Industry Overview

11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS 11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS (Prepared for inclusion in the Prospectus) Q VITAL FACTOR CONSULTING Crealing Winning 6usines!> $olulions
Vital Factor Consulting SdnBhd (Company No: 251J7!i7·n 75C & 77C Jalan $522119 Damansara Jaya 47400 Pelaling Ja:/8 Selangor DarulEhsan. Malaysia Tel: (603) 7728-0248 Fax: (603) 7728-7248 Email: enqu11ies@vilalraclor.com Web~;le _vjlallaClQrcom o9 JUN 2011 The Board of Directors Oldtown 8erhad 47A. Jalan Chung Ah Ming Pasir Puteh 31650lpoh Perak Darul Ridzuan
Dear Sirs and Madam Independent Assessment of the Food Services Industry Focusing on Cafe Outlets The following is an independent assessment of the Food Services Industry focusing on caf~ Qullets in Malaysia prepared by Vital Factor Consulting Sdn Bhd for inclusion in the prospectus of Oldtown Berhad (herein together with all or anyone or more of its subsidiaries will be referred as Oldtown Group or the Group) in relation to its listing on the Main Market of Bursa Malaysia Securities Berhad. 1. BACKGROUND • Oldtown Group’s business is focused on the operation of a chain of cafes, and manufacturing of coffee and other beverages, As at 18 May 2011, there were a chain of 182’OLDTOWN WHITE COFFEE’ cafe outlets, of which 171 were in Malaysia, nine were in Singapore and two were in Indonesia.
• For the financial year ended 31 December 2010, the total revenue of Oldtown Group amounted to RM255.1 million. Of this, operation of cafe outlets accounted for 65.1% of the Group’s total revenue. As such, this report will be on the Food Services Industry focusing on cafe oullets.

 

11. INDEPENDENT ASSESSMENT ON THE FOOD SERViCES INDUSTRY FOCUSING ON CAFE OUTLETS Q VITAL FACTOR CONSULTING Creating Winning Business SolUlions 2. SOCIO-ECONOMIC PERFORMANCE OF MALAYSIA 2.1 Economic Performance • The performance ofthe Malaysian economy has a direct impact on businesses operating in Malaysia. A growing economy will provide the basis for business growth.
• Malaysia’s real GDP has been “. 7.2% growing every year from 2005 to 2008. The Malaysian economy registered a growth of 4.7% in 2008, amidst the international financial turmoil and sharp deterioration in the global economic environment. Robust domestic demand, in particular sustained private consumption and strong public spending, supported the growth during the year.
• While external demand was strong in the first half of 2008, the sharp and rapid deterioration in the global economic conditions as well as major corrections in commodity prices in the second half of the year led ·to a contraction in Malaysia’s export performance.
• As for 2009, Malaysia’s real GDP for the first quarter contracted by 6.2% compared to the same period in the previous year. However, the implementation of fiscal stimulus measures by the Malaysian Govemment led to the subsequent recovery in the last quarter of 2009. Overall, Malaysia’s real GDP for 2009 contracted moderately by 1.7%.
• The Malaysian economy registered a real GDP growth of 7.2% in 2010. The growth was driven by expansion in domestic demand, which was supported by higher private and public sector spending.

(Sources: Bank Negara Malaysia) ·1.1% Source: Bank Neg8fB Malaysia Figure 1. Real GOP Growth 11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS o VITAL FACTOR CONSULTING Creating Winning Business Solutions 2.2 Consumer Sentiments • As the key consumer group of food is the general consumers, the revel of consumer confidence of the economy will impact on their spending pattern. A high consumer confidence level indicates increased consumer spending that will benefit businesses in Malaysia. • In the fourth quarter of 2009. the ‘Zoo , 30%:_CSIPQ-“l. ‘ .-Gn;M’\’,Ralll 4.0′-1> 4.2’A, •.,’Ao 1 :l~ Consumer Sentiment Index (CSI) increased by 4.0% (0 –~;’5——-~:;””, : 0%’so109.6 points compared to !he •
115.8 ‘H?1’4,2third quarter of 2009. 108,2 Consumers continued to remain 100
• ·30% , optimistic, albeit cauliously. Favourable current and expected finances, and employment expectations
o … -90%conlributed 10 the growth in the 40l1tJ9 IQI,10 201110 30lrl0 4Qlrl0 lalrll CSI. Source.’ Mefeysi’ln Institule of Economic Research • The CSI registered a growth of Figure 2. Consumer Sentiment Index 4.2% to reach 114.2 points in (he
first quarter of 2010. The growth is attributable to the continued improvement in current and expected finances, and employment expectations.
• The CSI decreased by 3.3% to 110.4 points. The decline could be due to customers’ concerns over inflationary pressures caused by subsidy removal plans in the pipeline, as well as the goods and services tax on the cards.
• In lhe third quarter of 2010, the CSI grew by 4.9% to reach 115.8 points. Households are feeling better about their present situation with even higher expectation for the near term especially in the employment expectations, indicating that the economy is well on the mend.
• In the fourth quarter of 2010, the CSI grew further by 1.2% to reach 117.2 points. This was attributable to improvements in financial and job expectations as well as current incomes allhough fears over inflation grew.
• In the first quarter of 2011, the CSI registered a contraction of 7.7% to 108.2 points. Fears of innation prevailed leading consumers to be cautious of (heir spending plans while employment expectations, and current and expected finances remained stable.

