This F&B chain looks good, but …

In my previous job, I came across this F&B chains. In less than 5 years, it grew to more than 10 outlets across Singapore. The price of each meal is between $10 and $15, so not considered cheap but also not very expensive. During lunch crowd, it’s quite full with long queue. The founders have many years of experience in related sector and were working as senior management in big companies. They also have lots of contacts in this sector and understand the cost structure well. So, the background and experience seem to pave the way to a good start in entrepreneurship.

I tried the food and it’s good. So, like my manager, we thought the business must be doing very well since it could open more than 10 outlets in such short time. Our role is to value the business and help re-structure the business to improve its valuation. When we looked at the financial statement, the numbers just didn’t match with the impression I got from outside.

Revenue was growing well and on course to break $10 milions. Some outlets did very well, some did fairly, some did poorly. That’s normal. Straight to the bottomline, profit margin for the Group was less than 1% for the past 2 years. Before that, it was negative. Losses exceeded half a million. If each outlet takes $100k – $180k to start, imagine that you’d need nearly $1.5 million to start 10 outlets. With $0.5 million loss in first few years, you’ll need at least $2 million to survive. The net profit from the last two years was less than $150k, still not able to cover the losses from earlier years.

Some outlets are very profitable, but some keep incurring losses. You won’t know which one will be profitable until you start it. If you knew it, you wouldn’t have opened the loss-making outlets, would you? The same when you decide to take franchise. Whether you start your own restaurant/cafe or become a franchisee, if you put all your money into one outlet and it’s loss-making due to whatever reasons, it’ll be difficult for you to turnaround because you have run out of capital. Subway restaurants have more outlets than McDonalds now but was loss making for the first few outlets. So, before you plunge into starting your F&B outlet, do your calculation properly. You really need reserved capital to survive the very tough first few years (and maybe even many years).

Still interested to start your F&B chains?

Let’s look at the cost breakdown of this F&B chain:
About 34% for food cost
About 34% for salary
About 17% for rental
About 10% for miscellaneous
About 4% for depreciation
About 1% for profit

No tax to pay by the way because losses from earlier years have not been covered. This cost structure does not apply to all F&B outlets. This is just for this F&B chain. With this super thin margin, they are running at a risk of closing down if unexpected event occurs. For example, if recession strikes Singapore, or disease outbreak occurs, and overall revenue decline by 5% for few months to a year, they’ll fall into losses immediately. Without reserved capital or additional funding, they won’t be able to survive in few months. That’s often the risk that is understated in running a business.

The profit at each outlet level, on average, was actually ok. The operating profit was on average more than 10% at outlet level. However, headquarter overhead cost around 10%. What’s this headquarter cost? The salary of management, admin, HR, finance, marketing, office rent, office supplies, audit, vehicles, telephone, etc.

Research by McKinsey shows that in 2012, average EBITDA margin for restaurants and cafe business was around 6-7%. If the depreciation is 3%, then your EBIT margin is 3-4%. After paying loan interest (if any) and taxes, net profit margin will be around 2-3%. So, the above F&B chain did poorer than average, but the average’s net profit margin isn’t fantastic either.

Operationally, what are the challenges?
– High staff turnover – you know it well. Service sector is fighting for service staff due to limited supply. Even admin staff has high turnover.
– Staff theft – think that staff theft is rare in Singapore? Staff cheating money creatively a few times here. I was surprised actually because I thought staff wouldn’t dare to do this in Singapore.
– Staff absence – when they don’t appear or take medical leaves, the outlet will be understaffed, affecting service and revenue.
– Revenue and cash receipt not tally – this could be due to careless staff or cheating. When you have thousands of transactions  involving tens of thousands of dollars per day, some errors are bound to happen. If you have $1 discrepancy, the effort to uncover this discrepancy could take 15 minutes or more and cost more than $1. Will you want to uncover this discrepancy? If it happens almost every day, what would you do?
– Lots of manual work, time consuming and prone to errors. You can use technology to streamline the process and improve productivity, but you gotta have experience in doing this (or hire the right person with good experience) and be prepared to invest first in technology.
– Long working hours. If you can’t stand working for at least 14 hours a day, don’t try.
– Unexpected costs – fridge broke down, aircon broke down, coffee machine broke down. Need repairs. For some, they need new replacement. After 3 years of rent, you think you can continue renting the same place without renovating it? Your landlord may want to take back the space and your renovation cost of $20-40k for fixture went into drain.
– Other challenges that I’m not aware of. There must be a few others.

I believe this F&B chain should have gotten better. Revenue increased. Cost declined. Loss-making outlets closed. Rent has not increased like crazily like in the past. Hence, margin improved. Also, govt grants help a lot. That’s the impression I got, but I haven’t seen the latest financial reports though. If they manage to increase the net profit margin to 4%, that’s 4x increase! I wish them good luck.

I hope my sharing provides you more information on the challenges that you may face to start F&B business. The cost structure above just serves as very rough guideline. If you start your F&B business and expect profit margin of 15-20%, above standard may tell you that it will be very difficult. In this industry, the margin can vary widely. Some F&B business break even in few months, some takes years. Some got back their capital within first year, some never did. If you expect to have high margin and get back capital within 1-2 years, then you must expect your business to be performing among the best, i.e. always crowded, fully occupied, long queue, keep having returned customers, not only new customers who want to try something new.

Still interested to start a restaurant or cafe chains?

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