Industry Overview

6. INDUSTRY OVERVIEW 6. INDUSTRY OVERVIEW 6.1 OVERVIEW OF THE GLOBAL ECONOMY The global economy recovery continued but at a moderating pace in the third quarter of 2010 following waning effect from the temporary fiscal stimulus that supported growth in the first half of 2010. Economic activities in the major advances economies remained fragile, recording moderate expansion as private sector activities had yet to fully recover while the policy support had begun to fade. After registering an exceptional growth performance in the first half of 2010, most Asian economies continue to sustain a firm recovery, although the rate of expansion showed signs of moderation due to weaker external demand and dissipating low base effect. Compared to the second quarter of 2010, conditions in the international financial markets improved, particularly after the release of the results of the stress test on the European banks in July 2010. However, the euro area peripheral economies continued to face higher financing cost. In additional, the divergence in growth prospects between the advanced economies and emerging economies resulted in large and volatile capital inflows into the emerging economies, exerting upward pressure on asset prices and exchange rates. While authorities in the advanced economies have undertaken further quantitative easing to stimulate the economy, the authorities in the Asian region have adopted wide-ranging measures to mitigate the impact of capital flows on their economies. (Source: Quarterly Bulletin, Third Quarter 2010, Developments in the Third Quarter of 2010, International Economic Environment, Bank Negara Malaysia)
6.2 OVERVIEW OF THE MALAYSIAN ECONOMY The Malaysian economy expanded strongly in the first half of 2010, underpinned by strengthening domestic demand, particularly in the private sector. As in other regional countries, Malaysia’s export growth has, however, slowed in recent months. These conditions are expected to continue with the slowing of global growth underpinned by weaker global trade conditions and the ongoing sovereign debt problem in the Eurozone. Nevertheless, developing Asia continued to lead global growth through their resilient domestic demand. In Malaysia, economic growth decelerated to 8.9% year-on-year in the second quarter of 2010 on slower growth in net exports. While these external developments may result in a moderation in the pace of growth of the Malaysian economy, moving forward, the overall growth will continue to be supported by the robust domestic economic activity. Leading indicators suggest that private consumption and private investment will continue to expand. This is also supported by the favourable labour market conditions, positive consumer and business sentiments, low inflation and conducive credit conditions. The above, alongside improvement in consumer and business confidence has prompted the Malaysian Institute of Economic Research to maintain the economic growth rate to +6.5% year-on-year in 2010. Nevertheless, the economic growth rate is forecasted to moderate to +5.2% year-on-year in 2011. (Source: Malaysian Economic Out/ook 3Q 2010, Malaysian Institute of Economic Research; and Monetary Policy Statement, 2 September 2010, Bank Negara Malaysia)
6.3 OVERVIEW OF THE FOOD SERVICE INDUSTRY IN MALAYSIA Malaysia’s food service market was estimated to be valued at RM19.8 billion to RM23 billion in 2009. These estimations exclude revenues from the catering business and from restaurants within hotels in Malaysia. It is also estimated that the food service market in Malaysia will grow at an average of 10% to 15% in the coming years. 6. INDUSTRY OVERVIEW The Malaysian food service industry is highly competitive. Consumers are spoilt for choices thus raising competition among food service companies. Not only do food service industry players have to innovate and produce, they need to sell reasonably good standards of food to win continued support and patronage from customers. A large component of the food service industry in Malaysia comprises local food service restaurants, locally known as “mamak stalls”, and kiosks owned by small-to-medium scale business operators. Food industry experts estimate that there are at least 20,000 of these small scale food service operators in Malaysia. Another well-recognised food service segment in Malaysia is the food chain operators. The food chain model is considered a western concept, where a food operator expands its business by establishing other outlets or through franchise. Although most of the popular fast food brands in Malaysia are of foreign-origin, trade specialists mentioned that local independent players are gradually adapting to the idea of franchising. The Malaysian Franchise Association reported a 15% increase in the number of registered franchise businesses, under the Registrar of Franchise, Ministry of Domestic Trade, Cooperative and Consumerism, in Malaysia from 2005 to 2009. Malaysia’s food chain restaurants comprise mostly of cafes, fast food joints and FSRs. The Malaysian food service industry is divided into four (4) broad categories, namely:­
• FSR -Include restaurants that provide dine in services, with a sit down and serve concept;
• Fast Food Restaurants -Include outlets that provide dine in services, with a self service concept;
• Small-to-medium Independent Food Operators -Include the “mamak stalls” (operated and owned by Indian Muslims), Food Stalls, Kiosks and Street Vendors;
• Cafes & Bars -Include restaurants where drinks and light snacks are offered, with a sit down and serve concept/self service concept.

