Tan Sri Andrew Sheng: The wonton vs sushi story; So what is the right business model for small businesses in the age of massive social and technological change?

Saturday March 16, 2013

The wonton vs sushi story

Think Asian by ANDREW SHENG

MY friends know that I am a noodle foodie. Everywhere I go throughout Asia, I try the noodles, from laksa in Penang, pad thai in Bangkok, beefpho in Hanoi to mohinga in Yangon; each bowl showcases the culture and flavour of the place, through the different texture, spices, and taste. Somehow, I remember a place by the quality of its noodles.

There is nothing quite like the great wonton and noodle shops in Hong Kong. They are not fancy places, but have been in the same location for ages, and have become beloved local institutions with lifetime customers. In the past few months. several historic Hong Kong noodle shops and cafes have closed from rising rents. The closure of the 42-year-old Lei Yuen Congee Noodles in Causeway Bay this January made the South China Morning Post. Hundreds of tourists and residents flocked to the shop in its last days, waiting in hour-long queues at lunch time for their last chance to eat there.

Rising rent in Hong Kong is nothing new. Hong Kong competes with Tokyo as one of the world’s most expensive real estate markets. Yet Tokyo is full of small ramen and sushi shops that have been around for decades brought to international attention recently by the film Jiro Dreams of Sushi about a dedicated Michelin star sushi shop in the Tokyo subway. Tokyo sushi shops also have to pay the high rent demanded by landlords, but perhaps their landlords realise that Japanese culture is poorer if there is no local sushi and ramen shop around.

It is part of the economic cycle that rent will increase in line with inflation and supply and demand. But property prices in Hong Kong are both a function of location as well as interest rates, which are now the lowest for decades. Thus, low interest rates and the US dollar peg does mean that real estate prices and rents will rise faster in a faster growing Hong Kong than in the United States.

The 91-year-old owner of the recently-shuttered Kam Kee Caf in Shau Kei Wan only retired after 45 years because his rent jumped from HK$20,000 to HK$50,000 a month, not because he was tired of serving milk tea. If he owned his shop, at HK$50,000 a month, he might as well retire on the rental income and let someone else take all the business risks.

The point of this parable is not just to highlight the vagaries of the Hong Kong real estate market or the particular reverence Japanese people have for veteran sushi makers. Hong Kong hasn’t had rent control laws on the books since 1998, but neither does Tokyo. Hong Kong is instead an extreme example of the sociological effect of what can happen to small and medium enterprises when rent inflation occurs in a situation of low land supply response.

The free market view is that if location is good and rents are rising, the shop must convert to higher value-added products. So wonton shops may change to selling sushi or become bars that can charge higher prices. Hollywood Road is famous worldwide as the Chinese antique centre of the world, but today, the antique shops are being replaced by bars and pubs. Even antique dealers find it hard to make money with high rents. The more entrepreneurial ones have moved into cyberspace, but the Hollywood Road brand, created by the cluster of small and large antique shops that have been around for decades, may become lost because tourists can’t find too many antique shops around as before.

In economics, the inestimable social value of an old caf is called a “positive externality”, because its social value to the community lies beyond its rental value. The inability of the real estate market to take this external value into account is a market failure.

Even town planners realise that the shopping experience has to cater for a range of tastes, from the poor to the rich, for the real estate to be sustainable long-term. It is the diversity that makes the place vibrant. The growing retail business model of “clicks versus bricks” is that you need only a few premium stores like Apple in prime locations, and the rest will be bought off the web. The small wonton or sushi shop simply cannot have the scale to do that. Small businesses tend to be local, not global. So young entrepreneurs will be driven out of business by high rents and start-ups become more and more expensive to fund.

We are witnessing Schumpeterian “creative destruction” in action. In the United States, the rise of Amazon not only created the demise of small “mom and pop” bookshops, it brought down large chains that could not compete against the convenience of browsing the whole range of products on the web.

So what is the right business model for small businesses in the age of massive social and technological change? Individually, the noodle shop or small business is a price taker, not a price maker like a famous brand. They have no influence on their rents, nor their selling price. If they get driven out of business, there is not just an inflationary effect, but social choice will decline as diversity is lost. You only get fast-foods instead.

This is a classic collective action trap as no individual player can change the game on his own, not the state, the landlords or the businesses. Markets are moving faster than town planning and land supply rules can change.

Planners across Asia in cities like Mumbai, Jakarta or Kuala Lumpur will have to provide retail space at affordable prices for the new wave of migrant entrepreneurs selling bakso noodles or nasi lemak for the masses that keep prices down. Not doing so would only increase the social divide between the haves and have nots.

Markets change and land use rules and regulations must change with the times. l Tan Sri Andrew Sheng is president of the Fung Global Institute.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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