Palatable sector but plateful of challenges

The retail food and beverage (F&B) industry attracts significant investor interest, ranging from equity portfolio funds and private equity firms to retail investors. Its appeal lies in the sector’s healthy cash flows, scalability and visibility, as consumers easily recognise well-known food brands.

A notable example is Oriental Kopi Holdings Bhd, a local kopitiam chain that listed earlier this year with just 20 outlets. Investors eagerly sought its shares, priced at 20 times historical earnings.

Since then, the company has reported three quarters of decent profits. Its share price has doubled, and the market now values the stock at a price-to-earnings (PE) multiple of 50 times its financial year 2024 (FY24) earnings.

With strong growth prospects, the stock trades at 36 times its FY25 earnings – a valuation that, while more reasonable, still appears elevated for a kopitiam chain.

Oriental Kopi operates in a crowded and intensely competitive Malaysian cafe and F&B market, where low entry barriers, constant fears of price wars and customer loyalty challenges are prevalent.

These concerns are particularly pronounced in the coffee chain space. Despite this, investors have poured hundreds of millions of ringgit into the sector.

Last year, ZUS Coffee secured a private equity deal that valued the company at a whopping more than RM1bil. Early investors cashed out handsomely, making way for new investors who trust ZUS Coffee’s ability to navigate intense competition.

The deal included an investment of RM250mil by several private equity firms, including the Retirement Fund Inc (KWAP).

A more recent deal in the coffee space has come from property developer Paramount Corp Bhd, which is proposing to spend RM126.32mil for a 28% stake in the Singapore-listed operator of Texas Chicken and San Francisco Coffee (SFC) in Malaysia.

Jeffrey Chew, CEO of Paramount, tells StarBiz 7: “SFC is on the positive path of profitability with about 50 outlets. SFC is not another coffee outlet where competition is very intense, but a cafe and snack place for meeting people. It is a great place to chill.

“I still remember my old days in Menara Citibank where we used to come down to the lobby where SFC operates, just to chill or get away from the stressful office environment or hide from bosses.

“I am totally impressed that the outlet is still around after 25 years. I am confident that it will be profitable and we also hope that SFC can collaborate with Paramount’s property division and our co-working business.”

Nevertheless, with more than 3,000 branded coffee outlets in the country, it is clear that competition is intense.

The F&B space has also seen the entry of many foreign-owned brands in recent years. China beverage chains such as Mixue and Chagee have become household names.

Both companies listed this year in Hong Kong and US markets. Mixue has more than 300 outlets in Malaysia. These chains are certainly crowding the beverage market.

Fraught with risks

Speaking of private equity involvement in retail F&B, Ekuiti Nasional Bhd (Ekuinas) has been a notable player, though not all its investments delivered favourable outcomes.

In 2011, Ekuinas acquired a 95% stake in Cosmo Restaurants Sdn Bhd, the franchise holder of Burger King Malaysia, for RM68.2mil, and later took full ownership of Burger King Singapore Pte Ltd for RM78.2mil. Both entities were loss-making at the time of acquisition and continued to incur losses.

By the time Ekuinas exited in August 2015, it had recovered only 0.45 times its capital investment, with a negative internal rate of return (IRR) of 28.1%.

Around the same time, Ekuinas invested in SFC, acquiring a 90% stake for RM17mil. However, SFC also faced persistent losses, and in December 2015, Ekuinas sold it at a negative IRR of 5% to Singapore-listed Envictus International Holdings Ltd.

Then there is Starbucks Malaysia. Once a popular coffee chain, it started facing severe backlash last year amid widespread consumer boycotts tied to the conflict in the Middle East.

The beleaguered coffee chain had pushed its franchise owner and operator, Berjaya Food Bhd (BFood), into losses. By FY25, BFood registered a massive net loss of RM291.99mil, from a net loss of RM91.52mil in the previous year.

In FY23, prior to the boycott-driven slump, Starbucks Malaysia had contributed about 89.3% of BFood’s revenue. Currently, Starbucks has 320 outlets, down from 408 at mid-2024.

Analysts remain cautious, maintaining their “sell” calls for BFood, opining that boycott headwinds are here to stay. BFood’s share price remains at the 30-sen level, far from its RM1-plus level at the beginning of 2023.

Two other local F&B stories come to mind when talking about challenges, namely, homegrown Papparich Malaysia and Old Town White Coffee.

Papparich, once a very promising kopitiam chain, saw its shareholders run into disagreements and its founder selling out. The chain subsequently faced legal hurdles in the form of unsettled debts.

Despite the hiccups, Papparich outlets continue to operate, while the original founder Rich Tan, has gone on to launch his own kopitiam-style eatery, Rich Kopitiam.

Old Town White Coffee had 182 outlets when it listed on Bursa Malaysia in July 2011 at an issue price of RM1.25 a share, being valued then at a historical PE of 12.9 times.

