8. INDUSTRY OVERVIEW 8. INDUSTRY OVERVIEW Q VITAL FACTOR CONSULTING Vital Factor Consulting Sdn Bhd (Company No.: 266797-T)Creating Winning Business Solutions V Square @ PJ City Centre (VSQ) Block 6 Level 6, Jalan Utara 46200 Petaling Jaya Selangor, Malaysia Tel (603) 79313188 Fax (603) 7931 2188J a APR 2014 www.vitalfactor.com The Board of Directors 7-Eleven Malaysia Holdings Berhad (formerly known as Seven Convenience Berhad) Level 3A, Podium Block, Plaza Berjaya No. 12, Jalan 1mbi 5.5100 Kuala Lumpur Dear Sirs and Madam Independent Assessment of the Convenience Store Segment of the Retail Industry in Malaysia
The following is an independent assessment of the convenience store segment of the retail industry in Malaysia prepared by Vital Factor Consulting Sdn Bhd (“Vital Factor Consulting”) for inclusion in the prospectus of 7-Eleven Malaysia Holdings Berhad (formerly known as Seven Convenience Berhad, and herein together with all or anyone or more of its subsidiaries will be referred to as “7Eleven Malaysia Holdings Group” or the “Group”) in relation to its initial public offering and listing of and quotation for the entire issued and paid-up share capital of 7-Eleven Malaysia Holdings Berhad on the Main Market of Bursa Malaysia Securities Berhad. OVERVIEW OF THE RETAIL INDUSTRY 1,1 Industry Structure The overall distributive trade industry consist of two sectors namely the retail industry and the wholesale industry. The wholesaling industry is mainly concerned with the resale of goods to industrial, commercial, institutional or professional users, or to retailers and other wholesalers. In contrast, the retail industry is mainly concerned with the resale of goods to the general public for personal or household consumption. Generally, the retail industry in Malaysia is segmented into three key sectors, namely retail trade in non-specialised stores and specialised stores, and non-store based retailing. (i) Non-specialised stores are typically those that are involved in selling more than one type of goods and therefore, convenience stores fall under this category. Other examples of non-specialised stores include, among others, departmental stores, hypermarkets, supermarkets, provision stores and minimarkets. 7-Eleven Malaysia Holdings Group’s “7-Eleven” convenience stores are categorised as non-specialised stores commonly involved in selling a select range of food and non-food fast moving consumer goods (“FMCG”). (iI) Specialised retail stores refer to stores that specialise in selling mainly one category of goods. Some examples of specialised retail stores include among others, stores retailing books, home appliances, sporting goods, fashion and apparel, and hardware. 7-Eleven Malaysia Holdings Berhad Page 1 of 34 Industry Assessment 135 8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions (iii) Non-store based retailing refers to other retail trade activities that are carried out independently of a fixed enclosed structure, including instances where the customer does not have direct contact with the retailer at a fixed location. Some examples of non-store based retailing include internet sales, direct selling and retail trade from temporary structures such as stalls and kiosks. 1.2 Convenience Store Segment • Convenience stores are designed to provide convenience to customers by offering a select range of household goods, groceries, food and beverages with extended operating hours in accessible locations. Extended operating hours is arguably the most distinctive characteristic of a convenience store, with many operating 24 hours per day, seven days per week.
• There are currently two types of convenience stores operating in Malaysia, namely standalone convenience stores and convenience stores located in petrol stations (also known as petro marts). Standalone convenience stores and petro marts exclude provision stores and minimarkets.
Standalone convenience stores usually operate on a smaller retail space compared to other retail formats such as hypermarkets and supermarkets. Standalone convenience stores are commonly located in shopping centres, street level shopping areas and transportation hubs in commercial and residential areas. Petro marts generally carry the same types of goods as standalone convenience stores with the addition of automotive products offered at most stores. While petro marts usually offer extended operating hours, some do not operate after midnight.
• Convenience stores operate on a modern retail format and offer a select range of goods focusing on food and non-food FMCG, usually for immediate consumption or usage. Some examples of FMCG that are commonly available at convenience stores include prepared, perishable and snack foods,
confectioneries, bakery products, goods, newspapers and magazines. Estimated Growth in Sales Value of Convenience Stores 4,000 —E~~~E~~~__~2~2_~~”I~_J c ~ ‘E ” !!S ~ il ~ ‘” 3,000 2,000 1,000 I,.) 0 2009 2010 2011 2012 2013 (Source: Vital Factor Consulting)
beverages, tobacco products, household Estimated Growth in the Number of Convenience Stores 5,000 .CAGR. (2009:2013)=9%j 4,000 3,000 2,000 1,000 0 2009 2010 2011 2012 2013
7-Eleven Malaysia Holdings Berhad Page 20f34 Industry Assessment 136
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Between 2009 and 2013, the estimated sales value of convenience store and the number of convenience stores grew at a compounded annual growth rate (“CAGR”) of 10% and 9% respectively. Estimated Growth in Sales Value of Standalone Convenience Stores
2.500 ~ 2,000 ‘E ~ 1,500 ~ ” 1,000~ ~ SOD o
2009 2010 2011 2012 2013 (Source: Vital Factor Consulting) Estimated Growth in the Number of Standalone Convenience Stores r•• CAGR I26(92013)=13% J2,000 1,500 ~ il ~ 1,000 1i E, z SOD :, Ii ill 0 2009 2010 2011 2012 2013
• Between 2009 and 2013, the estimated sales value of standalone convenience store and the number of standalone convenience stores both grew at CAGR of 13%. 1.2.1 Potential Growth in Penetration Rate and Sales Value Convenience Stores per Million Persons2012 600 CorWB.’lience Stores Only ” ~ 500 8: 4 ~ 400 ‘E ~ <fj 300 ~ ~ 200 i z 100
Combination of Convenience Stores an(j Olher Re~ail Formats
401 295 Notes: (1) Standalone convenience stores only. Convenience Store Annual Sales Value per Capita -2012
3,000 ,—-~·~_··-····~~·_ ….· ….~:,-·-·-~ ..~..~·~..·~ …. ··I 2,500 :;~2,OOO 2’o. ~ 1,500 1l..
~ 1,000 Convenience Stores Only Combination of I Convenience Slor~s “,nd Oll1cr Retail Formals 2,682 ,242 918
Calculated by dividing the estimated number of standalone convenience stores in Malaysia in 2012 by Malaysia’s mid-year 2012 population; (2) Standalone convenience stores and petro malts; (3) Standalone convenience stores only. Calculated by dividing the estimated sales value of standalone convenience stores in Malaysia in 2012 by Malaysia’s mid-year 2012 population; (4) Standalone convenience stores and petro malts; ‘Indonesia includes convenience stores and minimarkets; Hong Kong includes convenience stores and supermarkets; Singapore includes convenience stores, minimarkets and provision shops. No available data for Thailand on annual sales value per capita ofconvenience stores, (Source: Secondary research by Vital Factor ConSUlting)
7-E1even Malaysia Holdings Berhad Page 3 of 34 Industry Assessment 137
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating W’lnning Business Solutions • In 2012, Malaysia’s penetration rate in terms of the number of convenience stores per million persons was ahead of China but trailed Thailand, Japan, Taiwan and Korea. Similarly, the retail sales value per person spent at convenience stores in Malaysia was significantly lower compared to more developed nations like Korea, Taiwan and Japan. This indIcates that there is significant growth potentIal for convenience stores in MalaysIa As Malaysia moves towards the status of a developed nation, the market SIze of the convenience store segment is likely to grow In tandem providing opportunities for convenience store operators in the Industry.
