This article first appeared in The Edge Financial Daily, on 30 November, 2015.

KUALA LUMPUR: Unable to absorb rising costs caused by the weakening ringgit and the implementation of the goods and services tax (GST), Bonia Corp Bhd, the operator of retailing brands including Bonia, Sembonia and Carlo Rino, will pass on the additional costs to its customers by raising prices of its leather goods in the coming months.

Bonia managing director Datuk Albert Chiang said it will increase prices of its goods next year to offset shrinking profit margins caused by a combination of rising input costs, promotional activities and higher discount given to drive sales amid weakened consumer sentiments, as well as absorption of the 6% GST.

“We have not raised our selling price since the implementation of the GST. But moving forward, I think we have to,” he told The Edge Financial Daily in an interview.

Nevertheless, Chiang assured shoppers that any price increases will be “gradual and marginal”.

“If the price hike is too much, the market might not accept it. It could, in turn, affect our branding,” he said.

To ease consumer price sensitivity, Chiang said Bonia has embarked on branding initiatives to improve product qualities, services and locations in the hope that they will help lessen the impact of any price hikes on its sales.

For its first financial quarter ended Sept 30, 2015 (1QFY16), Bonia saw its net profit drop by 31.5% to RM8.87 million from RM12.96 million in 1QFY15, on lower gross profit margin.

Revenue for 1QFY16 also fell 3.6% to RM164.71 million from RM170.88 million a year ago, amid a tough operating environment after the implementation of the GST, coupled with weakened consumer sentiments.

Chiang said he doesn’t see the outlook changing much for the remaining financial year as consumers are expected to be cautious in their spending in view of the slowing local economy, as well as rising costs of living partly due to the weakening ringgit and the GST.

“[The outlook for] FY17 (ending June 30) will be better, but for FY16, we don’t see any improvement,” said Chiang, expecting negative same-store sales results in its Malaysian operations.

To ease pressure on its margins, Chiang said Bonia will close non-profitable stores and be more selective in new store openings.

“We will continue to consolidate our non-performing outlets and subsidiaries to reduce rentals and costs. We have about 60 subsidiaries now [and] we plan to merge some of them to improve our business performance,” he added.

On its plan to focus on its expansion to overseas markets, Chiang said the group is looking to increase overseas contribution to 50% of its revenue in three to five years from 35% currently, in order to achieve its revenue target of RM1 billion by 2020. For FY15, Bonia posted a revenue of RM695.33 million.

“We see the oversea markets having more opportunities next year, their growth rates are indeed higher than Malaysia’s,” Chiang said, adding that the group is currently exploring partners to start new ventures in Middle Eastern countries such as Bahrain, Qatar and Oman.

“We are still studying these markets, and we expect to finalise them soon,” he said, adding that the group will open a new store in Egypt and Kuwait next year.

The group has recently re-entered China’s retail market by opening three Bonia counters at Parkson department stores in Shanghai and Beijing.

Bonia withdrew from the Chinese market in 2012 due to rising costs of production and difficulty in getting skilled staff.

Chiang said the decision to re-enter China was because its management felt that China still has significant potential. “As no capital expenditure is incurred [on the construction of the store there] by Bonia, we see this as another pilot testing”.

On the local front, Bonia will open two new boutiques in Shah Alam and Kota Baru in March and April next year respectively, which will involve a combined investment of RM2 million.

As at June 30, 2015, Bonia had a network of over 1,400 sales outlets and 170 boutiques in Malaysia, Singapore, China, Taiwan, Japan, Vietnam, Thailand, Myanmar, Cambodia, Indonesia, Brunei, Oman, Kuwait and Saudi Arabia.

Currently, the domestic market accounts for about 65% of the group’s revenue, followed by Singapore (25%), Indonesia (4%) and Vietnam (4%).

Bonia (valuation: 0.9; fundamental: 1.6) shares closed unchanged at 70 sen last Friday, for a market capitalisation of RM564.4 million. Year to date, the stock has declined by 26.7%.

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