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Report: Why 30% of F&B Businesses in Singapore Fail Every Year

1 in 4 F&B businesses in Singapore churn out of business every year. Many close within the first year of operations. This is the case across segments, from hawkers, to cafes and even high-end fine dining restaurants. Reputable Michelin stars restaurants too, have been leaving the scene.

Why is it that even F&B operators with S$150-550m in revenue only have 5-7% margins. How do they then also command a respectable 25%+ return on capital?

In June this year, we conducted close to a thousand surveys with F&B business owners across Asia. Many shared common challenges – people, off-peak demand, competition. (Read Full Article Here) Despite the many tech and software start-ups helping to create change in the F&B space, it is a highly challenging business to be in.

This (somewhat long) post focuses on F&B in Singapore. We explore some of the main challenges, zooming in on the realities of what it takes to survive, as well as what we can learn from those who have succeeded.

For aspiring and existing F&B business owners, we believe some of our findings will be useful and hope everyone can benefit from it.

There are several inherent challenges to running F&B businesses in Singapore:

  1. Rental rates are high
  2. Employment rules are stringent and it is difficult to hire, train and retain people
  3. The market is highly competitive and chains / scale players makes it harder for single outlet F&B operators to compete
  4. Newly established F&B operators often struggle with operations
  5. Hawkers and food court / coffee shop stall operators face their own unique challenges with working capital and cashflow management

For these reasons, 28% of F&B establishments are replaced every year. While efforts are underway at the governmental level to help transform the F&B industry through technology and policy support, we think it is equally important for individual F&B business owners (especially aspiring entrepreneurs) to understand the economics of F&B in Singapore.

To survive and do well, owners need to think commercially – serving great food and having a nicely renovated outlet is no longer enough.

That said, Singapore is also home to many successful local F&B entrepreneurs who have built great business around good food and went on to grow their business within and outside of Singapore. Breadtalk, Paradise Group, Fei Siong, Kith, PS Gourmet and Katrina Group are just some examples of the many successful F&B businesses in Singapore. Those who have succeeded and done well often share a few common characteristics:

  1. They cash in on underlying consumer trends (not fads) that exposes new segments
  2. They scaled rapidly for economies of scale, many with central kitchen operations
  3. They are well managed operationally and financially – for quality food, service, margins and returns

So what does success look like? We studied a number of successful Singapore F&B businesses and found that they typically have 5 – 10% pre-tax profit margin and 10 – 25% return on invested capital. Respectable!

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More importantly, we discovered interesting facts about their sales and operational productivity. Hopefully, these set as a yardstick for F&B operators to work towards.

The Challenges of F&B in Singapore

Rental rates are high

A 90-seater at Dempsey cost S$ 11k/mth. A similarly sized unit at Raffles Place cost $32k/mth and a stall unit within Plaza Singapura’s food court cost $8k /mth + 5% of sales.

Our study of 7 F&B groups in Singapore (with ~40+ brands across cuisine types) shows that operators need minimally revenue of 4x rental expenses in order to breakeven. This means that if you are running an F&B operation in Raffles Place, you need to be hitting ~$120k monthly gross sales. That is $6k per working day (assuming 22 working days a month). Depending on menu type and price point, most operators will concur that this is not an easy feat.

The people challenge

This is the most common issue faced by F&B business owners.

In our survey among SG F&B operators, 56% indicated hiring and training as a key challenge they faced.

There are strict quotas on local-foreigner employee ratios for F&B businesses in Singapore. At the same time, it is (as many have experienced) difficult to hire Singaporeans within F&B. Hiring aside, retention is also an issue.

Younger Singaporeans are willing to work in F&B, but mostly as part-time staff and they don’t tend to stick around long enough. Most are gone by the time they are sufficiently trained and efficient.

Silver generation employees are a lot more willing to work longer hours and don’t mind the grind, but often require patience and dedicated training programs to onboard them. Once every so often, operators find good individuals whom they can train and promote to supervisory or management roles. Such employees are however actively sought after by competitors or often drawn to higher paying jobs in other sectors after clocking a few years of customer facing work experience.

Many within the F&B scene have wondered, how does Chinese hotpot restaurant Hai Di Lao (HDL) manage to hire such a big team of pre-dominantly non-Singaporean stuff? or How does McDonald’s succeed in training Uncles and Aunties who are there from 7am till late and consistently way more efficient than some of the other fast food chains?

It is not just a staff cost issue or about how much one is willing to pay to hire.

The real challenge is, how does one profitably hire and retain people in F&B?

Successful F&B companies in Singapore have labour productivity of 2.5 – 4x. Meaning, for every dollar they spend on staff cost, they make $2.50 – $4.00 in monthly sales. The range is largely a function of the type of F&B business involved.

F&B is very competitive

There are ~3k restaurants in Singapore and ~4k other F&B outlets including hawkers. With some creativity, it is always possible to create a niche, a unique dish or a special experience indeed. Did you notice that fusion cuisines are becoming increasingly common in recent years?

The silver lining is that F&B businesses in Singapore are quite adept and picking up niche cuisines and innovating. Many start off on that basis.

The challenge is in making that sustain beyond the first 3 months of operations. Would Breaktalk’s bakery have succeeded as it did but for the Pork-floss bun and the many other interesting ones that follow? There is a commercial rationale why McDonald’s launches a new menu item almost every month.

