HONG KONG'S fast-food sector is leaving investors with a bad taste in their mouths. Witness the appalling results posted by two chains, whose restaurants span the island, Kowloon and the New Territories. Cafe de Coral Holdings two weeks ago admitted that interim profit attributable to shareholders had dived by 28 per cent to $56.51 million despite a 15 per cent rise in turnover. Now its rival, Fairwood Holdings, has said interim attributable profits dived 84 per cent even though turnover rose 25 per cent. Both have blamed an exceptionally rainy summer for the fall, but that explanation seems to ignore some serious structural problems. Inflation is in the neighbourhood of 8.6 per cent, but their price rises have been limited to five per cent. The price of raw produce from China is rocketing - food inflation has reportedly hit 50 per cent in some mainland cities this year. Wages and retail rentals are rising, especially as leases are renegotiated to reflect the runaway property market of two to three years ago. According to Salomon Brothers, volume growth in the sector has fallen from 11 per cent in the third quarter of last year to 2.5 per cent in the first quarter of this year. Sales volumes are expected to contract in the second and third quarters of this year. Investors in the fast-food sector should be framing some tough questions to put to directors - a rehearsal for the annual general meetings, assuming they keep the shares that long. What is the point of investing in a sector as vulnerable to imported inflation? What is the economic sense of investing in an industry whose price increases lag inflation by at least three percentage points? How long can fast-food chains sustain rising wage, rental and material costs while paring profit margins to the bone? Fairwood and Cafe de Coral have much in common, - they target the same consumers, have the same style of operations, need the same venues and share the same problems, and they have a family connection. How long will it be before there is a shake-out in the industry? It would make sense for the boards of both chains to meet to talk about synergy.