1.2.2 Potential Growth in Household Consumption Expenditure Top Five ASEAN Countries by Household Top Five ASEAN Countries by Household Consumption Expenditure Consumption Expenditure per Capita 500 479 25,00046~ ~ E ~ 20,000 30 g~ 15,000 ‘~~ o~.. g: ~ 10,00Q u· ~~ ~ ~ 5,000 ~ 2008 2009 2010 2011 2008 2009 2010 2011 2012 lJJlncioncsia I~, Thailand ‘,1: Philippines eMalaysi<l Gl Singapore !lJSil1gapore ;’;’: Brunei Daru5salam eMalayi>id !>IThniland IJ Indonesia
2012 ASEAN = Association of Southeast Asian Nations Note: The top five ASEAN countries are selected and sorted based on the highest value of household consumption expenditure and highest value of household consumption expenditure per capita (Source: Secondary research by Vital Factor Consulting) • In 2012, Malaysia’s household consumptIon expenditure ranked fourth highest among the 10 ASEAN countries trailing Indonesia, Thailand and the Philippines However, based on household consumptIon expenditure per capita, Malaysia ranked thIrd among ASEAN countries surpassing ThaIland, Indonesia and the Philippines. In 2012, Malaysia’s household consumption expendIture per capita was 1.63 times higher than Thailand, the next highest country. The relatively high household consumption expenditure in Malaysia provides significant opportunities for the retail industry including the convenience store segment MACROECONOMIC INDICATORS • Growth in real gross domestic product (“GOP”) and consumer purchasing power are key drivers of growth for the convenience store segment of the retail industry in Malaysia An Increase In a country’s GOP per capita measured on a purchasing power parity (“PPP”) basIs would Indicate an increase in the purchasing power of the respective country’s consumers. 7-Eleven Malaysia Holdings Berhad Page 4 of 34 Industry Assessment 138
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 2.1 Sustained Economic Growth Malaysia’s Real GOP Growth 9% ., –:..;A”‘c”‘tu”‘ac:../ ‘ Forecast I I I I I I
5.6% I ~ 6% 5.1% 14.5-5.5%~
0% 2010 2011 2012 2013 2014f -3% f= forecast (Source: Bank Negara Malaysia) • Overall, Malaysia’s real GOP grew at a CAGR of 5.7% between 2009 and 2013 with growth recorded every year during this period with the exception of 2009, when the economy contracted by 1.5% due to the global economic downturn. In 2012, growth of 5.6% was driven by resilient domestic demand despite the weak external environment. In 2013, the Malaysian economy grew by 4.7% driven by domestic demand, underpinned by steady private sector spending in both consumption and investment activities. • While domestic demand in Malaysia has remained strong during the first and second quarter of 2013, the prolonged weakness in the external sector has affected the overall growth performance of the economy, which resulted to an expansion by 4.1 % and 4.4% respectively. In the second half of 2013, exports showed improvements and coupled with the stable domestic demand, the Malaysian economy was boosted with growth recorded at 5.0% and 5.1 % in the third and fourth quarter of 2013 respectively. • For 2014, the Malaysian economy is forecasted to grow between 4.5% and 5.5%, supported by favourable domestic demand and an improving external environment (Source: Bank Negara Malaysia).
7-E1even Malaysia Holdings Berhad Page 5 of 34 Industry Assessment 139
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Real GOP Growth by State and Territory 2008 2009 2010 2011″ 2012P Kuala Lumpur and Putrajaya ………………. 9.1 3.6 10.6 8.8 7.2 Melaka ……………….•.. 4.7 1.2 6.6 4.0 7.2 Selangor……………….. 9.1 -0.5 11.9 5.7 7.1 Perak……………………. 6.5 -1.1 5.7 7.0 7.1 Johor ……………………. 4.2 -3.0 9.8 6.4 6.5 Kedah…………………… 0.8 -0.5 4.3 8.5 6.1 Labuan …………………. -11.5 4.9 6.4 13.6 5.8 Kelantan ……………….. 6.9 2.1 4.9 6.5 5.4 Pahang…………………. 5.0 -1.0 4.9 6.2 5.4 Negeri Sembilan…….. 4.3 0.6 5.8 4.9 5.0 Pulau Pinang…………. 5.5 -10.5 10.4 3.9 5.0 Perlis ……………………. 2.9 -2.6 4.8 1.9 4.5 Sabah…………………… 10.7 4.8 2.7 1.3 4.1 Terengganu …………… 2.1 -4.2 4.3 2.6 3.5 Sarawak ……………….. 0.3 -2.0 4.3 5.8 1.5
e= estimate; p = preliminary Note: All units in percentages. (Source: Department of Statistics, Malaysia)
• Between 2010 and 2012, real GDP of all states in Malaysia registered positive growth rates. 2.2 Comparisons with Other Countries and Regions Real GOP Growth 10%
2009 2010 2011 2012 2013 [JIUSA [j European Union IiilASEAN-5 _Malaysia ASEAN-5 = Malaysia, Indonesia, Philippines, Thailand and Vietnam (Source: Bank Negara Malaysia; Secondary research by Vital Factor Consulting)
7-Eleven Malaysia Holdings Berhad Page 6 of 34 Industry Assessment 140
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Malaysia and the ASEAN-5 countries have continued to experience robust real GOP growth between 2009 and 2013. In 2013, both Malaysia and the ASEAN-5 countries recorded growth of 4.7% and 5.2% respectively, compared to advanced economies like the United States of America (“USA”) and the European Union (“EU”). GOP per Capita Growth Based on Purchasing Power Parity 10% ~ a.
<: 0 5%”C ” III ‘” III .r: ~ e t!l 0%.l!!.0. III u ” ~ a.
c -4.0%t!l -5% 2009 2010 2011 2012 2013 I1JUSA [J European Union rnASEAN-5 _Malaysia (Source: Secondary research by Vital Factor Consulting) • GOP per capita in Malaysia grew by 5.3% in 2013, surpassing growth in the USA and EU. This indicates the increase in purchasing power of consumers in Malaysia, which will have a positive impact on the growth potential of the convenience store segment of the retail industry in the future. Household Consumption Expenditure 30% ” li ‘i’i
16.2%<: 0. 15% ” tlj <:7.2% 8.9% .2~ c..~ 41o/c f.~~ . 0@B ‘” 05c:s 0% t-“”””= ~:n u “C (5-4.3%.r: -5.3% Ul ” ” o -9.1% :I: -15% 2008 2009 2010 2011 2012 IJDUSA i}] European Union ‘ilASEAN-5 _Malaysia (Source: Secondary research by Vital Factor Consulting) 7-Eleven Malaysia Holdings Berhad Page 7 of 34 Industry Assessment 141
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • An increase in household consumption expenditure is an indication of the growing affluence of the population. In 2012, Malaysia recorded the highest growth in household consumption expenditure as compared to the ASEAN-5 countries, the USA and EU. This in turn will stimulate expenditure on food and non-food FMCG. GDP Per Capita -Developed Market GDP Per Capita -Emerging Market Countries Countries 50.000
12.000 46,175 46.530 10,387 10,548 9,879 40,000 8.659g 2. 8,000i2”7.203 30,000 .~ g. 6.000u u.~ 20,000 ~ a. 4.000o o” ” to,aoo 2009 2010 2011 20132008 2010 2011 2012 2013 tJ Pllilippines (CAGR: 8.0%) Cllndonesia (eAGH: 12.9%) (] Taiwan (CAGR: 6.4%) tJ Hong Kong (CAGR: 5.4%) ~iJ<lpan (CAGR: -0.5%) ~Thailand (CAGR: 7.0%) • Malaysia (eAGH: 5..1%)
2012 CAGR between 2009 and 2013 (Source: Secondary research by Vital Factor Consulting)
• An increase in a country’s GOP per capita generally indicates economic growth and improvement in living standards. While GOP per capita of the developed market countries were higher, the GDP per capita of the emerging market countries registered higher CAGR between 2009 and 2013. The general growth in per capita GOP indicates improving living standards, and should stimulate consumer expenditure. 2.3 Growth in Other Economic and Social Indicators • Other major economic and social indicators for Malaysia are summarised in the following table: 7-Eleven Malaysia Holdings Berhad Page 80’34 Industry Assessment 142
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Malaysia’s population continues to grow, increasing at a CAGR of 1.6% between 2009 and 2013. With the exception of 2009, per capita income during this period increased at a higher rate than inflation, which bodes well for the Malaysian economy as consumer purchasing power increases. Increases in per capita income indicate the growing affluence of Malaysia’s population which may contribute to the growth potential of the convenience store segment.
