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Jumbo Group
08-10-2017, 03:53 PM,
Post: #21
RE: Jumbo Group
My thoughts on Jumbo from last month, would be interested in what other people think.

https://fundamentalsmatter.wordpress.com...ompounder/

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08-10-2017, 10:00 PM,
Post: #22
RE: Jumbo Group
Hi bardsmanship, my 2 cents,

1) To be able to expand as much as shareholders would like them to, Jumbo has to secure large supplies of crab. Not only is it expensive, but it is also perishable. Perhaps Jumbo does not want to risk its capital (and borrow) to go up-stream to be a crab farmer.

2) The market for crab diners isn't very big, mainly due to the expensive bill at the end of the meal. This is why Jumbo does not have many restaurants in Singapore covering a wide geographical area, but a few very big restaurants. This allows it to reduce wastage of rent and labour if there were numerous stores, during lull period such as weekdays and afternoon. So I would expect Jumbo to be present in large cities, but limited in store number.

3) The price only makes sense if Jumbo is certain to expand its profit and dividends exponentially. While the management has thus far been successful, I believe there are numerous operational issues to overcome for expansion. Jumbo isn't a fast food chain where you can employ low-skilled employees and expect the stores to do okay. I think there is a lot of expectation in the price.

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09-10-2017, 01:25 PM, (This post was last modified: 09-10-2017, 01:27 PM by bardsmanship.)
Post: #23
RE: Jumbo Group
karlmarx, thanks for commenting.

Quote:1) To be able to expand as much as shareholders would like them to, Jumbo has to secure large supplies of crab. Not only is it expensive, but it is also perishable. Perhaps Jumbo does not want to risk its capital (and borrow) to go up-stream to be a crab farmer. 

Food costs are certainly significant for Jumbo and I would be surprised if the crabs aren't a big component of that, but Jumbo has some (albeit limited) ability to pass on increased costs to customers - pricing for crabs is always seasonal in its restaurants. I also don't see any evidence yet that suggests Jumbo needs to venture into crab farming to secure its crab supplies. They already have ~20 suppliers of mud crabs from 5 different countries.

Quote:2) The market for crab diners isn't very big, mainly due to the expensive bill at the end of the meal. This is why Jumbo does not have many restaurants in Singapore covering a wide geographical area, but a few very big restaurants. This allows it to reduce wastage of rent and labour if there were numerous stores, during lull period such as weekdays and afternoon. So I would expect Jumbo to be present in large cities, but limited in store number.

Agreed; I have wondered why Jumbo's restaurants in China are so much smaller than those in Singapore. The conclusion I reached was that they are being prudent, and wanted to be sure there is enough of a market before expanding. So space permitting, I expect they would favour expanding existing overseas outlets than establishing new ones (assuming in the same city), for the reasons you cited. I still think they have a lot of room to increase seating capacity in the Tier 1 cities though, regardless of the way they might choose to do it.

Quote:3) The price only makes sense if Jumbo is certain to expand its profit and dividends exponentially. While the management has thus far been successful, I believe there are numerous operational issues to overcome for expansion. Jumbo isn't a fast food chain where you can employ low-skilled employees and expect the stores to do okay. I think there is a lot of expectation in the price.

Mind expanding on what the operational issues to overcome are? Upmarket restaurants don't expand at the rate of popular fast food chains, that's for sure, but I have always put that down to the viability of eating fast food for every meal because of the lower cost. Maybe another bottleneck is the ability to find good enough chefs, but Jumbo says they have simplified cooking procedures so that even junior chefs can replicate the taste of their dishes. Jumbo isn't a fast-food chain, but their restaurants aren't exactly Michelin-starred fine dining establishments either.

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09-10-2017, 10:18 PM,
Post: #24
RE: Jumbo Group
(09-10-2017, 01:25 PM)bardsmanship Wrote: Mind expanding on what the operational issues to overcome are? Upmarket restaurants don't expand at the rate of popular fast food chains, that's for sure, but I have always put that down to the viability of eating fast food for every meal because of the lower cost. Maybe another bottleneck is the ability to find good enough chefs, but Jumbo says they have simplified cooking procedures so that even junior chefs can replicate the taste of their dishes. Jumbo isn't a fast-food chain, but their restaurants aren't exactly Michelin-starred fine dining establishments either.

