Investing theory 1 - ROE
How to Value Family Mart
Philip ( buy what you understand)
Publish date: Fri, 07 Jun 2019, 06:04 PM
Hi All,
My name is Philip. Having not been in Melaka for very long, I was very surprised to see the changes (or lack of change) in Melaka. It is a very beautiful state with a lot of very historical buildings. This time around, I traveled in GRAB with my wife, and we had a lovely mini re-enacment of our honeymoon by staying in jonker street itself and enjoying the weekend eating nonya food and walking around the Malacca river.
As usual, I love to scuttlebutt on my trips, so I would love to share my mental model on how I view daily businesses and their competitive advantage.
As we arrived in jonker street late, we stayed in a beautiful boutique hotel in Malacca. It's very reasonably priced, and a very swedish design on safety, cleanliness and size. I stayed in a 400SQFT giant room with its own guest sofa area, and only paid RM230 per night. It is far better than staying at far away double tree surrounded by construction. I believe if you have to stay, stay in jonker street itself, it is a wonderful experience. My honest recommendation = TIMEZ HOTEL right in the center, get the biggest room, its worth it.
Anyway, as I scuttlebutt over, we came across this beautiful store, the 100th branch of Family Mart, right here in jonker street, right next to 7-11.
Yes, this was around 10.30 PM at night, and queues were downright silly.
Family Mart here decided to use back the original structure of the old shops in jonker, kept the facade but added their own twists to the tale. They decided to work together with tradition, instead of 7-11 next door, which is just another cookie cutter boring convenience store.
This was the official 100th unit Family Mart store, just opened last month, and very tastefully done.
There was a huge long queue for oden, ice cream and fresh bread (maybe a little less fresh at midnight) but the queue was incredible.
There was a long queue for good quality cheap hot coffee (at RM2.50) and their unique japanese imported soft served ice cream.
This was 11:15 pm. Yes the queue is tstill there. And yes next door 7-11 was empty.
After visiting Family Mart I have a clearer idea of its areas of expertise and its competitive advantage. Here are my views on the business model of Family Mart.
FM is very different from 7-11 and MyNews.
1. They do not sell any newspaper, magazines or low margin products that frankly, not many of the younger generation buy. Even myself, I do my reading online these days. many low margin items you find in other stores are not here.
2. They specialize in quality freshl baked products like japanese oden, onigiri, instant meals and fresh cooked food that is kept fresh, delivered JIT (just in time fullfillment, I saw 3-4 deliveries per day while I was stying in jonker), and the quality is clearly visible compared to products like bread from massimo and gardenia.
3. They keep mostly specialized products, and are constantly exuding the japanese imported, healthy, clean and green concept to give the idea of high quality goods to buyers. They live off the niche of ( FM > cheaper > japanese restaurant, but FM < better quality < convenience 99 speedmart, 7-11. mynews) as the price is not that much more expensive than the competitors (+10%) in terms of fresh bread, soft serve ice cream, imported sodas and drinks, people are more willing to buy the unique stuff.
4. In terms of sellable items, FM doesn't keep unsellable items like stationary, toys, hardware, household items etc but keeps items only as per local demand (inflatable pillow at Airport, toothbrush, mini shampoo, at jonker etc) There is a system to their stocking inventory architecture which is based on big data, similar to how H&M, ZARA and UNIQLO cycles their product line. Interestingly enough, there is a huge H&M store right at the entrance of jonker street.
5. Their products resonate with day to day crowd who are looking for an experience and comfort rather than just buy and go. As they sell more buy and wait items (gourmet coffee, soft serve ice cream, ODEN) customers are more inclined to wait and stay longer, thus increasing store reputation and buying opportunity. This is very big difference in comparing with a 99-speedmart for example, whose entire goal is to sell cheap, you come in fast and buy what you need and go. Not much in gaining the impulse buying.