• Inflation is measured through changes in consumer price index, and is mainly affected by energy and commodity price fluctuations including fuel and food prices. Between 2010 and 2013, inflation was mainly affected by price increases in food items. Moving forward, any price fluctuations in fuel and food prices will continue to have an impact on the country’s inflation rate.
• The labour market in Malaysia continues to be robust, with unemployment rate stabilising between 3.0% and 3.3%. A relatively low unemployment rate is one of the factors contributing to positive consumer sentiments and increase in consumer spending.
• Private and public consumption and investment in Malaysia were generally resilient between 2009 and 2013 with the exception of a dip in 2009 when the Malaysian economy as a whole contracted. Increases in private and pUblic consumption and investment will have a flow-on effect on increasing consumer spending in Malaysia.
2.4 Consumer Confidence • The level of consumer confidence in the economy will have an impact on consumer spending. A high level of consumer confidence level may result in an increase in consumer spending that will benefit the general retail industry including the convenience store segment. Consumer Sentiment Index -Malaysia 200 ·20% 0.3% 3.5% 0% 150 -20%
‘l’.”eSI -I-Growth Rate (Source: Malaysian Institute of Economic Research) 7-Eleven Malaysia Holdings Berhad Page 9 of 34 Industry Assessment 143 8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • The Consumer Sentiment Index (“CSI”) improved marginally to 118.7 points in the fourth quarter of 2012. Although expectations on present and expected incomes remained favourable with moderate outlook of the employment market, price pressures were expected to build up with delays in consumer spending. In the first quarter of 2013,the CSI increased by 3.5% to 122.9 points, which was the highest in six years. This was contributed by positive expectations on financial and employment outlook, easing of inflationary concerns and stabilisation of current incomes which led to the increase in consumer confidence. However by the second quarter of 2013, CSI registered a contraction of 10.7% to 109.7 points due to concerns of inflation coupled with bleak employment and financial expectations. The CSI further contracted by 7.0% in the third quarter of 2013 to 102.0 points due to dwindling income and job expectations, growth in inflationary concerns and weaker outlook on consumer spending. In the fourth quarter of 2013, CSI fell below the 100-point threshold, first time in almost five years, as the prospects of the household income and job weaken. DEMAND AND SUPPLY CONDITIONS • The sales value of retail trade provides an indication of the overall level of demand for the retail industry in Malaysia. Sales Value of the Retail Industry CAGR 2009-13 2009 2010 2011 2012 2013 % Sales Value of Overall Retail Trade…………………….. 216.8 239.4 264.7 284.3 309.2 9.3 -Sales Value of Non-specialised Stores …………. 66.2 76.2 83.5 91.3 101.1 11.2 -Sales Value of Specialised Stores ………… 147.4 160.2 178.1 189.7 204.4 8.5 -Sales Value of Non-store Based Retailers…………….. 3.2 3.0 3.1 3.3 3.6 3.1 Notes: All units in RM billion except percentages. (Source: Department of Statistics, Malaysia) • According to the Department of Statistics, Malaysia, the convenience store segment is classified under the “retail sales in non-specialised stores” category of the overall retail industry. This category also includes sales generated through departmental stores, hypermarkets, supermarkets, minimarkets, newsagents and other segments of the retail industry.
• The sales value of non-specialised stores (which includes convenience stores as a subsector) grew at a CAGR of 11.2%, surpassing the CAGR in the sales value of overall retail trade, specialised stores and non-store based retailers, between 2009 and 2013. This suggests an industry that is robust with sustained growth over the last five years.
7-Eleven Malaysia Holdings Berhad Page 10 of34 Industry Assessment 144
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions SUPPLY AND DEMAND DEPENDENCIES 4.1 Supply Dependencies • Convenience stores are dependent on local manufacturers and suppliers for most of their products. In terms of supply dependency, some of the main types of goods purchased by convenience stores for subsequent resale include:
Food products such as biscuits and cookies, bread and other bakery products, chocolate products and sugar confectionery, and snacks; Non-alcoholic beverages; Tobacco products; Newspapers, journals and periodicals.
• Between 2009 and 2013, the sales values of the manufacture of the selected products listed in the table above recorded positive CAGR, which suggest the availability of such products from local sources of supply.
4.2 Demand Dependencies • The performance of convenience stores in Malaysia are dependent on several factors, including population growth and age profile, spending patterns of the different age groups, consumer affluence and spending, household final consumption expenditure, urbanisation, tourist arrivals and expenditure, and the sale of tobacco products and mobile phone products and services. These factors are further discussed in Section 10 of this document. 7-Eleven Malaysia Holdings Berhad Page 11 0’34 Industry Assessment 145
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions COMPETITIVE ANALYSIS • Operators in the retail industry, including operators of convenience stores, generally face normal competitive conditions. This is similar to a free enterprise environment characterised by the following factors:
There are no undue government regulations or licensing requirements; No single or small group of operators is large enough to dictate pricing; Operators may enter and leave the industry freely.
• In such an environment, the industry is sUbjected to normal supply and demand conditions moderated by the price mechanism and other factors of competition and differentiations.
• Convenience stores generally have extended operating hours, with many operating 24 hours per day, seven days per week. This is arguably the most distinctive characteristic of convenience stores compared to other retail formats.
• The following tables list the trade names of some of the standalone convenience store chains and petro mart chains currently operating in Malaysia (sorted by tier based on number of stores).
Standalone Convenience Stores -March 2014
KL = Kuala Lumpur Notes: The list above is not an exhaustive list of standalone convenience store chain trade names in Malaysia. t) A small number of ‘7-Eleven” stores operate as petro marts. (Source: Vital Factor Consulting)
• As at March 2014, 7-Eleven Malaysia Holdings Group, through its ”?-Eleven” convenience stores, was the only Tier 1 operator in Malaysia with more than 1,000 stores. The next closest competitor among the standalone convenience store operators was KK Super Mart, a Tier 3 operator with 100 to 499 stores. Other standalone convenience store operators were Tier 4 operators, each with fewer than 100 stores. 7-E1even Malaysia Holdings Berhad Page 12 of 34 Industry Assessment 146 8. INDUSTRY OVERVIEW (Cont’d)
Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Petro Marts -March 2014
Notes: The list above is not an exhaustive list ofpetro mart chain trade names in Malaysia 1) A very small number of “Mesra” stores operate as standalone convenience stores. 2) Petro marts at Petron petrol stations currently operate under the “Treats”, “On-the-Run” and “Tiger Mart” trade names. An exercise is currently underway to rebrand these stores to operate under the “Treats” trade name. 3) Includes only “Select” brand ofconvenience stores at Shell petrol stations. (Source: Vital Factor Consulting)
• As at March 2014, “Mesra” and “Petron” were Tier 2 operators, each operating between 500 and 1,000 stores in Malaysia. “Select”, “Star Mart” and “BHPetromart” were Tier 3 operators, each operating between 100 and 499 stores.