(Source: IMRR)
6. INDUSTRY OVERVIEW 6.4 GROWTH DRIVERS Growth in the sector is seen to be directly related to the trends in consumer eating habits. Industry experts opine that Malaysians prefer to consume their meals outside of their homes. This is due to the fact that food stalls provide more variety and are a cheaper option for family meals. They also save families a lot of time in view of preparation of meals at home. Locals currently only consider cooking at home during weekends as a hobby or as an enriching activity for the family, as commented by the Chairman of Malaysian Muslim Restaurant Owners Association (commonly known as “PRESMA”). It is further noted that the Malaysian food industry follows the trends of locals from all age groups. The family crowds are catered for by the many types of restaurants offering numerous types of cuisine to cater for everyone in the family. The teenage crowd, which is usually known to come out later in the night, are catered for by the many restaurants that remain open for a longer period of time. The Chairman of PRESMA further believes that the opening of these restaurants has helped to curb youngsters from engaging in illegal or unhealthy activities. Consumer Spending The food service industry is largely consumer-centric, as Malaysians spend almost 31.4% of their wages on food and non-alcoholic beverages (as measured in 2005). This constitutes the highest weightage in Malaysian household expenditure. It was noted that the average wage of Malaysians in all sectors have been consistently increasing. The average Malaysian monthly consumption expenditure reached RM1,953 in 2004/05. As reported by a household expenditure survey, this was an increase from 1998/99 when it was RM1,631. It was further noted in the 2004/05 survey that households in urban areas spent RM2,285 monthly, 1.8 times more than rural households, who spend RM 1,301 monthly. Converging Knowledge notes that there are no updated statistics available on the average monthly consumption expenditure in Malaysia. The last available information for the household expenditure survey was in 2005 and the latest household expenditure survey has been conducted in 2010 but the results from the survey are still pending release. Converging Knowledge further notes that 70% of household expenditures are spent on four main groups, namely:­• Food;
• Housing, Water, Electricity, Gas and Other Fuels;
• Transport; and
• Restaurants and Hotels.

As Malaysians continue to earn more, their spending power increases. Experts opine that expenditure on food, as a basic necessity, will increase. The increase in number of working mothers also increases the number of families that dine out for meals. These factors ensure that the food retail business is set to thrive under present economic conditions. Industry experts and food stall owners in Malaysia have expressed that despite the rise in food ingredient prices, they have endeavoured to ensure that food prices are not affected. They opine it is unwise to constantly change their food prices and contribute the rise in cost to the unstable commodity prices globally. Urbanisation Malaysia’s increase in urban population saw a rise in the number of shopping malls developing in many parts of the country.