If I had to summarize, I would say FM is more on the gourmet fast food convenience store experience than anything else. In Malaysia at least, where there are more and more convenience stores opening, the difference between a local family mart and its competitors are jarring. I wouldn't be surprised to note that the margins afforded to Family Mart would be far far more than its peers, as the average spend in a Family Mart is far higher than its competitition
Maxincome resource sdn bhd
Company number : 383322 - D
Total issued capital - 60,000,000.00
owner - QL Carbon sdn. bhd
Non current assets : 32.8 million
Current assets : 15.5 million
non - current liabilities : 208 K
current liabilities : 22 million
Retained earnings :-13.89 million
Revenue : 75.18 million
Profit/loss after tax : 7.11 million
The analysis of the FM holding company we come to a few conclusions. Based on last year 2018 results, FM had 80 stores. the average revenue per store was 939K, meaning monthly revenue for each store is 78K, meaning daily revenue for each store is RM2,610. Using projections, we can estimate that with 400 stores targeted by the next 10 years , we are estimating revenue of 1 billion from family mart franchise.
Using peer reference, seven-11 has 2250 stores in Malaysia as of 2018 year end, with revenue of 2.26 billion, meaning per store returns of 1 million per year, meaning monthly revenue for each store is 83K, daily revenue is RM2,770 (30 days)
So sales are pretty much inline, profit returns though are interesting.
The average net profit of a 7-11 store is around 2%, from the 2.26 billion generated in 2018, they made a total profit of 44 million. Steady, stable and very predictable.
Family Mart is also, steady stable and very predictable, at around 9.4% profit after tax. 80 stores, 75 million in revenue, 7.11 million in earnings.
Meaning, estimated profit per store is around 88K per year.
You do the math. Also add into the mix additional convergence from QL in terms of surimi production, eggs and broilers meat and bread production. there is a huge organic synergy involved which I do now have the information or the capability to analyze deeply.
Please do not take me at my word. Do your own logic, study your own methodology. Add in your own mental models on what is good and bad. Decide on your own.
Hope you learn something new today.
Philip.
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Discussions
3 people like this. Showing 44 of 44 comments
eventually no one can differentiate itself ....................all become mediocre and meet at the lowest common denominator.
2019-06-08 00:04
this is not to say QL cannot come up with another innovative idea in next 2-3 years to sustain investor interest.
like innovative restaurants and innovative tourism based projects.
2019-06-08 00:22
(US/CHN trade war doesn't matter) Philip
I believe workers follow the boss and the system. With a very good system, it matters little what the workers are like, with a good system and minimal training, you will still have a good service level.
If what you said is correct, KFC and McDonald's in Malaysia would be horribly run compared to other countries. And yet, McDonald's service in quick processed, good food, friendly counter service is still the same the world over.
A good system is well worth the franchise cost.
2019-06-08 07:24
(US/CHN trade war doesn't matter) Philip
I remain confident that this will remain true.
They have already found innovative ways to grow, but more importantly they have the management in place that allows them to maintain and sustain their growth organically.
My prediction for the coming years:
Family mart will hit 1000 stores in Malaysia in 15 years.
Palm oil plantation will grow 3x the size due to Europe and worldwide accepting 70 fossil/30 biodiesel usage mix technology. The slowdown in Palm oil business will be marked by a sharp and sustained turnaround as fossil fuels become more and more scarce.
Surumi and seafood catch will transition into self-heating/ frozen premade meals as foodtech becomes more and more advanced due to new technology.
More consolidation will occur as the barrier of entry becomes more and more expensive for newcomers as commercial farming becomes more and more tech driven.
>>>>>>>>>>>>>
qqq3 this is not to say QL cannot come up with another innovative idea in next 2-3 years to sustain investor interest.
2019-06-08 07:38
Heavenly PUNTER UBS Shanghai Future Analyst
McDonalds friendly service counter? WAHAHAHAHAHAHAH Joke of the day thanks
2019-06-08 08:11
Dear Philip,
Let’s do Math:
Seven-11 has 2250 stores in Malaysia as of 2018 year end, with revenue of 2.26 billion, meaning per store returns of 1 million per year
Based on last year 2018 results, FM had 80 stores. the average revenue per store was 939K
The Math tells you Seven eleven has the store sales of 1 million and FM 939K per year.
We can estimate that with 400 stores targeted by the next 10 years, we are estimating revenue of 1 billion from family mart franchise.