(Source: Mafaysian Institute of Economic Research) OJdlownBerhad Page 30f21 Industry Assessment 681 11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS Q VITAL FACTOR CONSULTING Cre<lIing Winning Business Solutions 3. OVERALL INDUSTRY STRUCTURE 3.1 structure of the Food Services Industry • In general, the Food Services Industry comprises nine segments as depicted in the figure below: Trac1ilional Pubs and Restaurants Canteens
OthersLoungesCoflee Shops Quick Service Restaurants Call!’s (incruding Food Sialls’ Ca1ering Bislros) O/flCluding hawker stalls ana/aile-away shops o Ola/own Group pn’marily operates within’this sec/oro’the overall indus’!)’ Figure ‘3. Structure of the Food Services Industry • Traditional Coffee Shops are normally called ‘kopitiam’ in Malaysia. A traditional coffee shop is normally an owner-operator business serving hoi and cold beverages and various types of food. Some traditional coffee shops may sell food prepared by the operator while others would lease parts of their shop 10 lhird party food stall operators.
• Quick Service Restaurants are also called fast food restaurants. A quick service restaurant normally has a limited menu where food can be prepared and served qu·lckly. Many of these reSlaurants are franchise chains with standardised food ingredients shipped to each restaurant from central locations. In addition, quick service restaurants tend to specialise in products such as hamburgers, pizzas, chicken, fish and sandwiches. While most quick service reslaurants provide dine-in facilities in Malaysia, take-away and delivery services are also prevalent.
• Restaurants are food services outlets lhat normally specialise in one type of cuisine focusing on dine-in facililies with full waiting service. Types of restaurant based on cuisine include, among others Chinese, Malay, Indian, Mediterranean, Spanish, Middle Eastern, French and Italian. Food is normally prepared and cooked on the premises and cover a wide range of selections.

11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS o VITAL FACTOR CONSULTING Creating Winning Business Solutions
• Cafes (including bistros) are casual and relatively small dine-in outlets that provide full waiting service or part self-service. Many cafes are similar to restaurants except that the dine-in facilities and ambience are more casual. There are various types of cafes in Malaysia. These cafes mainly focus on serving food, beverages. desserts, a particular specialty or a combination of some food and beverages. Some cafes also use the term ‘kopitiam’ for their oullels. Oldtown Group operates in the Food Services Industry focusing on the operalion of a chain of cafe oullels.
• Pubs and Lounges are places where alcoholic beverages are sold and drunk within a relaxed environment. A limited range of food may also be served in pubs and lounges.
• Food Stalls comprise hawker stalls. take away shops, snack bars. food court and other food stalls and carts. The focus on food stalls is in casual dining or take-away. with relalively tow cost food and beverages.
• Canteens are food services facilities wilh the provision of meals and drinks. usually at reduced prices, serving a defined group of patrons. Examples include factory canteens for factory workers, office canteens for employees. school canteens for teachers and students, and mobile canleens for groups of people on the move.
• Catering is mainly the supply of cooked food and beverages and delivered in bulk to a location determined by the customer. Catering may service private households and functions. enterprises. institutions. airlines, and others.

• others may include gourmet chefs thai cook at the customers’ premises, drive-in services, consolidation and delivery of foods from various food services outlets, and others. 4. SUBSTITUTE PRODUCTS • There are many substitutes for cafe oullets serving food and beverages. These include, among others, Ihe following: Home cooked meals: Prepared meals: Quick services restaurants: Hawker stalls: Restaurants; Caterers; Canteens. 11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS Q VITAL FACTOR CONSULTING Creating Winning BUSiness Solutions 5. GOVERNMENT REGULATIONS, POLICIES AND INCENTIVES

 