6. INDUSTRY OVERVIEW As more of these shopping malls are developed, industry experts opine that there will be increased accessibility to food and beverage outlets. Locals also appear to prefer shopping in cool comfort, and spend more time in malls. Interviewees opine that locals prefer the concept of a shopping centre with various outlets available and hence, food stall owners would prefer to have their outlets in shopping centres as well. Locals interviewed said they prefer to consume their meals with families at nearby malls and food outlets within the proximity of their houses. Urbanisation has increased the establishment of more food outlets in the various states in Malaysia, hence allowing wider choices for the locals. Kuala Lumpur is said to be the most densely populated city in Malaysia, with a number of “super-sized” shopping malls. According to data released by the National Property Information Centre, as of second quarter 2010, the average occupancy rate for shopping centres in Kuala Lumpur stands at 83.9%. Interviews by Converging Knowledge suggest that the increase in the number of shopping malls in the country has also created a positive increase in the number of entrepreneurs in the food industry. With more outlets available, franchising has become an increasing trend in the country. With over 388 registered franchises in the country and an estimated 120 of them in the food business, the franchise industry is said to constitute approximately 5% of market share in the retail sector. The food industry in Malaysia is set to grow with the increasing number of franchises in the country. Perbadanan Nasional Berhad has been appointed by the Ministry of Domestic Trade, Cooperative and Consumerism (formerly known as the Ministry of Entrepreneur and Cooperative Development) as the agency to support government policies in producing more entrepreneurs. These franchising entrepreneurs may decide to franchise local brands or acquire foreign brands. Tourism The tourism department reported that in 2009, tourists in Malaysia have spent RM9.29 billion on food and beverage, an increase of 6% compared to RM8.77 billion in 2008. Malaysia’s tourism industry is growing and is fast becoming a major tourist destination in Asia. In 2009, Malaysia recorded 23.6 million tourist arrivals and RM53.4 billion in tourist receipts. This is an increase of approximately 7.3% and 7.7% respectively from the previous year (2008: 22.0 million; RM49.6 billion). Tourist arrivals were recorded at 2.1 million in November 2010, representing an increase of approximately 2.8% from the same period of the previous year. The Malaysian Tourism Ministry holds an annual “Fabulous Food 1 Malaysia”, a street food festival held during the December period, which showcases Malaysian cuisine. Other innovative and aggressive programmes, to benefit both locals and tourists, have been rolled out to boost tourism in the country. The Homestay programme allows local Villagers to rent their rooms to tourists, providing an “authentic unique experience”. Furthermore, approximately 500 Malaysian guides are said to be undergoing a three-month foreign language course. The languages being pursued include Russian, Arabic, South Korean, Japanese and French. These guides would boost the tourism sector and act as much needed aid to the tourists in Malaysia. The launch of a Malaysian Healthcare Travel Council will aid in introducing Malaysia as a healthcare hub in the region. As at October 2009, the health tourism industry contributed RM300 million to the GDP but is expected to be able to contribute more than RM1 billion. As the government looks to collaborate with the private sector to strengthen the health service industry, an influx of health services tourists will benefit the local food industry. Apart from appealing to general tourist avenues, Malaysia is also set to promote itself as a destination for MICE tourists. Tourism Malaysia is reportedly targeting the MICE market, which recorded an estimated 1.18 million MICE arrivals in 2009. This is considered a 150% increase since the opening of Malaysia’s Kuala Lumpur Convention Centre in 2005. 66
6. INDUSTRY OVERVIEW Malaysia is still bullish on its ability to attract tourists into the country after emerging strong from the impact of the H1 N1 pandemic and the global economic crisis. The government and the private sector were quoted to have acted decisively to counter the impact of the crisis. The added measure of conducting audits on tourism products through the Innovation Center of Universiti Teknologi Malaysia has helped to maintain the standards of their tourism products. (Source: IMRR) 6.5 INDUSTRY PLAYERS AND COMPETITION It is estimated that there are approximately 65 well-recognised food chain brands in Malaysia, operated by 55 companies. These are mostly franchise brands that operate over 2,600 outlets across the country as at 30 July 2010. In terms of number of outlets as at 30 July 2010, the top five (5) leading food service chain brands are Kentucky Fried Chicken (494 outlets), Pizza Hut (208 outlets), Secret Recipe (200 outlets), McDonald’s (196 outlets), and Old Town White Coffee (160 o~t1ets). As mentioned in Section 6.3 of this Prospectus, the food services industry comprises four (4) broad categories which consist of FSR, fast food restaurants, small-to-medium independent food operators and cafes & bars. The Group positions itself as an FSR operator within the industry. FSR are “family friendly” food establishments where customers are conveniently seated and are offered personalised table service. In view that the target market of FSR operators differs from the other categories of food operators within the industry, FSR operators should not be compared to other food operators. The IMRR has identified below the closest competitors of BRoasters in the food service industry. Note that these players are all FSRs and have a similar food offering as BRoasters, which is poultry. They are also well-recognised food service operators in Malaysia. “‘ ‘ ‘  Nando’s I  TCRS  Rasamas,  Chickenland (M) ,, Restamants Sdn  Holdings Sdn  BRoasters  Sdn Bhdi  Bhd  Bhd
Principal activity Key Brands Number of Outlets* Financial Year Ended Revenue (RM mil) Gross Profit (RM mil) EBITDA (RM mil) Profit/CLoss) before tax (RM mil) Profit/CLoss) after tax (RM mil) Operation of KRR chain of restaurants Kenny Rogers Roasters 51 30 April 2010 60.41 22.63 15.90 10.75 9.03 Operates Nando’s I chain of restaurants I i I, Nando’s 38 31 December 2009 56.85 38.74 6.53 3.30 1.76 Operator of restaurants selling chicken rice and related dishes The Chicken Rice Shop (UTCRS”) 56 31 December 2009 52.07 31.52 4.61 1.79 1.07 Operation of a chain of RasaMas restaurants RasaMas 37 31 December 2009 17.55 9.39 (5.16) (9.78)

