You might already be feeling the pinch as the value of the Malaysian ringgit (MYR) continues to drop against the US dollar (USD). Currency depreciation has significant consequences for businesses, especially restaurants, where margins are often tight. When the value of the ringgit weakens, it can create a domino effect that affects your daily operations, costs, and even the prices you offer to your customers.
In this blog, we will explore the causes of the depreciation of the ringgit. We will also understand what are the disadvantages of a weak Ringgit and how it impacts your restaurant.
What is Currency Depreciation?
Currency depreciation happens when the value of one currency decreases in comparison to another. The Malaysian ringgit has been declining steadily against major currencies, particularly the US dollar. In October 2024, the exchange rate between the Malaysian ringgit and the US dollar hovered around RM 4.75 to 1 USD a significant decline from a few years ago when it stood closer to RM 4.20 per USD.
But why does this happen, and what are the main causes?
Causes of Ringgit Depreciation
- Global Economic Conditions: The US dollar has become stronger because of higher interest rates in the United States. The Federal Reserve has raised interest rates multiple times to combat inflation. When US interest rates are high, global investors prefer to invest in the US, strengthening the dollar against other currencies, including the Malaysian ringgit.
- Weak Commodity Prices: Malaysia relies heavily on exports, especially palm oil, oil, and gas. When the prices of these commodities drop globally, Malaysia earns less revenue, which weakens the ringgit. In recent years, volatile oil prices have hurt the country’s economy, contributing to the ringgit’s depreciation.
- Political Uncertainty: Political instability can shake investor confidence. When investors are uncertain about the country’s direction, they tend to pull their money out of the economy, causing the currency to fall. In Malaysia, recent political changes have added to this uncertainty, making the ringgit less stable.
- High National Debt: Malaysia’s national debt has been increasing, and when a country has high debt, it may struggle to pay it back, especially in foreign currency. This puts pressure on the local currency, causing it to lose value.
Now that you understand the reasons behind the depreciation of the Malaysian ringgit, let’s dive into how this impacts your restaurant.
How Ringgit Depreciation Affects Your Restaurant
The falling value of the ringgit impacts various aspects of your restaurant business, from ingredient costs to operational expenses. Let’s break down the specific challenges you may face.
1. Increased Cost of Imported Ingredients
As the Malaysian ringgit weakens against the US dollar, imported goods become more expensive. Many restaurant ingredients, such as beef, seafood, cheese, and certain spices, are imported and priced in US dollars. With the current exchange rate of RM 4.75 to 1 USD, these imported items cost you significantly more than they did a few years ago.
For example, if you were buying imported cheese at RM 100 per kilogram when the exchange rate was RM 4.20, today the same cheese would cost approximately RM 113. This increase eats into your profits and forces you to either raise prices or absorb the cost. Neither option is ideal for retaining customers or maintaining healthy margins.
2. Rising Equipment and Technology Costs
If you rely on imported kitchen equipment or technology, ringgit depreciation makes these items more expensive. Equipment like ovens and refrigerators often come from overseas and are priced in foreign currencies like USD or Euros. When the ringgit weakens, replacing or upgrading this equipment becomes a bigger financial burden.
3. Inflation and Higher Operating Costs
Currency depreciation often leads to inflation, as the cost of imports goes up. This can lead to a rise in the cost of local goods as well. Your local suppliers might increase their prices because their operational costs are higher, especially if they rely on imported raw materials.
For instance, the price of flour, cooking oil, and packaging may increase due to inflation, directly affecting your menu prices. In Malaysia, inflation has been hovering around 3-4% in 2023, with expectations that it could rise further. A higher inflation makes it difficult to control costs while keeping your food affordable.
4. Reduced Customer Spending Power
As prices rise across the board, your customers’ spending power declines. When daily essentials like groceries, fuel, and transportation become more expensive, customers may dine out less often or choose cheaper dining options. A weak ringgit means that Malaysians have to stretch their money further, and dining out becomes less of a priority for many families.
5. Difficulty in Expanding
If you’ve been planning to open a new branch or upgrade your current restaurant, the weak ringgit could make those plans more expensive. With higher costs for construction materials and imported goods, expanding your restaurant may require more capital than before. Additionally, if you’ve been thinking about franchising or partnering with foreign investors, the weak currency might make your restaurant less attractive to them.
What Can You Do to Manage the Effects?
Managing the impact of the ringgit depreciation isn’t easy, but there are a few steps you can take to cushion your restaurant from its worst effects.
- Source Locally: Try to source as many ingredients as you can from local farmers and suppliers. This reduces your reliance on imported goods and helps you avoid price spikes due to currency fluctuations.
- Adjust Your Menu: Focus on creating dishes that use ingredients that are readily available and affordable locally. This helps you keep your costs stable while offering customers value.
- Review Your Pricing: While raising prices can be risky, it may be necessary to maintain profitability. You can introduce smaller portions or bundle deals to provide value to customers while keeping your prices competitive.
- Focus on Operational Efficiency: Use technology, such as a POS system, to monitor your sales, manage inventory, and reduce waste. By operating more efficiently, you can lower costs and offset some of the financial pressures caused by a weak ringgit.
- Keep Customers Loyal: During tough times, it’s crucial to retain your loyal customers. Offer loyalty programs, promotions, or discounts to encourage repeat business and show your customers that you appreciate their support.
As a restaurant owner, you’re facing challenging times due to the depreciation of the Malaysian ringgit. The rising cost of imported ingredients, higher inflation, and shrinking customer spending power can make it difficult to keep your business running smoothly. Understanding the causes behind the depreciation and how it impacts your restaurant can help you take proactive steps to protect your profits.
By sourcing locally, managing your menu, and focusing on efficiency, you can weather this storm and continue to offer great food and service to your customers.
Remember, every challenge presents an opportunity. With the right strategies, your restaurant can adapt and thrive, even in a tough economic environment.
