Leong Hup’s farm-to-plate play

(From left) The Baker's Cottage advisor Dr Kooi Eng Teong, Leong Hup International Bhd CEO of Malaysian operations Lau Joo Han and CFO Chew Eng Loke.

DURING the height of the movement control order (MCO), many food and beverage companies were badly hit.

But there was one clear exception.

People queued up for one hot-selling item: freshly roasted whole chickens at a hard-to-resist price of RM9.90.

That incident seems to have catapulted bakery chain The Baker’s Cottage (TBC) into a new era.

On June 1, the largest chicken producer in the country Leong Hup International Bhd (LHI) announced a surprising acquisition – that it was going to buy the entire equity interest in The Baker’s Cottage Sdn Bhd, which owns The Baker’s Cottage brand of retail outlets, as well as nine other licensed TBC outlets for RM20.3mil.

The deal is also a related party transaction (RPT), because TBC was privately owned by the Lau family, comprising LHI executive chairman Lau Chia Nguang, his brothers and nephews. The Lau family are the major shareholders of LHI.

Notwithstanding that, LHI’s plans for boosting the homegrown TBC business is impressive.

For starters, there is now an aggressive plan to spike up the number of TBC outlets to 300 by 2023.

In an exclusive interview with StarBizWeek, LHI CEO of Malaysian operations Lau Joo Han says TBC will open its 50th store next week and the group targets to set up 80 stores by the year-end.

“The MCO period provided us a new opportunity. Live bird prices dropped to a low of RM2.10 per kilogram as wet markets were not allowed to operate during the MCO.

“We had an ample supply of chicken, so we decided to sell whole roast chickens at a promotional price of RM9.90 through TBC stores.

“From selling 570 to 1,245 roast chickens per day, demand for TBC’s roast chickens increased during the MCO and sales of its roast chickens peaked at 14,500 birds per day.

“Demand was so overwhelming with long queues forming at TBC stores that we had to ration the supply, where each customer can only purchase one roast chicken, ” Lau recalls.

The brisk halal-certified roast chicken sales were the main contributors to TBC’s sales during the MCO, as same store sales rose more than 85% in May as compared to the same month a year ago.

Recently, TBC has increased the price of the roast whole chicken to RM10.90, and continues to see strong demand from its customers.

The situation highlighted one big plus for LHI to think about taking over TBC.

“By leveraging TBC, LHI has another downstream business segment, apart from the group’s processed and frozen food segment.

“There are many synergies to be tapped from this additional downstream revenue, the most significant of which are greater margin stability and higher profit margin from adding more value, ” explains Lau.

Note that all TBC outlets will be owned by LHI and will not be franchised out.

Hence, this allows greater flexibility and more efficient management, says Lau.

“Live bird prices are volatile. Even without events like MCO, weather conditions affect the growth cycles of chicken. Profit margins for live bird sales are relatively thinner. As such, we are banking solely on the volume game.

“Now, with a downstream or business-to-consumer (B2C) avenue like TBC, LHI is able to determine the operations stage (upstream, midstream or downstream) that will yield the most optimum profit margins for the group.

“For example, when live bird prices command lower profit margins, we are able to get better profit margins from the sale of roast chickens instead. Likewise, when live bird prices increase, we can reduce the price of roast chickens and offer greater savings for our customers.

“Thus, LHI is able to increase its profitability through economies of scale. In addition, being a fully-integrated poultry producer, we are able to pass on savings to consumers, ” Lau explains, adding that LHI is also able to build on its brand awareness through TBC.

For the financial year ended Dec 31,2019, LHI registered a revenue of RM6.05bil, of which the feedmill segment (upstream) contributed RM4bil, while the livestock and poultry-related products (midstream) contributed RM3.4bil.

The further processed production (downstream) is currently immaterial, given its small size.

The savings offered to consumers are commendable.

A quick observation of prices shows that the standard (non-promotional) price of TBC’s roast chicken is RM16.85, while other brands are marketing a similar product for more than RM25.

The affordable and value-for-money niche segment is where TBC is well-positioned to grow.

TBC first began selling roast chicken rice at RM6.90 with free drink refills in November 2017.

During the MCO, with takeaway forming the bulk of TBC’s sales, the same roast chicken rice now comes with a free doughnut or Portugese egg tart, at the same price of RM6.90.

As part of the strategy to cater to the affordable segment, TBC targets to open stores in suburban areas, to be a neighbourhood food and beverage (F&B) outlet.

Generally, TBC stores are located in shoplots that are close to high traffic and commercial areas, where rentals are considerably lower as compared to shopping malls.

The expansion of TBC stores also opens up job opportunities for locals.

“Going forward, there are further synergies to be unlocked as TBC launches new products.

“Raw materials for baked goods and pastries containing meat, sausage and egg can be sourced from LHI, ” adds Lau.

Clarifying concerns raised on the acquisition of TBC, Lau explains that the acquisition garnered full support from its board of directors.

In fact, it was the independent directors who encouraged the acquisition of TBC, after seeing the growing sales figures and taking into account the scheduled opening of one to two outlets each month this year.

TBC was previously privatised as it was principally involved in the manufacturing and trading of bakery products, which was not aligned with LHI’s core business of integrated poultry production.

“In 2017, when TBC was acquired by the Lau family for RM20.3mil, the company was making losses of RM7.7mil.

“In addition, part of the turnaround of TBC involved additional investments in machinery and equipment.

“The first 15 outlets took more than a year to transform, in terms of establishing the quick-service restaurant (QSR) concept, processes and fine-tuning of the roast chicken, as well as its other baked goods.

“So, not only did the Lau family absorb the losses of TBC, we managed to turn the company around with a net profit of RM593,000 in 2019, as well as established the Baker’s Cottage brand name and its current QSR concept, ” explains Lau.

It is also noteworthy that TBC was acquired by LHI for RM20.3mil, which was the same price that TBC was acquired for in 2017.

LHI has deferred farm expansion plans this year but ongoing building works for the group’s farms will continue.

At the current production capacity of more than 10 million kilograms of birds per month, Lau estimates that the group will hit maximum capacity by year-end as volume increases.

The group’s focus this year for its Malaysian operations is to grow the TBC chain of stores.

At an estimated RM500,000 required to set up each TBC outlet, the total capital expenditure for the expansion of TBC for the rest of the year will amount to about RM15mil.

Additionally, TBC will revamp and transform its existing outlets to new generation outlets that are fitted with modern interiors.

Brimming with prospects, the expansion of TBC is certainly one to look out for.

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