The Motley Fool

3 Key Risks That May Derail Jumbo Group Ltd’s Growth Plans

Jumbo Group Ltd (SGX: 42R), one of Singapore’s leading food and beverage (F&B) establishments, made a name for itself with its iconic chili crab dish. The group now has 14 F&B outlets in Singapore and six F&B outlets in China. It is also exploring multiple restaurant concepts, with six different restaurant brands under its belt: Jumbo Seafood, JPOT, Ng Ah Sio Bak Kut Teh, Chui Huay Lim Teochew Cuisine, Zui Yu Xuan Teochew Cuisine, and Chao Ting.

Jumbo has been steadily growing its presence in Asia through its franchising model, and it intends to slowly penetrate countries such as South Korea and Taiwan with new offerings. In fact, I’ve written about how Jumbo’s expansion could benefit investors as the group seeks to broaden its customer base and reach out to a wider pool of potential customers through the introduction of new dining concepts.

Our FREE SGX stock pick!

chart

We reveal 1 fast growing, Singapore stock pick flying under the radar, absolutely FREE!

However, investors should note the following three key risks, which could potentially derail Jumbo’s ambitious growth plans.

1. The high cost of labour and rental

In Singapore, where Jumbo predominantly operates, labour costs are rising steadily, and there is also a lack of suitable labour for F&B due to the government’s quota on foreign workers. This may make it extremely costly and onerous for Jumbo to hire good talent to staff its outlets.

In addition, rental costs are also rising around the island. The rise of these two key expenses could offset any increases in revenue coming from Jumbo’s expansion and franchising strategy.

2. Over-diversification of food concepts

Jumbo started out with just one restaurant in 1987 serving its famous chili crab, and it has steadily grown and expanded its restaurant concepts to rely less on seafood dishes. The group has launched two new dining concepts of Zui Teochew cuisine under sister restaurants Cui Huay Lim and Zui Yu Xuan, which specialise in Teochew classics. Another new concept introduced by Jumbo is “Chao Ting,” which is a casual quick-service establishment specialising in Teochew “Pao Fan” (rice in broth).

While it’s good to see management thinking of different food concepts in order to engage a wider crowd of customers, there is a risk of over-diversification as Jumbo increasingly strays away from its original roots. If the new food concepts are not well embraced, it will result in the group wasting valuable time and resources.

3. Risks relating to geographic expansion

Jumbo is currently expanding its presence in countries such as Taiwan and South Korea. In February this year, the group signed an agreement with TCI Inc to operate franchised Jumbo Seafood outlets in South Korea. The franchise agreement was signed in April and the joint venture formally incorporated. For the Taiwanese market, Jumbo opened its second and third Ng Ah Sio outlets in April and June this year.

The risk here is that each country’s residents likely have their own unique likes and dislikes, and Jumbo’s menu may not appeal to every country’s palate. The group may have to modify certain dishes or menu items to suit the tastes of a particular country, and even then, success won’t be guaranteed. Investors should be aware that geographic expansion, especially for restaurants specialising in local food concepts, comes with significant risks.

Want to know the Singapore stock we like more than this one? Read about one of our stock picks that has shot up 78% in just 2 years. We reveal the amazing story behind this stock ...and how you can potentially profit from it. Click here to download the free report now.

The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.