5.1 Manufacturing Licence • Application of a manufacturing licence under the Industrial Coordination Act, 1975 is mandatory for companies with shareholders’ funds of RM2.5 million or more or engaging 75 or more full·time paid employees. (Source: Malaysian Industrial Development Authority)
• White Ca~ Sdn Bhd (While Caf~) and Gongga Food Sdn Bhd (Gongga Food), subsidiaries within the Oldtown Group, have obtained the following manufacturing licences from the Ministry of International Trade and Industry Malaysia:

White Cafe has obtained a manufacturing licence for the production of Instant Coffee Mixture and Instant Tea Mixture, which is valid from 10 December 2009: Gongga Food has obtained a manufacturing licence for the production of Instant Corree Powder and Roasted White Coffee, which is valid from 10 December 2009. 5.2 Retail Licence for Rice • Under the Control of Padi and Rice Act 1994, those who wish to engage in the retailing of rice ate required to obtain a retail licence for rice under the Control of Padi and Rice (Licensing of Wholesalers and Retailers) Regulations 1996. The licence is issued by the Ministry of Agriculture and Agro-based Industry.
• Gon9ga Food, a subsidiary of Oldtown Group, currently holds the following retail licences for rice for the procurement of rice for the operation of the Group’s cafe outlets:

Retail licence for rice for its business premises in Perak, which is valid from 18 January 2011 to 17 January 2014; Retail licence for rice for its business premises in Johor, which is valid from 18 January 2011 to 17 January 2013; Retail licence for rice for its ~usiness premises in Selangor, which is valid from 5 June 2009 to 4 June 2012.
5.3 Scheduled Controlled Goods • Under the Control_of Supplies Regulations 1974, operators are required to obtain authorisation for dealing in scheduled controlled goods such as wheat flour, sugar and cooking oil. 11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS Q VITAL FACTOR CONSULTING Creating Winning Business Solutions _ • Oldtown Group’s sUbsidiaries have obtained the following authorisations: Gongga Food has an authorisation letter for the purchase and storage of 10 tonnes of sugar which is valid from 13 July 2010 to 12 July 2011; White Cafe has an authorisation letter for the purchase and storage of 25 tonnes of sugar which is valid from 7 January 2011 to 6 January 2012. Emperor’s Kitchen has an authorisation letter for the purchase and storage of 5,000 kilograms of cooking oil, five tonnes of sugar and one tonne of flour which is valid from 13 December 2010 to 12 December 2011. (Source: Ministry of Domestic Trade, Co-operatives and Consumerism) 5.4 Trademarks • In Malaysia, trademarks are governed by the Trade Marks Act 1976 and Trade Marks Regulation 1997 (Amendment 2001). Trademark registration is not compulsory in Malaysia.
• Trademark registration provides trademark owners with the exclusive rights to use their marks in trading.

(Source: Intellectual Property Corporation of Malaysia) • The Registrar of Trade Marks is the issuin9 authority for the registration of trademarks in Malaysia. Registration of trademarks is valid for a period of ten years and may be renewed from time to time. • Oldtown Group has registered trademarks in various countries. (Please refer to Section 4. 15 of the Prospectus for further de/ails) 5.5 Registration of Franchise • According to the Franchise Act 1998, a franchisor shall register his franchise with the Registrar of Franchises before the franchisor can make an offer to sell the franchise to any person.
• Oldtown Group’s subsidiary, Kopitiam Asia Pacific had obtained approval for the. registration of its franchise from the Registrar of Franchises on the 16 August 2009.

OldtownBemad Page 70f21 Industry Assessment 685 .11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 6. DEMAND AND DEMAND DEPENDENCIES

6.1 Demand • Oldtown Group’s operation of cafe outlets is supported by its in-house manufacturing of coffee and tea beverages. As such, the following analysis will also cover the demand for coffee and tea beverages.
• Demand for food services in general can be determined from the household expenditure on food and beverages away from the household. These are listed as follows:

In 2004/2005, the average monthly household expenditure on restaurants and cafes was RM204.89. The average monthly household expenditure on food and beverages away from the household remained approximately the same at RM205 and RM204 for 1998/99 and 2004/05 respectively. However, the total Malaysian household expenditure on food and beverages would have recorded growth due to the increased number of households from 1998/99 to 2003/04. In 2000, the number of households then amounted to 5.2 million while in 2004, the number of households increased to 5.7 million. • Between 1998/99 and 2004/05, the average monthly expenditure per household on coffee in Malaysia increased from RM3.67 in 1998/99 to RM4.50 in 2004/05, which represented an average annual growth of 3.5%.
• Between 1998/99 and 2004/05, the average monthly expenditure per household on tea, cocoa and other beverages in Malaysia increased from RM7.63 in 1998/99 to RM9.16 in 2004/05, which represented an average annual growth of 3.1 %.
• Between 2006 and 2010, the GDP of the accommodation and restaurant industry based on current prices grew at an average annual rate of 10.3% to reach RM18.3 billion in 2010.
• The large size and growth of household expenditure on food services would augur well for operators in the Food Services Industry.