6. INDUSTRY OVERVIEW <, Nando’s TCRS ;’., Rasamas ,>y>.’ Chickenland (M) Restaurants Sdn . HoldingsSdl’l ,.,;1:’.. BRoasters Sdl’lBhd Bhd “Bhd Gross profit margin PBT margin PAT margin Current ratio Gearing ratio 37.46% 17.80% 14.95% 3.86 -68.14% 5.80% 3.10% 0.46 0.61 60.54% 53.50% 3.43% -2.05% -0.59 0.77 -Note:­.. There are no comprehensive statistics publicly available on the number of food chain outlets (by operator) in Malaysia. Interviews were conducted to ascertain the number of outlets of each chain operator, on a best effort basis. The number of outlets is as at 30 July 2010, except for BRoasters, which is based on the number of outlets as at the LPD. (Source: IMRR) A review of the aforementioned companies’ financials shows that in terms of gross profit margin, Nando’s secured a lead with 68.14%. However, TCRS comes close with a gross profit margin of 60.54%. BRoasters came in third with 37.46% in gross profit margin. Notwithstanding the above, BRoasters posted the highest EBITDA, amounting to RM15.90 . million. This reflects the company’s efficiency as it is able to keep its operating costs lower as compared to its closest competitors, which is Nando’s (EBITDA: RM6.53 million) and TCRS (EBITDA: RM4.61 million). RasaMas incurred losses for the financial year ended 2009, amounting to RM9.78 million. This is due to the company’s high selling and marketing expenses. Amongst the factors that may affect competition among players in the FSR segment are as follows:­(a) Pricing Licensed franchise operators of FSRs have little control in terms of pricing. Since pricing is determined by the local franchisor, the franchisee has less advantage compared to non-franchise FSR players. As such, non-franchise FSRs have more flexibility in adjusting prices to attract customers. Franchise operators tend to have higher operating costs, as compared to non­franchise FSRs. A franchised FSR must comply with standards set forth by the franchisor, and any fluctuation in its supplier’s prices is not immediately passed on to the customer. However, this benefits the customers since pricing is more regulated, as compared to independent FSRs. (b) Branding FSRs can either be a foreign brand or a “home-grown” brand. Industry players find that there are a growing number of young Malaysians who are drawn to foreign brands due to western exposure or influence. Foreign branded restaurants are perceived to be more “trendy” and better in quality control, as compared to local restaurants offering similar services. Although foreign branded FSRs are said to be priced slightly higher than local restaurants, there are customers who are willing to pay a premium for the dining experience and “ambience”. 68 6. INDUSTRY OVERVIEW
Chained restaurant brands, which are usually foreign franchise companies, are said to have more budget in terms of R&D and advertising. This enables them to promote its brand to the masses throl1gh commercials, as well as conduct R&D work, compared to local restaurant food operators that are conservative in their budgets. (c) Halal Muslims comprise approximately 60% of Malaysia’s population. In order to capture a significant market share, businesses need to ensure that the food served comply with the Muslim faith. This includes obtaining “Halal” certification from the Department of Islamic Development Malaysia. (d) Food Options Poultry is a common staple in the Malaysian diet. FSRs that offer meals with this diet usually have a market advantage, as compared to restaurants that do not. Moreover, local restaurant operators also mentioned that there are a number of Malaysians who are becoming more aware of the benefits of healthy living. As such, restaurant operators are gradually including healthier food options to customers who are diet conscious. (e) Location Industry specialists commented that restaurant patronage of FSRs may also vary depending on location. Some local FSRs tend to have higher patronage in areas that are outside the capital, Kuala Lumpur. They explain that locals in some Malaysian states (Le. Sarawak) tend to be more nationalistic and opt for brands that they recognise as home-grown. Meanwhile, there are areas in Malaysia where there are a growing number of foreign communities. Interviews with some locals revealed that Ampang, a suburb of Kuala Lumpur, has seen an increase in Korean residents. As such, there is a growing precinct of Korean restaurants and shops gaining popularity among residents, as compared to FSRs that serve local cuisine. (Source: IMRR)


6.6 LEGISLATIONS, INCENTIVES AND POLICIES Healthy Lifestyle Campaign The Malaysian government first embarked on a Healthy Lifestyle Campaign in May 1991. The campaign was initiated by 1VI0HM and officiated by the then Minister of Health, Y.S Dato’ Lee Kim SaL The campaign’s slogan was appropriately named “Love Your Heart”. The focus of the campaign was to encourage the public to exercise, to encourage the public to consume nutritious food in appropriate amounts, and to curb the occurrence of various forms of stress. The campaign was introduced in two phases, beginning from 1991 to 1996 (Phase 1) and 1997 to 2007 (Phase 2). Phase 1 focused on issues pertaining to common medical conditions/situations in Malaysia each year. This included the following themes:­• Cardiovascular Diseases -1991 ;
• Control and Prevention of Acquired Immune Deficiency Syndrome (more commonly known as AIDS)/Sexually Transmitted Diseases (more commonly known as STDs)­

1992; • Food Hygiene -1993;
• Health Promotion for Children -1994;

6. INDUSTRY OVERVIEW • Cancer -1995; and
• Diabetes -1996.

Phase 2 of the campaign was aimed at educating the public on specific behavioural traits/skills that would ensure a longer and healthy way of life. Phase 2 included the following themes:­• Healthy Nutrition Campaign -1997;
• Exercise and Physical Fitness Campaign -1998;
• Safety and Injury Prevention Campaign -1999;
• Mental Health Promotion -2000;
• Healthy Family Campaign -2001;
• Healthy Environment Campaign -2002;
• Healthy Lifestyle Campaign (School Setting) -2003 to 2004; and
• Healthy Lifestyle Campaign (Workplace Setting) -2005 to 2007.

The above mentioned healthy lifestyle initiatives were intended to encourage the public to lead an overall healthy lifestyle and create awareness of common medical conditions. The campaign is set to continue beyond 2007 under the theme of “Lifelong Healthy Lifestyle”, and is to focus on five important concepts, namely:­• Healthy Eating;
• Exercise and Physical Fitness;
• No Smoking;
• Handling Stress; and
• Healthy lifestyle without alcohol.

