Bangkok--9 Feb--Fitch Ratings
The margins of the three main large-format food retailers in Thailand are likely to improve this year as they focus on profitability and rein in competition on sales volume, Fitch Ratings says. The key players, two of which are now owned by large local conglomerates, are likely to tap links with their parents in terms of network, product sourcing and logistics to enhance product offerings to their target customers and improve cost management.
The profit margins of both Siam Makro Public Company Limited (Makro, A(tha)/Stable) and Big C Supercenter Public Company Limited (Big C) improved in 3Q16 from the preceding quarter after several quarters of weakness. This was likely driven by changes in strategy to focus on profitability instead of competing for sales volume. Fitch expects this trend to continue in 2017.
The competition for sales volume has eased since June 2016, when Big C shifted away from big discount campaigns to attract large volume buyers and moved towards sales with healthier margins by focusing more on its target of retail consumers. This move by Big C should benefit Makro, which targets large-volume buyers, including traditional food retailers, hotels, restaurants and catering operators. This is in contrast to Big C and Tesco Lotus, which appeal to end-consumers. Makro has also adjusted its strategy given continued weakness in sales to traditional retailers in 3Q16, and it has expanded its product offerings to hotels, restaurants and caterers, which has enhanced both sales and profitability.
An expected gradual recovery in purchasing power in 2017 should also support the Thai food retailers. The Fiscal Policy Office of the Ministry of Finance forecasts private consumption to grow at 3.0% in 2017, supported by rising agriculture prices and the country's economic growth, which it forecasts at 3.6%. In addition, the large number of consumers who purchased cars in 2011, when there was a tax rebate for first-car buyers, would have mostly paid up their car loans in 2016, which could help to free up their budgets for other purchases this year.
Fitch expects Big C to continue focusing on improving profitability in 2017 through synergies with its new major shareholder, Berli Jucker Public Company Limited (BJC), which is a leading manufacturer of consumer goods in Thailand. According to Big C, it expects to integrate its logistics operations across the entire value chain after the acquisition, use BJC's manufacturing capability for its private brands, and cross-sell BJC products in Big C's distribution network. These synergies should lead to more cost efficiency and consequently, higher profitability.
Makro and its major shareholder, CP ALL Public Company Limited (A(tha)/Stable) - both of which are leading food retailers in Thailand - have reaped the benefits of better bargaining power against their suppliers and logistics management. This was reflected in the improved margins of both entities in 2014-2015, amid a weak domestic economy.
Fitch expects Makro to generate higher EBITDAR margin and stronger operating cash flow in 2017. However, Makro's free cash flow and financial leverage over the next two to three years could be pressured as it has started to execute its regional expansion plan. Makro's FFO-adjusted net leverage was 1.7x at end-September 2016, which offers the company moderate rating headroom for additional investments.