“A market report by SMITH ZANDER says the retail convenience store market has been the fastest growing sub-segment of the grocery retail market in Malaysia, outpacing other sub-segments. The number of outlets has more than doubled from 1,054 stores in 2007 to 2,776 outlets in 2015.”

Poultry company goes into convenience store business in tie-up with Japan’s FamilyMart.

QL Resources Bhd, one of the largest poultry companies in the country, has taken the market by surprise by tying up with FamilyMart, the world’s second largest convenience store chain after 7-Eleven.

Notably, QL was in the limelight last year for its takeover plan of another local poultry player, Lay Hong Bhd, but the deal fell through.

The company, which has been on an acquisition spree, was said to have reached a stage where growth has hit a plateau, according to market observers.

Bringing FamilyMart into the Malaysian market marks QL’s first foray into convenience store franchising.

However, by looking at the share price of QL, investors are not so psyched up about the deal. Shares of QL fell 18 sen after the news came out to RM4.17 before jumping back to RM4.30 at yesterday’s close.

On Monday, QL inked a 20-year franchise agreement with Japan-based FamilyMart Co Ltd to develop and operate FamilyMart stores in Malaysia. The franchise agreement is also renewable for a subsequent period of 20 years.

A dealer says: “While FamilyMart has a big brand name, the main concern is that convenience store business has high capital requirements with low margins, we still need to see the execution part.”

QL corporate development director Chia Lik Khai is confident that the company would be able to break even in seven years with its FamilyMart venture, referring to FamilyMart’s expansion in Taiwan.

“This is a long term project for QL where we need to set up the base for the next 20 years,” he tells StarBizWeek in an interview on the sidelines of Invest Malaysia 2016.

Analysts say QL’s tie-up with FamilyMart will benefit the company in the long run and that will spur the expansion of QL’s existing food manufacturing and distribution businesses.

“This venture will lengthen the value chain of QL’s agro-food operations, and offers the chance to deliver another steady cash generation business if QL manages to secure strategic locations for its outlets,” says AllianceDBS Research in a note.

Chia says that the QL is expected to invest about RM100mil to open about 300 FamilyMart outlets in the next five years.
Notably, this is a sizeable investment for QL as the company is sitting on cash of RM200.7mil as at Dec 31, 2015.

QL has a market capitalisation of RM5.3bil. In the third quarter ended Dec 31, 201, the company reported a net profit of RM57.9mil on the back of RM738mil in revenue.

“The capex for FamilyMart outlets expansion is about 10% of QL’s annual capital expenditure,” Chia says. He plans to open the first FamilyMart outlet by end of this year.

According to CIMB Research, QL is expected to spend about RM15mil – RM21mil a year, which would be funded from internally generated funds.

“As of Q3FY16, the group’s gearing was manageable at 0.36 times while annual operating cash flows stood at RM200mil-RM300mil per annum,” it says in a note to clients.

However, the research house is neutral on QL’s move to step into the retail convenience store industry in the medium term due to the initial start-up costs incurred by new stores.

“Note that convenience stores would typically have a gestation period of 12-24 months.

“Thus, we do not expect significant earnings contribution from this new development in 2016 and 2017,” it says.

QL is a market leader in the poultry business with a local production rate of 3.2 million eggs per day.

In the marine processing segment, it is the largest producer of surimi in Asia, and via a 40.7% stake in Boilermech Holdings Bhd, has a presence in palm oil activities.

But will QL be able to make a success of its new foray, considering that there are various convenience stores in the market now?

Right now, there are two pure convenience store companies listed on Bursa Malaysia, namely, 7-Eleven Malaysia Holdings Bhd and myNEWS.com press, run by convenience chain store operator Bison Consolidated Bhd.

The other convenient store operators include Circle K, KK Mart and 99 Speedmart.

7-Eleven alone has almost 1,900 outlets nationwide, while Bison has 250 outlets.

CIMB says FamilyMart operates on a similar business model as 7-Eleven Malaysia, of which stores will be open for business 24 hours. “QL will have to fork out a fixed royalty fee of 1% of its total sales to FamilyMart every year compared with 7- Eleven’s 2%-3%,” it says.

Chia says that although he recognises the competition in the market, there are opportunities in the market that are looking for FamilyMart kind of services.

“FamilyMart offers quality and ready-to-eat food products and I think there is a lot of room to grow in this segment,” he says.
“Convenience stores don’t go for price wars, instead the competition will be based on quality and convenience,” he adds.
AllianceDBS says that QL’s focus on ready-to-eat F&B products would bring synergistic benefits to its surimi-based products, snack foods, and processed poultry product businesses.

“The strong FamilyMart brand name is also a positive factor – it already has a strong presence in neighbouring country Thailand with about 1,200 stores,” it says.

Chia says that the ratio of population per convenience store is still lower compared with neighbouring countries, such as Thailand.

UOB Kay Hian says the QL’s maiden foray into the convenience-store business comes as a surprise and may not bode well with some investors given that it is not part of QL’s core business.
“However, we see long term potential gain arising from it given that Malaysia is an under-penetrated market with penetration rate of 135 stores per million persons, favourable demographics with more than 50% of population comprising the age group of 29 years old and younger, and FamilyMart is a strong brand in Asia,” it says.

According to various market reports, Malaysia are among the countries that has the lowest number of convenience stores per one million population.

Malaysia has about 135 convenience stores, while Thailand and Hong Kong have 145 and 190 respectively. Taiwan and South Korea have more than 400 stores.

A market report by SMITH ZANDER says the retail convenience store market has been the fastest growing sub-segment of the grocery retail market in Malaysia, outpacing other sub-segments. The number of outlets has more than doubled from 1,054 stores in 2007 to 2,776 outlets in 2015.

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