• To a certain extent, convenience stores also compete against other retail formats such as hypermarkets, supermarkets, departmental stores, minimarkets and provision stores, as most of the products that are commonly available at convenience stores can also be purchased at these retail stores. However, competition from other retail formats is moderated by the following factors:
The longer operating hours typical of convenience stores results in some convenience stores continuing to operate when other retail formats are closed; Easy accessibility and availability of stores at convenient locations.
• The trade names of some of the hypermarket, supermarket and minimarket chains that are currently operating in the retail industry in Malaysia are listed below (sorted in alphabetical order):
“99 Speedmart” minimarkets; “AEON” supermarkets; “AEON Big” hypermarkets; “Cold Storage” supermarkets; “Econsave” hypermarkets and supermarkets; “Giant” hypermarkets and supermarkets; “Isetan” supermarkets; “Jaya Grocer” supermarkets; “Kedai Rakyat 1 Malaysia” minimarkets; “MYDIN” hypermarkets and supermarkets; ”Tesco” hypermarkets; “The Store” hypermarkets and supermarkets.
Note: The list above is not an exhaustive list of hypennarket, supermarket and minimarket chains currently operating in Malaysia. (Source: Vital Factor Consulting)
7-Eleven Malaysia Holdings Berhad Page 13 of 34 Industry Assessment 147 8. INDUSTRY OVERVIEW (Cont’d)
Q VITAL FACTOR CONSULTING Creating Winning Business Solutions MARKET SHARE, SEGMENTATION, RANKING AND SIZE 6.1 Market Share Market Share of “7-Eleven” Stores based on Number of Convenience Stores in Malaysia
(Source: Vital Factor Consulting) • As at March 2014, the 7-Eleven Malaysia Holdings Group, operating under “7Eleven”, has an estimated market share of 38% of the convenience store segment based on number of stores in Malaysia. Market Share of “7-Eleven” Stores based on Number of Standalone Convenience Stores in Malaysia
(Source: Vital Factor Consulting) • As at March 2014, the 7-Eleven Malaysia Holdings Group, operating under “7Eleven”, has an estimated 82% market share of the standalone convenience store segment based on number of stores in Malaysia. 7-Eleven Malaysia Holdings Berhad Page 14 of 34 Industry Assessment 148 8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 6.2 Market Segmentation Market Share of “7-Eleven” and Petro Marts Market Share of Top 4 Operators Based on Based on Number of Stores in Malaysia Number of Stores in Malaysia
• As at March 2014, petro marts have a 54% market share of the convenience store segment based on number of stores in Malaysia.
• As at March 2014, the convenience store segment has a high concentration ratio where the top four operators, namely “7-Eleven”, “Mesra”, “Petron” and “Selecf’, represented an estimated 74% of the convenience store segment based on total number of stores in Malaysia.
6.3 Market Ranking Standalone Convenience Stores • As at March 2014, 7-Eleven Malaysia Holdings Group, through its “7-Eleven” convenience stores, ranked first among standalone convenience store chains based on the number of stores operated in Malaysia.
• As at March 2014, 7-Eleven Malaysia Holdings Group had approximately 10 times more convenience stores compared to the next largest standalone convenience store chain in Malaysia.
• As at March 2014, the number of “7-Eleven” convenience stores was greater than the total number of convenience stores operated by all other standalone convenience store chains in Malaysia.
(Source: Vital Factor Consulting) Convenience Stores (Including Standalone Convenience Stores and Petro Marts) • As at March 2014, 7-Eleven Malaysia Holdings Group, through its “7-Eleven” convenience stores, ranked first among convenience store chains based on the number of stores operated in Malaysia. 7-Eleven Malaysia Holdings Berhad Page 15 of 34 Industry Assessment 149 8. INDUSTRY OVERVIEW (Cont’d)
Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • As at March 2014, 7-Eleven Malaysia Holdings Group had slightly more than two times the number of convenience stores compared to the next largest convenience store chain in Malaysia.
• As at March 2014, the number of “7-Eleven” convenience stores was greater than the total number of stores operated by the next three largest convenience store chains in Malaysia.
(Source: Vital Factor Consulting) 6.4 Market Size and Share of Food, Beverages and Tobacco • In 2013, the market size for food, beverages and tobacco in Malaysia based on household expenditure was estimated at RM54 billion.
• In 2013, 7-Eleven Malaysia Holdings Group had approximately a market share of 3% of the food, beverages and tobacco in Malaysia based on household expenditure.
Note: 7-Eleven Malaysia Holdings Group’s market share of household spending on food, beverages and tobacco was estimated by dividing: 1) 7-Eleven Malaysia Holdings Group’s revenue from convenience store operations, less revenue from non-food items; with 2) The estimated market size for household expenditure on food, beverages and tobacco in Malaysia. (Source: Vital Factor Consulting) GOVERNMENT REGULATIONS, LICENCES AND INITIATIVES
7.1 Government Regulations and Licences • The convenience store segment of the retail industry is subjected to the following Malaysian Government regulations and licences in Malaysia: (i) Trading Licence whereby under the Local Government Act 1976, a retail outlet is required to obtain a Trading Licence from the relevant local council in order to operate.
(ii) Signboard Licence whereby a retail outlet is required to obtain a Signboard Licence from the relevant local council to display a signboard at its premises under the Local Government Act.
(iii) Retail Licence for Rice whereby under the Control of Padi and Rice Act 1994, those who are engaged in the retailing of rice are required to obtain a Retail Licence for Rice under the Control of Padi and Rice (Wholesale and Retail Licensing) Regulation 1996. The licence is issued by the Ministry of AgricUlture and Agro-based Industry. (iv) Retail Licence for Scheduled Controlled Goods whereby under the Control of Supplies Act 1961, those who are engaged in the retailing of goods classified as scheduled controlled goods are required to obtain a Retail Licence for the relevant good under the Control of Supplies Regulation 1974. Scheduled controlled goods include flour, sugar, cooking oil, and all types of bread except French loaf. 7-Eleven Malaysia Holdings Berhad Page 16 of 34 Industry Assessment 150
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions (v) Under the Franchise Act 1998, registration with the Registrar of Franchise is required before a company is allowed to commence on the franchising business. 7.2 Government Initiatives • The Malaysian Government has introduced a number of initiatives that may benefit operators in the retail industry including the convenience store segment. 10thSome of these initiatives in the Malaysia Plan and the Economic Transformation Plan are discussed below. (i) 10th Malaysia Plan The 10th Malaysia Plan is a framework of targets and plans developed by the Malaysian Government to be executed from 2011 to 2015 with the aim of promoting economic development. There are twelve drivers of economic growth, also known as National Key Economic Areas (“NKEA”), which are expected to contribute to Malaysia’s transformation target. This development is in line with the Malaysian Government’s goal of shifting the economy towards higher value-added activities. The wholesale and retail Industries have been identified as an NKEA sector where objectives to be realised under this sector include: Liberalising the retail and wholesale sector, and promoting investments; Encouraging consolidation among local retailers to encourage efficiencies and achieve economies of scale; Encouraging modern retail formats such as hypermarkets, supermarkets, convenience and specialty stores to stimulate investment and accelerate the progression towards modernisation; Promoting franchise, direct sales and e-commerce.
