F&B retail operators now face the prospect of higher rental bills and increased fit-out expenses, further straining already thin margins.
PETALING JAYA: The expanded sales and service tax (SST) is piling pressure on retail food and beverage (F&B) operators, with industry groups cautioning that higher costs could render many outlets unprofitable and may even force some to shut down.
The new tax regime, which came into effect on July 1, entails an 8% service tax on commercial property leasing and rental services, alongside a new 6% SST on previously exempt construction work services.
This means F&B retail operators now face the prospect of higher rental bills and increased fit-out expenses, further straining already thin margins.
Malaysia Retail Chain Association (MRCA) vice-president and chief of F&B division Valerie Choo said rental already represents a significant portion – often up to 20% to 30% – of monthly overheads for operators, especially in shopping malls and prime commercial areas.
“To give a rough example, an F&B outlet paying RM50,000 in monthly rent would now incur an additional RM4,000 in SST (at 8%).
“For a chain operating 10 outlets, that is an extra RM40,000 per month – or nearly half a million ringgit annually – just in rental-related SST alone.
“Renovations or refurbishment works, which can range from RM100,000 to RM800,000 per outlet, now also attract an additional 6% SST, significantly raising capital expenditure cost.
“Monthly maintenance works and upkeep costs may cost RM1,000 to RM5,000 before the 6% SST,” she told StarBiz.
Choo said small and medium F&B operators are likely to be more affected than larger multinational chains given the latter’s better economies of scale, stronger negotiating power on rental terms, and the ability to absorb or offset additional tax burdens through centralised operations or pricing strategies.
“In contrast, small and medium enterprises typically operate on thinner margins and may struggle to absorb the additional SST costs.
“For many, these added expenses may erode profitability or force them to increase menu prices, which could impact competitiveness and consumer demand in a tight spending environment.
“Some may be forced to close down eventually,” she said.
Choo added that cost-pass-through strategies may not be a feasible option looking at the current operating environment.
“With the new 8% SST applied on top of existing rent, this adds a material cost burden that cannot always be passed on to consumers in a price-sensitive market,” she further added.
In its recent report, Retail Group Malaysia noted that for the second quarter of 2025 (2Q25), Malaysia’s retail industry declined by 3% year-on-year (y-o-y).
This was a sharper drop than the industry’s earlier projection of a 1% y-o-y contraction in June.
Additionally, the report’s findings were derived from feedback provided by the members of the Malaysia Retailers Association and MRCA.
The report attributed the weaker- than-expected performance of the retail industry to the earlier timing of Hari Raya Aidilfitri this year, which was celebrated from March 31.
The pre-festive sales had been captured in 1Q25. In comparison, this major festival was celebrated last year from April 10.
Only part of the festive shopping was done during 1Q24.
“This latest quarterly result also signalled higher living costs and reduced purchasing power among Malaysian households.
“Malaysian consumers, especially those living in major cities, needed to navigate their monthly expenditures carefully in order to maintain their lifestyles.
“Retail prices of many non-essential goods and services continued to rise during 2Q25. During this period, the disrupted supply chains due to the United States tariff war contributed to higher costs of imports that impacted retail companies in Malaysia,” the report stated.
The y-o-y sales performances of retail sub-sectors in 2Q25 saw negative growth rates.
The top performer was the mini-market, convenience store and cooperative sub-sector, which rose by 11% y-o-y in 2Q25.
The worst performer was the department store sub-sector, where sales shrunk by 16.5% y-o-y in 2Q25.
Moreover, the earlier celebration of Hari Raya Aidilfitri this year also led to a slowdown in sales for F&B establishments in 2Q25.
“The prolonged Israel-Palestine conflict continued to affect sales of several international F&B franchises.
“Many Malaysian consumers were still avoiding these restaurants and cafes.
“This had led to heavy losses of several F&B brands operating in Malaysia,” the report noted, adding that the new opening of many independent cafes and the new entry of many international F&B chains had worsened the situation.
F&B outlets (cafes and restaurants) grew at a slower pace of 2.5% y-o-y in 2Q25, far below the 8.5% growth rate operators had projected earlier in June.
Meanwhile, takeaway kiosks and stalls saw sales fall by 8.1% y-o-y in 2Q25, in line with their earlier estimates.
Despite this, Hong Leong Investment Bank (HLIB) Research does not anticipate significant downward repricing in the valuations of listed F&B players.
The research house added that its view on the broader consumer sector, which remains constructive, is supported by government cash assistance and the recent wage revisions, both of which should help cushion disposable incomes.
“Moreover, most staple food items are excluded from the expanded SST, which limits the pass-through effect on essential spending.
“Given the essential nature of F&B, we believe current valuations remain palatable,” it said.
While HLIB Research expects there to be some cost pressures, particularly from higher rental expenses for F&B operators located in malls which could compound the impact of the expanded SST, it does not see the tax as a major conundrum or headwind.
“Furthermore, consumer appetite for dining out remains resilient, and we believe demand strength will help offset the incremental cost pressures faced by operators,” it said.
For instance, the research house estimates Oriental Kopi Holdings Bhd
’s SST obligations to be manageable, with a potential dilution of around 1% to its gross profit margin.
“The exact quantum (of SST-related payments the company has to make) will, of course, depend on sales volumes subject to the tax.
“That said, we believe Oriental Kopi possesses adequate pricing power and operational flexibility to mitigate the impact, enabling it to preserve healthy margins despite the adjustment,” the research house said.
Overall, HLIB Research said the consumer sector’s current valuation is below its five-year mean.
In fact, the research house sees the sector as somewhat of a laggard relative to historical levels.
“For the F&B sub-segment specifically, we only have coverage on two names, but broadly speaking, the sector still looks reasonably priced in our view,” it noted.
