Japan Foods Holding Ltd (SGX: 5OI) is a leading Japanese restaurant chain in Singapore. Established in 1997, the group operates 55 restaurants in Singapore under various brands such as Ajisen Ramen, Osaka Ohsho, and Menya Musashi.
Investors may be wondering if Japan Foods’ wide spread of brands would make it an attractive investment. After all, the group is attempting to capture customers across a wide variety of segments by opening restaurants with different Japanese food concepts. The idea is to provide customers with a good range of choices for Japanese cuisine in order to generate loyalty and repeat patronage. How well has this concept worked out over the years?
A wide portfolio of brands
Over the years, Japan Foods has expanded its range of brands. From its original core brands of Ajisen Ramen (known for its rich and aromatic soup broth), the group has opened many other Japanese dining concepts. Some of these are franchised brands, while others are self-developed brands and concepts. Some examples include:
- Fruit Paradise: Fruit tarts and desserts with cream and topped with fresh fruits.
- Curry Is Drink: Promoting the idea that curry can be consumed as a soup rather than just used as a sauce.
- Menya Musashi: Offers multiple tastes and concepts including ramen and bento sets.
- Kazokutei: Offering Osaka’s famous udon brand to Singaporean customers.
Japan Foods has even become a franchisee for a non-Japanese concept restaurant called New ManLee Bak Kut Teh from Kuala Lumpur, Malaysia. Clearly, the group has a dizzying array of brands and is working on launching even more.
Spreading itself too thin?
The danger here, of course, is that the group may end up spreading itself too thin. Rather than concentrating on a few core brands and concepts, Japan Foods seems to be dipping its toes into almost everything in a valiant attempt to capture a slice of every pie. While the group does not provide details on how each brand is performing, both on an overall and same-store sales basis, it is probably fair to conclude that some brands are doing well while others are not.
Management then needs to devote time and resources to supporting the weaker brands, or decide to shut the stores altogether. The time, money, and resources devoted to these activities could very well have been spent on the better-performing brands to enable them to become more profitable.
Rental and manpower remain persistent challenges
As can be seen in Japan Foods’ recent fiscal year 2019 (FY 2019) earnings report, rental and manpower costs remain a pressing issue. The group reported weak revenue growth of just 0.3% year on year, while cost of sales increased by 4%, thus depressing gross margins. Selling and distribution expenses rose by 4.4% year on year, a testament to high rentals, meaning operating and net profit tumbled. Although the business continues to generate good free cash flow, it may just be a matter of time before the weak performance affects cash as well.
Sharpen focus and manage costs
Japan Foods would probably do better if it sharpened its focus on its best-performing brands while reducing the total number of brands it has. A wide portfolio may sound good on paper, but it sucks up significant amounts of time, money, and effort. In an environment where competition is stiff and labour costs are high, the group cannot afford to spread itself too thin.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.