SINGAPORE (Sept 11): In the latest earnings season, the majority of local F&B firms reported huge losses. But, despite the overall lacklustre performance, market watchers remain positive on the sector.

BreadTalk, Jumbo, Neo Group, Japan Foods Holding and Kimly were among those that saw their earnings dragged down by higher operating costs, which overshadowed increases in revenue.

Meanwhile, others found themselves starved of revenue and saw a corresponding decline in earnings. These include Soup Restaurant and No Signboard, which fell into a loss of $1.4 million in 3Q19 compared to earnings of $0.8 million a year ago.

It was only Koufu that stood out with higher revenue and earnings, owing mainly to higher contributions from all its business segments.

However, DBS Group Research lead analyst Alfie Yeo expects the F&B sector to grow at a faster 2.1% CAGR over the next five years -- up from a 1.1% CAGR over the past five years -- led by the mass-market F&B segment.

The mass-market segment represents 75% of Singapore’s F&B market and is estimated to be worth about $6.2 billion. According to Yeo, this segment, defined by per-head spend of $20 or less, is currently thriving, in line with eating habits, lifestyle and affluence of consumers. On the other hand, higher-end restaurants have been seen closing down recently.

“Mass-market F&B has shown robust growth and resilience to GDP cycles, offering both quality and value to consumers, with the next 5-year CAGR estimated at over 2.5% for each mass-market sub-segment (cafes, kiosks and limited service restaurants),” Yeo in a Sept 9 report.

One of the current popular F&B trends in Singapore is bubble tea, with more bubble tea kiosks popping up into the scene lately. Priced at an average of $5 a cup, bubble tea fits into the mass-market segment.

“We believe the attraction of bubble tea kiosks lies in the market’s high acceptance for bubble tea beverages, low floor area required to operate these outlets (about 150-200 sqft), low capex of S$100,000-250,000 relative to restaurants, and lower depreciation and breakeven. Operating margins can be in the double digits, which makes such businesses attractive,” says Yeo.

According to the analyst, F&B retail sales have a high correlation to GDP. The F&B Services index pointed to a decline in 2015 due to a slowdown in GDP growth, with restaurants posting the largest drag, declining by close to 5% y-o-y. Fortunately, restaurants’ performance recovered in 2018 along with GDP, but is still lagging fast-food restaurants, which are currently growing at the fastest pace.

With the sector bubbling, Yeo expects local F&B and retail REIT players in the mass-market space to benefit.

In the F&B sector, DBS has “buy” picks on Jumbo and Koufu, as both have strong exposure to the mass-market segment, with clear growth drivers for both local and overseas expansion. Earnings growth will be led by store and margin expansion and better efficiencies.