I believe the difference between a mediocre and successful restaurant is in the labour employed. Labour is key because they perform the 2 most important functions; cook the food and pacify the customer. Fast food chains solved the labour problem by making food preparation fool-proof and customers self-serve. I believe Jumbo does neither, so a lot of its prosperity (and expansion) is dependent on the management of its human resources.

1) I don't know how much preparation is performed by Jumbo's central kitchen. It is possible that their dishes have been 100% cooked in the central kitchen and only require reheating in the restaurants. But they may not do this because seafood does not taste good if it is reheated, and customers might rebuke if they find out. Assuming that central kitchen does 50% of the preparation, say cook the sauce, the chefs in the restaurants are still required to do 50% of the cooking. In this 50% where the chef has autonomy, he may deviate from the cooking instructions because he had a bad day, or be unable to follow if he is incompetent or is having a terribly busy evening. Jumbo therefore has to hire and train chefs to follow its cooking instructions. After a few years of experience, there is the possibility your junior chef may just decide to jump ship, or start out on his own.

2) Jumbo being a restaurant is expected to provide wait staff to serve customers. Wait staff are not paid a lot, and neither are there good opportunities for personal growth or career progression. On top of that they have to accede to customers' sometimes unruly demands. You can imagine that staff turnover is not low. There is therefore a constant effort to recruit and train wait staff. And if you were the wait staff manager, you may get frustrated at having to constantly train new workers and keep them from leaving.

These two HR issues is also why they have so few restaurants, so that you only need a few head-chef or head-waiter to manage, supervise, and train the newer staff. If Jumbo wishes to expand, they will need more highly competent head-chef and head-waiter to oversee the new restaurants, ostensibly from within its own ranks.

The simple solution to all these HR conundrum is to share a greater percentage of your earnings with your staff. This obviously is not good for shareholders, but will be necessary for the business' long-term sustainability.

If you think about the good local food places with a long history, you will realise that almost all of them only have one store. And it is because of the reasons I have mentioned above; easier to manage your staff.

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10-10-2017, 06:31 PM, (This post was last modified: 10-10-2017, 06:35 PM by bardsmanship.)
Post: #25
RE: Jumbo Group
Quote:1) I don't know how much preparation is performed by Jumbo's central kitchen. It is possible that their dishes have been 100% cooked in the central kitchen and only require reheating in the restaurants. But they may not do this because seafood does not taste good if it is reheated, and customers might rebuke if they find out. Assuming that central kitchen does 50% of the preparation, say cook the sauce, the chefs in the restaurants are still required to do 50% of the cooking. In this 50% where the chef has autonomy, he may deviate from the cooking instructions because he had a bad day, or be unable to follow if he is incompetent or is having a terribly busy evening. Jumbo therefore has to hire and train chefs to follow its cooking instructions. After a few years of experience, there is the possibility your junior chef may just decide to jump ship, or start out on his own.

I doubt the dishes are fully prepared in the central kitchen here in Singapore, most likely the central kitchen prepares the sauces, pastes etc. which are delivered to the overseas restaurants. Like I mentioned in my previous post, Jumbo claims they have "standardized and simplified" the cooking procedures for their dishes so that the taste is easily replicable even by junior chefs. And if junior chefs are leaving only after a few years, that doesn't sound so bad.

Quote:2) Jumbo being a restaurant is expected to provide wait staff to serve customers. Wait staff are not paid a lot, and neither are there good opportunities for personal growth or career progression. On top of that they have to accede to customers' sometimes unruly demands. You can imagine that staff turnover is not low. There is therefore a constant effort to recruit and train wait staff. And if you were the wait staff manager, you may get frustrated at having to constantly train new workers and keep them from leaving.

Jumbo has experimented with greater automation to reduce reliance on wait staff - one of its bak kut teh outlets has self-order kiosks (and therefore no service charge). It would be nice if they could do the same in their seafood restaurants - reduce costs and reduce prices, thereby attracting more customers. Not sure if this is possible or even desirable though! 

Anyway, it sounds like you're saying that the full-service restaurant industry isn't as attractive as the quick-service / fast food restaurant industry, since the points you brought up aren't specific to Jumbo.

