This article first appeared in digitaledge Weekly, on September 14 - 20, 2015.
Japanese retailer AEON Co Ltd, which bought French retailer Carrefour’s ailing Malaysian operation in 2012, has obtained a one-year extension to comply with a ruling that requires it to sell a portion of its business to a bumiputera partner or company.
AEON Co, which now operates the hypermarkets under the AEON BiG brand, was initially given three years from the date of acquisition to adhere to the ruling. The Ministry of Domestic Trade, Cooperatives and Consumerism, which oversees foreign participation in the distributive trade services in Malaysia, has now given the retailer more time, until November next year. Among the rules regulating foreign companies, those governing the hypermarket business are considered the most stringent. The guidelines require that AEON Co sells at least 30% of AEON BIG (M) Sdn Bhd to a bumiputera partner or firm.
British retailer Tesco PLC, which operates Tesco Stores (M) Sdn Bhd, started business in Malaysia in 2001, after signing Sime Darby Bhd as its 30% partner. Dairy Farm International Holdings Ltd, the operator of the Giant hypermarket chain, did not have a partner for 14 years, until recently when GCH Retail (M) Sdn Bhd found its bumiputera partner in Syarikat Pesaka Antah Sdn Bhd, a company controlled by the Negeri Sembilan royal family.
AEON BiG director of corporate values and communication A Rashid Adam tells digitaledge Weekly in an email that the retailer has held talks with several parties but none of them have been conclusive.
In an interview in December 2013, its then managing director, Nagahisa Oyama, said although AEON BiG was already being approached by bumiputera suitors who were interested in buying a 30% stake, the company was more keen to turn it around before selling the stake. This strategy makes sense because the retailer would be able to fetch a better price when it is profitable.
A planned listing on Bursa Malaysia’s Main Market next year has also been postponed until AEON BiG gains a stronger footing. It had originally projected to turn profitable in its financial year ended Dec 31, 2014. However, hypermarkets are not seeing the cash register ringing as much as they would like it to due to stiff competition and low consumer confidence.
According to Tesco PLC’s latest annual report, like-for-like sales for its Malaysian operation declined every quarter until February 2015 — 1QFY2015 (-2.3%), 2QFY2015 (-6.8%), 3QFY2015 (-8.7%) and 4QFY2015 (-3.6%).
Retailers in Malaysia have been facing tough times in the last couple of years. Last year, retail numbers grew a mere 3.4% despite the fact that the gross domestic product expanded the fastest in four years to 6%. With the implementation of the Goods and Services Tax (GST) on April 1, sales have dipped further. Retail Group Malaysia (RGM), which tabulates retail growth numbers on behalf of Malaysia Retailers Association, has had to make a fourth downward revision for retail sales this year. It expects retail sales to grow just 3.1%, and this takes the GST component into account.
Numbers released by RGM two weeks ago show that retail growth in 2Q2015 contracted 11.9% with the supermarket and hypermarket subsector posting negative 0.7% growth. The subsector posted 1.9% and 1% growth in the third and fourth quarter of 2014 respectively before improving to 5.1% in 1Q2015 due to pre-GST shopping.
On the new date for the planned listing, Rashid says, “Hopefully by 2017.” AEON Co has two other listed entities in the country — department store cum supermarket operator AEON Co (M) Bhd and financial services company AEON Credit Service (M) Bhd.
digitaledge Weekly was not able to obtain AEON BiG’s financials for FY2014 and Rashid was mum on the numbers. However, he says AEON BiG hopes to achieve a positive bottom line in FY2015.
A search on the Companies Commission of Malaysia’s (CCM) website shows that in FY2013, AEON BiG saw its revenue improve to RM1.65 billion from RM1.58 billion the year before, when the business was operated as Carrefour. Within just a year, AEON BiG also managed to narrow net losses. It recorded a net loss of
RM73.17 million in FY2013, compared with RM126.04 million in FY2012. Its accumulated losses as at FY2013 was RM203.3 million while total liabilities stood at RM1.15 billion, of which RM741.65 million was current liabilities.
In July 2015, a report, quoting sources, says AEON Co was interested in buying Tesco PLC’s Malaysian operation. Local industry players viewed the move as sending out a signal to the British retailer that AEON Co is keen to buy the business should it be up for sale. There has been no development on the matter since.
This comes after Tesco PLC posted its biggest pre-tax loss of £6.4 billion in its 96-year history. Just last week, it announced the sale of its South Korean business, Homeplus, for £4.2 billion to help pare down debts and strengthen its balance sheet.
In Malaysia, based on numbers submitted to CCM, Tesco Stores is profitable. Its 49 stores posted a combined net profit of RM94.29 million on revenue of RM4.66 billion in its financial year ended Feb 28, 2014. The company had an accumulated profit of RM99.40 million and total liabilities of RM4.24 billion, of which RM1.24 billion was current liabilities.
Tesco PLC’s FY2015 annual report shows that its Malaysian operation, comprising 54 stores, posted RM4.54 billion in revenue. Like-for-like sales in FY2015 shrunk as much as 5.3%.
AEON Co took over all 26 Carrefour stores in Malaysia — 22 hypermarkets and four superstores — on Nov 1, 2012, for €147 million or an enterprise value (value of debt in the business minus cash in the business) of €250 million. Today, there are 24 hypermarkets and three superstores remaining. In July, AEON BiG closed a superstore in Pandan Indah. It expects to open another hypermarket by end-2015 in Ipoh.
Since the takeover, it has renovated 11 stores — in Subang Jaya, Wangsa Maju, Mid Valley Megamall, Putrajaya, Kepong, Klang, Ampang, Tropicana City Mall, Kota Damansara, Seberang Prai and Batu Pahat.