(Source: 1dh Malaysia Plan) (ii) Economic Transformation Programme (“ETP”) The ETP is a progressive framework identifying various economic sectors and strategies to transform Malaysia into a high-income and developed nation by 2020. The wholesale and retail Industries are identified as a NKEA, with a number of entry point projects (“EPP”) recognised including: Developing ‘Makan Bazaars’, which are food centres that would also have space for retail outlets such as convenience stores; Intensifying the transformation of Kuala Lumpur International Airport (“KLlA”) into a retail hub; Developing big box boulevards, which refer to the concentration of integrated large-scale retailers and factory outlets within a single location. These boulevards would be supported by other retail outlets such as convenience stores; Removal of import duties on all finished goods except tobacco. (Source: Economic Transformation Programme) 7-E1even Malaysia Holdings Berhad Page 17 of34 Industry Assessment 151
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions (iii) The Corridors and Cities Transformation Programme The Corridors and Cities Transformation Programme complements other government initiatives such as the 10th Malaysia Plan and ETP. The goal of the programme is to develop five regional secondary cities and their corresponding economic corridors by focusing on their competitive advantages and ‘industry strengths. The following table provides a summary of the five corridors: Corridor Iskandar Malaysia Northern Corridor Economic Region East Corridor Economic Region Sabah Development Corridor Sarawak Corridor of Renewable Energy Development Period 2006 -2025 2007 -2025 2007 -2020 2008 -2025 2008 -2030 Main City and State Johor Bahru, Johor Georgetown, Penang Kuantan, Pahang Kota Kinabalu, Sabah Kuching, Sarawak Focus Sectors Creative industries, education, financial services, healthcare, logistics, tourism, electrical and electronics industry, oleo chemicals, food-and agroprocessing. Agriculture, logistics, education, manufacturing and tourism. Agriculture, education, manufacturing, oil and gas, petrochem icals and tourism. Agriculture, logistics, manufacturing and tourism. Aluminium, glass, marine engineering, metal-based industry, oil and gas, timber-based industry, tourism, aquaculture, livestock, palm oil and tourism. Expected Investment IRM billion! 383 177 112 113 334 Committed Investment between Jan-Sep 2013 IRM billion! 12.6 7.2 22.8 8.6 2.2 Realised Investment between Jan-Sep 2013 (RM billion) 10.0 7.2 3.7 3.0 1.7
(Sources: Iskandar Region Development Authority; Northem Corridor Implementation Authority; East Coast Economic Region Development Council: Sabah Economic Development and Investment Authority; Regional Corridor Development Authority; Ministry of Finance Malaysia.) 7.3 Budget 2014 • In Malaysia’s Budget 2014, the Government stated that the sales tax and service tax will be abolished and will be replaced by the Goods and Services Tax (GST), which will be effective from 2015. The GST will be applied to all goods and services unless specified as zero-rated supply. Many of the products sold in convenience stores will be subjected to the GST when it is implemented in 2015. (Source: Ministry of Finance Malaysia) 7-Eleven Malaysia Holdings Berhad Page 18 of 34 Industry Assessment 152
8. INDUSTRY OVERVIEW (Cont’d)
Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 7.4 Subsidy Rationalisation • The Government has rationalised several subsidies in 2013. The subsidy on petroleum products such as petrol and diesel were reduced by RMO.20 per litre, while the subsidy on sugar amounting to RMO.34 per kg was abolished. In addition, the electricity tariff for all user categories in Peninsular Malaysia, Labuan and Sabah was· increased effective from 1 January 2014 (Sources: Ministry of Domestic Trade, Co-operatives and Consumerism Malaysia, Ministry of Energy, Green Technology and Water Malaysia).
• These measures are likely to reduce the disposable income of the average Malaysian consumer, as well as increase inflationary pressure in the Malaysian economy. The reduction in the petroleum product subsidy and the increase in electricity tariff are likely to increase costs for operators in the retail industry, including the convenience store segment.
8 THREAT OF SUBSTITUTES • There are several substitutes for convenience stores in terms of other types of retail formats that would carry a similar, if not, a wider range of products such as hypermarkets, supermarkets, departmental stores, minimarkets and provision shops. However, these retail formats are unlikely to completely replace or sUbstitute in view of the following advantages and characteristics of convenience stores: Longer operating hours commonly extending to 24 hours a day, 7 days a week; Wide availability where there are more convenience stores in a given urban and suburban area compared to other retail formats; Convenient locations in proximity to residential and commercial areas in urban centres, suburbia, high pedestrian and traffic areas, and petrol stations; Ease of accessibility where convenience stores are located in areas where they are easily accessible to pedestrians and vehicles; Stock a range of FMCG typically for immediate consumption or usage.
9 RELIANCE AND VULNERABILITY TO IMPORTS • Operators of convenience stores are involved in retailing a range of products, some of which are manufactured locally, while others are imported. The convenience store segment generally faces a low degree of vulnerability to imports as the products normally sold at convenience stores are general in nature, and are not controlled by a small or limited number of overseas suppliers. There is a range of alternatives available for each type of product in terms of differing brands and close product sUbstitutes. These alternatives are usually available from a number of local and overseas manufacturers and suppliers. The ready availability of alternatives significantly reduces the convenience store segment’s vulnerability to imports. 7-Eleven Malaysia Holdings Berhad Page 19 of34 Industry Assessment 153 8. INDUSTRY OVERVIEW (Cont’d)
Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 10 INDUSTRY PROSPECTS AND OUTLOOK 10.1 Prospects of the Convenient Store Segment of the Retail Industry • The prospects of the convenience store segment will be dependent, to a certain extent, on the economic conditions of Malaysia. The social factors that continue to drive the prospects of the industry in Malaysia are the continuing increase in urbanisation, consumer confidence which may increase the propensity to spend, population growth and growing affluence of consumers as reflected in income per capita as well as household consumption expenditure in Malaysia. 10.2 Future Trends and Drivers of Growth 10.2.1 Positive Population Growth Creating a Larger Consumer Base Malaysia’s Population -Mid-Year
5% 0% -5% -10% -15% ,,>:Population • Growth Rate
34 32 30 28 26 (Source: Department of Statistics, Malaysia) • The population in Malaysia has been increasing at a CAGR of 1.6% between 2009 and 2013 with an expected targeted population of 31.3 million by 2017. 7-Eleven Malaysia Holdings Berhad Page 20 of 34 Industry Assessment 154 8. INDUSTRY OVERVIEW (Cont’d)
Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 10.2.2 Relatively Young Population • A growing population will benefit the retail industry in general by expanding the base of potential consumers and raising the overall level of demand. Age Distribution of Population in Malaysia -As at Mid-2013
0-9 10-1 9 20-29 30-39 40-49 50-59 60-69 70+ Age Group (Years) (Source: Department of Statistics, Malaysia) Age Distribution of Population in Malaysia -Mid-Year 2009 2013 Age Group (Years) CAGR 0-9 _ _ . 5,027 5,072 10-19 _.. _ _.. __ .. . 5,334 5,428 20-29 _.. _ .. ., 4,906 5,820 30-39 _. _. ._… ,__ .. 4,363 4,562 40-49 ,__ .. 3,675 3,575 50-59 __ . . . 2,544 2,715 60-69 __ .. _.. .. _,_ .. _, 1,275 1,572 70+ __ .. _.. _., __ .. 771 970 TOTAL . 27,895 29,715