(Source: Department of Statistics and Bank Negara Malaysia)
6.2 Exports • Between 2006 and 2010, the export value of coffee, roasted, not decaffeinated increased at an average annual rate of 32.0% while in 2010, it grew by 72.1 % to reach RM1.9 million. OfdtownBerhad Page B of21 Industry Assessment 686 11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS Q VITAL FACTOR CONSULTING Creating Winning Business Solulions: • Between 2006 and 2010, the export value of coffee. roasted and decaffeinated increased at an average annual rate of 5.6% while in 2010, it grew significantly by 100.5% to reach RM932,064.
• Between 2006 and 2010, the export value of ex\racls, essences and I;oncentrates of coffee (including instant coffee) increased at an average annual rate of 37.5% while in 2010, it grew by 22.5% to reach RM400.4 million,
• Between 2006 and 2010, the export value of the preparations with a basis of extracts, essences or concentrates Of with a basis of coffee, coffee pastes or other than coffee pastes consisting of mixtures of ground, roasted coffee with vegetable fats and other ingredients increased at an average annual rate of
24.1 % while in 2010, it grew by 52.6% to reach RM361.1 million.
• Between 2006 and 2010, the export value of tea increased at an average annual rate of 16.1 % while in 2010, it declined by 2.1% to RM46,3 million.

(Soun:;e: Department of Statistics) 6.3 Demand Dependencies • As the demand for food services is ultimately dependent on the end-consumers, the following factors will have an impact on the Food Services Industry: population growth; growth in income; average monthly household expenditure.
• The increase in Malaysia’s population wilt continue to spur the demand lor food services, including car~ oullels: Between 2007 and 2011, the population of Malaysia is forecasted to grow at an average annual rate of 1.3% 10 reach 26.6 million. The population of Malaysia is projected 10 grow at an average rate of 1.1% per annum between 2011 and 2015. It is forecasted that Ihe population in Malaysia will reach approximately 30 million by 2015. • The increase in the affluence of Malaysian households determined by household income will mean greater affordability, thus stimulating demand and expenditure on consumer products and services such as food services. Between 2009 and 2011, per capila income is forecasted to grow at an average annual rale of 8.7%. Between 2004 and 2009. the mean monthly gross household income increased from RM3.249 to RM4,025, which represented an average annual growth rate of 4.4%, 11. INDEPENDENT ASSESSMENT DN THE FOOD SERVICES INDUSTRY FDCUSING ON CAFE OUTLETS o VITAL FACTOR CONSULTING Creating Winning Business Solulions
Between 1998/99 and 2004/05, the average monthly expenditure per household increased at an average annual rate of 3.0% to reach RM1,9S3 in 2004/05. (Source: Bank Negara Malaysia, Department o{ Statistics and Tenth Malaysia Plan 2011-2015) 7. SUPPLY DEPENDENCIES • The main raw materials that are used by the Group for its coffee manufacturing operations include: Instant coffee powder; Coffee beans; Non-dairy creamer; Sugar. • As such, the supply of these main materials would be crucial to ensure the continuous operation of its cafe outlets. The following statistics on local produclion and imports are used to assess the supply of Ihese types of materials. 7.1 Local Sources • Between 2006 and 2010, Ihe total area of coffee crops in Malaysia decreased at an average annual rate of 19.5% while in 2010, it was estimated to grow by 1.6% to reach 3,160 hectares.
• Between 2004 and 2008 (latest available data), the sales value of instant coffee (including ground coffee powder) increased at an average annual rate of 79.3% while in 2008, it grew by 9.2% to reach RM726.4 million.
• Between 2006 and 2010, the sales value of non-dairy creamer increased at an average annual rate of 8.7% while in 2010, it grew by 24.8% to reach RM440.9 million.
• Between 2006 and 2010, the sales value of the manufacture of sugar increased at an average annual rate of 12.3% while in 2010, it increased by 36.4% to reach RM3.1 billion.

(Source: Bank Negara Malaysia and Department ofStatistics) 7.2 Imports • Between 2006 and 2010, the import value of coffee not roasted, not decaffeinated increased at an a~erage annual rate of 15.2%, while in 2010, it grew by 39.9% to reach RM332.3 million. 11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS o VITAL FACTOR CONSULTING Crealing Winning Business Solutions
• Between 2006 and 2010, the import value of coffee and coffee substitutes increased at an average annual rate of 13.2% while in 2010, it increased by
26.1 % to reach RM507.5 million.
• Between 2005 and 2009, the import value of non-dairy creamer (Asean countries only) increased at an average annual rate of 13.2% while in 2009, it decreased by 63.0% 10 RM34.B milnon.
• Between 2006 and 2010, the import value of sugar, molasses and honey increased at an average annual rate of 15.4% while in 2010, it grew by 20.5% to reach RM2.6 billion.