The healthy lifestyle campaign promotes competition among food service industry players in Malaysia. Since the campaign promotes social awareness on the benefits of having a healthy lifestyle, this affects Malaysians’ way of life as they are gradually becoming more conscious of their food intake. This increases the demand for healthier food options where food service operators, who can cater to such a market, will have an edge over their competitors. Food Safety Policy The food safety policy in Malaysia is governed by MOHM via its Department for FSQ. The objective of the Department for FSQ is to protect the public against health hazards and fraud in the preparation, sale and use of food. Its objectives are as follows:­• Ensure that all food preparation, sale and storage of food material is safe and hygienic;
• Ensure that all food material sold are:­
o Free from contamination and food additives, which are not required and fraudulent;
o Compliance with the established legislations and regulations; and
o Labelled and advertised in a clear and non misleading manner;


• Ensure that all food imported into the country is safe and in compliance with the Food Act 1983 and Food Regulations 1985;
• Ensure that food consignments exported by the country is in compliance with the regulations imposed by the importing countries; and
• Ensure that the public receives sufficient information on food safety aspects.



6. INDUSTRY OVERVIEW The above mentioned objectives are to be executed and monitored by the Department for FSQ. in line with the requirements as stated in the Malaysian Food Act 1983 and the Malaysian Food Regulations 1985. These legislations are the basis for reference in terms of food and related food products’ import, export, manufacturing, processing, labelling, and retail. The National Food Safety Policy provides the direction and emphasis to all related parties participating in the mentioned activities to develop and maintain food safety steps based on collaborations to protect consumer health. The National Food Safety and Nutrition Council further allows the MOHM and Department for FSQ to protect the consumer’s safety and their nutrition with enhanced corporation and coordination to face new challenges in the various aspects of the food industry. Malaysia has occasionally imposed stricter rules on a case-by-case basis to ensure the safety of its food products. Malaysia voluntarily halted its frozen seafood exports to the EU in June 2008, citing health standards imposed by the EU and to avoid an outright ban. Malaysia had to strengthen the health standards and pass the EU inspection before they were allowed to proceed with exports in May 2009. Malaysia Vision 2020 The Malaysian government has drawn up a series of Malaysian Plans to achieve the Malaysia Vision 2020 goal. Vision 2020 was a term coined by the former Prime Minister, His Excellency YAS Tun Dr Mahathir Mohamad. to ensure that Malaysia becomes a fully developed country by the year 2020. (a) 9MP The 9MP, part of the series of Malaysian Plans, was a five (5)-year economic blueprint that was announced in March 2006. and was the guiding plan till the year 2010. The 9MP consists of five (5) major thrusts. namely the following:­• Thrust One -To move the economy up the value chain;
• Thrust Two -To raise the capacity for knowledge, creativity and innovation and nurture ‘first class mentality’;
• Thrust Three -To address persistent socio-economic inequalities constructively and productively;
• Thrust Four -To improve the standard and sustainability of quality of life; and
• Thrust Five -To strengthen the institutional and implementation capacity.

Growth during the first three years (2006-2008) of the 9MP remained strong at an annual rate of 5.7%. However, the effects of the 2008 global financial crisis resulted in a contraction, reducing the average growth rate to 4.2% during the 9MP period (2006-2010). In terms of sectoral performance, the services sector was a key growth area, expanding 6.8% per annum during the 9MP period. This was attributed to growth in the finance, insurance, real estate and business services, wholesale and retail trade, accommodation and restaurants, as well as the transport and communications sub­sectors. (b) 10MP The Malaysian government has allocated a RM230 billion budget to implement the 10MP. Similar to the 9MP, the 10MP is a five (5)-year economic blueprint from 2011 till 2015.
6. INDUSTRY OVERVIEW The 1OMP consists of five (5) major thrusts, namely: • Thrust One -Creating the environment for unleashing economic growth;
• Thrust Two -Moving towards inclusive socio-economic development;
• Thrust Three -Developing and retaining a first-world talent base;
• Thrust Four -Building an environment that enhances quality of life; and
• Thrust Five -Transforming Government to transform Malaysia.
Some of the plans included in the 1OMP are:
• Introduction of the Competition Law to promote healthy competition;
• Establishing a RM7 billion Working Capital Scheme (“WCS”) for small-to­medium enterprises, ensuring they have better access to financing facilities. Due to encouraging response to the WCS, the Malaysian government will provide an additional RM3 billion, raising a total of RM10 billion for the fund; and
• Foreign worker policy will be streamlined by introducing different levy rates according to foreign worker ratio in the company. The levies will vary depending on the foreign workers’ skill level, and higher rates will apply for lower-skilled workers. The rates are said to increase annually.