2009-13 % 0.2 0.4 4.4 1.1 -0.7 1.6 5.4 5.9 1.6 Note: All units in thousand persons except percentages. (Source: Department of Statistics Malaysia) • Malaysia’s population aged 60 years and above registered relatively high growth in terms of CAGR between 2009 and 2013. However, the composition of Malaysia’s population is relatively young. In 2013, 54.9% of Malaysia’s population comprised 29 years of age and younger. Therefore, the needs and requirements of the young adult population in Malaysia will be the main driver shaping the market for the retail industry including the convenience store segment. 7-Eleven Malaysia Holdings Berhad Page 21 of34 Industry Assessment 155
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 10.2.3 Higher Expenditure from Younger Age Group Malaysia’s Average Monthly Household Expenditure on Food and Beverages Away from Home CAGR Age Group of Head 2005-10 of Household 2005 2010 % 24 and below …………. 260 301 3.0 25-34 ……………………. 204 254 4.5 35-44 ……………………. 216 243 2.4 45-64 ……………………. 210 229 1.7 65 and above 142 157 2.0 (Source: Deparlment of Statistics, Malaysia) • Households headed by younger persons aged 24 and below have a higher average monthly expenditure on food and beverage products away from home compared to households with older heads. This is positive when coupled with the relatively young composition of Malaysia’s population discussed in the previous section. Malaysia’s Average Monthly Household Expenditure on Food, Beverages and Tobacco by Age of Head of Household 24 and 65and below 25-34 35-44 45-64 Above In 2005 Food and Non-alcoholic Beverages …………… 165 319 415 435 385 -Rice ……………………………………………………., 15 32 37 40 36 -Bread and Other Cereals………………………… 29 40 49 47 39 -Me~ ……………………………………………………. 18 37 56 63 55 -Fish and Seafood ………………………………….. 25 58 84 96 88 -Milk, Cheese and Eggs…………………………… 15 37 37 28 27 -Oils and Fats ………………………………………… 4 9 12 13 12 -Fruits …………………………………………………… 10 20 28 31 26 -Vegetables …………………………………………… 16 32 44 51 47 -Sugar, Jam, Honey, Chocolate and Confectionery………………………………………… 6 11 15 14 11 -Food Products, Not Elsewhere Classified …. 8 20 26 29 21 -Coffee, Tea, Cocoa and Non-alcoholic Beverages……………………………………………., 19 22 28 26 23 Alcoholic Beverages and Tobacco …………….. 50 37 35 36 24 In 2010 Food and Non-alcoholic Beverages …………… 251 382 453 496 403 -Rice …………………………………………………….. 29 34 42 47 38 -Bread and Other Cereals………………………… 37 50 56 57 45 -Meat ……………………………………………………. 30 49 63 77 57
7-Eleven Malaysia Holdings Berhad Page 22 of34 Industry Assessment 156
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 24 and 65 and below 25-34 35-44 45-64 Above -Fish and Seafood ………………………………….. 46 76 98 114 gg -Milk, Cheese and Eggs…………………………… 22 47 44 34 30 -Oils and Fats ………………………………………… 7 10 13 14 11 -~~ ………………………….. _•……………………. 122125 3126 -Vegetables …………………………………………… 27 37 46 54 47 -Sugar, Jam, Honey, Chocolate and Confectionery………………………………………… 7 12 14 13 10 -Food Products, Not Elsewhere Classified …. 11 17 20 23 19 -Coffee, Tea, Cocoa and Non-alcoholic Beverages……………………………………………_ 23 28 31 32 22 Alcoholic Beverages and Tobacco …………….. 55 52 49 48 30 CAGR 2005-10 (%) Food and Non-alcoholic Beverages …………… 8.8 3.7 1.8 2.7 O.g -Rice …………………………………………………….. 14.1 1.2 2.6 3.3 1.1 -Bread and Other Cereals………………………… 5.0 4.6 2.7 3.9 2.9 -Meat ……………………………………………………. 10.8 5.8 2.4 4.1 0.7 -Fish and Seafood ………………………………….. 13.0 5.6 3.1 3.5 2.4 -Milk, Cheese and Eggs…………………………… 8.0 4.9 3.5 4.0 2.1 -Oils and Fats ………………………………………… 11.8 2.1 1.6 1.5 -1.7 -Fruits …………………………………………………… 3.7 1.0 -2.2 -Vegetables …………………………………………… 11.0 2.9 O.g 1.1 -Sugar, Jam, Honey, Chocolate and
Confectionery………………………………………… 3.1 1.8 -1.4 -1.5 -1.9 -Food Products, Not Elsewhere Classified …. 6.6 -3.2 -5.1 -4.5 -2.0 -Coffee, Tea, Cocoa and Non-alcoholic Beverages…………………………………………….. 3.9 4.9 2.1 4.2 -O.g Alcoholic Beverages and Tobacco …………….. 1.9 7.0 7.0 5.9 4.6
(Source: Department of Statistics, Malaysia) • Between 2005 and 2010, average monthly expenditure on food and nonalcoholic beverages by households headed by those aged 24 years and below recorded the highest CAGR at 8.8% compared to households with older heads. Households headed by younger persons aged 24 and below have a higher• average monthly expenditure on alcoholic beverages and tobacco compared to households with older heads. 7-Eleven Malaysia Holdings Berhad Page 23 of34 Industry Assessment 157
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 10.2.4 Increase in Consumer Affluence and Consumer Spending Malaysia’s Per Capita Income
i CAGR (2009-2013) =7.4iJ ICAGR (2013-2015) =10.7% I 1-t___.-.£:9rocast –t 1 0’ 50 12.7% I13.7%10.4% 1 7.8% 0 3.4%_1? •. I 38.840:Ee:., 11 34.231.730.7 IQl 29.7E 30 26.90 23.9 .::u 20 …'” ‘0.. U ‘” … 10 Ql a. 0
1 I 1 1 1 1 11 1 I 1 I 20% 0% —20% _. -40% I<0% –,-‘—–80% 2009 2010 2011 2012 2013p 2014f 2015f ii.[, Per Capita Income Growth Rate p =preliminary; f =forecast (Sources: Bank Negara Malaysia; Economic Planning Unit, Prime Minister Department) • Generally, an increase in consumer affluence as reflected by the growth in per capita income is likely to increase overall consumer spending. This would be a growth driver to the overall retail industry, including the convenience store segment. Between 2009 and 2013, per capita income in Malaysia grew at a CAGR of 7.4%. Moving forward, per capita income in Malaysia is expected to continue growing with an estimated CAGR of 10.7% between 2013 and 2015. This would provide consumers with increased disposable income that could contribute positively towards the prospects of the retail industry, including the convenience store segment. Average Monthly Per Capita Household Income by State CAGR 2009-12 2009 2012 (% Kuala Lumpur…………. 1,933 2,854 13.9 Putrajaya……………….. 2,161 2,562 5.8 Selangor………………… 1,714 1,986 5.0 Labuan ………………….. 1,297 1,702 9.5 Pulau Pinang………….. 1,322 1,547 5.4 Melaka ………………….. 1,169 1,382 5.7 Johor…………………….. 1,100 1,368 7.5 Negeri Sembilan …….. 1,020 1,339 9.5 Sarawak ………………… 974 1,257 8.9 Pahang………………….. 960 1,131 5.6 Sabah……………………. 833 1,073 8.8
7-E/even Malaysia Holdings Berhad Page 24 of 34 Industry Assessment 158 8. INDUSTRY OVERVIEW (Cont’d)
Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 2009 2012 Perak…………………….. 836 1,049 Terengganu……………. 783 1,023 Perlis…………………….. 752 982 Kedah……………………. 762 954 Kelantan………………… 641 742
CAGR 2009·12 % 7.9 9.3 9.3 7.8 5.0 Note: All units in RM except percentages (Source: Department of Statistics, Malaysia) • Between 2009 and 2012, the average monthly per capita household income in Kuala Lumpur grew the fastest among all states and territories in Malaysia with CAGR of 13.9%. In addition, the average monthly per capita household income in Kuala Lumpur was the highest in Malaysia in 2012. 10.2.5 Private Final Consumption Expenditure Private Final Consumption Expenditure CAGR 2008 2008 2009 2010 2011″ 2012P 12 (“/0 Food and Non-alcoholic Beverages . 75.3 79.4 84.6 92.6 100.6 7.5 Alcoholic Beverages and Tobacco .. 6.8 7.1 7.8 8.1 8.8 6.9 e =estimate; p =preliminary
Note: All units in RM billion except percentages. (Source: Department ofStatistics. Malaysia) • Between 2008 and 2012, private final consumption expenditure on food and non-alcoholic beverages increased at a CAGR of 7.5%, while alcoholic beverages and tobacco increased at a CAGR of 6.9%. Increasing private final consumption expenditure on these product categories augurs well for operators in the retail industry, including convenience store operators. 7-E1even Malaysia Holdings Berhad Page 25 of 34 Industry Assessment 159