The Math tells you if per store revenue is 939K/year then you need 1065 stores to achieve 1 billion revenue/year.
The question now is why with the long queue, FM has the store sales of 939K and Seven-11 1 million? Can FM increase it sales per store in the coming year? Who are the customers that prepare to queue? Can FM evolve from a neighborhood convenient store that serve local community, single person or people on the hurry into serving who family? The answer is yes if Dr. Chia prepare to think out of the box and have confident on the foods FM serve then he should think of KFC and McDonald's model serving FM Japanese Foods to the crowd and whole family in fast foods style.
Thank you
2019-06-08 08:36
Family mart in Tokyo and Shanghai, We queue too....Long queue doesnt mean Bad service...
2019-06-08 09:09
if for example, i want to buy a battery, i will buy from 7-11 with no queue, rather than wasting time queueing at FM
2019-06-08 09:22
Marginal utilities. Upon 400nos FM, bottom line becomes worst. Expand for the sake of expand only. Ntg worth an infinite price
2019-06-08 09:37
I think Mr Philip meant that he was at Family Mart at 11.15 pm at night. What convenient stores has long queues at midnight? That is pretty amazing actually - Although I think it is probably more due to the newness of the franchise in Melaka than anything else. We should come back in 3 months and see if the queue is the same as the putu piring nearby.
Posted by jellyfish > Jun 8, 2019 9:02 AM | Report Abuse
long queue means bad service, convenient stores should not have queues.
2019-06-08 09:43
Well, i guess 80 of fm. Store has a location strategically set out for data statistics collecting .
Of course the true show still need time along with the collecting of the data.
2019-06-08 09:50
(US/CHN trade war doesn't matter) Philip
I thought you are giving up on Malaysia and gone to shanghai? Why are you still posting in horrible no future Malaysia investment forum?
In either case, everything has to be based on context. I would say Mcdonalds has exemplary service, when put in the context of the hordes and millions of customers served daily, 2 minute burgers (you can complain many things, slow and badly cooked food is not one of them, even during heavy queues).
As someone who used to work as a waiter in his school days in whitecastle at jalan raja laut (when there was a whitecastle in Malaysia), I can tell you it is easy to be a friendly service counter when the restaurant is near empty, and almost impossible to keep your cool when there are hundreds of hungry barbarians at the gates.
>>>>>>
Heavenly PUNTER UBS Shanghai Future Analyst McDonalds friendly service counter? WAHAHAHAHAHAHAH Joke of the day thanks
08/06/2019 8:11 AM
2019-06-08 09:51
Interaction amongst fm's networking shall work as its most powerfully tool, marginal wise I'm not so much concern during this period.
But, it does matter for those who want an entrepreneurship with fm outlet.
2019-06-08 09:54
(US/CHN trade war doesn't matter) Philip
That is not the question. the question is how to differentiate your business model and be the market leader in industry.
You need to understand the difference between a KFC and a FM, on has 2-3 staff per location, the other is a full restaurant (10+ workers) with associated costs. One is easily scalable with high profits, the other requires specific locations.
Simple idea of scale:
there are more than 700 locations of KFC : profit margins unknown (until QSR listing soon, but previous QSR annual report 2011 they did 144 million from 2.8 billion revenue for KFC, around 6%)
there are 2250 locations of 7-11: 2% profit margins reselling other peoples items.
I would say Family mart will be the happy-in-between of 1000 locations around Malaysia with higher margin and quality Japanese food, but with 9% profit margins going forward. Dr. Chia does not have to think out of the box. QL bought the franchise and leaving it up to the Japanese management to use big data and fulfillment centers to increase customer purchase locations.
Obviously Cheoky is correct in that as more stores are increased the costs become higher and profit margins lower.
but an interesting point is also how RESILIENT is the business, what is its difficulty of being replaced by a speedmart99 and a Mynews, and how well it can take market share from 7-11 and those other stores.
>>>>>>>>>>>>>
The question now is why with the long queue, FM has the store sales of 939K and Seven-11 1 million? Can FM increase it sales per store in the coming year? Who are the customers that prepare to queue? Can FM evolve from a neighborhood convenient store that serve local community, single person or people on the hurry into serving who family? The answer is yes if Dr. Chia prepare to think out of the box and have confident on the foods FM serve then he should think of KFC and McDonald's model serving FM Japanese Foods to the crowd and whole family in fast foods style.
