Aeon Co to reduce capex and focus on business transformation

This article first appeared in The Edge Malaysia Weekly, on March 21, 2022 - March 27, 2022.
Shafie: I don’t see any new malls coming up within the next two years, but we are looking at opening one in 2025. (Photo by Sam Fong/The Edge)

Shafie: I don’t see any new malls coming up within the next two years, but we are looking at opening one in 2025. (Photo by Sam Fong/The Edge)

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AEON Co (M) Bhd plans to cut down on capital expenditure in the coming years as it turns its focus on rejuvenating older malls in its portfolio and investing in a digital ecosystem, rather than building new malls.

Speaking to The Edge in an exclusive interview at Aeon’s lounge in Mid Valley Megamall, CEO Shafie Shamsuddin says between 2012 and 2019, Aeon Malaysia spent RM400 million to RM500 million on average a year on capex as the mall operator was driven to open malls in almost every city and town in the country.

Shafie says his focus will be on technology improvements as well as a programme to rejuvenate and maintain Aeon Malaysia’s existing malls at an average capex spend of RM200 million to RM300 million a year, with 30% to be spent on technology improvements, 40% to 50% on a mall rejuvenation programme and the remainder on the maintenance of the malls.

“I don’t see any new malls coming up within the next two years, but we are looking at opening one in 2025. We have not signed the agreement yet but we are looking at building another mall, and it has to be very strategically located,” he says.

Rejuvenating old malls is not just about putting up a new façade or giving the building a new coat of paint, but taking a more holistic approach to how the malls can interact with customers, vendors, partners and the community as a whole through the implementation of technology and sustainable programmes, says Shafie, who took the helm in January 2020, just before the outbreak of Covid-19.

The pandemic has accelerated the transformation of Aeon Malaysia to ensure the group remains competitive and relevant in uncertain economic times.

Shafie has a wealth of experience in running retail groups, and even turning ailing ones around.

His previous stints include managing Carrefour Malaysia and Singapore between 2006 and 2009, and Carrefour Indonesia between 2009 and 2011. In addition, he was president of PT Trans Retail Indonesia between 2013 and 2019.

In late 2019, the Singaporean approached Aeon Co Ltd’s founders to discuss the digital transformation of the Malaysian business. After several discussions and showing the founders his plans, Shafie was appointed the CEO of Aeon Malaysia.

Shafie’s plan is to create a comprehensive and integrated digital ecosystem for Aeon Malaysia, with customers as the focus. His vision calls for Aeon Malaysia’s vertical business operating units to be torn down and reintegrated into a shared platform.

“The digital platforms were previously in place within the verticals but not in a circular manner, despite the fact that the customers who shop in our malls are also shopping at our supermarkets, department stores and hypermarkets, and use Aeon Credit Service.

“These are the same customers, but we were not talking to them directly as a group. It was the people running each of the verticals — the malls, supermarkets, department stores, hypermarkets and Aeon Credit Service — who were talking to the customers, [but] each of them was not connected with the other.”

Part of the solution is to ensure that all Aeon Malaysia’s teams are connected, says Shafie.

In order for Aeon Malaysia to remain relevant with the onslaught of digital retail offerings by many newcomers, the group has to become an ecosystem, whereby its offerings are connected to customers’ demands, vendors’ business models and the community.

In building its ecosystem, Aeon Malaysia is guided by three philosophies: demand chain, personalisation and transparency.

To ensure Aeon Malaysia sells or promotes the right products to its customers, it is focused on customer demand, rather than its suppliers.

“[Prioritising] the demand of customers first, before supply. In the past, who knew how many Coca-Colas we would need to sell? Coca-Cola would decide because they did mass production, so [we were told] this was the quantity that the customers wanted. We also didn’t know whether that number was really the demand. Just because it was marketed so widely, we just assumed that the number was the real demand.

“Supply is very important, but now what is more important than supply is demand. With the digital connectivity, we must be able to ask the right question of what is it that [consumers] really want,” says Shafie.

The data that is captured by Aeon Malaysia’s digital applications such as myAeon2go and iAeon will guide the group on who its customers are and what they really want.

“We can no longer say, because you are a multinational corporation and you sell across the world, you would be able to sell your products. And not only that, we need to listen — for example, there might be some local products in Kota Baru that customers in the Klang Valley want,” says Shafie.

