Over the last 20 years, Astreem has been championing brand growth and supporting the arduous journey of entrepreneurs in the region. In particular, this 2024, after the initial positive bounce back post Covid, we have observed a distinct tightening of business conditions and complexity in doing business directly and indirectly caused by global geopolitical issues for many brands in Astreem’s network.
For many F&B Operators, Q3 and Q4 2023 saw a sharp decline in F&B sales, dropping between 15 to 30%. It’s a worrying trend especially at the back of rising costs, new compliances, and with a much more challenging labour pool. The on-going tension between US, China and Taiwan, the Russia-Ukrainian war and the recent Israel-Palestine conflict has been a major concern on supply source stability and related incidental business costs. Most business owners also raised the concern that global inflation is suffocating many businesses.
All in all, we witnessed a lot of pressure on increasing costs, increasing uncertainty all round for the F&B sector which indicate stronger headwinds for business owners in 2024.
Rising costs strain the franchise business world
One of the biggest challenges faced by businesses in the F&B industry in Singapore is managing costs. In recent years, the F&B industry in Singapore has been facing a big problem of labour shortage, making it challenging to find and retain skilled workers. Add to that, cost of goods have also become another factor that brand owners need to grapple with, making earning consistent net profits even more challenging. Rising costs of rent, labour and now, costs of goods put a strain on profitability for all businesses, but especially for small businesses.
On the franchise end, growth continues to be dichotomous for franchisors with a larger network of franchisees, even when overall sales grow YOY, individual outlets performance varies significantly in each country, with a continuous pattern of outlets closure as well as new outlets opening. Master franchisees across the region face uncertainty and lack confidence when envisioning growth in the midst of rising costs and geopolitical instability.
F&B franchisors’ views on 2024 business growth and business processes
Operations Excellence Champions – Singapore FnB Franchisors with Hsien Naidu of Astreem
Despite the possible challenges, we know that there are always pockets of opportunity that can work in our favour. In the spirit of “Stronger Together”, we asked some of our very courageous F&B franchisors in our network about their views on business growth for 2024 amidst these challenging times and many generously shared their views on business growth as well as the possible new territories they might explore this year. Below is a consolidated summary of some views as expressed by our F&B franchisor network.
New Business Strategy: Be Cautious and Prudent
Whilst Franchisors focus on bringing the best products they can for their customers, the approach to local growth is extremely cautious because of external drivers related to higher cost of capital due to high interest rate, higher operating cost due to inflation and higher manpower and rental cost.
Consumers are also more cautious with their spending and are more price sensitive than ever. Y-O-Y same store sales growth are hardly achievable nowadays due to more competitions and less volume as Singaporeans opt to travel more frequently abroad to spend. To mitigate risks, many brand owners are taking on lower capex investments to reduce upfront risk and hasten breakeven.
To win their share of the consumer’s spend, some brand owners are also pitting against each other with price wars and extensive promos.
These factors give cause for business owners of previously very profitable businesses to tread a careful balance in order to obtain a higher revenue share and reasonable returns on capital investment. New stores may find it more challenging to turn profits although existing stores may still extract some profit provided they do not encounter any unexpected events like sudden big increases in rental by landlords or further manpower cost increases.
Refocus growth efforts, business and operational processes
Uncertainties in the Singapore market is pushing brand owners to relook at where investments in terms of time and resources are being made. For Singapore, most brand owners are adopting a more cautious and opportunistic stance, choosing to double down on regional expansion. Some brand owners cited that they have been spending 80% of energy just protecting what constitutes 20% of growth potential.
In responding to our question on where the areas of focus might be, Malaysia came up top, followed by Indonesia then the Philippines. Following closely is Australia, a market that is beginning to attract more and more interest from Singaporean brands.
Given this feedback from our clients, this year Astreem will be following suit and will be planning our Franchisor Franchisee brand introduction programs according to our findings. Brand owners who wish to find out more or join us in our Franchisor Franchisee Deal Hunter Programs, click here.
Increase the accessibility of Singapore brands regionally
Visitor arrivals are forecasted to hit 15 to 16 million, bringing in approximately $26 to $27.5 billion in tourism receipts in 2024. This builds on 2023’s numbers, when the Republic had 13.6 million visitors. To some extent, this tourism recovery will benefit the food and hospitality sectors but many Singaporeans are still flocking overseas, affecting their home-based revenue.
Whilst businesses face a lot of challenges in Singapore, many brands are still optimistic about growing the brand regionally. Most cited that enquiries from franchisees in the region are still coming in from more developed countries. Brand owners are keen on expanding through franchising because it is the only vehicle that can facilitate their growth without hefty investments upfront.
