24-30-food-inflation

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					Food inf lation




  EATING
   AWAY
      AT
INCOMES
 Inflation has chewed up Hong Kong's
  food chain, from stalls in wet markets
         to restaurants in five-star hotels.
     Reno Ong reports on how Institute
  members and other business people
         are coping with the rising prices




A                         t a government-owned
wet market in North Point, Ng Mui scales a fish
as a lone customer looks on. It's late morning,
and her stall is one of a handful showing signs
of life in an alley of mostly idle booths.
                                                  recent years,” she says. “Suppliers have in-
                                                  creased prices by 20 to 30 percent but there's
                                                  nothing we can do about it. All of them
                                                  raised their prices at the same time.”
                                                     A couple of stores down, a butcher who
                                                                                                   cent. If you go back a decade, you'll see a 50
                                                                                                   percent increase,” says Lam, who wishes to
                                                                                                   be identified only by his last name. “I don’t
                                                                                                   know how I’ll cope with the economic situa-
                                                                                                   tion. I can only try to bargain with suppliers
    Ng, who has been selling seafood for the      has been selling pork for more than 20 years     and hope for the best price.”
past decade, takes a moment to compose her        echoes Ng's views. “Business [in 2011] was          According to the Food and Agriculture
thoughts when asked how business is going.        extremely difficult. Compared with the year      Organization of the United Nations, global
“Food prices have gone up ridiculously in         before, pork prices rose by at least 20 per-     food prices soared by an average of 26 percent


24   January 2012
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                                           PHOtO: CRystal fung




Most of the produce sold in Hong Kong's wet
 markets are sourced from China, exposing
 vendors to fluctuations in mainland prices.




                            January 2012   25
Food inf lation




     Lam, a butcher at a market,
        says pork prices rose by
     at least 20 percent in 2011.

during the first 11 months of 2011 from a year      killing livestock. In Japan, an 8.9-magnitude              from January to October 2011) from the year
earlier. At the heart of that dramatic shift was    earthquake in March triggered a tsunami                    before. The year-to-year rate was 1.3 percent
a global economy rattled by volatility in the fi-   that ravaged cities and rice fields in the north-          in 2009 and 2.4 percent in 2010.
nancial markets, sending investors scrambling       east. A subsequent radioactive leak from a                     In the past few months, food prices have
for the supposed safe haven of commodities.         nuclear power plant sparked fears of contam-               shown signs of easing. Global food prices on
    Crude oil prices, for example, skyrock-         inated exports.                                            average dropped by 10 percent between Feb-




                                                           6.8%
eted during the period (also partly due to                                                                     ruary and November 2011 and, according to
political instability in the Middle East),                                                                     the Hong Kong government, food inflation in
adding to operational costs associated with                                                                    the mainland peaked in July.
production and distribution. Speculation on                                                                        However, the Economic Analysis and
commodities such as corn and soybeans also                                                                     Business Facilitation Unit, Financial Secre-
drove up costs as investors, including busi-                                                                   tary's Office, remains cautious. “We have to
nesses involved in the food industry, antici-             increase in the food                                 stay vigilant to the risks of gyrations in the
pated prices would climb even higher.                      component of the                                    international food and commodity prices in
    On a regional level, various conditions              consumer price index,                                 the coming year, in view of the loose global
aggregated to make the situation worse. The                   2010-2011                                        monetary environment,” it said.
struggles of nearby countries had profound
economic repercussions on Hong Kong,
                                                          Source: Hong Kong Census and Statistics Department
                                                                                                               The food conglomerate
which imports almost all of its food.                   On top of those calamities, the appre-                 Maxim’s Caterers, which operates more than
    China and Japan, the city's two largest         ciation of the yuan and the yen, and Hong                  400 food outlets in Hong Kong, has felt the
sources of food, each suffered natural di-          Kong's peg to the weakening U.S. dollar also               negative impact of food inflation in a big
sasters that affected the course of trade. Six      helped drive up the price of food coming in                way, says Keith Siu, general manager of the
months of severe drought, followed by heavy         to the city. The overall result is a 6.8 percent           group and a member of the Hong Kong In-
downpours, devastated China's central agri-         increase in the food component of the con-                 stitute of CPAs. “Since we have the largest
cultural provinces, destroying farmlands and        sumer price index (using the average taken                 food and beverage group in Hong Kong, we