Thank you
2019-06-08 10:06
(US/CHN trade war doesn't matter) Philip
cheoky, behind every 99 speedmart and seven-11 is something called a fulfillment center. The distribution warehouse is what determines the bottom line margin of the overall business. Basically the more they expand, the cheaper the overall costs will drop. If they have 5 or 6 convenience stores on one area, it will be far far cheaper to deliver everything fresh to the 6 stores in one go, rather than deliver to one convenience store. This is the true barrier of doing convenience store business and why a lot of small scale family owned minimarket are closing down.
>>>>>
cheoky Marginal utilities. Upon 400nos FM, bottom line becomes worst. Expand for the sake of expand only. Ntg worth an infinite price
08/06/2019 9:37 AM
2019-06-08 10:11
(US/CHN trade war doesn't matter) Philip
FM doesn't sell batteries. you can buy it from 7-11.
You keep thinking 7-11 and FM does the same business model. Look closely, the approach is different, the items on sale is different, the feel and quality is different.
You go to FM combini to buy healthier choice sandwiches, bread, pan and Japanese imported snacks. You buy tasty soft serve ice cream, you get instant hot oden and good tasting coffee.
You go to 7-11 to buy batteries. how often do you really buy batteries from 7-11? The answer is, very rarely.
>>>>>>
Posted by jellyfish > Jun 8, 2019 9:22 AM | Report Abuse
if for example, i want to buy a battery, i will buy from 7-11 with no queue, rather than wasting time queueing at FM
2019-06-08 10:22
Hi Mr Lee Soon Shen,
I think you are also missing a big point, with 2250 stores, Seven-11 is making net profit of 44 million ringgit a year, from 2.26 billion of sales. If we give out the same projection, with maximized distribution centers and efficient delivery mechanism and 50% > private label brands (made by QL foods under FM international specifications), Mr Philip is probably looking at a math of 200 million net profit yearly from the same amount of 2250 stores.
not to mention the added direct revenue to QL foods and share profit margins in the long term to QL resources directly.
I'm excited enough to consider buying QL shares (even though it is so expensive now I probably will not. PE50!).
Good wonderful companies does not necessarily make a good wonderful investment.
Unless QL buys over and merges LHI, then I'm all in.
2019-06-08 10:30
U see only the internal pros of FM, perhaps u managed to visit the best FM in FM group. The issue is there a market to absorb 400FM in msia? Highly not. Perhaps in China yes.
2019-06-08 10:40
Heavenly PUNTER UBS Shanghai Future Analyst
China everything yes, 5G? Yes. Trade war? Yes. ECRL? Yes. One Belt One Road? Yes. China everything yes, no problem.
2019-06-08 10:42
The more probable measurement is the located spot that willingly of spending power & behavioural. Without this all others becoming unimportantly .
Be it the tourist commercials or the urban area.
2019-06-08 10:47
With Chia family as the core driver... why worry.
Win win is Chia's family core value mah !
Next unilever maybe kikiki
2019-06-08 10:58
There are so many competitor offering the same product as Familymart popping up like mushroom across the country. Even Mynews also start to offering the same thing
2019-06-08 11:09
(US/CHN trade war doesn't matter) Philip
Judging from 11pm queues at jonker street, the financial report, the belief is yes, there is room for 400 fm in Malaysia. But I am interested in your logic on "highly not". In either case total population of Malaysia is 32.8 million in 2018, with 1.5% growth rate (roughly 500k increase in population yearly).
>>>>>>>>>>>
Posted by cheoky > Jun 8, 2019 10:40 AM | Report Abuse
U see only the internal pros of FM, perhaps u managed to visit the best FM in FM group. The issue is there a market to absorb 400FM in msia? Highly not. Perhaps in China yes.
2019-06-08 11:12
(US/CHN trade war doesn't matter) Philip
Hi,
Care to elaborate on same thing?