The services sector is expected to remain the primary source of growth during the 10MP period. Growth will continue to be driven by the expansion in finance and business services, wholesale and retail trade, accommodation and restaurants, as well as transport and communication sub-sectors. (Source: IMRR) 6.7 DEMAND/SUPPLY CONDITIONS 6.7.1 Demand Dependencies Growing Middle Class The growing middle class population group in Malaysia has spurred the development of the Malaysian food industry in many ways. Firstly, with an increase in consumer expenditure power, and as the middle class created more demand in the food industry in Malaysia, the food industry, as a whole, has become more profitable. The current middle class has numerous food options due to their bigger spending power, as compared to 15 to 20 years ago. Tourism With the increasing number of tourists visiting Malaysia, tourism is fast becoming a large influence in the dynamics of the food industry. The local government has established numerous initiatives to spur tourism in the country. One such initiative is the Malaysian Tourism Ministry’s efforts to promote Malaysian food. The ministry has endeavoured to classify several food dishes as being uniquely “Malaysian”, and encouraging tourists to visit Malaysia to experience Malaysian food. This move to promote local delicacies is seen as positive by industry players, and is expected to deliver a positive impact to the country’s food and service industry.


6. INDUSTRY OVERVIEW Healthier Lifestyle Trends A wide diversity of food is available to Malaysians in view of its multi-cultural environment. In addition, cheap and affordable food is in abundance in the country. However, healthier food options are not as widely available. Many local food operators have been slow in introducing healthier options due to low demand. Some food operators would only cater healthier options, for example reducing the use of oil, upon specific request from customers. The general perception is that consumers wishing to have healthy meals would have to undertake their own cooking. Despite that, the Malaysian society is gradually becoming more image and health conscious, thus, increasing the demand for healthier food such as chicken or fish, or food prepared in a healthier manner, such as grilled or steamed. Eating out culture Eating out has become a growing trend in Malaysia. This trend has been attributed to several reasons. Firstly, busy schedules have left Malaysians with little time to cook and/or consume their meals at home. It has become more convenient to eat out or to purchase food from outside their homes, unless the household employs a maid. Competitive prices in the food industry have also made it more economical to eat out. Secondly, food stalls are known to provide more variety to the consumers, as compared to cooking at home. Lastly, the growing younger generation in the country are known to eat out more and during late hours of the day. Stall owners have now endeavoured to stay open for longer periods of the day to cater to this crowd. Stall vendors, especially the “mamak stalls”, have seen an increase in their business as the “family” crowd consume their meals during normal dinner times, whereas the “Iepak” crowd comes thereafter. (Source: IMRR) 6.7.2 Supply Dependencies Labour As at May 2010, Malaysia had approximately 1.9 million foreign workers spread across sectors. The contributing countries, by rank, include Indonesia (50.9%), Bangladesh (17.4%), Nepal (9.7%), Myanmar (7.8%) and India (6.3%). Restaurants in Malaysia tend to employ Indian and Indonesian workers. Restaurant owners commented that they find nationals from these countries more “culturally aligned” with the locals. Indian restaurant workers, in particular, are in short supply. Nevertheless, restaurant owners explained that since India is progressing economically, theyhave become less interested in working overseas. It has been reported that at least 10,000 workers are needed in the food services sector. Currently, organisations such as PRESMA are training locals to work in the restaurant sector. The training, which lasts for six months, is said to be subsidised by the Malaysian government. However, the shortage in supply remains as not many locals are willing to work as cooks, waiters or dishwashers in restaurants. 6. INDUSTRY OVERVIEW Cost ofFood Although the cost of food generally co-relates to the prices of commodities and/or basic food ingredients, it is reported that the food retail industry will continue to stay competitive in terms of pricing. Intense competition has made competitive pricing the key way for local food businesses to remain viable. As such, a conscious effort has been made by local food operators not to pass the burden of rising costs to their consumers. In addition, the high volatility in the prices of commodities and basic food ingredients makes it impractical to adjust food prices frequently. The cost of food varies in view of the fixed costs the operators have to bear. These fixed costs include rental costs, operations costs and manpower costs. Rental is said to be the largest contributor of varying food prices in Malaysia. Food outlets in central or developed areas and areas of high demand incur high rental fees and hence, charge more for food products. A similar food product in the suburbs would be much cheaper. (Source: /MRR) 6.8 SUBSTITUTE PRODUCTS/SERVICES There are many substitutes for an FSR operator serving rotisserie chicken as its main product. With a myriad of food products to choose from, patrons can select from amongst others, other FSR operators, fast food restaurants, small-to-medium independent food operators, and cafes and bars.
6.9 INDUSTRY’S RELIANCE ON AND VULNERABILITY TO IMPORTS As the food services sector grows, so does the demand for raw material. Malaysia has a strong domestic livestock and poultry supply, but imports most of its beef, mutton, wheat and dairy products. Disruption in import sources and fluctuations in domestic food prices will, thus, affect the local food services sector in the country. (Source: /MRR) The bulk of materials used by most food services operators are relatively common food items. Whilst there is a large and readily available supply of materials and ingredients from local sources, certain materials and ingredients may be required to be obtained from imported sources. Nevertheless, the Malaysian government emphasis on the need to increase food production and self sufficient levels may reduce the industry’s reliance and vulnerability to imports.
6.10 PROSPECTS AND OUTLOOK OF THE FOOD SERVICE INDUSTRY Restaurant operators are optimistic in their outlook for Malaysia’s food service industry. Improved living standards, driven by the country’s growing economy, are expected to contribute to an increase in consumer spending. Changes in lifestyle show a growing number of Malaysians expanding their food preferences and adapting to western-style “fast food”. Due to busy schedules, some families are also finding it more convenient and cheaper to eat­out, rather than buy and prepare food at home. The Malaysian government recognises the importance of the food service sector. To help restaurant owners in coping with manpower shortage, the Malaysian government released subsidies to support local restaurant operators. Through PRESMA, the government is able to provide training to locals who are interested in securing employment in the food services field. 6. INDUSTRY OVERVIEW Aside from food services, the food supply situation is also being addressed. In April 2008, the Malaysian government formulated the National Food Security Policy. The policy is aimed to overcome food crisis by:­(a)  Increasing output and productivity of agro food sector to achieve self sufficiency level;  (b)  Ascertaining enough food supply of good quality and safe to consume; and  (c)  Ascertaining agriculture entrepreneurs (fishermen, farmer and breeder) get sufficient  incomes that will ensure increment in output and production on agro food.
Tourism contributes to growth The tourism sector is also contributing to the growth of the food service industry. As tourism arrivals rise, restaurants are expanding their food options in order to cater to foreign food preference. The tourism department reported that in 2009, tourists in Malaysia spent RM9.29 billion on food and beverage, an increase of 6% compared to RM8.77 billion in 2008.
Consolidation Food service operators foresee that some consolidation may take place in their sector. During the periods from 1993 till 2005, which was considered the “boom” period for the food service industry, a number of food restaurant players had at least two outlets in operation. As a result of the 2008 economic crisis, some food service players closed down unprofitable food outlets. Others have also sought to consolidate their business with other operators in the industry. Restaurant operators view this positively since it will bring about “stronger” and more reliable food service players in Malaysia.
Increasing number of SME operators Apart from consolidation, industry experts opine that there is an increasing number of SME operators in Malaysia. This may be attributed to infrastructural developments and construction of numerous shopping centres that will cater to the growth in SME operators. With an increase in shopping centres, there will be a demand for food outlets to attract and feed shoppers, thus presenting opportunities for existing and new food operators. The food service segment is expected to see further growth in view of an increasing emergence of young entrepreneurs. As the economy has recovered from the 2008 crisis, these entrepreneurs are expected to venture into the market in the quickest possible fashion.
Forecast growth A growing Malaysian population and a growing economy provide huge market potential for the Malaysian food service industry to grow. Industry specialists forecast the food service sector in Malaysia to grow at about 10% to 15% annually. (Source: IMRR)



