ST Group brings flavours from home to Asians abroad, enjoys rapid revenue growth with outlet expansion
All over Asia, bubble tea — also known as boba tea — stalls are popping up on every corner and long queues are a usual sight. Bubble tea, which consists of tea, milk and toppings such as chewy tapioca pearls, has sparked a craze, with people willing to wait for hours for their favourite drink.
Sensing the potential of bubble tea outside Asia, ST Group Food Industries Holdings brought the well-loved beverage to New Zealand in 2015 and the UK earlier this year. It has a track record of only seven years, but so far, ST Group seems to have a knack for spotting what is hot or going to be in the market. “A key strength of our company is that we are able to identify new trends,” says executive chairman and CEO Saw Tatt Ghee in an interview with
Apart from riding the bubble tea wave, ST Group has also capitalised on the global obsession with all things Korean. The group brought the popular Korean chicken wings brand NeNe Chicken to Australia and Malaysia, and saw a positive response in both countries.
It also helps that countries such as Australia and the UK are popular destinations for Asian emigrants. Thus, it is no surprise that all of the brands under ST Group’s belt are Asian.
“There are many Asians in Australia these days, more than in the past. There is a strong influx of Chinese, both students and tourists, and it is not going to stop,” says ST Group’s central kitchen production manager Leong Weng Yu in the same interview.
According to statistics from the Parliament of Australia, overseas enrolment in higher education institutions in the country has been steadily increasing since 2012. In 2018, there were 398,563 overseas students, compared with 349,123 in 2017. In 2018, students from mainland China numbered 152,591, or 38.3% of overseas students. Meanwhile, there was a total of 30,247 students from Singapore, Malaysia and Hong Kong in 2018.
Sweet beginnings
Apart from bringing popular Asian brands to the market, ST Group has also started its own brands. Capitalising on the popularity of Japanese-inspired food, its first inhouse brand was Pafu, a hybrid of French apple turnovers and Japanese cream puffs, launched in 2017. This year, the group introduced its second brand, Kurimu, eclairs with a custard filling and topped with crunchy almonds.
With its own brands, the group is able to enjoy higher sales margins and better control the food served. But for now, it prefers to focus on its two in-house brands and there are no plans to launch new brands yet.
It plans to open another eight franchise outlets and one more Kurimu outlet. “We’re also looking at some new trends that we would like to leverage, but we can’t talk about them right now,” says Leong.
In FY2020 ending June 30, 2020, ST Group expects to open at least 17 new stores, with plans for more Gong Cha outlets in the UK this year. In FY2019, ST Group opened 33 outlets.
For the company, the number of outlets opened is not an issue, as it is more focused on how much each store can contribute. “Right now, we are more focused on the quality of the stores rather than the number of stores,” says Leong. He adds that some brands may take longer to break even and contribute.
He notes that Gong Cha became popular very quickly. Each of the two outlets in the UK rakes in about £20,000 ($34,083) a week, or about £1 million a year. ST Group plans to open at least three more Gong Cha outlets in the UK.
“There are a lot of opportunities for the company, but we will also need to look at our own resources, in terms of capital and people, so that we can grow and maintain [a healthy] return of capital, rather than spreading ourselves too thin and growing too quickly. We don’t want to be reckless or change the culture of the company,” adds Leong.
A taste of home
ST Group was established in 2012. In the same year, the group opened its first PappaRich restaurant in Melbourne as well as its central kitchen.
PappaRich was started in Australia because Saw realised that there was a large community of Malaysians who had either migrated or were studying there. As a Malaysian living in Australia, Saw missed food from home, so he decided to bring a taste of home to the country.
Currently, the group has a total of 35 PappaRich outlets in Australia and New Zealand. But with so many outlets, how does it ensure that the food quality is maintained?
One way is to rely on its central kitchen located in Melbourne, from which consistency in taste and quality can be better managed. For example, the sambal and curry chicken paste served in the PappaRich outlets are prepared in the central kitchen and then distributed to the outlets.
“It is very important that we try to reduce the amount of cooking in the outlets and have more things prepared in the central kitchen, because it’s much easier to control the food quality,” says Saw.
The group has plans to establish a central kitchen as well as a corporate office in Malaysia to support its business expansion strategy in the region.
Apart from the consistent food quality that keeps customers coming back for more, ST Group also has an innovation and trial kitchen in its central kitchen to create new recipes and products. “Every market is different. You cannot just take the menu from one country and put it in another. Even in Australia and New Zealand, the menu is different as well. Aside from new items, the core products will remain in the menu,” explains Saw.
Growing appetite
Besides the ability to sense what the market wants, ST Group tries to be savvy in the management of its financials as well. FY2019 marked the most aggressive year in its expansion, with the opening of 33 outlets. Despite that, gearing remained at 23.7%. The group managed to keep gearing at that level because of its group of sub-franchisees. “Our outlet expansion is not purely corporate stores. In fact, more will come from sub-franchisees,” says Leong.
Essentially, when a sub-franchisee opens a store under one of the group’s brands, most of the start-up costs will be funded by the sub-franchisee. ST Group, on the other hand, will receive royalty income. “Our mid-term strategy is to have a ratio of three sub-franchisee outlets to one company outlet so that the cost of expanding will be offset by income from the sub-franchisees. At the moment, we are almost at two sub-franchisee outlets to one company outlet,” says Leong.
As a result, ST Group is able to hold down expansion costs incurred with the opening of new stores. The bulk of the group’s expenses went towards funding its staff costs, which increased 46.4% y-o-y to A$16.3 million ($15.4 million) in FY2019 and represent 33.1% of the group’s total revenue.
Revenue for the full year ended June 30 increased 42.9% to A$52.1 million from A$36.5 million a year ago, with higher contribution from all the group’s business segments: F&B retail sales, supply chain sales and franchise revenue.
However, the company reported earnings of A$2 million, down 28.4% y-o-y in the same year. This was because it had to book its IPO expenses of some A$2.9 million. Stripping out the one-off IPO costs, the company would have reported earnings growth of 46.5% y-o-y to A$4 million.
ST Group was listed on the Catalist board of the Singapore Exchange in July this year. At its IPO, shares were offered at 26 cents each, which then increased to 28 cents when it made its debut on SGX. On Sept 11, shares in ST Group were trading at 27.5 cents, above its IPO price. At this level, the company has a market value of $67.7 million and is valued at 36.3 times historical earnings. E