Dough is fast rising in China for BreadTalk

SINGAPORE - IF BreadTalk can survive the cost challenges in highly saturated and competitive markets such as Singapore and Hong Kong, it will be able to tackle similar problems in China, founder George Quek said yesterday.

He made the comments when asked about the group's ambitious plans announced in September to have 1,000 bakery outlets worldwide by 2014, with more than half in China.

This year alone, nearly 100 outlets have been opened across all three BreadTalk divisions - its core bakery business that contributes over half of revenue, food atrium segment, and its restaurants segment. This boosted the total number of outlets including franchises to about 630.

In China, its bakery outlets, mostly run by franchisees, will double to more than 500 by 2014. Some 120 new outlets will open there next year.

"Consumers there are accepting our brand," Mr Quek told BT in Mandarin yesterday.

"Singapore and Hong Kong are both saturated markets, both advanced economies, where the standards of living are high, personnel costs, rentals, investment costs, materials costs are all very high. I feel that our challenges in China aren't as heavy as in Singapore and Hong Kong. We have been in China for over 10 years and understand the business climate there."

BreadTalk shares closed trading at 67.5 cents, close to their record high of 72 cents in January last year.

The stock is up 27 per cent year to date and up 45 per cent from an intra-year low of 46.5 cents in May.

Rising costs have hit BreadTalk's bottom line. Its latest results for the three months to end-September show a 7.7 per cent fall in net profit to $3.4 million compared to a year ago.

On the back of a 26.9 per cent increase in group cost of sales versus a 21.5 per cent revenue increase, gross profit margin declined from 54.4 per cent to 52.3 per cent for the third quarter.

Profit contribution from its bakery segment was weaker than last year due to higher food, labour and rental costs. Labour costs also increased due to higher foreign worker levies and employer contributions, and an increase in mandatory minimum wages in China.

To cope, BreadTalk raised prices for its bakery products two months ago. Its signature pork floss bun now costs $1.70, up 20 cents from $1.50 at the beginning of the year.

Over the year, prices have gone up gradually by 15 to 18 per cent, said Mr Quek. This is in line with the rise in its labour costs.

"Otherwise with food costs, wage costs, rentals costs keep going up, your profits will decline. We adjust prices to a reasonable level. As a business, you need to have reasonable profits in order to keep going," he said.

This is only the fourth price adjustment since BreadTalk was founded in 2000, he added, and no more price increases are planned for next year.

BreadTalk is also hedging against rising rental costs by taking an interest in property. In October, the group's subsidiary, Imagine Properties, invested $20.13 million in a mixed-use project in Beijing's Tongzhou district. The project is developed by a subsidiary of Perennial China Retail Trust. Mr Quek said the investment is to allow the group to better understand the property business and achieve more reasonable rental rates.

Yesterday, he launched BreadTalk's latest venture, Thye Moh Chan at Chinatown Point and Parkway Parade. This was a 68-year-old bakery at Geylang Lorong 27, known for its Teochew-style mooncakes and tau sar piah (mung bean pastries).

The bakery closed last September as third-generation owner Koh Hong Chua, 66, said his helpers were getting old and his two sons had no interest in taking over the business.

Mr Quek, who is also a Teochew, bought the brand last December for an undisclosed sum. The purchase was for both sentimental and business reasons, he said yesterday.

He has eaten the bakery's pastries since he was 10. They were bought by his father, who died nine years ago. It took several years after that before he found out, through his wife's friends, where the pastries were sold, he said. "The brand is a cultural treasure, it has a lot of potential," he said.

He does not plan to expand the brand quickly, or buy other similar old brands for now, he said. "After three months, I will know how it will perform."

Added senior vice-president of brand development Joyce Koh: "We need to introduce it to a younger generation. This is an old brand and still quite niche."

Meanwhile, Mr Quek said all three lines of BreadTalk's businesses remain profitable.

"We will be careful to pick right locations in every city. Over the last 12 years, we have survived several financial crises. We have an experienced team and can meet the challenges ahead."