26   January 2012
                                           PHOtO: CRystal fung




have suffered from food inflation, especially
during the past year,” he says. “This has been
one of the key challenges for the food and
beverage industry in the past few years.”
    The restaurant group relies heavily on
its Chinese cuisine operations, which range
from the Maxim’s MX quick-service chain to
the more formal Maxim’s Palace banquet-
style restaurant. The group sources most
of its food supplies from China and nearby
countries, thereby making it susceptible to
regional price fluctuations. “The price of
pork increased a lot in China,” Siu says. “The
price of rice also increased because of the
flooding in Thailand.”
    Siu says that a conscious effort has been
employed to switch sources in order to miti-
gate the price fluctuations, but that doing so
poses a tremendous challenge for a large food
group. “We have a balanced approach in deal-
ing with our suppliers, especially because we
can lock in a longer-term contract,” he says.
“But we cannot have just one supplier, con-
sidering our volume. We have to balance the
number of suppliers as well.”
Food inf lation




                                                                                                                                            PHOtO COuRtesy: aqua RestauRant gROuP
                                                                       At Shiro, an upscale Japanese restaurant in Admiralty, the chef has
                                                                       full authority in sourcing ingredients, typically priced at market rate.

    Besides switching suppliers, Maxim’s     of the original group of restaurants founded       restaurants hasn’t increased that much, the
has looked into changes to menu offerings.   in London and most ingredients are sourced         business of each restaurant has seen a healthy
By doing so, Siu says, prices can remain con-from Europe.                                       increase,” he says. “Through economies of
sistent and portions, untouched. “We can do      “Yes, definitely, inflation is a problem,”     scale, we have greater bargaining power with
some substitutions, provided we can give     says Michael Mak, finance director of Pizza-       our suppliers.”
the same quality to the customers,” he says. Express and an Institute member, citing a 5            Mak says the fluctuation of food prices
“That’s why we focus on food innovations     to 7 percent increase in food costs during the     will remain uncertain in the near future, but
and concepts that can have a better margin.” past year. “But because most of our products       that the volatility of global currencies will
    A diverse portfolio that includes Lawry’sare imported from Europe, the fluctuation of       still be the company’s primary challenge.
The Prime Rib, Miso and Pearl on the Peak    currencies affects us as well.”                    “We do have to find some solution in hedging
gives Maxim's a degree of insulation, as         Mak says that while some ingredients such      the uncertainty of currency risk,” he says.
                                             as salmon and oil can be sourced elsewhere,
those operations are less sensitive to region-
                                             80 to 90 percent of ingredients originate from
al price fluctuations than others in the group.                                                 The upscale establishment
Lawry’s, an upscale roast-beef restaurant,   the same suppliers to preserve consistency.        At Aqua Restaurant Group, which operates
sources ingredients from the United States   PizzaExpress meets with suppliers at least         upscale concept restaurants in Hong Kong,
and Australia. “Because we source different  once per quarter to figure out ways to weather     Beijing and London, chefs have full author-
materials from different countries, we have adownturns. “With each meeting, we try to en-       ity to source their ingredients, meaning that
different impact from each source,” Siu says.hance our mutual understanding,” Mak says.         a significant portion of ingredients are pur-
                                             “We try to make some commitments over              chased at market rate. “[Prices] fluctuate
The specialty restaurant                     contracts or we try to diversify to see if there   all the time with the seasons… but we have
For a company like PizzaExpress, the past are any new products which we can purchase            fluctuations every year,” says Richard Ward,
year presented different challenges. Estab- from them.”                                         co-owner and chief financial officer of the
lished in Hong Kong more than a decade ago,      PizzaExpress opened two new restau-            group. “Having said that, there has been an
it has since grown to 10 outlets in the city rants in the past year and more are in the         overriding trend of increase in 2011.”
and two in Shanghai. While it functions in- pipeline. Mak says the expansion is part of a           Since the group currently serves six dif-
dependently, the company follows the menu plan to rein in costs. “Although the number of        ferent types of cuisine, the chefs source from


