ENVIRONMENTAL SCANNING Economic Factors In economic recession people lose jobs or tend to save their money because they

do not know when things are going to get better. When people curtail spending due to an economic recession, the first thing they stop spending money on is luxury items. These items include: going out to eat at restaurants, going on trips, and basic recreation. Restaurants are a luxury, not a necessity; people must have the disposable income to spend at a restaurant. The 2009 Family Income and Expenditure Survey (FIES) of the National Statistics Office revealed that families in the bottom 30% or those considered poor earn an average of only P62,000 annually, while the upper 70% income group or the nonpoor recorded an average P268,000 annual income. FIES data showed that an average P64,000 is spent by poor families yearlya budget that exceeds their annual earnings by P2,000. The non-poor, on the other hand, spend an average P224,000 per year. In 2009, about 42.6 percent of the expenditures of an average Filipino family were on food. For families in the bottom 30 percent income group, the percentage was much higher at 60 percent, while for families in the upper 70 percent income group, it was 40.5 percent. The continuing growth of the population is also a major driver for the growing demand for food. The population expanded by 2.1% annually to 90.5 million in 2008 from 71.9 in 1997. Based on the census-based projection of the NSO, population will grow by 1.9% per year until 2010. Relatedly, intensifying urbanization will also propel food demand. The percentage of urban families to the total number of families expanded from 38% in the late 1980s to 48% in the 2000s (NSO). Generally, urban inhabitants have higher incomes and thus, greater per capita spending on food. The busier consumer lifestyles, however, tend to

shift consumer preferences towards more convenience-based products such as canned and frozen foods. Despite the economic crisis experienced today, the need for food is still higher. This yields a great potential for the food industry specifically the restaurants but with an affordable price.

Technological Point-of-scale System One technology that has been rapidly adopted and pioneered by the restaurant industry is the point-of-sale or POS system. These systems use a touch-screen display to allow cashiers and servers to input orders, sending them to the kitchen for preparation without having to manually call the order back and submit a hand-written dining ticket. As they have become more common, the POS systems have also become much more complex, with modern POS technology allowing separate tickets to be sent to different food preparation stations from a single order being sent back by a server or cashier. As soon as a server types a customer's order into a POS terminal, separate tickets can be printed out at a salad prep station, a fried foods station, and a grill station, all while the server is getting back out to check on his/her tables and make sure that all of there customers are happy. Technology for Creating Ambience Ambience is important for any restaurant, but full-service, fine dining restaurants in particular rely on providing a memorable, pleasant atmosphere for their guests. This includes two major aspects: temperature and music. Indoor temperature. Restaurants need to conform to local health codes and maintain a functional heating, ventilation and air conditioning (HVAC) system inside the building. This is important for both the kitchen as well as the dining room. The temperature, although a fairly simple variable to control, can make or break a guest's restaurant experience. Install a

programmable thermostat to maintain a consistent, moderate setting so guests can stay comfortable. Lighting. Restaurant owners have a world of options when it comes to lighting their dining space. Create the atmosphere you want with different colors, strengths and types of light. It is also fairly simple to take advantage of energy-efficient lighting technology in the restaurant. In fact, switching from incandescent to compact fluorescent lights can save as much as $30 per bulb over the lifetime of the light. Music. For a variety of restaurants, the music adds to the overall feel of the restaurant. You will need to decide whether you want to use satellite radio technology and an expensive sound system in your restaurant, or simply tune in to a local FM station and install some speakers. Before you buy, research music systems online and ask other restaurant owners what they use. Music systems for full-service restaurants can cost tens of thousands of dollars, so be sure consider what would be appropriate for your restaurant concept, as well as whether or not you will require professional installation. Internet technology Restaurant owners are tapping into the possibilities of the internet technology to promote their establishments, market to different crowds and even offer different options for ordering food or making a reservation. From social media websites to online reviews, the internet is a major player in technological advances affecting restaurants today. Political/Legal Republic Act 7394 (Consumer Act of the Philippines) reiterated BFAD's mandate "to protect consumers from adulterated or unsafe product with false, deceptive and misleading information". The enforcement activities have been focused on four (4) strategies, namely; 1) licensing and inspection of food establishments; 2) product registration; 3) monitoring of trade outlets, and 4) monitoring of product advertisements and process.

Administrative Order No. 26 (AO 26), which updated its Administrative Order No. 39 (2000) or the Revised Rules, Regulations and Standards Governing the Importation of Meat and Meat Products into the Philippines. AO 26 reiterates the need for a DAaccredited importer to obtain a Veterinary Quarantine Clearance (VQC) certificate prior to the importation of meat and meat products. A VQC will now be valid for 60 days from the date of issuance, within which the meat or meat products are to be shipped from the country of origin, and may no longer be extended beyond that. A VQC is non transferable and can only be used by the consignee to whom it was issued. A one shipment/bill-of-laiding per VQC issued policy will be strictly adhered to. Social, Cultural, Demographics The figures from the Family Income and Expenditure Survey reveal that households choice of food consumption is changing, wherein purchases of food away from home continue to surge steadily while expenditures for food prepared at home declines; in fact, eating out accounts for about 11% to 13% of the food budget in the previous decadean improvement from the 8% to 9% range recorded in the While food expenses still account for