(Source: Department o{ Statistics) 8. COMPETITION 8.1 Nature of Competition in the Industry • All operators of food services including cafe outlets in Malaysia face normal competitive conditions. This is similar to a free enterprise environment where there are no undue government regulations or licensing requirements. There are also many o~erators, and operators may enter and leave the industry with relative ease, and no one operator is large enough to dictate product pricing. In such an environment. the industry is also sUbjected 10 normal supply and demand conditions moderated by the price mechanism. Operators compete on product and service differentiations, and other factors of competition. 8.2 Factors of Competition • As with most free enterprise environments, competition is based on a number of factors, including: Brand name and market repulation; Quality of producls and services; Economies of scale. 8.3 Impact of Factors of Competition on Oldtown Group • Brand Name and Market Reputation Brand name and market reputation are key competitive factors in the provision of services to consumers, including food services such as cafe outlets. As such, an established brand name with good market reputation that appeals to its target group will have more loyal customers, higher market awareness to attract new customers, and the ability to command higher pricing compared to less prominent operators in the industry. 11. INDEPENDENT ASSESSMENT DN THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS o VITAL FACTOR CONSULTING Creating Winning Busine!>s Solulions
Oldtown Group, through its subsidiaries and substantial shareholder, Old Town International has won numerous awards since the Group operated its chain of OLDTOWN WHITE COFFEE cafe outlets in 2005. Oldtown Group’s numerous awards are a testament to the success of the Group in building its brand equity, which includes a high level of brand awareness and customer loyalty. The Group’s established brand name provides the Group with a key competitive advantage to compete effectively within the Food Services Industry. • Quality of Product and Service Quality of products and services is critical to end-consumers, especially for food services, where consumers have many choices in the market. Over the years, Oldtown Group had received numerous awards, recognitions and certifications that demonstrate the quality and appeal of its food and services, which meet the preferences and tastes of its customers. Oldtown .Group’s operation of cafe outlets is largely supported by its in-house operation in the manufacturing of coffee and tea beverages. Apart from the numerous awards, Oldtown Group has also obtained various certifications for its subsidiaries. The certifications obtained by the Group would provide customers with the assurance of the quality of its products and services. • Economies of Scale Operators who have capabilities to operate a number of food services outlets would have stronger negotiation power to obtain better commercial terms from suppliers of inclUding material and ingredient costs, credit terms, logistics arrangement and others. Oldtown Group enjoys economies of scale from its network of cafe outlets in Malaysia. Economies of scale enable the Group to spread its fixed and operating costs across a number of food services outlets. This is particularly pertinent in terms of human resources and centralised functions including procurement, administration, training, advertising and promotional costs. Economies of scale represent a key competitive advantage as it helps the Group to reduce ils unit cost of operations. 8.4 Competitive Intensity • Competition among operators of cafe outlets within Malaysia is based on the following observations: The Food Services Industry is highly fragmented with many different forms of compelition, these include: Restaurants: Quick service restaurants: Hawker stalls; Cafes; Caterers; Canteens.
11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS Q
VITAL FACTOR CONSULTING Creating Winning Business Solutions
There are many players competing in the Food Services Induslry. However, the Food Services Industry in Malaysia is sufficiently large to accommodate many of the operators in the industry. In 2010, the market size of restaurants and cafes in Malaysia was estimated at RM23.1 billion. (Source: Viral Factor Consulting SdnBhd) Barriers to entry into the operation of cafe outlets are relatively low for operators with only one outlet. This is substantiated by (he large number of operators in the industry. However, operators with a network of chain ouUets will have an advantage over smaller players due to their economies of scale, thereby reducing operating costs and improving profit margins. An established brand name and good market reputation can also help 10 reduce the competitive intensity In the Food Services Industry. Operators who have successfully developed their brand name and market reputation, and have gained recognition will be in a better posilion to compete in the industry. 8.5 Players in the Industry • Some of the players in cafe chain outlets in Malaysia listed in alphabetical order under their common brand names are as follows: DOme Cafe; Gloria Jean’s Coffees; Hailam Kopitiam; Killiney Kopiliam; OLDTOWN WHITE COFFEE; PappaRich; San Francisco Coffee; Secrei Recipe; Slarbucks Coffee; Slation 1 Cafe; The Coffee Bean & Tea Leaf. Note: The above is not an exhaustive list. (Source: Vita’ Factor Consulfing SdnBnd)
9. BARRIERS TO ENTRY 9.1 Set·up Costs • The barriers to entry into the Food Services Industry specifically cafe outlets based on capital requirements (excluding land and building) are low.
• The capilal requirements of setting-up a food and beverage retail outlet would be approximately RMBOO,OOO including franchise fee and renovation costs. A food services cafe outlet will generate approximately RM1 million to RM2 million per year in revenue.

