Product and Service

Companies included in restaurant –coffee, tea& snacks sector in food service industry primarily operate restaurants serving coffee, tea& snacks.


Demand for Product and Service

As our sales data indicates, the demand for coffee and baked food has been strong with a solid consumer base due to some positive factors in current unfavourable industry climate. However, growth slows down in the past two years as growth in traffic decreases probably as a result of some temporary changes in a long run upward trend.

The Sector

Sector’s current, trend, causes behind trend, and future

Current and Trend

  1. There is an apparent downward trend in traffic since 2015, which has caused a huge pressure on sales of those companies.
  2. Generally, demand from loyal customers for the service/ products of coffee, tea, and baked food restaurant seems to be solid as indicated by the fact that while traffic declined the sales has been still increasing driven by increasing check size, which may be offset by promotion on expenses side. Continuingly increasing sales has been also benefiting from quick expansion in developing new market by opening new stores (franchising).
  3. All restaurants in this sector present a consistency in terms of this downward trend probably under the common influencing factors.
  4. QSR companies in this sector have tended to re-franchise their company-operated restaurants and the trend is more obvious among coffee and baked food restaurants primarily due to strong market demand and high profitability.
  5. Successfully increasing franchise rate has helped improve the gross margins of companies, which have also benefited from rising menu price and decreasing commodity costs.
  6. While slowing down traffic and thus decreased revenue from comparable stores, companies’ revenue have kept increased benefiting from quick expansion in developing new market by opening new stores(franchising).

Causes behind the trend

Competition in the low end sector of restaurant industry has never been focused on price as indicated by the fact that restaurants usually raise menu price/products mix to offset the impacts of decreasing traffic. Therefore, there are two explanations for the slowing down traffic: 1. Traffic stay home as a result of economy or changes in eating habit 2. Traffic goes to somewhere else.

We think the trend happening among restaurants in this sector has reflected changes in economy that influence consumers’ spending. Generally, benefiting from the recovery of economy, especially quantitative easing monetary policy and low borrowing cost, consumers’ spending has been strongly stimulated and kept on the high level, which probably has been the major reason why we have seen the favourable industrial environment in the years before 2015. However, in a recovery characterised by low wage increase and due to the recent change in monetary policies and their influence such as rising interest rate and slow rise in property price, pressure on the rising consumers’ disposable income increased or at least the pressure was felt.

Slowing down mall traffic resulted from changes in economy and in shopping habit (turned to online) is attributable to the declining traffic of restaurants in this sector.

Lower price products usually present lower sensitivity to declining purchasing power from the consumers and at the same time may benefit from shifting of consumption down to cheaper products/service as a result of declining purchasing power.

Another reason that may be attributable to the decrease in comparable sales in this sector may be increasing overlapped competition as a result of increased new opening of restaurants.

Integration of supply and the size of consumer pool, demand, and margin seem to be the factors determining extent to which business can be franchised in every sector of restaurant industry. Deeply re-franchising and quick expansion happening among companies in this sector companies just reflect favourable factors of franchising to those coffee and baked restaurants as discussed above. 

Industry Future

We think restaurants in this sector will continue to be competitive with their low consumption costs in the current unfavourable industry climate and the accelerating recovery of economy will eventually help bring consumers back to restaurants after the temporary impacts from cease of quantitative easing policies are consumed.


General Financial Performance of Companies In the Sector

It seems that the slowing down traffic is the major reason contributing to slowing down increase in comparable sales for those coffee and baked food restaurants in the past several years. Data indicates that the average increase in comparable sales all across this sector went down from around 4.7% of 2015 to around 0.8% of 2018.  Correspondingly, accompanied with declining sales, the traffic has been down for most of companies in this sector since 2015.  However, companies in this sector present strong ability to expand its business by opening new stores (both company-owned or franchised) and it seems, in terms of margin of new store, the demand in the newly developed market for their new stores is strong. In addition, still strong demand allowed companies in this sector to adjust menu/sale mix to generate more spending per customer to offset the decreasing traffic. This is probably why we are seeing that for most companies they have been able to present positive growth in their comparable sales while decrease in traffic.

For many companies in this industry, franchising their company-operated restaurants obviously has been the focus of their business strategies in dealing with unfavourable climate of this industry. It seems it is easy, due to high margins and strong market demand, to find franchisees for their restaurant expansion.

Our data indicate that, while slowing down comparable sales, there are general improvements in franchising companies’ gross margins (went up to 63% in 2017)  in the past several years benefiting from shifting of revenue to re-franchising and rising menu price. With an average of 22% SG&A percentage of sales, the average franchising companies’ operating reaches 44% in 2018. For companies with owned stores, the margin decreased as traffic slowed down (increasing check size was offset by promotions as estimated). The typical gross margin for non-franchising company is about 23% with 7% SG&A percentage of sales and 16% operating margin.

The average cash flow per share of companies in this sector increased slightly in 2017 and 2018 probably as a reflection of combination of decreasing margins and store &re-franchising expansion.

According to our analysis, the current companies’ enterprise price/EBI ratio is average 31with an interest/EBITDA ratio of 15%.      

Generally, impacts of unfavourable climate of restaurants industry to traffic since 2015 seem to be less significant to this sector than to other restaurants.


                                                        Growth in Comparable sales              Growth in Traffic

                                                         2018     2017        2016         2015               2018       2017           2016            2015

  •  Quick service restaurants      0%         1.3%        2%           4.8%                1%         -0.9%         -1.3%           0.6%
  •  Fast-casual restaurants          -1%       -2%         -0.8%        3%                  -5%       -3.5%          -1.5%          0.2%
  •  Casual dining restaurants      1.3%      -0.6%      -0.9%       1.7%                -0.9         -2.4%          -2.3            -1.1%
  •  Fine dining restaurants          1.2%       0%         -0.2%        1.7%                -1.5%     -1%             -0.5%          -0.5%
  • QSR-Coffee, tea, and baked    0.8%      1.2%        3%           4.7%               -1%           0%


Average enterprise Price/EBI ratio (2017):

QSR: 31     

Fast-casual: 40 

Casual dining: 30

Fine dining: 21

QSR-Coffee& baked: 25

Average Enterprise price/EBI ratios (2018):

QSR: 29     

Fast-casual: 35 

Casual dining: 29

Fine dining: 24

QSR-Coffee& baked: 31


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