In this issue:
The 7-Eleven and Mini-Stop Perspective Expose Ayala Corp-SSI Group’s Rush to Sell FamilyMart!
-BSP’s Emergency Measures as Sources of Aggregate Demand or 24/7 Business Sales
-24/7 Business: Pricing, Competition and Business Costs
-The Dash to Sell FamilyMart: The 7-Eleven and Mini-Stop Perspective
-See, The BSP IS TERRIFIED to Raise Rates!
The 7-Eleven and Mini-Stop Perspective Expose Ayala Corp-SSI Group’s Rush to Sell FamilyMart!
Read, every day, something no one else is reading.
Think, every day, something no one else is thinking.
Do, every day, something no one else would be silly enough to do.
It is bad for the mind to be always part of unanimity.
-Christopher Morley, American journalist and novelist
Why the undue haste to sell Familymart, one of the leading convenient-store chain, if domestic consumers have this insuperable ability to grow its cash flows endlessly?
In early October, the Inquirer, a leading media outfit, broadcasted the sale of the Ayala and SSI Group owned, FamilyMart.
Though the article was presented as news, it masqueraded the intent to publicize the sale of the said retail outlets [Ayala Land-SSI Group’s FamilyMart For Sale? Media Expert Utters an Economic Taboo: OVERSUPPLY! October 9, 2017]
In less than a month, the sale was consummated. The politically connected Phoenix Petroleum immediately snatched this opportunity as a means to diversify. [Phoenix Petroleum Bailouts Ayala Land-SSI in FamilyMart, Why Have Consumer Loans Been Weakening?, November 2, 2017]
BSP’s Emergency Measures as Sources of Aggregate Demand or 24/7 Business Sales
First, let us put into context, the current monetary conditions.
When the consuming public goes to the 24/7 outlets to purchase goods or services, they use money to conduct exchange. Thus, money represents the other half of every transaction.
With this in mind, we can discern that changes in monetary conditions affect changes in aggregate nominal expenditures.
Thus, the exploding record rate of credit issuance by the banking system supported by the BSP’s stealth stimulus of financing the National Government’s (NG) fiscal stimulus (infrastructure, military, bureaucratic and welfare spending), has been pressuring upwards not just domestic liquidity but also the government’s measure of real economy prices.
Taken together, the Philippine economy has been operating under the conditions provided for by the cauldron of emergency measures, namely lowest interest rates, record BSP monetization of debt and record fiscal stimulus
In the 3Q, the banking system’s production loans (+20%) have surged to rates attained in 2011 but still distant from the 2011 record (23+%). While the banking system’s consumer loans have whittled down, its growth rates (20+%) remain at record levels.
In the context of the industry, expenditures from production loans essentially represent the construction of malls and other retail edifices and the retail interiors, as well as the inventory, labor and other forms of working capital used for such business operations.
Meanwhile, expenditures from consumer loans have been directed mainly on consumer goods and services. Consumer loans supplement expenditures from the other various sources of incomes; viz. labor, rents, profits, welfare and etc…
The tapping of savings signifies as another avenue to finance consumer spending.
Thus business sales registered by retail outlets and various consumer businesses are derivative of the conditions of the combination of income, credit, and savings.
In the prism of the retail 24/7 chain industry, sales of FamilyMart, 7-Eleven, Mini-Stop, All Day, Circle K, Lawson and Alfamart, among the many others, have been sourced from this.
Unlike mainstream perspective, these funding sources are not like Samara Morgan/Sadako Yamamura, who in the movie, “The Ring”, was the vengeful ghost who just popped out of the TV screen. Or growth rates are not a linear thing.
Yet, given the persistent sizzling rate of consumer spending growth, it wouldn’t be far-fetched to perceive that many “banked” people have become reliant on credit as a MAJOR source of growth.
The alarming rapidity of credit expansion has become too conspicuous to even escape the IMF, a customary Pollyanna on the Philippines: “High credit growth, especially to the real estate and household sectors, merit continued monitoring.”
