technology and productivity initiatives, while rising rents can be managed with strong bargaining power using multi-outlet strategy in malls, taking up a larger floor area, locating outside of malls, or only entering malls at the landlord’s invitation at a favourable rate.”
Referring to DBS’s sector briefing, Mr Paul Ho, chief mortgage officer at iCompareLoan, said, “the challenges for F&B players in Singapore are great, but despite this, operators are still expanding as they are hoping to leverage on technology.”
He added, “technology is both a boon and a bane for the mass-market F&B sector. While it provides convenience driving up consumption, some operators could find it difficult to cope with costs associated with adoption of technology. But adoption of new technology is a must for mass-market F&B operators to survive in this very competitive environment.”
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