The growing chain of restaurant struggles
S&P Syndicate’s experience in recent years is representative of the industry’s trends, as customers search for newer experiences with greater convenience. By Jesus Alcocer
Legacy chain restaurants are struggling to adapt in the rapidly shifting food and beverage marketplace as consumers pivot towards more unique, digital-friendly restaurants and buffet outlets.
Pravesvudhi Raiva, chairman of S&P Syndicate’s executive committee, recently sat with Bangkok Post to discuss the most important trends in the industry, and what S&P, one of the largest food and beverage companies, is doing to adapt to newer generations.
Recent trends in the Thai restaurant industry closely reflect consumers’ fast-paced lifestyles and more sophisticated preferences. Convenience stores, prepared food sections of supermarkets, mobile meal deliveries, and independent restaurants are eating away chain restaurants’ market share.
Low barriers of entry and a novelty advantage (consumers favour restaurants younger than 5-6 years old) have made the restaurant industry particularly unstable and prone to change, with “dated” chains in constant danger of being replaced by new establishments.
“I recently had a talk with university students, and what they say is that they wouldn’t go to our restaurant because there is nothing exciting. They go to [S&P] restaurants because their parents take them there,” says Mr Pravesvudhi, who is the youngest brother of S&P founder Patara Sila-on.
S&P was established in 1973, and listed in the SET in 1989. “If you understand the business curve you will see that it is already too old — it is time to come up with something that is exciting for the new generation,” Mr Pravesvudhi says. The average age for consumers at the original S&P restaurants is upwards of 40 years old, he says.
As of 2016, S&P operated 491 restaurants in Thailand (25 more than in 2015). The overwhelming majority of outlets are still in the form of traditional S&P restaurants and outlets, but the company operates 24 of the restaurants under different brands.
Mr Pravesvudhi says that chain restaurants like S&P are becoming obsolete, “I myself don’t enjoy going to chain restaurants,” but the company is still figuring out how to retain its scale while shifting consumer perceptions of the company as an entrenched chain.
Brands like SNP, located on the ground floor of the FYI Center on Ratchadaphisek Road and on the first floor of Italthai Tower on Phetchaburi Road, is where the brand is heading, according to Mr Pravesvudhi. The restaurants are in office buildings or standalone locations (as opposed to malls), and are designed to appeal to younger consumers, as well as stray away from the “chain” identity that consumers may associate with other outlets.
“The original S&P is still the company’s cash cow, and is growing the quickest,” says Mr Pravesvudhi, but he did not provide figures to draw a comparison of the revenue per restaurant of the two brands. SNP is an experimental restaurant, and the company is prepared to wait as long as necessary for the new restaurant to succeed, he says.
The company added five restaurants outside of its core offerings in 2016, and one in 2015. In percentage terms, new brands are growing at a quicker pace (5% in 2015, and close to 26% in 2016), but in absolute terms expansion is still driven by the traditional S&P brands. The company added 13 new S&P restaurants and seven bakery shops in Thailand last year.
In 2016, S&P opened Patara restaurant in London, one S&P Restaurant & Bakery in Phnom Penh, and Vanilla Restaurant in Shanghai. In Bangkok, the company opened two “experimental restaurants” — SNP Headquarter and SNP/Cafe, which are aimed at “presenting neo-classic Thai and international dishes to our new lifestyle customers”.
This is not just a problem for S&P Syndicate, but an issue that concerns the industry as a whole. “Five years ago I used to say that I had to wear sunglasses because our future was so bright, but right now I cannot say that,” says Mr Pravesvudhi.
Normally the industry experiences 10% growth, but growth has slowed to 2-3% in recent years.
S&P’s revenue has slowed down in line with the market. From 2015 to 2016 the company posted 3% growth, a far cry from the 17% revenue growth in 2003-04 and the 12% in 2004-05.
Two main competitive factors driving the slowdown are mobile food delivery marketplaces like Foodpanda, and convenience stores like 7-Eleven, which have transformed into convenience restaurants of sorts, says Mr Pravesvudhi.
Services such as Foodpanda and UberEats have vastly expanded the number of establishments any one restaurant competes against. Before, customers might have been reluctant to buy from an unpretentious restaurant lacking ambience or those far from their home. Convenience and fast delivery, however, have eliminated both of these barriers and allowed smaller market players to compete on an equal footing with chain giants like S&P.
It is these smaller, newer restaurants that are driving growth in the industry, he says.
According to Carsten Hirschberg, senior partner at management consultancy McKinsey’s Berlin office, the overall market for food delivery (including offline and online delivery) grew 3.3% in 2011, accelerating to 3.8-3.7% in 2015, a rate that will be maintained at least until 2020. The online delivery market, however, is poised to grow at a rate of 25% before slowing down to 14.9% in the years leading to 2020.
As the growth in the food delivery market is driven by online solutions, the share of online aggregators (like Wongnai), and new delivery platforms (like UberEats) that have their own logistics network will increase from 8% of total deliveries in 2011 to 58% in 2020, says McKinsey.
Tom Lutz, global leader of Boston Consulting Group’s consumer practice, says in the US 50% of food delivery happens online already.
Growth is likely to be much higher in markets like Thailand, where penetration is relatively low and the industry is in the early stages of the growth cycle. Online food delivery is a highly profitable business, with margins ranging from 30-50%, attracting players to the industry. Convenience stores, for their part, have been eating at single and chain restaurants’ market shares for years, with the effect most noticeable in the breakfast sector, Mr Pravesvudhi says. Years ago restaurants were closed for breakfast, but convenience stores’ appeal to young consumers with lower disposable incomes indicates it is a market trend worth pursuing.
But revenue does not tell the whole story. Competition, both internal and external, has pushed the razor-thin margins of restaurants even lower. This year S&P Syndicate posted its lowest net profit margin (5.6%) since the financial crisis, when it dipped to 5.1% in 2008. Net profit margin has plunged 47% in the last five years.
Competition has been especially strong in the bakery segment, since it is hard to differentiate products in that field, says Mr Pravesvudhi.
In terms of cost, two of the most important factors have been location prices. “The cost of locations has been increasing every year. Nowadays restaurants are looking at standalone locations instead of expensive slots in shopping centres,” he says.
The company wants to shift towards investment in standalones over the next few years.
For S&P and other established chains going abroad may be a more promising avenue for growth. S&P operates 25 restaurants abroad, down from 26 in 2014. Overseas restaurants represent a relatively small part of the syndicate’s total revenue (12%), but they bring on average 323% more yearly income per store than their domestic counterparts (37.8 million baht vs 12.23 million baht). The Thai market is too saturated with S&P outlets already, Mr Pravesvudhi says. Moving forward, the company will focus its expansion plan in the UK and Asean, he says.
The company has been exporting food products to China, the US and Europe for years. The Chinese market, he says, is especially promising, since Chinese consumers perceive Thai products like durian items to be of very high quality. In terms of market penetration, however, the company is in the early stages.