Percentage Distribution of Total Family Expenditure by Major Expenditure Group 2003 and 2006 (at current prices)

Expenditure Group Percent Food Food Consumed at Home Food Consumed Outside the Home Alcoholic Beverages Tobacco Fuel, Light and Water Transportation and Communication

2000 100.0 43.6 38.7 5.0 0.7 1.1 6.3 6.8

2003 100.0 43.1 37.7 5.4 0.7 1.1 6.5 7.3

Household Operations Personal Care and Effects Clothing, Footware and Other Wear Education Recreation Medical Care Non-Durable Furnishings Durable Furniture and Equipment Rent/Rental Value of Dwelling Unit House Maintenance and Minor Repairs Taxes Paid Miscellaneous Expenditures Other Expenditures

2.3 3.6 2.7 4.2 0.5 1.9 0.2 2.5 14.2 0.9 2.1 2.4 4.0

2.2 3.9 2.9 4.0 0.5 2.2 0.2 2.6 13.1 0.7 2.1 2.6 2.9

The estimated number of employed persons based on the October 2008 Labor Force Survey is 34.5 million. Of this number, 38.4 percent are women (13.3 million). This translates to an employment rate of 93.5 percent for women, higher than the employment rate of 93.0 percent for men.

Industry Analysis Restaurant companies are essentially retailers of prepared foods, and their operating performance is influenced by many of the same factors that affect traditional retail stores. For the most part, restaurants have business models that are relatively easy to understand, and the array on the Value Line page is the same as that of a standard industrial company. Nonetheless, there are a number of unique factors to consider when making investment decisions regarding this large and segmented industry. Competition between restaurants is intense, since dining options abound. And, while there are certainly dominant players in this industry (especially among fast-food purveyors), no one company has the market cornered. Indeed, virtually every restaurant location must compete not only against other publicly traded chains, but also a wide array of small, local establishments. Competitors include everything from delis and pizzerias to fine-dining restaurants. And, of course, it is relatively easy to forgo prepared foods, altogether, in favor of home cooking, which is usually a less expensive option. Thus, restaurant meals are discretionary purchases, and the industry tends to be highly cyclical. Sales is a straightforward strategy, and usually the main driver of revenue when a company is in its early stages. As a chain grows in size, however, it becomes increasingly difficult to capture benefits. The best, most profitable locations are established first, and then managers must be careful not to place restaurants too close together, lest they cannibalize each other's sales. Comparable-store sales, or "comps", is a valuable metric to examine when analyzing restaurants. Comps are particularly important once a company reaches maturity, since they become the primary driver of growth. Product innovations and menu-price increases are two of the most common ways to increase same-store sales. Remodeling

existing locations is another way to boost guest traffic. Furthermore, promotions and limited-time offers are widely used to attract diners. Investors should also pay attention to trends in the dollar value of the average guest check, as this can shed additional light on what exactly is driving sales. Margins Management's execution and ability to deliver a menu that appeals to a wide range of palates go a long way toward determining a restaurant's margins. Most companies in this industry have operating margins in the mid- to upper teens, and net profit margins in the mid- to high-single digits. Food costs are obviously an important line item and, at times, can fluctuate wildly. Prices for staples, such as corn, chicken, beef and dairy, can move greatly, depending on factors like crop yields, feed costs and other external demand factors. Labor is another major cost for service-oriented restaurants. Typically, workers earn modest salaries, often at or just slightly above government-mandated minimum wages. Employees that fall into this category are usually fast-food workers, dishwashers and bus boys. Servers, who make the lion's share of their money through tips, are usually paid even less. Consequently, changes to federal or state minimum-wage laws can have a noticeable impact on a restaurant's costs and margins. Fast Food vs. Casual Dining Restaurants can be loosely broken down into two broad categories: fast food and casual sit-down establishments. The same general factors discussed above dictate the performance of each group, but sit-down restaurants tend to be more expensive, making them even more sensitive to consumer budgets and the health of the economy. Fast-food restaurants, being less dependent on macroeconomic conditions, are better defensive investment plays. In a recessionary environment, their convenience and value make them attractive options for diners seeking inexpensive meals or for those trading down from casual-dining establishments.

Convenience is a major part of the fast-food business model, so a vast network of stores is essential to success. In addition to expansive hamburger chains, there are a number of large players that focus on niches, such as sandwiches and pizza. Fast food is responsible for most of the industry's international sales. Foreign markets offer vast growth potential for companies willing to take on the challenge of finding a successful formula that appeals to a wide array of customs and tastes. A well-know brand name provides a huge leg up when expanding overseas, which is one reason why fast-food makers dominate the international arena. The convenience of these restaurants and their typically inoffensive menus, which appeal to most diners, are other pluses. Investment Considerations Restaurant stocks have a number of attractive attributes. Their business models are easy to understand, as are the factors that effect their performance. Most are cyclical, so broad economic conditions often play an outsized roll in the group's overall performance. However, fast-food retailers can sometimes provide more shelter in a down economy. Conservative investors might find the stocks of mature operators appealing as growth-and-income holdings. Conversely, fledgling companies, with new or unique formats, use most of their cash flow for expansion, and their stocks may offer attractive 3- to 5-year appreciation potential to the more venturesome.