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!

(4) Soulless establishments

Then there're these establishments that seem to have no concept of what they are offering their customers. It seemed like they found a hole in the wall, scraped together a bunch of food suppliers, bought a bunch of second-hand kitchen appliances, and started firing up the grill, hoping for people to come in. Sure they will, until they realise the food is "meh!" and the service sucks. There is really no story to the restaurant's existence. It is simply a poor excuse for being. Such establishments - and you know who you are - really have no reason to be there. By insisting that the government, the customers and the food suppliers owe them a living, they will quickly find themselves out in the cold!

Contrast that with an establishment that has a view to die for! I frequently patronise a restaurant that sells so-so food and beer by the bottle or on tap, not because the food is good, but because it oversees Pulau Ubin. The sea is just 10m from the restaurant frontage. Man! That is a view to die for! So, the food takes a back seat to the scenery. Of course, they are being held to ransom by the rent - but they can get away with reboiled chicken soup at $12 per bowl because of the view!

Ultimately, customers will pay for the experience. And if the quality of the food matches it, all the better! Soulless establishments don't have the intangible equity to charge more, and have a higher margin to hire Singaporeans.

Backed by a father-mother-grant that allows them to experiment, they go into the market with unreasonable expectations on the success of their business

(5) Unreasonable expectations

Another reason why landlords can act they way they do is because there are so many wannabe restauranteurs who think they have the next best thing to sliced bread! Backed by a father-mother-grant that allows them to experiment, they go into the market with unreasonable expectations on the success of their business. Outbidding the incumbent in the next rent cycle, they take over the outlet with a half-baked idea pushing out a more established business that cannot maintain the business at that rental rate. Six months in, the wannabe realises that he is in over his head and just walks away from the lease. The thing is, because the restaurant is not collateralised, even if the landlord were to pursue the legal route to recover the lost rent, he will not be able to do so. The best thing he/she can do is put the property up again in the market - but with an asking rent no less than what he/she lost. Again, this leads to a vicious upward spiral of rent.

They are now faced with an existential question: "How can I pay more for Singaporeans to work for us, when Singaporeans won't pay us more to eat with us?"

So, the problem is really a systemic one, where all players have a hand in. Up until now, restauranteurs have been able to stay one step ahead of the cost spirals by hiring cheap labour. At the salary levels they offer their staff, which is admittedly at a depressed rate compared to what local Singaporeans need, they have been able to maintain a razor-thin margin. With this margin, they have been keeping the establishment running. But also realise that this is just one month from failure! If they cannot keep the machine running, their game of musical chairs will come crashing down on them, as we have seen. They are now faced with an existential question: "How can I pay more for Singaporeans to work for us, when Singaporeans won't pay us more to eat with us?"

The perfect Catch-22.

The solution is also a systemic one which will need the realisation of the following:

when the competition is lessened and customers know that they have to pay for the quality of food and the experience - and that includes having Singaporean servers in the restaurant - then we would have a healthy ecosystem.

Solution 1: Allow some - or many - restaurants to close

We have seen many restaurants fail in the midst of Covid-19. While that is sad, it is also a good thing. It shows that the business has no long-term viability, which is not something that will attract good candidates, and also means that they cannot pay good salaries. This also decreases competitive pressures which will make the demand more inelastic. This further means that there is a higher chance of being able to charge more for their food, increasing margin, making the business more viable and paying a decent wage. All round win!

Solution 2: Going to the restaurant is a treat, so pay for it!

It is time that Singaporeans and residents paid the real price of restaurant eating. Because of the reasons laid out earlier, F&B establishments are reluctant to increase prices for fear of losing what little market share they have. But when the competition is lessened and customers know that they have to pay for the quality of food and the experience - and that includes having Singaporean servers in the restaurant - then we will have a healthy ecosystem. Being spoilt for choice makes Singaporeans - well - spoilt! And being spoilt means they will demand for more than what the restaurants can provide. If Singaporeans demand, then Singaporeans must have to pay for it. And if they cannot pay for it, then they will need to adjust their spending, and eat at the proper establishments.

on the back of illogical and unsustainable exuberance, landlords are the ones who stand to gain

Solution 3: Ensure that restaurants are well thought out, well funded, and have a compelling value proposition

There is also a need to have supportive approvals for F&B licenses. The government always prides itself in offering an open economy where anyone who wants to run a business can do so; and let the market respond. However, on the back of illogical and unsustainable exuberance, landlords are the ones who stand to gain from this. So the first thing we need to do is to ensure that the F&B outlet can stand on its own through well thought-out, well funded business proposition that holds compelling value for customers. Be that a unique menu, an interesting decor, a great ambience, or an award like Michelin stars or Best Bar in the World, there must be a reason for people to patronise the restaurant for more than its location, and for more than the sum of its parts.

Solution 4: Make F&B a true profession

Because the current barriers to entry are so low, anyone can do an F&B business. They believe that all they need are good ingredients and great cooking skills. Even if they have an injection of funds, they are unable to stay afloat in this brutal industry if they do not have something of value to offer. The greatest value to create, pound-for-pound, is experience. But it takes more than just culinary skills for that. It takes a savvy businessman, a shark, to survive in this business. Hence, there is a need to make this a true profession - of celebrating the next Singaporean Daniel Boulud or Joel Robuchon. They are not just culinary giants - they are also business masterminds! By ensuring that restauranteurs enter the industry with the right educational exposure, it will ensure that barriers are higher, and that ensures that only proper businesses with a valid value proposition can and will operate in Singapore.

Solution 5: Take a hit in the CPI

Finally, the Singapore government will have to take a hit in the consumer price index (CPI) when food prices go up. Singapore has been having it very good up until now, and do not appreciate how inexpensive food prices are. If one travels more - and I am not talking about the 10-day package tour to Japan - but really stay in a country for a couple of years, they will realise that food is very inexpensive in Singapore, and we have the government to thank for that. By keeping the baseline costs low through hawker fare, they are creating an artificial price ceiling for the residents. If these are lifted, the price will shoot up, increasing CPI along with it. In a country with no minimum wage, this can be (politically) dangerous. But what is even more dangerous is leaving the whole industry to fend for itself. It is perhaps time for the government to allow the industry to find its natural level in terms of pricing, so that it can sustain a local core. This means that they need to release the support for hawker fare so that every F&B segment competes on an even keel. This takes political will, one that is not easily supported. But if the government wants the industry to hire local staff, then it needs to do the right things.

Singaporeans must come to the aid of restaurants

An industry must both be a part of the local population as well as to serve it. Having the F&B industry staffed by foreign workers does not make it a part of the population; it is more like exploiting it. But because of many cost pressures affecting the industry, F&B owners are forced to take preventative measures to stay afloat. But with rent ever increasing, food costs ever increasing, price remaining stagnant, F&B owners have very little by way of margin to play to remain viable. This means that they have to resort to keeping manpower costs down - really the only cost component reasonably in their control. Ask any F&B owner if they prefer to pay more, and 80% will say yes, if they can afford it. But they cannot. With razor thin margins, they can only hope the government allows them to keep their foreign worker quota. Because, without it, they will not be able to hire any Singaporeans. There is simply no margin for that.