Driving stakes abroad: Expansion into foreign countries will spread out returns

Thai retailers have been rushing overseas, both to the near abroad and across the globe. Three things motivate them: the limits of Thailand’s domestic market size, perceived opportunities in other countries, such as Indonesia, and low prices for acquisition targets, especially in Europe. Another drive is self-confidence: the knowledge that they are very good at what they do. Thai outlets, especially department stores, have a lot to offer consumers and companies in other countries. Their services, style and quality are highly developed. The objective – as well as the hurdle – is to transfer these qualities to partners and acquisition targets elsewhere.

The Central Position

The leader in Thailand’s retail sector, the Central Group, is also leading the push into foreign markets. It has established a number of outlets in countries throughout the world and is continuing to develop projects, some quite ambitious. In China, the company has recently opened department stores in Hangzhou (2010), Shenyang (2011) and Chengdu (2013). In 2013, it acquired the Danish department store Illum, and in 2011 purchased the Italian department store group La Rinascente, which has 11 outlets in its home country and was founded 150 years ago. Most of its recent activity, however, has taken place in ASEAN countries. The company is establishing a department store in Indonesia in the upscale Thamrin district. This outlet, set to open in September 2014, will be 21,000 sq metres in size, carry both Asian and international brands, and be located in the east wing of the Grand Indonesia, arguably the country’s premier mall. Customers asked the firm to come to Indonesia after shopping at Central malls in Thailand, the company claims. It indicated in early 2014 that acquisitions in Indonesia are a possibility. The group is also opening its first outlet in Vietnam under the “Robins” name. The store will occupy 10,000 sq metres on the B1 level of Royal City, a 200,000-sq-metre mall in Hanoi attached to 5000 apartments. More than 100 brands will be available, and the outlet will include a 50-metre “shoe wall” featuring more than 20 brands of footwear. A second Robins outlet will be operating in Ho Chi Minh City by the end of 2014. The company already has a presence in Vietnam in the form of SuperSports, Crocs and New Balance stores, which it operates through subsidiaries via partnership agreements.

Malaysia Project

The Central Group is already involved in the development of i-City, a new cyber centre in Selangor, Malaysia. Of the total BT5.8bn ($175m) to be invested in CentralPlaza i-City, 60% will come from the group’s property development arm, Central Pattana, and the rest from ICP, a Malaysian company affiliated with i-Berhad. The total floor area will be 278,000 sq metres, while the net usable area will be 89,700 sq metres. The concept is to create a lifestyle shopping mall and entertainment centre for locals in the area. Besides retail space, the project will include apartments, offices, a hotel, a snow dome and a ferris wheel, and is expected to be finished in 2016. The company may eventually open 10 stores in Malaysia. It has also discussed branches in India and said it would consider minority stakes in US retailers.

Expansion efforts have not always gone to plan. In comments made to the press, the firm said its business in China has been difficult because of heavy competition and the economic slowdown. It had previously discussed opening five new stores in China by 2017, but no moves have been made on this front. It says its business has been strong in Europe.

Homepro Abroad

HomePro, meanwhile, is planning to open an outlet in Kuala Lumpur by the end of 2014. Eventually, it wants to have 40 stores throughout Malaysia. The investment in the first store, first mentioned in 2010, will total BT500m ($15m) and involve 7500 metres of retail space. The company believes that the home improvement market in Malaysia is less competitive than in Thailand, despite the Malaysian consumer’s keen interest in those types of products. HomePro plans to build a stand-alone outlet in Malaysia in 2015, and is considering expanding to Indonesia, the Philippines, Vietnam, Cambodia and Myanmar.

Franchises also find ASEAN appealing. CP All has asked Southland Corporation, the owner of 7-Eleven, whether it can expand its convenience store franchise into neighbouring countries. It is particularly interested in opening shops in Myanmar, Laos, Cambodia and Vietnam. As of early 2014, the company had not yet received a response to its ASEAN proposal. Meanwhile, it has already received permission to operate in China.

Even the smaller operations among Thai retailers are sizing up their chances overseas. Mr Bun, a bakery chain, is on an expansion push and hopes to open outlets in Indonesia, Malaysia and the Philippines via franchise arrangements. The MK Group, a restaurant chain, is rapidly expanding as well. It opened restaurants in Indonesia and Singapore in late 2013, is set to open 10 more in Vietnam within three years, and is looking at opening other units in Myanmar in 2014. The total estimated investment in this expansion plan is BT100m ($3m). These new branches will add to the company’s already established presence in Japan. To finance these expansions along with other major capital expenditures, the company launched an initial public offering in 2013, raising BT9.1bn ($275m).

Raising Money

The main issues for these Thai companies are related to financing and competition. Central Pattana, the property development business of the Central Group, raised $367m in a share offering in early 2013, largely to retire debt it had taken on in its expansion. Like HomePro, it is considering the listing of a property subsidiary. Tesco Lotus listed its own property fund in early 2012. The Tesco Lotus Retail Growth Freehold & Leasehold Property Fund (TLGF) raised BT18.4bn ($557m) in its initial public offering on the Stock Exchange of Thailand. The Central Pattana property fund would probably include the Central Plaza Chiang Mai shopping mall and could raise BT10bn ($303m).

The financing situation at CP All is particularly problematic. Having invested heavily in recent years, The CP Group may be edging up to the limits of its financing capabilities. CP All’s purchase of Makro left the company with the highest debt to equity ratio of all retailers in the region. Meanwhile, related companies have also been stretched. Charoen Pokphand Foods spent $2.1bn buying Hong Kong’s C.P. Pokphand. The CP Group bought a stake in China’s Ping An Insurance in early 2013 for $9.4bn. Given the group’s high cumulative debt, CP All is in less of a position to expand aggressively and cannot rely much on related companies for support.

All the same, international expansion is necessary for the largest of the Thai groups. While a certain amount of growth is possible as consumer demand picks up and new outlets are built in suburban and rural areas, it is efforts outside of Thailand that will help retailers maintain fast growth as the home market matures and becomes saturated. “The spread of home improvement stores across Thailand is facilitating greater consumer engagement with the ‘do-it-yourself’ segment, yet there is still a long way to go before this market starts to post sizeable returns,” Suebphongse Poonsatha, president of Nippon Paint, told OBG. Foreign markets are what will allow retailers to continue performing as they have in the past.

Having an overseas reach will also help the companies gain more experience and knowledge. While the Thai retailers are some of the best in the world, they have operated in a relatively closed market. In the face of global and regional competition – especially as the ASEAN Economic Community develops – they need more exposure to global and regional competitors. Expanding into other markets will help them gain that sort of exposure and allow them to maintain their leadership position for years to come.

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