>>>>>>>
Posted by shpg22 > Jun 8, 2019 11:09 AM | Report Abuse
There are so many competitor offering the same product as Familymart popping up like mushroom across the country. Even Mynews also start to offering the same thing
2019-06-08 11:13
the queue at 11pm the last few days are invalid. if you want the accurate assessment, come during weekdays, not during the holiday season. If that queue still that long, then yes, the logic can be considered.
we assess normal condition, not unusual event.
2019-06-08 11:18
(US/CHN trade war doesn't matter) Philip
I arrived Melaka on Sabah harvest festival 30th May 2019, Thursday, which is normal weekday (I believe west Malaysia does not celebrate harvest festival, as the roads were still empty). the queue during the Friday and weekend at jonker street is far more lively during the pasar minggu at jonker street.
But you are right, you should assess normal condition, not unusal event. Which is why I did not take pictures on the weekends.
>>>>>>>>
Posted by pak_pandir > Jun 8, 2019 11:18 AM | Report Abuse
the queue at 11pm the last few days are invalid. if you want the accurate assessment, come during weekdays, not during the holiday season. If that queue still that long, then yes, the logic can be considered.
we assess normal condition, not unusual event.
2019-06-08 11:40
anyway, bringing in FM, a Japanese franchise is a brilliant move.
The days of western franchise is over. When Western franchise meets Japanese franchise , nowadays it is Japanese franchises that wins. Those Japanese are incredible.
Next...don't be surprised China franchises wins ...whoever think selling hot pots in China can make her China's riches woman?
and QL can bring over tiger prawns and Sabah fish restaurants...sure hit.
2019-06-08 12:36
FM is good but QL is still overvalue & overrated loh....!!
That means all its good needs already fully discounted ,leaving high risk of sharp fall when it did not manage to perform up to its high expectation loh....!!
In Law of probability if u buy....win little but lose will be very big scenario mah....!!
2019-06-08 12:52
I really do love the family mart ice cream. There is one that opened near bukit jelutong. I sat outside the place looking for quite sometime, as well as sniffing around inside.
The food, i'm guessing is made in the central kitchen.
The taste is comparable to supermarket grocery food, price is 10-20% higher compared to the Japanese food in those supermarket.
I'm not that big of a fan of the food, much less willing to pay that price, but i think that is mostly me. Most people are willing to pay.
All in all, looks like quite a decent business.
Taking into account the 2018 figures, the question now is, what is the right price to pay?
Extrapolating the current 7.11m profit(lets assume 8m per year with economy of scale) 80 stores to 400 stores. We would look at 40m per year in profit 10 years from now.
Lets say it would be worth 20 times earnings then in 2029 as there would still be some growth prospect. That would be around 800m business. Discounted by risk free rate of 4.5%, the maximum price one should pay today is RM504 milion.
Ql price today is RM 11 billion. By buying QL now, you are paying 10.5bil is from surimi etc which makes 210m per year (2% earning yield) with 5% growth rate over the last 5 years
And 500m for Family Mart (assuming everything goes as planned).
of course, you might then think, 20PE is too cheap. This is family mart, should be minimum PE 50, or worth RM2bil in 2029. or RM1.2bil discounted.
In which case, you are paying RM9.8bil for a surimi business making 210m per year (2.1% earning yield), growing at 5% over the last 5 years. And 1.2bil for a family mart, where every goes right and it is valued at 50 times earnings.
Well, i'm not smart enough to buy, love the ice cream though.
2019-06-08 13:55
As at 31 March 2018, the Maxincome Resources Sdn. Bhd.'s (383322-D) accounting data extracted from the CTOS, it shows a net loss of RM 7,111,561 instead of a net profit of RM 7.11 million -- It couldn't have a net margin of 9.4% and also the QL management said that Family Mart business still had not been yet breaking even, how could it make profit as at 31 March 2018?
I think you have to verify the source that you took from.
Anyone who is interested to have the set of FM accounting data, kindly let me know I share with you.
2019-06-08 16:41
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
qqq3
yes, there is product differentiation but any service differentiation cannot be sustained because the workers are of low quality......This is Malaysia not Japan.
Eventually, do not take many years, they are all the same.
2019-06-08 00:02