F&B stores should be more experiential

TEN years ago, if you felt like having fried chicken, the only choices were KFC and Arnold's. Today you can choose from 20 brands with over 200 outlets! While this explosion of choice has been great for the customer, it has led to steadily declining business for F&B operators.

According to Spring Singapore's August 2016 report, cash margins for profitable F&B stores hover around 5 per cent, with 28 per cent of outlets losing money - leaving little or nothing to weather any further downturn. What's worse, the industry employs 4.5 per cent of the labour force but accounts for barely one per cent of GDP.

Surprisingly, food service providers continue expanding.

This demand for F&B space has led to landlords increasing the space allocated to F&B in the total mall net lettable area (NLA) especially as the retail sector continues to suffer. Real estate services firm JLL estimates F&B space in Singapore malls at over 30 per cent, compared with 23 per cent in rival shopping destination Hong Kong and 10-15 per cent in Europe. For example, M&G Real Estate reopened its Compass One mall with 33 per cent of space allocated to F&B outlets, up from 20 per cent prior to its year-long refurbishment.

CapitaLand estimates retail space in Singapore at 65.9 million square feet as at December 2016, of which nearly half is mall space. So even a 10 per cent reclassification from retail to F&B over the last decade means an additional 3.2 million sq ft of new F&B outlet space - which means an extra 2,133 new F&B outlets assuming an average outlet size of 1,500 sq ft. To put this in perspective, the current total number of outlets for all the major multi-unit F&B operators such as BreadTalk, KFC, McDonalds, etc, is around 830! Conversely, the Singapore Department of Statistics puts total growth in food service demand at only 8.3 per cent from 2013 to 2015.

STEADY DECLINE

So F&B operators, if you have been wondering why your sales per outlet has been declining steadily despite your best efforts, this is why: F&B outlet supply growth is exceeding customer demand growth primarily due to growth in total NLA allocated to F&B (from both new malls and repurposing from retail to F&B in existing malls).

F&B outlets at malls in Singapore are now visibly emptier than in previous years. Perhaps there are lessons to be learnt from other markets. Australia, for instance, is further advanced than Singapore in this repurposing. In July 2017, popular salad chain SumoSalad forced its landlord, Scentre, to cut rent. Sumo Salad's CEO said at the time: "There needs to be more consideration given to their existing retailers and the cannibalisation effect of putting up to 300 per cent more competition in the same trade environment."

Due to the growth of online delivery services and the steady migration to online shopping, malls should focus on experience per square foot rather than sales per square foot. Increasing the supply of F&B outlets in a market (malls) where demand is already shrinking is short-sighted, especially when this is coupled with higher rents and labour costs. These trends will eventually lead to a tipping point for mall-based F&B outlets and then what will landlords replace F&B with?

Negative same store sales growth is already the norm in Singapore. In the US and other developed markets, a key metric to analyse F&B outlet performance is year-on-year same store sales growth rate (SSSGR). Opening more outlets increases total sales and total profits but masks the fact that with negative SSSGR, operators are gradually becoming more exposed to simultaneous negative store cashflow across a larger number of outlets due to declining average store Ebitda margins. Eventually, this high operating leverage will result in a further decline in revenue per outlet and Ebitda margins reaching a tipping point of almost zero.

So a brand with, say, 30 outlets would move from a total annual Ebitda of S$2.25 million to S$570,000 with an average 5 per cent store level drop in sales across its network, which after head office costs (usually 10 per cent of sales), which are largely fixed, would almost certainly be negative .

With Amazon having just launched its online store in Singapore, expect that tipping point to come much sooner. The solution for F&B outlets is in offering experiences in a way that ensures they can attract mall footfall. F&B outlets should commit to brand building and marketing to make their outlets more experiential, such that they could potentially increase traffic to malls.