28   January 2012
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                                                                         PHOtO: CRystal fung




    PizzaExpress sources core ingredients such as cheese from Europe,
thereby shielding the operation, to a degree, from mainland food inflation.



                                                          January 2012   29
Food inf lation




                                                                                                                                               PHOtO COuRtesy: daH CHOng HOng HOldIngs
                                                                         Dah Chong Hong, a diversified food conglomerate, employs a global
                                                                         sourcing strategy that enables it to weather regional price fluctuations.

different suppliers and countries. This, he          To lower costs associated with fluctuations,  The company also has the ability to purchase
says, allows them to find suitable produce       the Ritz-Carlton pursues fixed-price contractsand store supplies, when prices are attractive,
at the best prices on a day-to-day basis. “Eu-   lasting six months or a year and tries to pur-as a safeguard against potential increases. “We
ropean products have been impacted by the        chase in bulk whenever possible. “To cope withhave the storage facilities, we have the cold stor-
strength of the euro,” he acknowledges.          rising prices, we have imposed tight control  age facilities, so we'll be able to make adjust-
    Chefs at the group drop certain dishes if    over costs,” Leung says. “We shall only con-  ments by stocking up,” Wai says. “Whenever
ingredients become too costly, and offer an                                                    there's a lamb supply in Australia and New Zea-
                                                 sider increasing menu prices as the last resort.”
alternative on the menu. Ward says that such                                                   land, we might import them into Hong Kong and
practices are essential to minimize the over-    The distributor                               then store them for a certain period of time.”
all impact of food inflation.                   Dah Chong Hong Holdings is a diversified con-      Wai argues that the food industry is a sta-
                                                glomerate that encompasses food processing, ble business that provides steady cash flow
The five-star hotel                             distribution and retail. The company makes in spite of the challenges. The company, he
Lionel Leung, director of finance at the Ritz- most of its money by supplying food and fast- says, sees China as its future. “The [main-
Carlton in Hong Kong and an Institute mem- moving consumer goods to institutional cater- land] food market is expanding fast, partic-
ber, cites an observable fluctuation in food ers, hotels, restaurants and retailers.           ularly for fast-moving consumer goods,” he
prices, particularly ingredients used in Chi-       Francis Wai, executive director and chief says. “The [increase in] demand, we expect,
nese cuisine. The price changes, however, financial officer of DCH and an Institute mem- will be running at 30 to 40 percent per an-
have not deeply affected the Ritz-Carlton’s ber, says that while food prices in general have num. We reckon that the demand will con-
restaurants. Leung says the performance of gone up in the past year, the company did not tinue to be high in the foreseeable future.”
the upscale segment was encouraging over see many additional costs it needed to pass on            In fact, most of DCH’s business now comes
the past year. The hotel opened during the sec- to buyers. “We've adopted a strategy of world- from across the border. “In the first six months
ond quarter of 2011, and the various restau- wide purchasing. We purchase our food from of 2011, close to 73 percent of revenue came
rants have since exceeded projections by more everywhere,” he says. “This is one of our com- from mainland China,” Wai says. “We are still
than 20 percent. “The guests in our restau- petitive advantages. The demand and supply, very confident that [demand] will continue to
rants are mainly people with high spending the seasonality, the exchange rates – we'll take grow, mainly because of the salary increases in
power and more disposable income,” he adds. those into consideration in global purchasing.” China.”


30   January 2012

				
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