An Update of Jollibee’s PacMan Strategy: In the Lens of 2Q and 1H Financial Performance
From the Business Mirror (August 6): HOMEGROWN food giant Jollibee Foods Corp.’s (JFC) attributable profit dropped by half in the second quarter of 2019, dragged by losses in its recently acquired US burger chain Smashburger, alongside lower sales from Red Ribbon. In a disclosure to the stock exchange on Monday, the listed company said net income attributable to the parent fell to P1.12 billion from April to June, 50.2% lower than the P2.25 billion it posted in the same period a year ago. This followed a 6.7% increase in revenues to P43.67 billion.
Figure 1
Jollibee’s domestic sales growth, which dropped to multi-year lows, in the face of falling gross profit margins, played a crucial role in the halving of its bottom line.
Figure 2
And has Jollibee’s domestic sales growth somewhat mirrored the household consumption GDP, which peaked in 2016?
Falling margins may have prompted JFC’s management to look at volume expansion as a substitute, hence the decision to ramp up investment overseas*.
*Jollibee’s Fantastic Paradigm Shift: From Consumer Value to Aggressive Debt-Financed Pacman Strategy March 3, 2019
Figure 3
The share of domestic sales has dropped from a high of 81% in 2011 to nearly 74% in the 1H 2019. However, from its apex of 67.33% in 2015, the share of domestic assets has declined to 53.14% in the 1H of 2019.
Despite the lower share weight relative to the total, foreign sales have taken a pivotal role in determining JFC’s profitability.
Well, this Bloomberg article quoted a local expert rationalizing the steep fall of its share prices following the JFC’s announced acquisition of Coffee Bean, “Its aggressive push outside could be a signal its home market is getting saturated. And if you valued Jollibee for its Philippine focus, would you still give it the same value with its growing overseas business?”
As a wrote last March,
“JFC’s external recourse may be about the weak peso. As a means or a strategy to hedge against this, the company engaged in foreign FDI. However, JFC may be venturing into the unknown or to unfamiliar markets, where its competitive advantage may be deficient. It may not possess the same quality of knowledge and expertise in dealing with foreign consumers.”
And the “home market is getting saturated”? Well, has this been so hard to notice? JFC has been aggressively expanding horizontally through Mergers and Acquisition (M&A) financed by debt, benefiting from the BSP's easy money regime. And aside from falling margins, perhaps they have come to realize that the pockets of Filipino consumers have limits, and so the overseas M&A gambit.
Again from March, “And JFC’s monopolistic behavior, via its Pacman strategy, has been consistent with this.”
Figure 4
Following its international M&A binge, which has led to a massive buildup of debt, JFC’s interest expense has been rocketing (73.4% in the 1H)! So, with deepening exposure overseas, JFC portfolio becomes increasingly sensitive to overseas developments.
What happens when today’s slowdown in the global economy picks up speed and morphs into a recession? And what happens if the Philippines join the world?
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