A year later, private equity firm Creador, then a newly founded firm in Kuala Lumpur, bought a 10% block for RM45.7mil, buying the shares at a time when the stock was trading around 10% below its IPO price. This marked Creador’s first taste of the local consumer sector, which has been the fund’s focus since its inception.

By 2013, Creador was able to partially exit its investment with a handsome two times cash-on-cash return and at an IRR of 101%.

OldTown was bought out in 2018 by a Dutch company at a share price of RM3.18, where presumably Creador divested the balance of its holdings.

However, Old Town today no longer seems to have a significant presence in the kopitiam space, which has seen the entry of many other players.

No discussion on F&B deals is complete without a mention of KFC. The chain, which was listed in the 1980s, was a company that many businessmen tussled for control over, largely due to the lucrative cash flows the company was churning out.

In 2012, Johor Corp Bhd (JCorp), together with the Employees Provident Fund (EPF) and private equity firm CVC Capital Partners Ltd, took QSR Brands and its unit KFC Holdings (M) Bhd private in a RM5.2bil deal that was completed in February 2013.

Since then and after many attempts and rumours of an initial public offering (IPO), no such exercise has materialised to-date.

It isn’t clear how private equity firm CVC has managed to still hold onto this asset, considering the usual five- to seven-year time frame that such firms exit their investments.

A newer headwind for retail F&B players is the sales and service tax (SST).

The expanded SST will entail landlords being subjected to an 8% service tax on rental income.

Also, a new 6% SST will be imposed on previously exempted construction work services.

Hence, F&B retail operators now face the prospect of higher rentals and increased fit-out expenses.

CIMB Securities says the expanded SST is negative for the consumer sector due to increased operating costs and weaker consumer demand.

“We expect most consumer companies will need to raise selling prices to pass on additional costs, which could further weaken spending power,” the research house says.

Malaysia Retail Chain Association vice president and chief of F&B division Valerie Choo notes that cost-past-through strategies may not be a viable option in the current operating environment.

“The new 8% SST applied on top of existing rent is a material cost burden that cannot always be passed on to consumers in a price-sensitive market,” she tells StarBiz 7.

“Renovations or refurbishment work, which can range from RM100,000 to RM800,000 per outlet, now also attract an additional 6% SST, significantly raising capital expenditure (capex) cost,” she says, adding that this could put some F&B operators out of business.

Industry sources say that one major international F&B chain in Malaysia with around 370 outlets estimates that it will have to pay around RM1mil a month in SST charges. Other smaller chains, they say, will be forking out a few hundred thousand ringgit every month for SST.

Choo says the expanded SST could potentially dampen the appetite for expansion. “This effect is more pronounced in malls, where rental rates are already high, and SST amplifies that cost pressure,” she says.

This is true for troubled BFood, which CIMB Securities Research estimates could face an annual earnings drag of RM4mil to RM5mil from the new SST structure, given the group’s “significant exposure to retail mall outlets”.

Operators will likely become more cautious and selective in choosing new locations, prioritising lower-rent areas to offset the impact. Some may shift their focus to smaller-format outlets or alternative retail spaces with more flexible leasing structures, says Choo.

In some ways, however, the higher costs from the SST may deter new entrants from entering the already crowded market, offering some breathing room for existing players.

Notwithstanding the headwinds, the F&B sector remains red hot. One big IPO in the works is Loob Bhd, another Creador-backed F&B player which operates the Tealive and Bask Bear chains.

Creador, which bought a 30% stake in the group founded by Bryan Loo, will exit most of those holdings via the listing, which is likely to take place early next year. It is left to be seen what IRR Creador will achieve from this exit.

Indications are that Loob will try to go to the market at around at least 30 times earnings.

Another notable private equity firm in Malaysia that has focused on the consumer sector is Navis Capital Partners, which acquired Oriental Group of Restaurants in 2016. However, due largely to the impact of Covid-19, the asset has yet to be divested by Navis.

Datuk Seri Phillip Siew, the founder and chairman of Oriental Group, who still retains a minority stake in the group, tells StarBiz 7 that Navis has been with the group for the last 10 years.

“We are still going through an exit handled by professional firms. Some offers have been received but nothing has been concluded. As our results qualify for a Main Market listing on Bursa Malaysia, our options are quite wide,” he adds.

Siew says notwithstanding the Covid-19 years, the group’s turnover has nearly doubled since the entry of Navis. “Likewise, cash flows have increased that has led to an increase in dividend payouts,” he says.

According to Nachiappan Arunachalam, a merger and acquisition consultant at Rosewood Consulting, outcomes in F&B transactions often hinge on whether the business stays owner-led.

“In some earlier cases, majority buyouts by private equity underperformed; more recent deals where investors take minority stakes appear to be delivering better results.”

He adds that several local F&B chains are raising expansion capital, while others are exploring monetising their businesses through both private investors and the capital markets.