This article first appeared in The Edge Malaysia Weekly on March 11, 2024 - March 17, 2024

WHEN breaking ground on the US$1.12 billion (RM5.3 billion) Four Seasons resort in Okinawa, Japan last week, Berjaya Group founder Tan Sri Vincent Tan Chee Yioun appealed to fellow Malaysians to end the ongoing boycott of Starbucks Malaysia over purported links to Israel, which has led to a plunge in sales at its franchised coffee chains held under Berjaya Food Bhd (BFood).

Muslims make up some 80% to 85% of employees manning Starbucks stores throughout Malaysia, he told reporters on March 4: “I think all those who are boycotting Starbucks Malaysia should know that it is a Malaysian-owned company [a franchise run by Malaysians]. We don’t even have one foreigner working at the head office … this boycott doesn’t benefit anyone.”

Starbucks Malaysia is not the only casualty of the ongoing boycott of the Seattle-based coffee chain, which has also reportedly hit Starbucks sales in Indonesia (not owned by Berjaya Food). Citing “challenging trading conditions”, the Alshaya Group, which operates Starbucks in the Middle East and North Africa, has cut 2,000 jobs or 20% of its workforce, Bloomberg reported on March 6.

Starbucks Corp — which too has seen slower sales growth despite having issued public statements on policy neutrality — has been operating in the Middle East for more than two decades and has not had any stores in Israel since 2003. Starbucks Corp’s share price has slipped 4% year to date to close at US$91.65 on March 6 for a market value of US$103.8 billion.

Tan admitted last Monday that the ongoing boycott “has had some impact” on Berjaya Food, but said “now, at least it is improving”.

His comments came less than a fortnight after BFood reported a whopping RM42.6 million net loss for the October to December 2023 quarter (2QFY2024) that usually benefits from year-end festivities. It was BFood’s worst quarterly performance since its listing in March 2011.

Even after excluding the one-off loss of RM10.5 million from the disposal of its entire equity interest in Jollibean Foods Pte Ltd — which owns three brands, namely Jollibean, Sushi Deli and Kopi Alley in Singapore — its core net loss was still high at RM32 million.

BFood said the key factor of the 2QFY2024 net loss was due to the boycott of the Starbucks franchise amid heightened conflict between Israel and Palestine. Lower sales pushed BFood’s 2QFY2024 top line down 38% year on year to RM182.6 million from RM295.3 million in the previous corresponding quarter. In 1QFY2024 (July to September 2023), it recorded a net profit of RM19 million on the back of RM278.53 million in sales.

Looking into its past record, BFood made its maiden net loss of RM3.4 million in the February to April 2017 quarter after it undertook impairments in the face of a slowing economy. BFood suffered a net loss of RM30.2 million during the April to June 2020 quarter when operations were restricted by the then ongoing movement control order to curb the spread of Covid-19.

All three analysts who updated their recommendation on BFood in the past two weeks now have a “sell” call on the counter, two of whom downgraded on Feb 22 after the earnings release, according to Bloomberg data. Of the three, KAF Equities had the lowest target price of 34 sen, followed by Hong Leong Investment Bank Research’s (HLIB) 38 sen and Maybank Investment Bank Research’s 40 sen.

According to Bloomberg data, Maybank had cut its recommendation on BFood to “sell” on Nov 16 last year with a target price of 59 sen when the stock price was hovering at 65 sen.

Closing at 55.5 sen (RM983.4 million market capitalisation) on March 7, BFood shares have regained some ground from the 52.5 sen (RM930.2 million market cap) that it had ended at on Feb 29 but is still a shade below the 57 sen (RM1.01 billion market cap) it closed at ahead of the earnings release on Feb 21.

Maybank’s 40 sen target price, however, implies a 28% downside potential if the research house continues to prove right.

BFood did not declare dividends for the latest quarter. In FY2023, it paid a 3.5 sen dividend compared with a 0.44 sen dividend in 1HFY2024. Its dividend yield is likely to come down substantially against its 12-month dividend yield of 5.5%, as management looks to conserve cash to address the challenging business operations.