Imagine, a financial system with a bank penetration rate of about 4 out of 10 people with a high credit growth! Yet only a segment of those banked people has access to formal credit! This only implies that credit accumulation has been heavily CONCENTRATED to those with access to the formal banking system
The astounding rate of credit growth tells us WHY nominal spending has been rising dramatically. And more importantly, because there is no such thing as free lunch, WHY such accelerated increases in spending growth have placed price pressures on the real economy. (Of course, it is not just real economy prices, the peso and bond yields have been affected)
Without proportional increases in income or absent the use of credit, higher prices on items for sale on goods and services in these retail chains would mean lesser items sold!
The chief takeaway is that credit and money conditions, which get transmitted into real economy prices, impact the convenient store industry.
24/7 Business: Pricing, Competition and Business Costs
Next, the essence of the industry.
The 24/7 retail industry can be characterized as a relatively low barrier-to-entry business, modern day innovative sari-sari store
Catering to the biggest of the consumer segment, the middle to the lower middle class, the industry’s business model largely depends on low price margins [see Tax Data: 92% of Taxpayers Earn 33K and Below! Tax Reform Equals Tax Increase! June 11, 2017]
Given the lack of pricing power, the scaling of profits for participants largely depends on expanded volume sales. Thus, the aggressive expansions highlight the industry’s chasing for yields.
Fierce competition likewise puts a cap on the industry’s ability to set prices. Besides, 24/7 companies mostly sell similar products, and even brands, on their shelve spaces.
Though brand names of 24/7 outlets can bring upon some premium in margins, generally, prices are constrained by their customer’s purchasing power and by competition.
Even more, because of the low-barrier to entry, other retail outlets of different specialties tend to cannibalize the 24/7 space by incorporating this into their businesses. Take for instance, pharmacy retails and gasoline stations.
The entry of more participants would entail the decline in the market share of competing entities in a largely homogenous industry
With participants competing aggressively for the share of the industry’s profits, naturally, this should diminish the share of the profit pie. Or, profits will get competed away.
Of course, profits can also originate from the cost side.
Lower cost of goods, through efficiencies in the procurement process, may increase margins.
Reduced operating expenses can also function to increase margins. The cost factor was the case in the 3Q for RRHI and SEVN.
On the other hand, wage inflation, surging real estate prices and higher input costs can be transmitted into as higher operating costs that would reduce profit margins.
While cost side reductions help, improvements in nominal expenditures or business gross sales structurally provide the salutary profits for participants in the industry.
The Dash to Sell FamilyMart: The 7-Eleven and Mini-Stop Perspective
This brings us to the rushed sale of Ayala Corp-SSI Group’s FamilyMart.
Question is why?
Let me use Philippine Seven Corporation’s 7-Eleven and Robinson Retail’s Mini-Stop current conditions to showcase the likely reasons.
Philippine Seven was proud to announce that profits and earnings per share jumped 18.03% and 18.92% in the third quarter. The huge boost in 3Q numbers pushed up 9 months net income and eps growth to barely positive .77% and .71%.
For 7-Eleven, yes, revenue growth has still been in positive. But the rates at which these have declined this year have been astounding.
In the 3Q, though growth rates system-wide sales rose to 21% compared to 19.09% in 2016, growth rate of revenue from merchandise sales plunged to 13.44% from 22.34% in 2016, while franchise revenues dived 9.11% from 42.77%! The growth rate of total revenues plummeted to 14.28% compared to 23.81% in 2016!
System-wide sales (which includes non-company owned franchised stored) improved to 21%, but franchise revenues dived to 9.11%! What an incredible disparity!
In the 9 months, growth rates of system-wide sales had been down to 18% from 24.42% in 2016. Growth rate of revenue from merchandise sales and franchise revenues had barely been double digits at 11.14% from 32.08% in 2016 and to 10.16% from 34.83%, respectively. The growth rate of total revenues more than halved to 12.34% compared to 31.53% in 2016.
