Key Takeaways:
- The company’s net profit more than halved in the first half of the year, squeezed by price competition and weak consumer confidence
- The dining chain is planning to scale back its network in mainland China and Singapore
By Lau Chi Hang
Hong Kong’s restaurant industry is serving up an unsavory set of earnings in the latest results season.
The dining sector’s struggles in the face of economic uncertainty and consumer caution are clear to see from the recent releases.
After profit warnings from fast food chain Fairwood (0052.HK) and the Café de Coral (0341.HK) restaurant group, Hong Kong’s biggest rice noodle chain has added to the dismal picture with an unappetizing performance in the first half of the year.
Tam Jai International Co. Ltd. (2217.HK) tried to put a positive spin on the figures, saying it had battled through adversity to raise revenues by 1.2% to HK$1.4 billion ($179.88 million) from the same period a year earlier.
However, there was no denying that the bottom line looked grim, and harder times could lie ahead. Profits slumped nearly 56% to HK$36.07 million, as the chain battled to attract customers in a challenging economic climate.
To maintain its position in the Hong Kong restaurant scene, Tam Jai was forced to shrink its profit margin, rolling out various promotions and aggressive discounts to entice diners through the door.
The Hong Kong market contributes nearly 94% of the company’s revenue, but Tam Jai’s operating profit in the city dropped 14.7% to HK$224 million from the corresponding period of last year.
The company said its operations in Hong Kong and other markets had been hit by economic slowdown, weak consumer sentiment and intensifying competition. Another factor was a trend for budget-conscious Hong Kong residents to head to the mainland for consumption purposes.
A series of promotion deals coupled with surging commissions paid to online takeout platforms took a big bite out of Tam Jai’s gross margin, which fell 3.3 percentage points to just 2.6%.
No wonder the company said it was facing one of the most challenging times in its history.
New Taste Options
To offset the issues in the home market, the company has been expanding its network to mainland China and other parts of Asia, with a slogan of “spreading the taste of Tam Jai to every corner of the world”.
The company started to open mainland Chinese noodle shops several years ago and is already active in Singapore. This month the company opened a store in Melbourne with the aim of expanding to three Australian outlets in the second half of this financial year. Franchised restaurants are also planned in the Philippines and Malaysia.
At the same time, the company is trying to introduce Hong Kong diners to other food options from the brand portfolio of its Japanese parent company, Toridoll. In November Tam Jai paid Toridoll HK$12.5 million for the Hong Kong rights to the Japanese udon label “Marugame Seimen’’, and has also launched the beef brand “Yakiniku Yamagyu” in the city this year.
Scaling Back Its Chain
The expansion strategy has hit a number of hurdles over the years and is now going into reverse in mainland China. The company said it had closed four struggling mainland stores during the first half of the year, and further consolidation was planned.
The situation in Singapore is even more fraught. Due to growing competition, elevated inflation and chronic staffing problems, revenues have been falling at its 11 shops in the city state, with losses widening further in the half-year period. The company said it would trim its business in Singapore, incurring one-off costs from closing dining outlets.
It is unclear whether the tactic of offering more parent brands will be a success. Newly acquired Marugame Seimen made a loss of HK$1 million in the financial year ending in March, while the Yakiniku Yamagyu outlet is struggling to survive in a neighborhood mall. The two brands combined will open only four branches in the second half of the year and are unlikely to contribute much to the company’s revenue.
Inevitable Price Pressure
Restaurant operators in both Hong Kong and mainland China are grappling with the knock-on effects of a weak economy, as reflected in the earnings figures.
Per capita spending fell 1% in Hong Kong to HK$61 and dropped nearly 9% in Singapore to HK$81.2. The slippage in mainland China was even bigger, as spending per head sank almost 13% to HK$36.2, according to the earnings statement. As for per-day revenue, mainland China logged a fall of 24%, followed by Singapore with a drop of 16% and Hong Kong with 4.6%.
To attract cost-conscious customers, the company said would it would fortify “the value-for-money positioning” of its two flagship brands, TamJai and SamGor, and offer “value offerings” in its meal deals.
In other words, the chain may have to cut prices to hold its ground in the Hong Kong and mainland markets.
The restaurant business there is not likely to recover any time soon, and competition can only intensify. Expanding into overseas markets comes with its own set of challenges, as illustrated by the push into Singapore.
With the risk of global economic weakness adding to the troubling mix, relief for the restaurant industry may be some way off.
This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.
