F&B eateries and establishments are among the hardest hit by the Covid-19 pandemic. While smaller outlets are depending on online orders and home deliveries to survive, many fine-dining establishments are struggling to stay afloat.
That is because food outlets are required to enforce strict safe management measures and the extra space needed has hurt sales as fewer dine-in customers are allowed. Singapore was also hit by its steepest economic contraction and working from home have caused a fall in dine-in sales. Adding to that is the perennial problem of high overheads like rental and scarcity of labour.
Payments and rewards platform Fave says transaction volumes from its F&B merchants fell 25% during Singapore’s “circuit breaker” lockdown from April 7 to June 1. But since the start of Phase Two reopening starting from June 19 when the dining-in ban was lifted, transactions had shot up some 8% within three months from May.
The 25.4% y-o-y contraction of F&B retail sales in July is also an improvement from the 29.2% in June, according to the Department of Statistics.
But are these just signs of a short rebound in pent-up demand only for economic realities to hit home and force consumers to tighten their belts once again?
DBS Group Research analyst Alfie Yeo does not expect things to improve anytime soon. “We believe outlook will be subdued since the ban on mass events and tourists is still in force, the workforce is still working from home and shorter operating hours for F&B outlets will continue to prevent F&B retail sales from normalising to pre-Covid-19 levels,” he says in a July 30 report.
Phillip Securities’ senior research analyst Terence Chua says the outlook is encouraging for F&B groups serving locals as more people venture out to eat more frequently given the number of community cases remains low.
But the pricier and fine-dining segment of the F&B industry, which relies heavily on tourists who are not returning in significant numbers anytime soon, will continue to suffer. “We think the outlook for F&B outlets that cater mainly to tourists will remain challenging and more exits from the sector may be seen in the near future,” says Chua.
Take restaurant chain Jumbo Group for example. The group, which generates 60% of its revenue from tourists and business customers, is now going through one of the toughest periods in its 33-year history. Earnings for 1HFY2020 ended June fell 71.5% to $2.1 million from a year ago as revenue fell 13.1% to $66.7 million. The bottom line would have been weaker had not for $3 million worth of wage subsidies from the government. To conserve cash, Jumbo also did not declare an interim dividend, unlike the same time last year when it paid out 0.5 cent per share.
RHB Group Research analyst Juliana Cai expects Jumbo to skip its final dividend for FY2020 as well. “Overall, with the major decline in Singapore sales and a slow recovery in China’s footfall, we think Jumbo might go into losses in 3QFY2020 before a gradual recovery in 4QFY2020 when more social distancing restrictions could be eased,” she says.
Adapting to the new normal
To stay relevant, many F&B companies are quickly adapting to the new normal. During the circuit breaker when dining-in was banned, restaurants rushed to roll out delivery and takeaway services while adopting technology and automation to cut down on manpower requirements and minimise physical contact between staff and patrons. Cashless payment also gained popularity.
“F&B companies that are able to adopt technology and innovate will be able to stand out from their peers. From our conversations with F&B operators, it is evident to us that those with an online presence performed about 30% better than similar peers without an online presence,” says Chua of Phillip.
“Many business owners were forced to change with the times and embrace or fast forward their digitisation plans. More merchants are willing to support digital payments too,” notes Fave’s managing director for Singapore and Malaysia, Ng Aik-Phong.
Meanwhile, stocks of supermarkets did exceptionally well as consumers rushed to stockpile on essential food items during the lockdown as many stayed home and cooked their own meals.
Supermarket chain Sheng Siong reported a record-breaking set of 2QFY2020 results, which covers the three months ended June. Earnings more than doubled to $46.1 million from a year ago while revenue rose 75.8% to $418.7 million. The company had declared an interim dividend of 3.5 cents per share, double that of the same period a year ago.
Although circuit breaker restrictions such as stay home and work from home orders have eased, many residents continue to abide by them. According to Yeo of DBS, this will help support supermarket sales post-lockdown.
“Sheng Siong is a direct beneficiary of Singapore supermarket sales in addition to its defensive qualities of strong balance sheet and cashflow generation capabilities,” he says.
But could this be just a passing phase? Chua thinks it is. “The B2B segment got a boost during the Covid-19 period that saw massive stocking up of essentials as people were working from home. This one-off boost, however, is unlikely to last and we expect this to normalise over time.”
Meanwhile, RHB is overall “neutral” on the consumer staple sector but has chosen Thai Beverage and Food Empire as its top picks under the F&B producer segment. RHB’s Cai says the two stocks have strong market share in their respective product segments, fairly resilient earnings and are trading at discounts to their peers and historical means.
“Amid the challenging business outlook, F&B producers tend to cut down on advertisement and promotional (A&P) spending to sustain margins. In the absence of the aggressive competition and promotions, consumers tend to gravitate to trusted brands if prices are not significantly different. As a result, we believe these branded F&B producers would deliver better-than-industry performance during this period,” adds Cai.
Similarly, Catalist-listed food solutions provider Neo Group reported profit from its manufacturing arm surged more than sixfold to $1.28 million in FY2020 from a year ago. Profit from its main catering business also grew 39.6% to $10.9 million, thanks to higher contributions from its home catering business. Its childcare and elderly catering businesses also saw steady growth.
Although consumer appetite for restaurants and dining-out has improved after the circuit breaker, challenges remain for operators. As at June, more than 500 eateries in Singapore have closed for good.
“I think the F&B industry as a whole will continue to face challenges due to the Covid-19 pandemic, but will ultimately be able to survive, though different segments within the industry will be affected differently. We expect the high-end segment to be impacted most negatively, while the mass market segment is expected to be the most resilient,” says Chua.
He expects the mass market segment, with a bill size of between $20 and $50 per head, to be the most resilient as they cater to casual diners in the HDB heartlands. Diners who would have gone to higher end establishments are likely to trade down too given the economic uncertainties.
In addition, Yeo expects higher-end restaurants looking to “right size” their operations but those in the lower end might be looking to expand instead. Moving forward, stocks like food court operator Koufu and coffee shop operator Kimly Group are the ones to watch, according to both Chua and Yeo.
“There will still be F&B food service demand but probably more subdued due to loss of tourist demand, workforce staying home, shorter operating hours and absence of large-scale events,” says Yeo. “It’s down to each company’s ability to hang on to ride out the pandemic. For now, we see demand at the mid to lower segment outperforming higher-end dining. So repositioning should help,” he adds.