OldtownBerhad Page 130(21 Industry Assessment 691 11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS Q VITAL FACTOR CONSULTING Crealing Winning Business Solutions • At this level of entry, this set-up cost is for one outlet with limited seating capacity. Capital costs would start to escalate for an operator that wanls to establish a network of caf~ Dullets in order to generate. higher revenue and achieve economies of scale. 9.2 Established Brand Name and Market Reputation • A new operator without an eslablished brand nama and track record may find it difficult to start a caf~ outlet. This;s primarily due to the wide choices of restaurants, cuisines and format in the Food Services Industry.
• The length of time required in gaining awareness and recognition, plus the cost of advertisements and promotions may deter some potential entrants from going into the Food Services Industry.
• As such, an operator without an established brand name and market reputation would face difficulties in gaining fast access into the market.

10. RELIANCE ON AND VULNERABILITY TO IMPORTS • Generally, operators of cafe outrels source a significant proportion of their raw materials and ingredients required for food preparation and processing locally as these are common input materials such as poultry, flour, rice, noodles and others.
• As for the manufacturing of coffee and other beverages, some of the main raw materials usad include instant coffee powder, coffee beans, sugar and non-dairy creamer.
• Malaysia is reliant on imports for the supply of coffee beans and inslant coffee powder as Malaysia is not a major producer of coffee beans. However as coffee beans and instant coffee powder are available from a number of countries worldwide, thus any disruption in supply is therefore minimised.
• As for other raw materials such as sugar and non-dairy creamer, these are available from both local and imported sources.

11. INDUSTRY OUTLOOK • Performance of the Food Services Induslry is largely dependent on the general economic conditions, consumer confidence and spending in Malaysia. As such, observations on the following areas may provide some indications on the oullook of the Food Services Industry: real GOP of the Malaysian economy; real GOP of the accommodation and restaurant industry; consumer confidence.
11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INOUSTRY FOCUSING ON CAFE OUTLETS Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 11.1 Real GOP of the Malaysian Economy • A growing local economy provides the impetus for increasing affluence of the people, which will have a positive effect on operators within the Food Services Industry.
• While real GOP registered a contraction of 1.7% in 2009, real GOP for Malaysia increased by 7.2% in 2010.
• As for 2011, Malaysia is expected to experience continuing growth where real GOP is expected to grow between 5.0% and 6.0%.

(Source: Bank Negara Malaysia) 11.2 Real GOP of the Accommodation and Restaurant Industry • Continuing growth of the accommodation and restaurant industry will provide sustainability and growth opportunities for operators within the Food Services Industry focusing on cafe outlets. .. The accommodation and restaurant industry has been growing over the last four years as indicated below: Between 2006 and 2010, real GOP of the accommodation and restaurant industry grew at an average annual rate of 6.3%; In 2010, real GOP of the accommodation and restaurant industry grew by 5.0%. (Source: Bank Negara Malaysia) .. As for 2011, real GOP of the accommodation and restaurant industry is expected to grow by 5.2%.(Source: Ministry of Finance) 11.3 Consumer Confidence • Consumer confidence level indicates consumer spending patterns that will affect businesses in Malaysia, including operators within the Food Services Industry focusing on cafe outrets.
• During the first quarter of 2011, consumer confidence decreased by 7.7% compared to the previous quarter and decreased by 5.3% compared to the corresponding period in 2010. (Source: Malaysian Institute of Economic Research (MIER))
• If the consumer confidence continues to decline over a sustained period, the outlook may be challenging for businesses, including operators within the Food Services Industry.

11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS Q VITAL FACTOR CONSULTING Cloating Winning Business Solutions 12. THREATS AND RISKS ANALYSIS 12.1 Public liability • The Food Services Industry interacts directly with the public as the end-consumers of its products and services. As such. there is always a risk of public liability from the food and beverages served, as well as dining within the premises.
• Any incidents caused on the premises would sUbject the operator to legal redress, which may impact financially on the business, as well as contributing to the bad publicity of Ihe restaurant, caf~ or other food service outlets.

