2017 Performance Reveals that Non-Durable Retail Sector sits on a Precipice as Puregold Sells Lawsons to Flee the 24/7 Chain Space!

2017 Performance Reveals that Non-Durable Retail Sector sits on a Precipice as Puregold Sells Lawsons to Flee the 24/7 Chain Space!

Last week, retail giant Puregold made two stirring announcements.

First, it confirmed a media report: “Puregold said in a presentation during a recent investors’ briefing consolidated net sales would rise by 6 percent to 8 percent this year, slightly lower than the 10.6-percent growth registered in 2017.” (bold mine)

Second, it sold its 24/7 business. From the Inquirer: “Retail magnate Lucio Co-led Puregold Price Club Inc. has decided to exit the convenience store business only three years after diversifying into this highly competitive retailing segment. Puregold disclosed to the Philippine Stock Exchange on Friday that it had signed an agreement to sell its 70 percent stake in PG Lawson to its Japanese partner Lawson Inc. The divestment will “enable Puregold to rebalance its risks portfolio in the grocery retail sector and focus its resources in the further development and strengthening of the Puregold brand,” the disclosure said

The first is related to the second.

Falling revenues have rendered the Lawson 24/7 as unviable for Puregold to prompt for its exit by selling back 70% of its holdings to the parent and franchise owner Lawson Japan.

And if you haven’t noticed, Puregold’s exit of Lawson marks the second sale of a 24/7 convenience retail chain by a major retail firm just over six months ago!

Last October, the Ayala-SSI Group advertised for sale its FamilyMart which Duterte crony Dennis Uy’s Phoenix Petroleum bought in less than a month.

 

Let us first start with how retail got financed. Cash, credit or debit card comprises most of the retail transactions. Hence, these variables provide a map of retail conditions.

At the end of 2017, M1 consisting of currency in circulation (or currency outside depository corporations) and peso demand deposits expanded by 16.06%, the strongest pace since 2014. Credit card growth at 20.58% rocketed to a record high! However, payroll loan growth sank to 8.27% from 2016’s 55.45%.

The rapid decline of payroll loans provides a mixed signal: Income growth has either grown considerably for demand for loans to shrivel or that the job market hasn’t been as healthy to support demand for payroll loans. 

The huge cash and credit card liquidity infused into the system has not transformed into vigorous revenue growth for the top 5 listed non-durable retail firms, namely, Puregold, Robinsons Retail, 7/11, Metro Retail and the SSI Group.

The group’s aggregate revenue growth slumped to almost half 8.87% in 2017 from 15.07% in 2016 and 15.5% in 2015.  SM Retail posted 7.15% revenue growth in 2017 down from 11.91% in 2016 and 11.43% in 2015. Including SM Retail, the group’s revenue was 8.06% in 2017 from 11.91% in 2016 and 11.43% in 2015

It must be pointed out that with the exception of SSI and Mini Stop, the above retail chains have added substantial inventories of retail outlets.

While revenues decayed, net income of the top 5 improved to 8.45% in 2017 from 6.27% in 2016 but had been down from 10.97% in 2015 and 21.9% in 2014. The top 5 relied on margins plus cost side improvements to scrape out their net income for the year.

But that is for the top 5. SM Retail had a different story.

As I pointed out last March, SM Retail’s net income FELL by 1.9% from Php 10.6 billion in 2016 to Php 10.4 billion last year (2017).

After a modest showing (up 10%) through 3 quarters/9 months, SM Retail’s annual net income growth turned negative because of a shocking collapse in the 4Q

Since SM Retail’s 2016 net income was Php 10.6 billion and 9m net income was Php 7.0, the difference or 4Q 2016 net income was Php 3.6 billion.

Thus, SM Retail’s 4Q income growth TUMBLED by a whopping 25%, which led to a 1.9% decline in net income growth in 2017!!!

[See After a 51% Pump, SM Investment posted a Net Income Growth of ONLY 6% in 2017 as SM Retail’s 4Q Net Income Tumbled by 25%! March 4, 2018]

If SM Retail’s income is included in the group, net income growth in 2017 posted a 3.8% from 6.63% in 2016.

SM Retail’s revenues accounted for 47% of the group’s cumulative revenues.

Yes folks, in 3 successive years ALL major non-durable listed retail chains had been plagued by diminishing revenues AND returns!       

And except for SSI and RRHI’s Mini Stop, hardly any of them had learned their lessons! Except for SSI and Mini Stop, most continued to plan for significant expansions

 

The sales growth of Philippine Seven’s 7/11 and Mini Stop explains the sale of Ayala-SSI’s FamilyMart to Phoenix Petroleum and the sale of Puregold’s Lawson back to Lawson Japan.

7/11 posted an aggregate revenue growth of 13.76% in 2017 which was almost half the rate of 25.73% in 2016 and 31.56% in 2015.

Mini Stop had a .79% (yes close to ZERO!) sales growth in 2017, lower from 3.19% in 2016 and a collapse from 19.01% in 2015.

The 24/7 chains have not just been susceptible to a systemwide surge in supply or industry saturation, the second demon has been inflation. As inflation rose, sales skidded. The charts above represents empirical proof of how inflation steals everyone’s purchasing power.

The ongoing shakeout of 24/7 retail chains must not be seen in isolation. 

The declining sales trend of ALL categories of Robinsons Retail highlights the relationship between the low-end with high-end sectors.

 

As to why Puregold projected this “consolidated net sales would rise by 6 percent to 8 percent this year, slightly lower than the 10.6-percent growth registered in 2017”, has been aptly demonstrated above.

Puregold reported an increase of 23 stores or 7% year on year. This means same-store sales have been about inflation and had no growth at all.

It is sad because hardly any of them have been guided by realistic projections.

A day prior to the Lawson sale, PGOLD confirmed this media report: “Puregold said it would allot P1 billion out of the P3.7-billion capital expenditures this year to build 25 stores, P1.5 billion for the two S&R stores, P200 million for 12 S&R quick service restaurants and P50 million for 10 Lawson stores.”

All have come to believe that current trends have been mere anomalies, so everyone continues to build inventories massively in order to “gain market share”

JM Keynes hit the nail on the head: Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner whichnot one man in a million is able to diagnose. 

Inflation has blinded everyone

Metro Retail and SSI’s annual revenues have been breathing for dear life.

Metro Retail’s annual revenue growth was at 1.74% in 2017, down spectacularly from the 6.95% in 2016 and 14.15% in 2015.

Meanwhile, SSI’s revenue was .01% in 2017 (yes ZERO!!) down from 5.86% in 2016 and 14.81% in 2015.

Metro Retail’s quarterly sales have been in a steady decline to hit a NEGATIVE .79% in 4Q! Lower financing cost plus a stunning -.12% growth in the cost of goods (COG) in a world of spiraling inflation, breathe exuberance to Metro Retail’s annual net income growth of 23.75%.

In 2017, SSI’s income before taxes was a -6% (yoy) but its net income growth jumped 18.84% due to a reduced tax deduction.

For both companies, accounting profits determined the annual results.

The trends exhibited above have been ominous. Even with over 6% in GDP, revenues of some companies have been drifting towards zero. And negative revenue growth will eat on the margins.

What if a downturn occurs?

And the hurdles have been mounting: systemic overcapacity, price instability or elevated inflation, choking regulations, debt overload, rising rates and the administration’s war on commerce.

And even worse, what if a recession occurs?

One can expect massive retrenchment or even risks of insolvencies.