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We need a significant shift in our attitude towards F&B prices

CNA reported last week that there were no applicants for 1,000 job openings in the food & beverage (F&B) sector in Singapore. This goes to show the structural issues facing the industry. Of course, both sides of the fence point fingers at each other. The applicants say that the F&B establishment owner is offering too low, since they are so used to having foreign labour to do the work. The F&B owners are saying that even when there are so many people being laid off, Singaporeans are not hungry, and will not pick up available jobs. The fact of the matter is, both are right. And then, not really so. This is a very complex issue that requires significant rethinking.

Let's start from the very beginning.

The psyche of less than $10 per person per hawker meal has been deeply ingrained in residents

Singapore is a food-lovers' paradise

Singapore prides itself at being a food-lovers' paradise - offering really delicious and, many will say, cheap fare. The hawker culture has been deeply ingrained in the people. Why do they need to buy ingredients from the supermarket, slave over the meal for over an hour, and then come up with something that is not even half as good as what they can get at the hawker centres for half the price per serving?! The only people who cook from home are people who love cooking or those who have a family to take care of. Many other Singaporeans simply walk no more than 10 minutes, and they get a whole gastronomic experience for less than $10 per person!

The psyche of less than $10 per hawker meal has been deeply ingrained in residents such that they will balk at prices of more than $15! Of course, these days, that amount had become somewhat fungible, as more people take to ordering in from the food delivery apps, where the platforms tack on a huge fee on top of the price of the food. While this seems to make demand for their favourite hawker food inelastic, it will drop off fairly quickly. Once the price crosses the $18 price point, they will start to compare them against cafe or restaurant food prices and will reject these hawker dishes.

This brings us to the next segment - one which is sandwiched between cost and revenue - the restaurants. To be fair, we are not referring to the high-end restaurants that serve dishes at $30 to $50 a plate. These high-end, fine dining establishments are very well heeled, and attract the equally well-heeled clientele. They have no problems attracting both staff and customers. Customers in these establishments do not so much as look at the price of the meal as to they do the experience. Hence, these restaurants do not have a problem hiring and retaining good staff since they pay very well. However, they also demand a high professional standard in their staff and hires, so they do not usually hire off the open market. These restaurants are therefore not the subject of our discussion, even though they have their own problems.

However, the restaurants that straddle between the hawker centres / food courts and the fine-dining establishments are the ones that face the biggest manpower crunch. They are the ones who need to hire more local staff because they have been hit by foreign worker quota reduction. However, they are facing many systemic problems that cannot be solved by money alone. It requires the efforts of the entire ecosystem to make it happen.

Here's why....

With every extension of the supply chain, with every risk reduction implementation, the landed cost of each item goes up

(1) Rising food costs

It is not a myth that costs are indeed rising. Since Singapore is not a primary producer of food ingredients, we will need to import a lot of what we cook. That is why Singapore pride's itself in - and works so hard to maintain - its connectivity. If there is greater network connection, we can shorten our supply chain. Covid-19 has stress-tested our supply chain resilience, and kudos to the Singapore Food Agency for maintaining food supplies resilience. But guess what? Just because we can get supplies in, does not mean it comes in cheap! With every extension of the supply chain, with every risk reduction implementation, the landed cost of each item goes up. So, food costs go up... that is not that bad, right? Well, no! That is not the only cost item that continues to rise!

(2) Increasing rental rates

We all know the impact of rental on a business, don't we? In land scarce Singapore, where lettable real estate is limited, the landlord holds all the cards. Not content to simply meet their internal rate of return (IRR), they seek to have that IRR increase over the years! This means that every year or so, they will check what the market is trading at, and look to match, or beat, that. It does not matter that their costs are sunk and an IRR last year would well suffice for this year or next. No! They want the IRR to increase, and that means there is no landlord loyalty. They know it is more difficult for the F&B owner to up and leave than it is for him to find a new F&B tenant. Hence, they play hardball, and they normally win! Unless the F&B owner is also the landlord, which makes things so much more manageable, he will always be at the landlord's mercy, especially if the location has high foot fall! The thing about restaurants is that the more successful one is, the more rental one will be paying over time. Who gets fat? The landlord!

because of the intense competition of me-too restaurants, the demand is very elastic

(3) Price elasticity of demand

All this will be well and good if the demand for the food is inelastic. Unfortunately, that is not the case. With so many restaurants in Singapore serving the same type of food, with the same quality (because they all source for the same supplier who has already done 80% of the food prep), there is a baseline price for the offering. You can probably move a couple of dollars on either side of the average price, but a braised lamb shank at a local restaurant cannot go beyond $28 because the same product will also be offered by the restaurant next door! Now, beverages are actually where these establishments can make the difference, but if the offerings are bottled or draft beer, then intense competition has set the price of one pint of beer at $10. Move beyond $18 per pint, and the customers will move to the next restaurant. Hence, because of the intense competition of me-too restaurants, the demand is very elastic. Move one or two dollars above the market, and the customers disappear! So what this means is that there is very little room for the restaurant to charge more, even if they wanted to!