Tuesday, October 26

KFC to open more outlets in East M’sia

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KUCHING: KFC Holdings Bhd (KFC Malaysia) plans on opening more “drive-through” outlets in East Malaysia to generate better store sales in the region.OSK Research Sdn Bhd (OSK Research) in its research report cited that KFC is looking to have more “drive-through” outlets as this would generate better store sales growth of about 25 per cent compared with the present 15 per cent growth.

It currently has about 25 “drive-through” outlets throughout Malaysia and targets to open another 10 more this year.

The group has plans to open more new restaurants in untapped areas (targeting 5-7 outlets), particularly in East Malaysia and small townships like Kelantan and Terengganu given that outlet rentals are lower on the East Coast making KFC restaurants there more profitable.

Last year, the East Coast region performed better with Kota Bharu being one of the top ten most profitable outlets for the group.

OSK Research believed that the outlets in East Malaysia will perform better this year given the stronger branding and less competition as Sugar Bun, one of the stronger fast food chains in East Malaysia, has closed down recently in Sabah.

Due to the advantages, KFC currently has a market share of 45 per cent in terms of the number of fast food outlets in the country.

On the other hand, it also aims to expand its franchisees in the Indian market. The research firm pointed out that currently KFC Malaysia has four existing outlets in India located at in Pune and Mumbai. The group is slowly expanding its business as it builds two more outlets which are targeted for completion in March this year. It also plans to open a total of between 10 to 12 outlets before the end of the year.

There are currently four franchisees in India while in Pune and Mumbai there are a combined number of 15 KFC outlets.

However, its management has provided assurance that KFC Malaysia has received support from Yum Brands whereby the other existing franchisees within the two cities are restricted from expanding their outlets.

KFC Malaysia also had the possibility of obtaining more franchise licences for other cities.

The pull back however was the expensive rentals in India. It was more costly to open an outlet in India compared with Malaysia, it observed.

A new outlet costs an estimated US$450,000 (RM1.53 million, assuming US$1.00 to RM3.40) in India compared with RM800,000 in Malaysia.

OSK Research said, although competition is India is tough, it believed the company may have the advantages over other fast food chains as its main product is fried chicken, which is usually preferred over its competitors’ signature menu items, which comprise beef. This is because the majority of the population is Hindu, making up 83 per cent of India’s population.

Other than that, KFC will also feature more vegetarian items on its menu in India to cater for vegetarians, who comprise 40 per cent of the population. Its management expected double digit growth in India which based on the past recorded same store sales (SSS) growth of about 15 to 20 per cent.

Meanwhile, the gestation period for KFC India will take some time before starting to contribute meaningfully. With only 55 outlets in Indian feeding a total population of 1.2 billion, KFC stands a chance to earn the benefits over the longer period.

KFC will gain in long term benefits given the massive population and great potential for growth in India.

Locally, KFC’s efforts to penetrate the suburban and rural areas through new outlets and Sudut Ayamas distribution outlets will continue to gain more support.

Aside from its restaurants businesses, KFC has innovative ideas on social welfare as well as improving its poultry business. It is targeting to grow its Ayamas sales which contributed some 30 per cent of overall group sales through the concept of “Sudut Ayamas”.

The mode of distribution involved making available freezers storing frozen products and shelf stable products available at hypermarkets.

KFC also initiated a partly funded business on push-carts to build up the entrepreneurship in unemployed graduates by encouraging them to start a small business by operating a push-cart in local universities.

The push-cart, involving a start up of between RM2,000 and 3,000, will generally sell Ayamas hotdogs, bubble tea and mineral water. Soft loans are also available to these graduates to finance their working capital whereby they can lease the carts for RM250 per month.

However, OSK Research maintained its earnings forecast for financial year (FY) 2009 and 2010 with a neutral recommendation given the limited upside potential on the stock and pegged its target price at RM8.30, based on 11.5 times average peer price earnings ratio on FY10 earnings per share.