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 10.2.6 Increasing Urbanisation • Increasing urbanisation will continue to drive the demand for goods and services from convenience stores. Malaysia’s Urbanisation Rate 90
80 77.9 -;;C Ol ‘” .l!! 70 <: ‘”~ Do ‘” 60 50 Kuala Lumpur Putrajaya1 Selan90r Pulau Pinan9 Melaka Labuan Johor Perak Negeri Sembilan Kedah Teren9ganu Sabah Sarawak Perlis
(Source: Secondary research by Vital Factor Consulting) • The urbanisation rate in Malaysia increased by 10.0% over a ten-year period between 2000 and 2010. The shift in population from rural to urban areas is expected to continue, with urbanisation forecasted to reach 77.9% by 2020. The projected increase in Malaysia’s urban population would continue to provide opportunities in the convenience store segment. Malaysia’s Urbanisation Rate by StatefTerritory 2000 (%) 2010 (%) . 100.0 . n.a. . 87.8 . 79.5 . 67.4 . 77.3 . 64.3 . 59.0 . 54.9 . 38.8 . 49.4 . 48.1 . 48.0 . 33.8
100.0 100.0 91.4 90.8 86.5 82.3 71.9 69.7 66.5 64.6 59.1 54.0 53.8 51.4 7-E1even Malaysia Holdings Berhad Page 26 of34 Industry Assessment 160
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 2000 (%) 2010 (%) Pahang . 42.1 50.5 Kelantan . 33.5 42.4 n. a. = not applicable 1Putrajaya became a Federal Territory in 2001. It was formerly part of the state of Selangor. (Source: Department of Statistics Malaysia)
• Between 2000 and 2010, Kedah recorded the largest increase in urbanisation rate, which grew by 25.8%. Kuala Lumpur and Putrajaya were fully urbanised by 2010. 10.2.7 Increase in Tourism and Expenditure • The influx of tourism into Malaysia will continue to provide opportunities for the retail industry including convenience stores due to their long operating hours and ease of availability. Foreign tourists are a sizable potential customer segment, with a total of 25.7 million tourist arrivals and total tourist receipts amounting to RM65.4 billion in 2013 (Source: Tourism Malaysia). Tourism Arrivals in Malaysia 28 10% 2.8’Y” 0% 26 24·J -10% 24 23J -20%
2009 2010 2011 2012 2013 ),rTourist Arr’lvals • Growth Rate (Source: Tourism Malaysia) 90 60
Tourist Receipts in Malaysia 7-7%
2009 2010 2011 2012 2013 Wl\’Tourist Receipts Growth Rate 20% 0% -20% -40% 7-Eleven Malaysia Holdings Berhad Page 27 of34 Industry Assessment 161
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Breakdown of Foreign Tourist Expenditure -2012
‘Others include accommodation services, passenger transport services, travel agencies and other reservation services, cultural, sports and recreational services, and country-specific tourism characteristics goods and services. (Source: Department of Statistics, Malaysia)
• The Malaysian Government is actively promoting the tourism industry, as a NKEA under the ETP. Some of the 12 EPPs that have been identified as part of the ETP are to position Malaysia as a duty-free shopping destination for tourist goods (Source: Pemandu, Prime Minister’s Department, Malaysia). The Malaysian Government’s initiative to drive the growth of the tourism industry would indirectly benefit the overall retail industry including the convenience store segment in Malaysia. 10.2.8 Sales of Tobacco Products • Between 2005 and 2010, the average monthly household expenditure on tobacco products in Malaysia increased at a CAGR to 6.3% to approximately RM38 per household per month amounting to a total of RM3.0 billion in 2010 (Source: Department of Statistics, Malaysia).
10.2.9 Sales of Mobile Phone Products and Services • Sales of mobile phone starter packs and reloads constitute important product categories of convenience stores. As such, growth in the mobile phone penetration rates in Malaysia would continue to provide opportunities for operators of convenience stores. The size of the pre-paid segment of the mobile phone market is particularly relevant to convenience stores as sales of starter packs and reloads are exclusively for pre-paid mobile phone customers. In addition, convenience stores may also provide various bill payment services including payments for postpaid mobile phone subscriptions. 7-Eleven Malaysia Holdings Berhad Page 280f34 Industry Assessment 162 8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Malaysian’s Mobile Phone Penetration Rate Malaysia’s Mobile Phone Subscription Type § 200 ,.~Co g, 160 @! 120 o & 80 c o ~ 40 a. ”
6.6% 7.1% 0.8% 142,5 143.6 119.2 127.7 105.4
2009 2010 2011 2012 2013 j”,Penetration Rate Grov-.’!h Rate> 2013 20% 0% -40% -60%
(Source: Malaysian Communications and Multimedia Commission) • The mobile phone penetration rate in Malaysia continued to increase even after it has reached the 100 subscriptions per 100 population milestone in 2009, with a CAGR of 8.0% between 2009 and 2013. Prepaid subscriptions, which accounted for 82.2% of all mobile phone subscriptions in 2013, continued to be the predominant segment with 35.3 million sUbscriptions. The substantial proportion of prepaid subscriptions in Malaysia will continue to drive the growth potential for convenience stores that are involved in selling prepaid mobile phone starter packs and reloads. At 7.6 million subscribers, the number of postpaid mobile phone subscriptions is still significant and represents an opportunity for convenience store operators with the capability to offer bill payment services at their stores in the future. 11 FUTURE GROWTH OF THE CONVENIENCE STORE SEGMENT Forecast Number of Standalone Convenience Forecast Number of Petro Marts in Malaysia Stores in Malaysia (2014 to 2018) (2014 to 2018)
3.000 3,000 . ~ in 2.000 2,000 ‘0
.8 5 z 1,000 1,000 2016 2e17 2018
7-E1even Malaysia Holdings Berhad Page 29 of34 Industry Assessment 163 8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • The number of standalone convenience store in Malaysia is forecasted to grow at a CAGR of 9% between 2013 and 2018. Growth is primarily driven by the expectations of continuing growth in, among others, real GOP, household expenditure on food and non-food FMCG, population and urbanisation.
• The number of petro marts in Malaysia is forecasted to grow by a CAGR of 4% between 2013 and 2018. The forecast growth in the number of petro marts is expected to be lower relative to standalone convenience stores. This is primarily due to the current high ratio of petro marts to petrol stations, with an expected low growth in the number of new petrol stations in Malaysia.
12 CRITICAL SUCCESS FACTORS • The convenience store segment operates within a competitive environment dominated by chain operators. In addition, operators are affected by factors outside their control including economic, social and regulatory conditions as well as factors within their control including management and operation of their businesses. While there are many factors affecting the operation of the business, there are some factors that are critical to the long-term sustainability and growth of business within the convenience store segment. Some of these critical success factors are discussed below. 12.1 Strong Branding • Branding is a critical success factor for operators in the convenience store segment primarily because it operates within the consumer industry. Operators with strong brand equity will derive benefits associated with instant brand recognition, brand recall culminating in long-term customer loyalty. From the operational perspective, operators with strong brand equity are likely to be in a stronger position to optimise from growth opportunities in the introduction of private label products associated with higher margins compared to the resale of other third party products.
12.2 Track Record and Market Reputation • Track record and market reputation are important factors of consideration for operators in the convenience store segment. Customers that need assurance of product and service quality would normally select operators with an established track record and good market reputation.
