New fuel prices could eat into F&B margins


Dubai: For the local F&B sector, there’s no such thing as taking a breather. More concepts are putting out the tables and their best cutlery to woo diners, and locations keep opening up at malls and streetside to accommodate the newcomers and those established brands that are seeking additional outlets.
 
Meantime, local business groups espy great potential in diversifying into fine and casual dining, as well in fast food. It is rumoured that one such entity with interests in real estate development will shortly confirm its foray into F&B shortly. And quite an amount of sizable funds are available to keep such plans simmering, with private equity starting to show a good deal of interest in the sector. (A F&B outlet at one of the prestige towers in Dubai has an asking price of just under Dh1.5 million, and has had no issues with trying to find bidders.)
 
But behind all the ceaseless activity, there are some real concerns bubbling through — “The cost of goods is not changing, which in turn, impacts the industry and diminishes the success rates of businesses,” said Jihad El Eit, founder and CEO of the Man’oushe Street chain, And “especially for entrepreneurs who are trying to cope with the high expenses of rent, paying employees and other related operational expenses.
 
“With all of these, businesses are already losing 35 per cent of their cost margin.”
 
Add to the already high expenses on rents and staff comes the additional cost incurred by the new fuel pricing mechanism, and more so in the mid- to lower end of the F&B spectrum.
 
“Any F&B operator catering to a mid and fast-food consumer market and with a high share of delivery orders [both residential and corporate] in their revenues will feel the pinch,” said the owner of a fast-serve concept. “The increased fuel costs should impact by between 2-3 per cent, and further cutting into net margins that are in the single-digits. The cost of operating a F&B outlet in Dubai, especially, has gone through the roof.”
 
It explains why even as new operators enter the market, some of the weaker ones go bust. At one particular mid-tier mixed-use tower cluster in Dubai, the attrition rate for F&B outlets have been as high as 50 per cent in the last three years.
 
But those operators with deep enough pockets are strictly thinking long term. “All of the trends are upwards and this will continue up to 2020 and beyond — It might be argued that the cost of rental supports a better class of competition,” said Darami Coulter, Global Marketing and Communication Manager at Sumo Sushi & Bento International.
 
“We work closely with investors prior to any purchase and help them calculate an attractive return on investment. We know which way the market is going.
 
“Accordingly we have adapted our offering as the market has matured, most recently introducing smaller ‘grab-and-go’ takeaway concepts as well as identifying new process efficiencies for larger dine-in restaurants.
 
“I do believe the solid concepts will launch, grow, and stay — as long as they focus on rewarding loyalty and focus on the quality of their proposition against discounting their prices.”
 
And F&B operators better be selective with the locations. Any mismatch there will have dire consequences on viability.
 
“The idea of locating your F&B business in a mall does not necessarily work for all concepts,” said El Eit. “This is mainly due to the high rentals and the structure of lease agreements, which will make it difficult for some concepts to operate in a mall.
 
“For example, Man’oushe Street’s concept works better across community malls rather than mega-malls. Of the 13 branches that we operate in the UAE, only one is located within a community mall, while the rest are all in street locations. I believe in the ‘hedgehog concept’ — placing strong focus on what you are doing and doing it right.”