Local fast food chain Fairwood Holdings posted an 11.6 percent decline in net profits to HK$46.4 million for the first six months that ended on Sept 30 due to rise in rental and food prices.

The company chairman, Dennis Lo, attributed the drop to the escalating rental expenses and surging food costs, saying overall rental costs increased by 1 percent during the period. The rental hikes have slowed down the opening of new shops that directly affected the growth in turnover.

Its Hong Kong outlets saw a 5 percent increase in average rentals as they renewed their contracts. This led to a significant increase in operation costs, said the company's executive director CK Ng.

However, Lo remained optimistic that the company will not revise its plan to open 100 fast food outlets in Hong Kong by 2010.

Fairwood currently has 86 and 12 outlets in Hong Kong and on the mainland. Lo said three more Hong Kong outlets are in the pipeline in the second half, while three or four outlets are scheduled to open up north.

He also stressed that the company will neither lay off employees nor freeze their salaries during this difficult period.

"To complement our expansion, we will increase our payrolls by 1,000 over the coming 12 months. Among which, Hong Kong and mainland outlets will recruit about 700 and 300 new hands, respectively," he said.

Speaking about food prices, Lo said that commodity prices such as pork have softened despite some items like beef remain at a high level. He believed that the company will be able to keep food costs under control.

Customers' average spending increased to HK$28 in 2008 from HK$26 last year. Lo admitted that it has little room to raise menu prices.

"We think the prices are in reasonable level because our customers still find it affordable," he said. "We, however, might consider reducing menu prices between 3 and 5 percent if food prices further drop."

He added that the company will diversify its food product mix to attract customers.

Regarding the slash of interim dividend from HK$0.19 to HK$0.1, Lo explained that the company needs to set aside cash to finance its new central processing plant in Tai Po.

The restaurant chain's total investment in the processing plant is about HK$120 million. The plant is scheduled to operate in the third quarter of 2009.

Shares of Fairwood closed at HK$5.2 yesterday, down 8.77 percent.

(HK Edition 11/28/2008 page2)