And instead of Aeon Malaysia telling all its customers that it is selling a specific product at a promotional price, the group will take a more personalised approach, Shafie says, such as asking whether a particular customer wants the product.

In terms of transparency, the challenge for Aeon Malaysia is to open up its ecosystem to collabore with other businesses. For instance, it has collaborated with Tupperware for its points redemption programme, even though Tupperware products are not sold in Aeon Malaysia’s stores.

To get to know its customers better as well as their needs and wants, Aeon Malaysia has identified seven personas of customers that represent the majority of its customers in the country.

The first persona is the Forgotten Heroes, the silver generation such as retirees and grandparents, who are mostly not technologically savvy, followed by Mr Simple & Mrs Chatterbox, the typical Malaysian household that is price sensitive and shops at Aeon as a treat.

Then comes the Opportunistic Hustler, the local stores or warung owners who are innovative and enterprising and have high business acumen, followed by Mr Kiam Siap and Madam Supermum, the highly educated modern-day family that prioritises education, health and the well-being of their children.

Other personas are Mr Successful and Mrs Tai-Tai — those who come from rich families in the neighbourhood and have climbed the social ladder — and The Diva and Tech Geek, newlyweds or first-time parents who are young working professionals.

The last persona is the Woke or Truth Generation — Gen Z university students who are ethical and socially driven in their outlook. All seven personas represent customers who shop at Aeon and have different demands and pain points.

Aeon Malaysia wants to cater to all of these personas and is rejuvenating its old malls in order to do so. The first mall that it is rejuvenating is Alpha Angle in Wangsa Maju, Kuala Lumpur — a 29-year-old mall that has seen better days.

To get past managing the mall, supermarket and department stores in silos, Aeon Malaysia now has “what we call the president of the mall as the person who runs the whole premises”, Shafie explains.

“Again, focusing on the personas, what we have done is interview them one by one and start to bring in what they demand.

“For example, for Alpha Angle — which is located in a Malay-dominated area — the Malay consumers shop at our fashion and clothing department, but they don’t shop at our supermarket. On the other hand, our Chinese customers shop at the supermarket, but they don’t shop at our fashion and clothing department.”

Even how the different races want their lemongrass is an eye-opener. While the Malay customers want them long and raw, the Chinese prefer them cut and cleaned, and sold in small packages.

Under the rejuvenation programme, solar panels will be installed in the malls to reduce Aeon Malaysia’s electricity bill as well as to reduce its carbon emissions. In addition, organic waste disposal systems will be set up to convert organic waste into fertiliser.

After Alpha Angle, the Cheras Selatan mall will be rejuvenated, followed by other older malls such as those in Bukit Raja in Klang, Selangor, and Bukit Indah and Permas Jaya in Johor.

Since the transformation programme began, Aeon Malaysia’s earnings have seen a marked improvement. In the financial year ended Dec 31, 2021, the group made RM85.29 million in net profit, more than double the RM41.42 million in the preceding financial year, even though revenue was 10.4% lower year on year at RM3.63 billion.

The segmental profit of its retailing business jumped 66.5% y-o-y to RM129.65 million, despite a 10% drop in revenue to RM3.1 billion.

The decrease in revenue was mainly due to the prolonged closure of stores, totalling 119 days, because of movement restrictions amid the pandemic and lower demand during festivities compared to the preceding year.

Shafie is cautious about Aeon Malaysia’s prospects this year as he says it may turn out to be another roller-coaster year just like 2021. For starters, Covid-19 cases continue to be elevated, which has resulted in reduced footfall at its malls.

The rising cost of raw materials is also another challenge for retail groups, including Aeon Malaysia.

Shafie says Aeon Malaysia will continue to look at ways to reduce costs while driving business through collaborations with partners and vendors.

The counter closed at RM1.50 last Thursday, which values the group at RM2.1 billion. The stock has appreciated 17.5% over the past year, and is currently trading at 24.86 times its trailing 12-month earnings.

Hong Leong Investment Bank has a target price of RM1.78 for Aeon Malaysia, while MIDF Research has a more muted target price of RM1.49. Kenanga Investment Bank has an “outperform” call with a target price of RM1.70, while Maybank Investment Bank has the most bullish target price of RM2.20.

 

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