Sales per store and revenue per store had been negative in the 3Q and in 9 months. Sales per store were at -3.2% in 3Q and -4.83% in 9 months. Revenue per store was at -3.9% and -5.85% over the same period.
The sharp downturn in sales performance and sales efficiency explains the sudden haircut in the rate of acquisition of the company’s new stores. In the 3Q, the rate of growth of new stores was down to the lowest level in 5 years at 18.04% (24.01% in 2016)
Robinson’s Mini-Stop fundamentally shared the same conditions.
Mini-Stop’s income before taxes surged to Php 41.8 million in 9M of 2017 from Php -12.046 million over the same period and from Php 1.6 million from the 1H of 2017.
But these gains came from cost side improvements, mainly lower cost of goods aside from higher interest income.
In the 3Q, revenues (Sales plus other income or franchise fees) grew by a measly 3.02% mainly from a boost in other income (+4.33%). This growth rate is about the same as the BSP’s CPI of 3.1% for the 3Q
In 9 months, revenues slid by a scanty -.13%, mainly from a decline in store sales of -.16%.
Revenue per store improved to 4.69% in the 3Q and was higher at a smidgen rate of 1.49% in 9M. The boost in 3Q store revenues was primarily from the headline numbers. Let me add that for stores, I used the 1H data since the 3Q quarterly report didn’t specify the changes.
And gains in 3Q margins, which transformed into profits, were mostly from costs side improvements.
The slide in the government’s wholesale price index in the 3Q essentially manifested the reduced cost of goods of these companies.
Seen in the context of the increase in CPI, such gap (CPI minus wholesale prices) represented the profit margins manifested on firms like SEVNand Mini-Stop
Such profits signify a gift, channeled through implicit transfers, from the BSP to owners of these firms which came at the expense of the consuming public, which paid for higher prices.
Under the auspices of BSP’s monetary policies, this exemplifies how unprofitable companies become profitable
Though credit financed cut-throat competition played a crucial role in the rush sale of FamilyMart, there were other principal factors involved; specifically the acceleration of credit financed overcapacity (the race to build supply), policy-based subsidies and real economy price instability as an offshoot of present policy.
The heightened fragility of increased competition must have prompted the Ayala Corp-SSI Group to opt for speedy exit the 24/7 retail business.
Yet these factors cannot be seen in isolation because they are entwined and interdependent with the rest.
See, The BSP IS TERRIFIED to Raise Rates!
Bear in mind that the dramatic plunge in the topline growth rates of 7-Eleven and similar sales pressures in Mini-Stop have occurred even when credit expansion have been soaring at record levels that have led to the inundation of domestic liquidity.
Given the current conditions, a slowdown in domestic liquidity would essentially highlight a demand shortfall (nominal GDP or gross sales). Such would push these companies into deep red. Many retail companies would be compelled to retrench. And such pullback would blow up vacancy rates in shopping malls. The economy’s growth rate would plunge which should give rise to credit concerns.
By commanding the biggest share of the GDP and the largest sectoral share in the banking system’s credit exposure, the retail, real estate, construction and hotel industries have collectively morphed into systemically important institutions/industry (Too big to Fail).
2015 proved to be a harrowing experience for the BSP. And the stigma from such deflation episode can be seen from their present actions which continue to reflect on such dread or apprehension.
As I wrote early this week, “Because the government has become too acutely dependent on free money, I am not inclined to think that they will be raising rates”. [See Yields of 5 and 10 Philippine Treasury Bonds Spike to 5-Year Highs, Will the BSP Raise Rates? November 8, 2017]
My inclination was right. The BSP defied pressures emitted in the treasury market to adamantly maintain the current historic policy rate level.
That said, the ROP’s response was to raise yields of several maturities which has led to even more yield curve flattening.
The BSP can only kick the proverbial can down the road.
But given the sustained accumulation of imbalances from such actions, it won’t stop the market from eventually forcing a clearing process or a likely disorderly adjustment.
Statistics is not economics.