Mitigating Factors “. Some incidents are unavoidable, and as such, operators of food services would normally take public liability insurance to help mitigate such risks. • In addition, operators that exercise due care, consideration and safety would be able to mitigate to a large extent, the risk of pUblic liability. Such care and consideration would include proper handling and storage of foods, ergonomics of lhe work place and the public seating area, and other customer interaction procedures. 12.2 Consumer Scare • Operators in the Food Services Industry including cafe outlets are highly sensilive to public opinion. This is because foods served in restauranls are consumed and may have a negative effect or reaction on the consumers.
• Contamination of food either due to poor storage or handling during Ihe process of prepa’ration, cooking and serving may cause food poisoning. This would have an adverse impact on the market repulation and brand name of the operator.
• In addilion, outlets may be target of sabotage or malicious rumours designed to cause harm to the outlets.
• As such, any adverse public opinion or perception would have a significant negative impact on Ihe operator.

11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUll.ETS Q VITAL FACTOR CONSULTING Creating Winning Business Solutions
Mitigating Factors • Operators that conlinually ensure the safe and proper handling of cooked and uncooked foods and ingredients through the whole process from procurement to storage, processing and serving to the end-consumers, would limit significantly Ihe risk of adverse reactions to their food. This is where food services operators Ihat have been certified with Hazard Analysis Crilical Point Management System (HACCP) and ISO 22000 in their food processing operalions have all the food safety management processes in place to ensure thai contamination risks are minimised.
• In addition. keeping the premises clean and hygienic would also avoid incidents of conlaminations. Operators of food services outlets that have been awarded or recognised for cleanliness by the relevant authorilies would also build consumer confidence in the food services outlet.

12.3 Global Financial Crisis • Any prolonged and/or widespread downturn such as those of the recent global financial turmoil has affected the global and Malaysian economies. The provision of food services is consumer based and any downturn in the local economy will reduce disposable income and consumer confidence in spending on discretionary items. This will in turn reduce consumer spending on consumer products and services such as food services. Mitigating Factors • As evidenced in the past, the Malaysian Government’s continued prompt policy flexibility in implementing pro-growth measures to sustain the country’s growth momentum, by raising domestic demand to compensate for slower external growth. has helped Malaysian companies 10 counter some of the effects of the slowdown in the global economy.
• In early November 2008, the Malaysian Government announced a RM7 billion stimulus package, which was 10 be channelled into 15 projects to promote business activity, and helps minimise the impact of the global financial crisis.
• On 10 March 2009, the Government tabled a mini budget as part of the second stimulus package. The second stimulus package was 10 be implemented over 2009 and 2010, and will include RM60 billion in spending and incentives.
• It is expected that these measure will help to generate domestic business activities and domestic consumption. which will in turn help counter the slowdown in the local economy.

11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS o VITAL FACTOR CONSULTING Creating Winning Business Solutions 12.4 Fluctuations in Prices of Raw Materials • Operation of caf~ outlets requires the use of various types of raw materials in the preparation of food and beverages. In some situations. increases in the price of raw materials and supplies are not easily passed onto customers. This .could impact on the margin or alternatively, if the increase in cost is passed onto the customers, the operators may no! be price competitive. Mitigating Factors • Major raw malerials used in the operation of cafe outlets including coffee, tea, rice, flour and refined white sugar are either price-controlled items in Malaysia or commodities that are subjected to world prices. All operators who use these raw materials are equally affected.
• Raw materials such as coffee, tea, non-dairy creamer, rice, flour, noodles and refined sugar are widely used in food and beverage preparations, and any increases in prices can easily be passed onto the customers.
• Furthermore, several of the raw materials including wheat flour and refined white sugar are price-controlled items. This will provide a certain level of protection from fluctuations in prices of these raw materials.

12.5 Dependency on Supply of Raw Materials • The operation of cafe outlets chain is dependent on the su’pply of its raw materials for food and beverages preparations. As such, any interruptions in the supply of these raw materials will directly impact on the operation 01 cafe outlets chain. Mitigating Factors • Raw materials such as coffee, tea, rice, flour, sugar can be obtained through local and imported sources, hence the disruptions in the supply of these raw materials are minimised.
• According to the Ministry of Domestic Trade, Co-operatives and Consumerism, wheat flour is listed as a controlled item banned from being exported unless a wrilten approval is obtained from the controller of supplies under the Control of Supplies Act 1961. As such. this will help to minimIse the risks of shortages.
• In case of any shortages in supply of certain raw materials, menu of caf~ outlets can be amended to a certain extent where other materials can be used as substitutes.