6. INDUSTRY OVERVIEW 6.11 FUTURE PLANS, STRATEGIES AND PROSPECTS 6.11.1 Future Plans and Strategies The management shall continue to adhere to the Group business model in pursuing its future plans. By adopting the Group’s future plans and the following strategies, the management believes that they will be able to further strengthen the KRR brand as well as enhance profitability and returns to the Company’s shareholders. (a) Increase the Number of Group-Owned Restaurants The management aims to continue to grow and expand its business as a leading mid-casual dining restaurant operator in Malaysia. To achieve this, the Group intends to increase the number of Group-owned restaurants in expanding its restaurant network to achieve overall revenue growth. Such expansion will be funded by internally generated funds. The Group continuously assesses future opportunities as well as identifies and evaluates potential locations for its chain of restaurants. In doing so, the management remains highly focused on selecting and obtaining choice sites to open new Group-owned restaurants in places of high traffic volume. Subject to market conditions and other relevant factors (Le. suitability of new locations, logistics), the management is currently targeting to open about five (5) new Group-owned restaurants in Peninsular Malaysia by the end of financial year ending 2011 of which three (3) are expected to be opened in Klang Valley, one (1) in the Northern Region of Peninsular Malaysia and one
(1) in Malacca. The Group intends to open about ten (10) new Group-owned restaurants (at locations to be determined later) for the financial year ending 2012.

In considering new restaurant openings, emphasis will be on anticipated sates growth and increase in overall customer traffic. To manage the Group’s overall growth, the management will closely monitor and regularly evaluate individual Group-owned restaurants and take timely action to enhance their business performance as appropriate. During the FYE 2010, the Group had acquired two (2) existing business operations from Independent Franchisees as part of its business expansion plan and may acquire such further business operations to grow and expand the number of Group-owned restaurants. (b) Drive Same-Store Sales Growth and Profitability Despite achieving encouraging year-on-year average growth in revenue of approximately 22% from FYE 2006 to FYE 2010, the management believes that the Group is still capable of improving or achieving higher sales and growth potential in Malaysia. The management intends to continue meeting its customers’ needs and drive sales growth and profitability by implementing the following strategic initiatives:­6. INDUSTRY OVERVIEW (i)