12.3 Extensive Store Network • The network of convenience stores and their geographic diversity is an important factor in determining the size of the addressable market of a convenience store operator. Generally, an operator’s revenue earning potential increases with the number of the convenience stores as well as its geographical coverage. Convenience store operators with a nationwide geographical coverage would also be in a strong position to offer additional services such as mobile phone reloads, bill collection, and providing access to ATM whilst generating income from sources such as in-store media placement and shelf space rental. The income from these sources will largely flow directly to the operator’s profit as the incremental costs of providing these services are low. 7-E/even Malaysia Holdings Berhad Page 300f34 Industry Assessment 164
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 12.4 Economies of Scale • A convenience store operator that has reached a certain optimal size in terms of number of stores will be in a stronger position to benefit from economies of scale. The operator would be able to allocate costs such as headoffice, advertising and promotions, and warehousing and logistics across its network of convenience stores. Other benefits that can be derived from economies of scale include: (i) Stronger negotiation power with suppliers including obtaining among others, favourable payment terms and lower product pricing, exclusive product distribution or promotions, and more frequent delivery schedules.
(ii) Greater efficiency in marketing costs and resources can be achieved through centralised purchasing and management of advertising, promotions and campaigns. Whilst marketing costs usually represent significant overhead costs, this cost can be defrayed across a large number of convenience stores to reduce the overall cost per convenience store.
(iii) Centralised business functions such as internal controls, human resources and training, information technology and communications, procurement, warehousing and logistics can be defrayed over a large number of convenience stores.
12.5 Supply Chain • An efficient supply chain system is critical for a convenience store operator with a large network of stores. Operators without any centralised supply chain are likely to experience inefficiencies in terms of procurement and logistics. The successful implementation of a supply chain with centralised procurement and logistics functions would enable an operator to achieve operational efficiencies
12.6 Long Operating Hours • Long operating hours is a key differentiator when competing with alternative retail formats such as hypermarkets, supermarkets and minimarkets. It is during periods outside normal trading hours that convenience stores have a significant advantage of accessibility while many of the alternative retail formats are closed. It would also help sustain higher pricing for the same or similar products offered by other retail formats. 12.7. Product Range and Mix • Convenience store operators that carry a product mix that is in line with the needs, expectations and preferences of their customers are in a better position to attract customers to their stores. Provision of value-added services such as bill payments, provision of ATM services and mobile phone reloads are added factors that will draw consumers to convenience stores. 7-Eleven Malaysia Holdings Berhad Page 31 of34 Industry Assessment 165 8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions
12.8 Financial Health • Operators with strong financial position would be in a better position to sustain their business in the long-term including reinvesting in the business by expand ing their store network, upgrading of stores and increasing advertising, marketing and brand development activities. In addition, operators with strong financial position are able to improve on centralised business functions such as procurement and logistics, IT systems and training to improve operational effectiveness and efficiency.
12.9 Internal Controls and Procedures • Internal controls and procedures are important in safeguarding a convenience store’s inventory and prevention of theft. A convenience store operator that fails to put into place effective internal controls is likely to experience cash shortfalls and/or inventory shortfalls, which would have an adverse impact on revenue and profitability.
• Convenience store operators with effective internal controls and procedures that are capable of detecting discrepancies in a timely manner and the ability to rectify discrepancies when detected are in a stronger position to prevent or minimise future losses from cash and inventory shortfalls. It is common for operators to invest in security systems such as closed circuit television (“CCTV’) recorders at their stores to monitor and record the actions of their staff and members of the pUblic at their stores.
12.10 Training • Generally, convenience store operators rely on relatively lower skill level personnel to operate their convenience stores. Staff turnover is generally high, resulting in the need to constantly recruit and train personnel. Operators that are in a position to provide formal training programmes to their staff are in a better position to recruit and retain workers. 13 THREATS AND RISK ANALYSIS
13.1 Global Economic Slowdown • Any prolonged and/or widespread economic slowdown is likely to affect economic performance, consumer confidence and spending in Malaysia. Uncertainty over the global and local economies may cause consumers to exercise more caution in their spending, which would have an impact on the retail industry inclUding the convenience store segment.
• Various initiatives introduced by the Malaysian Government such as the 10th Malaysia Plan and ETP which are expected to generate domestic business activity and consumption, would continue to provide opportunities in the retail industry and the convenience store segment.
• As convenience stores are primarily focused on selling FMCG, where most of which are used by consumers on a daily basis, an economic slowdown is unlikely to have a significant impact on the convenience store segment of the industry as compared to retailers of large ticket items.
7-Eleven Malaysia Holdings BerlJad Page 320f34 Industry Assessment 166
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 13.2 Competition from Other Retail Formats • Other retail formats such as hypermarkets, supermarkets, departmental stores, provision stores and minimarkets carry many of the same types of goods that are commonly available at convenience stores. As a result, these other retail formats pose a competitive threat to convenience store operators. Mitigating Factors • Convenience stores generally have distinct advantages such as offering extended operating hours and easy to access locations, which help to reduce competitive pressure posed by other retail formats.
13.3 Reputation Risk • The reputation of operators in the convenience store segment is sensitive to pUblic perception due to the sales of food and beverage items. Improper storage or handling of these food and beverage products may pose health risks as a result of food or beverage contamination. An operator may also become the target of malicious sabotage or rumours that are intended to damage its reputation. Mitigating Factors • Convenience store operators that continually ensure the safe and proper storage and handling of the food and beverage products sold at their stores are in a better position to reduce the risk of food or beverage contamination. While a convenience store operator may take all prudent measures to minimise the risk of food and beverage contamination and spoilage, incidences of sabotage or rumours are largely beyond the control of operators. To minimise the potential for reputation risk arising from sabotage and rumours, a convenience store operator may investigate any incidents with the relevant authorities, and communicate with consumers in a transparent and timely manner.
13.4 Public Liability • Operators in the convenience store segment operate premises that are visited by customers, who are members of the public. As a result, convenience store operators are exposed to the risk of public liability if an accident resulting in harm or injury to a member of the pUblic occurs on their premises. Mitigating Factors • Operators that exercise due care and consideration with respect to safety may be able to reduce the risk of accidents occurring on their premises, thereby reducing their exposure to public liability. Operators with public liability insurance are also in a stronger position to manage their exposure to risks arising from public liability.
13.5 High Operational Staff Turnover • Convenience store operators experience high turnover operational staff and the inability to replace and train new staff quickly may have an adverse impact on their operations and financial performance. 7-Eleven Malaysia Holdings Berhad Page 33 of 34 Industry Assessment 167
8. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Mitigating Factors • Convenience store operators may mitigate against the risk of high staff turnover by offering their operational staff competitive compensation, and training and skill development opportunities. Operators with an on-going programme of recruitment and training would be in a better position to mitigate against high staff turnover problems. Operators may also seek to retain qualified operational staff by offering opportunities to enrol in a structured training programme leading to a nationally recognised academic award upon successful completion. 13.6 Theft, Shoplifting and Robbery • Convenience store premises are typically open to the pUblic and operate extended hours where cash payments constitute a large proportion of convenience store transactions. As a result, convenience store operators are exposed to the risk of theft, shoplifting and robbery. Mitigating Factors • In general, convenience store operators may reduce the risk of theft, shoplifting and robbery by installing CCTV and alarm systems at their store premises. This may be supplemented by internal procedures and controls to reduce the risk of pilferage by internal staff. Vital Factor Consulting, have prepared this report in an independent and objective manner and have taken all reasonable consideration and care to ensure the accuracy of the report. It is our opinion that the report represents a true and fair assessment of the industry within the limitations of, among others, secondary statistics and information, primary market research, and forecasting methodologies. Our assessment is for the overall industry and may not necessarily reflect the individual performance of any company. We do not take any responsibilities for the decisions or actions of readers of th is document. This report should not be taken as a recommendation to bUy or not to bUy the shares of any company. Yours sincerely
Wooi Tan Managing Director 7-Eleven Malaysia Holdings Berhad Page 34 of 34 Industry Assessment 168