11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 13. AREAS OF GROWTH AND OPPORTUNITIES 13.1 Expansion into Different Segments within the Food Services Industry • In the Food Services Industry, there are significant opportunities for operators to expand into different segments of the industry or to target differentconsumer profiles.
• The diversity of consumer profiles with differing preferences combined with the myriad format and cuisines available in the Food Services Industry would provide significant opportunilies for business expansion inlo various segments of the industry.
• As different segments of the food services induslry target different consumer groups, such as those based on demographic profiles. lifestyles, and age groups, there are significant opportunities for operators to enter the segments that Ihey believe they are able to excel and grow their business.
• Expansion into different segments within the Food Services Industry will also enable operators to enlarge its potential target market size to provide business growth.

13.2 Building Brand Name and Market Reputation • Brand name and market reputation are important in the Food Services Industry to establish customer loyalty and where appropriate, command premium pricing. Apart from the quality of food and services, brand name and market repulation are key in enabling operators to distinguish themselves from the competitors to win new and retain existing customers.
• There are opportunities for operators to build strong brand names and market reputation by rocusing on marketing and promotions.

13.3 Franchising • Within the Food Services Industry inclUding the cale outlet segment, there are opportunities for franchising. This system enables operators to expand the number of outlets without the need for high capital investment or involvement in direct management and operations.
• Franchising not only provides the franchisers with royalties, but also increases brand awareness as more of their franchised oullels are spread over a wider geographic area.
• Franchising systems are also exportable, thereby providing incremental profits beyond the local market. Local operators of cafe oultets that have developed successful brand names and market reputation would be able !o optimise from the franchising system.

11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 13.4 Export Markets • Operators of cafe outlets can expand into overseas countries, either by establishing new outlets themselves or Ilia a franchising system or through joint ventures with local partners.
• Expanding into overseas countries will enable operators to enlarge their potential markel size and increase their geographical diversification.

14. CRITICAL SUCCESS FACTORS Critical success factors for operators of caf~ outlets include the following: • Established Brand Name and Market Reputation: Established brand names and market reputation for cafe Qulle!s pray a vital role in winning new and retaining existing customers. Operators that have establishec.l brand names and market reputation would have ,better control of their business direclions and at the same time create customer loyalty to sustain and grow the business.
• Continuous Supply of Competitive Raw Materials: The operation of cafe outlets utilise various common materials as ingredients for food preparation. As SUCh, uninterrupted supply as well as the cost competitiveness of raw materials is critical to the continuous operalion and profitability of the business.
• Keeping Abreast with Consumer Tastes and Preferences: It is essential for operators to keep abreast of consumer tastes and preferences to retain existing customers and to attract new customers. In addition, it will enable operators to address emerging business opportunities to maximise revenue and profits.
• Financial Stability: Operators who are in a healthy financial position will be in a better position to upgrade its facilities including the seating and kitchen areas, expand its premises to increase capacity. and undertake development of its brand through advertisements and promotions.

15. MARKET RANKING, SIZE AND SHARE Market Ranking • In April 2011 , Oldlown Group ranked second among operators of cafe outlets based on total number of outlets in Malaysia (Source: Vital Factor Consulting Sdn 8hd). 11. INDEPENDENT ASSESSMENT ON THE FOOD SERVICES INDUSTRY FOCUSING ON CAFE OUTLETS Q VITAL FACTOR CONSULTING Creating Winning Business So\ulions Market Size • In 2010, the market size for restaurants and cafes in Malaysia was estimated at RM23.1 billion based on household expenditure (Source: Vital Far:;tor Consulting Sdn Bhd).
• In 2010, the market size for coffee (ground and instant) based on local production in Malaysia was estimated at RM740 million (Source: Vital Factor Consulting Sdn Bhd).

Market Share • In 2010, Oldtown Group had a market share of less than one percent of the restaurant and cafe market in Malaysia based on the Group’s revenue from the operation of food services Dullets (Source: Vital Factor Consulting Sdn Bhd).
• In 2010, Oldtown Group had a market share of approximately 10% of the local production of coffee (ground and instant) based on the Group’s revenue from manufacturing of coffee beverages (not including canned ready-to-drink coffee) (Source: Vital Factor Consulting Sdn Bhd).

Vital Factor Consulting Sdn Bhd had prepared this report in an independent and objective manner and had taken all reasonable consideration and care to ensure the accuracy and completeness of the report. It is our opinion that the report represents a true and fair assessment of the industry within the limitations of, among others, secondary statistics and information, and primary market research. Our assessment is for the overall industry and may not necessarily renect the individual performance of any company. We do not take any responsibilities for the decisions or actions of readers of this documenl. This report should not be taken as a recommendation to buy or not to buy the shares of any company. Yours sincerely
Wong Wai Ling Director OldfownBerhad Page 21 of21 Industry Assessment 699

 

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