Subsidies to F&B sector crucial despite possibility of creating zombie firms
Singapore
SUBSTANTIAL subsidies administered to the food and beverage (F&B) sector to help it weather the pandemic have raised concerns about inadvertently keeping alive firms that are fundamentally unviable, referred to as "zombie firms".
Jochen Krauss, Singapore managing partner at Simon-Kucher & Partners, said there is undeniably a "massive oversupply" in the sector, which would be whittled down by supply and demand mechanisms under normal conditions.
"That's how cycles go - people think there's high demand, they come in, there's oversupply, people exit. And the moment you put in government subsidies, you are manipulating the dynamics of such an industry. Chances are, you extend the life of these businesses that shouldn't be extended," Mr Krauss said.
However, he noted that the subsidies are a necessary part of the government's welfare function, since allowing widespread business closures would cost jobs and damage the economy.
Andrew Kwan, group managing director of investment firm Commonwealth Capital, agreed that the subsidies are important in giving businesses time to pick themselves up and adapt to the new conditions. "There's definitely a case to be made that sufficient runway is given for those companies that are willing and able to pivot to do so, because livelihoods are at stake here," he said.
He does not think the financial support is likely to result in a large number of zombie firms. He pointed out that the assistance schemes require F&B business owners to bear the majority of the costs.
"I would like to think that most of the business owners will do their sums," Mr Kwan said. "Business owners are not foolish; if they don't think they are able to make it in the foreseeable near term, they will say it's better to cut losses than to hang on.
"This thing about zombie companies walking around - maybe a very small number would be in that category. Most of the businesses would do their sums and say they would rather not take any grants, but cut their losses and not bleed any further."
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