Through franchising, brand owners can now bring their brands to their customers in their home countries.
Achieve operational excellence to protect Margins
Margin expansion is mainly achievable through cost reduction strategies. With market conditions as challenging as they are, brand owners need to look at optimising their operational excellence methodologies.
One example could be, due to the scarcity of manpower, individuals tend to shift from one job to another for very small pay differentials. In studies done by panalyt.com, they estimate that every time an employee leaves a position, the company loses approximately SGD12,000 per employee for recruiting costs, onboarding costs, turnover costs, salary and benefits. To add, trainingmag.com reported that for every new employee that joins, over $1,286 is invested in each new employee that joins. This means that if 3 staff members leave the company within 12 months, and 3 new employees join, the net amount invested that is not accounted for in the financial budget works out to be $39,858 per annum. This can work out to be anywhere between additional unplanned investment of between 15-25% of overall planned manpower budget!
In a margin-tight environment, whilst this amount may not break a company, it certainly does not help the company maximise its bottom line. If you can reduce the associated costs involved with hiring and training new employees and the productivity loss while the new hire gets up to speed, it will mitigate the invisible losses to the company. That’s where business owners can look towards tools like Onboarding tools, Training programs and Evaluation tools to reduce the heavy reliance on manpower, improve the learning experience, track progress, improve staff motivation through continuous learning and increase the individual capabilities of each team member.
Achieving Operational Excellence is challenging but possible
Operational Excellence is always high on everyone’s lips but most do not have the time to pay attention to it. This is something we all think is important but often feel like we are not ready for the time commitment needed to build an operations excellence program.
Some brand owners think they have programs designed for operational excellence until they discover that the corporate goals and operations standards are not aligned. The degree of completeness and coverage of a holistic Operations Excellence Program must encompass both corporate goals like brand governance, financial performance, customer service; with operational necessities that include: well documented operations manuals, training and compliance programs, and onboarding programs. The alignment of both areas must go hand in hand to achieve operational excellence that is so desired.
There is a common misconception that as long as a business is operating well, they have achieved operational excellence. Having a profitable business now and having a business that can sustainably scale into the future are two very different things. Businesses that can continue to scale into the future must be able to effectively replicate their operations, measure their performance, train new team members easily, ensure compliance across all outlets and be able to maintain healthy profit margins as they grow. Before claiming that the business is built on Operational Excellence, it might be helpful to understand where they stand in some areas of Operational Excellence like SOP documentation and management, Training and Compliance implementation as well as Onboarding programs.
Increase the attractiveness of Franchise Offerings to increase Franchisee Confidence
From a franchise expansion perspective, the global economic downturn & currency fluctuations affect the real costs of franchising, which in turn increase perceived risks and generally affecting overall franchisee confidence in new investments.
Some brand owners are concerned that potential franchisees may be less willing to acquire new brands for portfolio expansion, and existing franchisees could be less aggressive in their resource allocation to open new stores.
From Astreem’s observations, franchisees in the region are still seeking innovative and exciting opportunities. Most are still very willing to put their investments behind brands that are fundamentally sound and operationally excellent.
In fact, due to the impact of digitalisation, three different groups of investors are emerging:
- Many companies in developing countries like Indonesia and Philippines are diversifying their portfolio to spread their risks,
- Some businesses are seeking to enter industries that are very different from the industry where they earned their wealth and
- Family businesses being more directly involved in franchise investments, possibly forming joint ventures with franchise brands.
Operational Excellence is a competitive advantage
Despite the uncertainties in the Singapore market and the challenges posed by rising costs, franchisors are keen on increasing the accessibility of Singaporean brands regionally. The growth potential in the region, coupled with the recovery of tourism, provides avenues for expansion.
Franchisors are also turning their attention to operational excellence to protect margins, emphasizing the importance of operational excellence, training programs, and evaluation tools in a tight-margin environment. Additionally, the global economic downturn and currency fluctuations pose challenges to franchise expansion, but franchisors can enhance franchisee confidence by offering fundamentally sound and operationally excellent brands.
Moreover, this summary of sentiments underscores the importance of aligning corporate goals with operational standards in building a holistic Operational Excellence Program. The readiness of businesses in terms of content and processes is crucial for sustainable scaling into the future.
In the ever-evolving landscape of FnB franchising, the key lies in adapting to challenges, strategically expanding regionally, and continuously enhancing operational efficiency to ensure sustained growth and profitability.