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10-10-2017, 07:00 PM,
Post: #26
RE: Jumbo Group
Part of the standardisation is to facilitate franchise biz in China.

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10-10-2017, 08:16 PM, (This post was last modified: 10-10-2017, 08:17 PM by karlmarx.)
Post: #27
RE: Jumbo Group
(10-10-2017, 06:31 PM)bardsmanship Wrote: Jumbo has experimented with greater automation to reduce reliance on wait staff - one of its bak kut teh outlets has self-order kiosks (and therefore no service charge). It would be nice if they could do the same in their seafood restaurants - reduce costs and reduce prices, thereby attracting more customers. Not sure if this is possible or even desirable though! 

Anyway, it sounds like you're saying that the full-service restaurant industry isn't as attractive as the quick-service / fast food restaurant industry, since the points you brought up aren't specific to Jumbo.

1) The government has been trying to encourage automation in order taking by sponsoring the necessary hardware for many years already. The purpose is to increase productivity by reducing manpower in the F&B industry. It may take some time for society to accept this (and other initiative such as return your own tray in hawker centres). For now, most of the adults still prefer making their orders through a person (and not returning their trays). Personally, I dislike making through orders through a touch screen; it is still too cumbersome.

2) There are challenges in both, so it really depends on the business owner's choice of poison. 

The quick-service model grows more easily as you only have to throw money at it to expand and hire a few key managers to manage the store employees. Apart from the higher capex required for continued expansion, increasing marketing expenditure is also required for continued sales. Or risk product obsolescence. After all, if your food is quick/easy to produce, it can't taste very good, right? And then there is the risk of changing consumer taste/preference, which could bankrupt the business quickly as the sales from all your stores plummet while you continue to pay for rent and labour for all your stores. This is why the big fast food chains like McD and KFC spend a lot on marketing; to make sure people continue to want to eat the quick-prepared food from their limited menu. Locally, Breadtalk also spends a lot of effort to market its products.

The full-service restaurants (one that enjoys brisk business), for reasons mentioned in my previous post, finds it difficult to grow, but it enjoys high ROE and margins. There is lower risk of changing consumer taste/preference damaging its sales, since there is variety in its menu and it serves dishes that are special or unique to the consumer. Having only a single (or few) store(s) also enhances the scarcity, and exclusivity, of your products.

3) As I have also previously mentioned, a lot of effort is required in the daily running of full-service restaurants. For Jumbo to have succeeded in expanding into China, I consider their management to be above-average. If I were to pay a P/E of 20, I will expect lots of growth in earnings (and more importantly dividends). But whether they are able to continue to expand successful, I haven't a clue. And so I don't have a position in Jumbo.

There are companies which are able to trade at higher P/Es although there is no or little growth, but I guess that is another matter.

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10-10-2017, 09:32 PM, (This post was last modified: 10-10-2017, 09:33 PM by bardsmanship.)
Post: #28
RE: Jumbo Group
(10-10-2017, 07:00 PM)Ray168 Wrote: Part of the standardisation is to facilitate franchise biz in China.

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Not just China, but also South Korea, Thailand, Vietnam and Indonesia. (From their latest corporate presentation: http://infopub.sgx.com/FileOpen/Jumbo-Co...eID=472638)

Quote:If I were to pay a P/E of 20, I will expect lots of growth in earnings (and more importantly dividends). But whether they are able to continue to expand successful, I haven't a clue. And so I don't have a position in Jumbo.

There are companies which are able to trade at higher P/Es although there is no or little growth, but I guess that is another matter.

This is where we differ, I'd actually prefer that Jumbo plough its cash into expanding (but prudently!) and adding more outlets than pay it out as dividends, since management appears capable of compounding capital at high rates of return.

Listed companies here that are in the restaurant industry seem to trade at higher multiples, because their business is more "visible" and more easily understood, I reckon. Tung Lok, Soup Restaurant, Katrina and ABR all have PEs exceeding 30. Only Japan Foods has a more "reasonable" multiple, but it's still trading at 16x earnings, and this is for basically a stable business. So Jumbo trading at 20x PE feels all right to me. Of course, it'd be even better if it were cheaper!

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