A&W accelerates expansion with a view to turn profitable

TheEdge Wed, Jul 20, 2022 03:00pm - 1 year View Original


THE A&W chain of restaurants is ramping up its expansion drive and tweaking its menu in a bid to boost its revenue threefold to RM180 million this year, to RM250 million in 2023, and ultimately to be profitable.

Since Inter Mark Resources Sdn Bhd acquired A&W (Malaysia) Sdn Bhd from KUB Malaysia Bhd for RM34 million in September 2018, the loss-making quick service restaurant (QSR) chain has undertaken a transformation of its offerings, service and infrastructure to ensure quality and affordable products in its attempt to beat the competition.

“We plan to double our 75 outlets currently to 150 by 2025 to be the second or third largest player in Malaysia. We’re opening another 12 stores by the end of the year and will hit our 100th by 2023. That gives us the confidence that our revenue targets are a done deal,” Inter Mark Resources founder and director George Ang tells The Edge.

To this end, A&W Malaysia will also penetrate the Borneo market by opening its first two outlets in Kota Kinabalu, Sabah, by the end of this year, followed by another three next year. The QSR chain plans to open eight outlets across Sabah and Sarawak by end-2023 and have a total of 25 outlets across Borneo within five years.

Ang believes that the Borneo market is underserved and likens launching A&W there with its recent opening in Alor Setar, Kedah. “That was another underserved market without many brands entering it. We had the biggest opening in the history of A&W in Asia, as we made RM60,000 in sales in a day,” he recalls.

“We don’t need to be the biggest player as having too many stores can be unprofitable. We need quality stores, with each doing better on average than our competitors. From a branding perspective, our long-term value proposition stands on quality and affordability,” says Kevin Bazner, global CEO of A&W Restaurants Inc.

A&W Malaysia currently ranks No 7 or No 8 in the QSR sector in terms of the number of outlets.

“The new management understands the food and beverage business to drive the turnaround. They understand that this is a very tight margin and capital-intensive business. As the fixed cost of rent in shopping centres is very high — as it is around the world — our focus is on driving up the average unit volume,” says Bazner.

If done right, this is expected to translate into more profitable outlets.

“We are putting the operations and quality right. First, we will continue to serve root beer in frozen mugs and do away with the paper cups that KUB used when customers used to steal dine-in mugs. The root beer is our most profitable product, contributing 15% to 18% of A&W Malaysia’s sales,” says Ang.

“Second, we now use fresh chicken and have done away with frozen poultry, which has made a significant enhancement to taste. We have also added new menu items.”

A&W Malaysia’s gross margins range between 50% and 55%. To enhance its menu and mitigate higher input costs such as the effects of inflation as well as higher cost of poultry — the most expensive item on the menu — there are plans to undertake “menu engineering” which  will give it some flexibility and options in its combo meal offerings.

“The cost of chicken has increased by 70%. We will pass some of the higher cost down to consumers by way of a 5% to 6% price increase in the next three to four months,” says Ang.

“We are fortunate as we have three protein items to work with [as opposed to fast food players who sell chicken as their primary offering]. Menu engineering gives us combos such as a three-piece chicken meal where two of the items can be replaced with other protein products. The set will still be of value as affordability is key,” he explains.

Bazner says, “We will have to sacrifice some margins to remain affordable, although small price increases are unavoidable. The other product development in Malaysia is to tie in with the appetite for Korean-inspired items due to its popularity. We want to have good flavour profiles and craveable foods at affordable prices.”

Although A&W has plant-based meats in its US and Canada markets, it may be some time before those offerings are available here, if at all.

“Our consumer researchers found that Malaysian consumers have not accepted that product very well due to the high price point. Second, consumers come to A&W for its ‘craveable foods’. We are working on a vegetarian product for the Malaysian market instead,” says Bazner.

“Labour challenges started before Covid, which affected productivity. First, we added automation in the kitchen such as self-cleaning equipment, oil filtering fryers — equipment that free staff to do other tasks with the push of a button. Second, technology for self-ordering service on the mobile phone, online, so the staff can prepare and serve food rather than take orders. In some markets, we have up to 90% of customers self-order their meals,” says Bazner.

Ang says that prior to the pandemic, A&W Malaysia’s online delivery sales, which had made up 10% to 12% of overall sales, rose to 60% to 70% during the pandemic-induced lockdowns in 2020 and 2021.

“Even with the reopening of the economy, there hasn’t been a significant drop in online delivery sales. It is still hovering above 20%, which is telling of the change in consumer behaviour,” says Ang,  adding about RM2 million has been invested in technology since 2021.

With the nation having started its transition to the endemic phase of Covid-19, A&W Malaysia saw 30% higher same-store-sales growth in the first half of the year than in the corresponding period in 2019. “During the pandemic, one of the highest sales we lost was the waffle, as it was a dine-in item. Therefore, we created a ‘waffle to go’, which became a top-selling and indulgence item during the pandemic,” says Ang. Under new management, A&W Malaysia made a net loss of RM6.1 million for the year ended Dec 31, 2018, from a net profit of RM3.3 million the year before. Revenue, however, grew 8.7% to RM68.4 million from RM62.9 million.

For FY2019 and FY2020, its net loss narrowed to RM3 million and RM2.6 million respectively on the back of RM86.6 million and RM82.8 million in revenue.

“We took over in late 2018 but despite the net loss, we were cash flow positive from an earnings before interest, tax, depreciation and amortisation standpoint. The bulk of the expenses went to expansion costs such as renovation,” says Ang.

 

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