Given the wide availability of alternative coffee choices, on top of viral home-made Starbucks-alternative recipes being shared on social media, observers wonder if Starbucks Malaysia can recover swiftly 

as awareness of the local franchised stores being Malaysian-owned and not American-owned increases — even if the Israel-Hamas conflict were to miraculously end or see a ceasefire during the holy month of Ramadan.

HLIB Research analyst Syifaa’ Mahsuri Ismail tells The Edge: “I think people would stick to the ones that they are used to … You can see the price itself is very attractive for other local brands. They are also going into the strategy of providing the comfort and the affordability of coffee.

“Starbucks is a very strong brand. It caters primarily to tourists, and for those who are not really familiar with [it] ... even after the boycott ends, I think Starbucks will still feel the pinch of competitors grabbing its market share.”

For now, analysts are not ruling out the possibility of still-bearish core results for the 2QFY2024 quarter, which covers the current January to March 2024 period.

“It was just a two-month impact from the war declared by Israel against Hamas. Therefore, we may see a stronger hit to the 3Q results [January to March 2024],” says an analyst who declined to be named.

Starbucks made up a huge chunk of BFood’s revenue at 90% in the latest quarter while Kenny Rogers Roasters contributed 7%. BFood did not provide the same-store sales growth figure in the latest quarterly results, but it was 2% for FY2023.

During 2QFY2024, BFood opened six new Starbucks outlets comprising one Starbucks Reserve, one drive-through outlet and four regular stores. Management guidance is that 40 to 45 new stores will be opened across Malaysia for FY2024.

HLIB’s Syifaa’, however, thinks that it is not a good strategy for now. “If you have more stores, then you would have higher fixed costs. It just wouldn’t make sense.

“Fundamentally, in the medium term, I don’t think it is going north anytime soon. Coffee prices have also been going up. The depreciation of the ringgit would cause the margin to be really contracting, especially with the promotions that Starbucks has been doing.

“The marketing spends would eat into the profitability sooner or later. While you would be able to stabilise the revenue, the promotions would obviously hit the bottom line.”

As 55% of BFood’s cost is denominated in US dollars, arising from purchases from the principal Starbucks International, she says this could further weigh on the group’s financials.

Another analyst, who declined to be named, recommends that investors adopt a wait-and-see approach for now, pending signs of a recovery in BFood’s financial performance.

As at end-December 2023, BFood’s net debt was RM219.2 million, with RM43.7 million being long-term and RM220.1 million short-term borrowings. This compares with a net debt of RM194.1 million as at end-September 2023, with RM56.1 million long-term and RM183.3 million short-term borrowings.

BFood declined to comment on questions sent by The Edge.

On Feb 28, Starbucks Malaysia — which employs more than 5,000 staff across 400 stores — reiterated through a posting on its website that neither Starbucks Corp nor the company’s former chairman, president and CEO Howard Schultz provides financial support to the Israeli government and/or the Israeli army in any way.

“Our position remains unchanged. Starbucks stands for humanity. We condemn violence, the loss of innocent life and all hate and weaponised speech. Despite false statements spread through social media, we have no political agenda. We do not use our profits to fund any government or military operations anywhere — and never have,” it said.

Shares of BFood are controlled by conglomerate Berjaya Corp Bhd (BCorp) with direct and indirect stakes of 5.7% and 52.3% respectively.

Tan’s daughter Chryseis Tan Sheik Ling, executive director at Berjaya Assets Bhd and Berjaya Land Bhd, sits on the board of BFood and BCorp as non-executive director. Chryseis has been married to Naza Group’s deputy group executive chairman and Naza TTDI Sdn Bhd group managing director SM Faliq SM Nasimuddin since 2018.

Tan, who relinquished his chairmanship of BCorp in 2023, was replaced by Johor princess Tunku Aminah Maimunah Iskandariah, the daughter of His Majesty Sultan Ibrahim, King of Malaysia. BFood’s chairman is Datuk Seri Diraja Tunku Shazuddin Ariff Sultan Sallehuddin, the Tunku Mahkota of Kedah. 

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