The top F&B groups in Singapore pretty much have all the cuisine segments covered – from Japanese in the early days, to Korean and Vietnamese of late. Fei Siong found its niche in local favourites such as Bak Chor Mee, Ban Mian, Curry Rice etc. and is proving itself to be a successful diversified chain in the last 2 years.

1 in 4 F&B owners we surveyed cited competition as a key challenge. 26% claim them face difficulties getting enough customers. Before launching into a new F&B venture, one might want to consider if there is truly an angle for capturing enough customers across peak and non-peak hours – be it a special menu or unique location.

Operational struggles for new operators

There are two types of new F&B businesses. Those started by former chefs / F&B business managers and those started by entrepreneurs who are entirely new to F&B.

Operational efficiency cannot be overlooked. The moment a customer shows up, a number of moving parts need to start working together in tandem. Sitting, ordering, food preparation and  serving needs to all happen within the span of 15-20mins.

The same is true for self-service operations and the bar is some times even higher. Staff need to sit customers while keeping flexibility for the next group of walk-ins. Mistakes with orders are common for new staff but often unacceptable.

Food quality and presentation is a base expectation but kitchen operations is in itself a skillset that requires an experienced head-chef / lead. Once the food is ready, service staff need to serve in time and check off the orders. It is no wonder why new F&B outlets often struggle with the full chain of F&B operations, or eventually lose customers to more established players who have refined their processes over time.

In the realm of restaurant operations, innovation queue management systems, self-ordering systems and even payment kiosk have emerged. Such capabilities, when utilized effectively can indeed help save on manpower cost and smooth operations. Technology adoption itself isn’t sufficient and staff needed to be trained as a team to fully maximize the benefits of such systems.

Several restaurant operators with self-ordering tablets are able to serve dishes within 3-4 minutes. With such systems in place, the burden of efficiency anchors on kitchen operations. When done right, such investments meaningfully improves table turn and mitigates some of the people related challenges of restaurant operations.

Many veteran F&B owners emphasize the importance of restaurant operations. Entrepreneurs who are new to the F&B scene should indeed carefully consider whether to first spend a few years learning the ropes. A friend of mine graduated from MBA and spent 2 years as a waitress and kitchen assistant just to learn the ropes before opening her own restaurant.

The cashflow challenge for food court hawkers

Food court hawkers face their own unique challenges. Often, the hawkers operating such stalls are sole-proprietors. Covering rent, managing supplies and handling food preparation are their day to day focus.

By centralising critical functions (eg. washing and cash management), food courts help ease many of the operational challenges and are core to providing a source of livelihood for thousands of hawkers in Singapore.

That said, cashflow is a common issue surfaced by many of these sole-proprietors. Consider the following: rental is often paid upfront and sometimes involve a 2-3 month deposit. It is also common for service fees (typically $300 at least) to be paid upfront. Supplies are either paid on a daily or weekly basis and in some limited cases at month end. Salaries for co-workers are commonly paid at month end. But what about revenue?

As stall rental often involves a monthly variable component pegged to sales, food courts typically control cashflows of the stalls. A food court staff usually tops-up the cashier for the individual stalls in the morning, providing a petty cash float for the hawkers. At the end of the day, a staff collects all the cash. Some food courts have also gone cashless, by using pre-paid cards etc.

There are legitimate rationale and benefits to such systems. The issue comes about when the timing of cash inflows for the hawkers do not match with that of their outflows for rental, salaries and supplies.

What can F&B business owners learn from successful chains?

As mentioned earlier, we dug into the success of several successful F&B businesses in Singapore. The goal is to identify common themes that underscore their success. These F&B businesses span a wide spectrum (see table below) but often shared common characteristics in terms of staff productivity, rental efficiency and how they captured consumer trends (not fads)

There are several things worth noting:

  • F&B margins are thin. Even at scale, these successful F&B businesses have thin margins. It is a common misconception (especially among first time F&B owners) that margins are high. Indeed, while gross margins are high, staff cost is usually 25-40% and rental is another 20-25%
  • Revenue turns really matter. While the examples we have listed above have similar margins within a tight band, their returns vary widely primarily because of differences in asset turns. Some cuisines like Asian food are naturally poised to capture full day crowds, weekdays and weekends included. On the flipside, F&B businesses that primarily rely on weekend traffic need to carefully consider whether to play in the mass-market segment and go for volume or find ways to consistently capture higher spending customer groups.
  • Operational efficiency supports productivity. The ability to achieve ~4x sales productivity on rental and ~3-4x on staff cost is a function of many factors. Cuisine, competition and location certainly matter but all these count for nothing if a restaurant is operationally unable to meet customer expectations.
  • Catching underlying consumer trends. As income levels progress, consumer behaviours shift. Over the last 20 years, there have been a boom in the options for international cuisine. Alongside that, dining habits have also shifted from coffee shops to food courts and restaurants. Health consciousness is yet another trend that is ongoing. Whatever it is, identifying consumer trends is not an easy task. What is important is that business owners ride on trends and not fads

We hope this article has been useful to anyone running a restaurant business today or contemplating doing so in the near future. There’s probably a lot more that this post has yet to capture. In the meantime, you might also find the following articles interesting:

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