(iii) (iv) Promote innovative advertising campaigns. The management believes that its innovative advertising campaigns helped drive improvements in comparable sales and average restaurant sales. As detailed in Section 5.10 of this Prospectus, the Group employs a range of advertising tools which include, amongst others, television commercials, movie tie-ins and outdoor advertising. Moving forward, the Group will concentrate its marketing activities via television commercials which the management believes is the most effective way to reach out to customers. Expand product offerings. The Group will continue to introduce new menu items, including non-chicken range, such as lamb, fish, seafood and beef products, to attract new customers. The Group’s menu selections are regularly reviewed and updated to accommodate changing market trends and differences in tastes and preferences in different geographical regions. Previously, the Group had been working hand-in-hand with its suppliers in dishing out new menu items. Recently, the Group has set up a product development team specifically for the purpose of research and developing new menu items. With this employment, the Group intends to introduce new products or new items to increase market share and to attract new customers/retain existing customers while being able to derive higher profit margin for the Group. Such new product offerings shall be introduced upon such product being made available and subject to the prevailing market conditions as well as consumer preferences. Prior to the beginning of each financial year, the Group will draw up a tentative schedule/promotion plan on the types of new products to be introduced during the said financial year and are normally targeted towards the school holidays and festive seasons. Introduce tea-time menu. At present, the restaurant sales of the Group are mainly generated during lunch and dinner hours. To better utilise the Group’s restaurant infrastructure, fixed assets and other resources, the Group has introduced tea-time menus and will vary its tea-time menu occasionally to continue to attract customers seeking quick and affordable meal outside lunch/dinner hours. The Group has a major advantage as most of its restaurants are situated in locations with significant customer traffic throughout the day. Delivery/catering services. Since February 2008, the Group has introduced its delivery/catering services which has been carried out on its own as well as via third-party service provider, namely Asian Room Service, which provides delivery services only. As a move to increase the revenue contribution from delivery/catering services, the Group intends to embark on a series of marketing campaign to convey and to inform/educate its customers and the general public that such delivery/catering services has been made available at the convenience of its customers. 6. INDUSTRY OVERVIEW (v) Refurbishment of restaurants. As detailed in Section 5.5 above, the Group continuously refurbishes its restaurants to create a contemporary ambience for its customers. This has been made possible with the Group’s own in-house interior designers who continuously refurbish the Group’s restaurants via feedbacks obtained from customers. Generally, the Group refurbishes the Group-owned restaurants as and when the management deems necessary. Although this has no direct contribution to the profitability of the Group, the management believes that such action would create a conducive environment to attract new customers as well as to retain existing customers.
(vi) Promote healthy eating lifestyle. As the society becomes more health conscious, the public tends to be more careful towards their selection of food. Hence, the Group’s emphasis on preparing wholesome, hearty and well-balanced meal which mirrors today’s discerning consumers’ changing attitude towards healthy eating lifestyle. Generally, the Group’s menu consists of offerings which are all steamed, baked or roasted. Such offerings appeals especially towards the younger generation and young working crowd who prefers dining in a comfortable environment which offers quick but healthy and tasty food.

(vii) Enhance the price/value proposition of products. The Group will continue to use a variety of strategies to enhance the price-value proposition offered to its customers by offering limited time offers. As the Group’s restaurants evolved to mid-casual dining concept, the Group had developed an array of value meals which includes amongst others, Kenny’s Chicken Meal, Jacket Potato Meal and Kenny’s Pasta Meal. (c) Professional Development of Employees The Group will continue to enhance the service and quality of its employees through systematic supervision, as well as regular and well-designed training programmes. Greater emphasis has been placed on the professional development across all levels of the Group’s employees. The Group has also introduced new incentives schemes, including the ESOS, to motivate and reward the Group’s existing employees and to attract qualified candidates. As set out in Section 7.9.2 of this Prospectus, the Group has specially tailored in-house training and development programmes for its employees. The training and development programmes are being closely monitored and reviewed and where necessary, improvised and/or updated to be in-line with the latest developments in the market to cope with changing consumer taste or preferences. Depending on the Group’s business requirements and future expansion plans, the Group may consider expanding its in-house training team, establishing a training institute and/or tying up with other educational institutions to improve the quality of its employees. The Group firmly believes that its commitment towards employee excellence will lead to strong business growth as well as more refined customer services with high customer satisfaction level.



6. INDUSTRY OVERVIEW (d) Setting-up of a Distribution and Quality Control Centre (UDQCC”) The Group is currently exploring the feasibility of setting up a DOCC. If implemented, the DOCC shall enable the Group to better manage and control its food costs as well as ensuring consistency in the quality of products throughout the KRR restaurants. 6.11.2 Prospects Premised on the foregoing, the prospects and outlook, and growth drivers of the industry as set out in Section 6.3 and Section 6.4 of this Prospectus, the Board is of the view that the Group will enjoy positive growth and favourable prospects in the long run. rrHE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]

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