This article first appeared in The Edge Malaysia Weekly on October 19, 2020 - October 25, 2020

ANOTHER form of Korean wave is set to sweep the country. MyNews Holdings Bhd is planning to bring in a leading Korean convenience store brand — CU, operated by BGF Retail Co Ltd.

CU, together with GS25, 7-Eleven, Ministop and emart 24, dominate the convenience store market in South Korea.

In fact, the earnings of convenience stores in the country — with a penetration rate that is among the highest in Asia — were higher than that of large supermarkets last year. CU raked in its highest ever operating profit of 196.6 billion won (RM712 million) from over 15,000 stores.

With a new brand coming on stream, market competition is likely to intensify as the existing local players — 7-Eleven, MyNews, Family Mart as well as KK Mart and 99 Speedmart — have been on expansion mode to tap the growing population and changing consumer behaviour.

However, the relatively weak branding of MyNews is probably the main reason behind the plan to open CU stores in Malaysia. MyNews was listed in March 2016 under Bison Consolidated Bhd, before being renamed in line with its retail business branding.

“The issue is not really with the quality of its fresh food, but the brand name itself,” an analyst with a bank-backed research house tells The Edge.

Inter-Pacific Securities analyst David Lai agrees, saying that strengthening brand awareness is crucial in this competitive landscape. “The quality of MyNews’ ready-to-eat (RTE) food is good, but awareness about the MyNews brand is not prevailing.”

While the new venture looks promising, a key risk is the possible cannibalisation between existing MyNews stores and new CU stores.

Kenanga Research, in an Oct 13 note, raises concern over the possibility that the new CU outlets will overcrowd the already competitive consumer value store space and cross-cannibalise its existing MyNews brand.

One way to circumvent this and alleviate execution risk, the bank-backed analyst says, is to convert some of the existing MyNews stores into CU stores. There are currently 570 MyNews outlets.

“If revenue for CU stores is much stronger than MyNews stores, then it makes sense for them to start converting MyNews stores into CU stores, which I believe they will in the long run. I reckon that this will be the lowest risk strategy for them,” he explains.

MyNews aims to set up 500 CU stores in the next five years, with the first to be opened early next year. It is expected to spend RM30 million to RM40 million in capital expenditure (capex) in the first three years — the targeted break-even period.

Management has indicated that no fundraising activities are needed at this juncture as capex will be funded internally via the previous credit facilities secured for its food processing centre.

MyNews’ cash and cash equivalents as at end-July were RM17.2 million, with RM31.02 million in bank borrowings.

Riding on the popularity of K-pop culture in Malaysia, could CU beat Family Mart, a Japanese-style convenience store chain operated by QL Resources Bhd that has been receiving encouraging response from consumers?

The analyst says as CU has a lot of in-house brands, that could help to extensively expand the product offerings at its stores.

“MyNews has to create the right atmosphere for consumers with more fresh food offerings. It is estimated that 60% of Family Mart’s sales come from fresh food, while for MyNews, it is significantly lower.

“Family Mart’s gross profit margin is much better, underpinned by higher average ticket size. Besides the strong brand name, Family Mart is capable of bringing in new products that address market needs,” he adds.

Kenanga points out that CU stores typically sell a greater share of higher-margin fresh food content (estimated at 70% of total sales), which could serve to boost both top and bottom lines after an anticipated gestation period of two to three years.

For the financial year ended Oct 31, 2019 (FY2019), MyNews registered a lower gross profit margin of 35.9% compared with 38.7% in FY2018.

Despite the weak market sentiment, the bank-backed analyst is not concerned about MyNews’ expansion plan. “MyNews is only planning to open its first CU store by early next year, so they have time to figure out the best locations.”

This will be supported by the still-low penetration rate, as measured by the number of convenience stores against population size, compared with Thailand, Singapore, South Korea and Japan. Citing the situation in Thailand, which has seen cannibalisation for the convenience store industry, Lai says the operators’ main goal is to increase revenue and presence with the right items on shelves.

Family Mart is seen as a successful venture for QL, as the convenience store chain turned profitable in just two years from its establishment in 2017.

The exact contribution from Family Mart is not revealed as it is parked under the group’s integrated livestock farming segment, which contributed 5% to total profit before tax for 1Q ended June 30, 2020.

QL’s integrated value chain gives Family Mart a competitive edge as it can reap higher margins from its products. Also, it is supported by QL’s financial strength — the group recorded a net profit of RM239.32 million for the financial year ended March 31, 2020.

QL, which is the master franchisee for Malaysia, has set a target of opening 300 stores by March 31, 2022. As at March 31, 2020, it had opened 184 stores. The company is investing in an additional central kitchen to support FamilyMart’s growing footprint in Malaysia.

Nonetheless, the Movement Control Order has taken a toll on convenience store operators.

7-Eleven Malaysia Holdings Bhd, which operates over 2,400 stores, saw its net profit for 2Q ended June 30, 2020, plunge 92.9% to RM1.03 million from RM14.59 million in the same quarter a year ago. First-half net profit also halved to RM12.4 million from RM25.73 million previously.

MyNews slipped into the red in the last two quarters, with net losses of RM2.33 million and RM6.09 million for 2Q ended April 30, and 3Q ended July 31, 2020, respectively. Its net profit fell 6.5% to RM24.32 million for the financial year ended Oct 31, 2019 (FY2019), compared with RM26.01 million for FY2018, due to the change in sales mix, price discounts offered to promote and drive sales of the in-house RTE food, and the expected high wastage of the initial rollout of RTE food.

D&D Consolidated Sdn Bhd, which is owned by the Dang family, is MyNews’ largest shareholder with a 57.43% stake.

It closed last Friday at 61 sen, giving the company a market capitalisation of RM416.11 million. Its share price has dropped 45.5% year to date. Analysts’ target prices for the stock range from 48 sen to RM1.05.

The Employees Provident Fund (EPF) has been accumulating MyNews shares in the past few months, raising its stake to 6.08% from 5.36% in March. Meanwhile, Kumpulan Wang Persaraan (Diperbadankan) owns direct and indirect stakes of 2.36% and 2.72%, respectively.

Last week, Aberdeen Standard Investments (Malaysia) Sdn Bhd also raised its shareholding to 5.08%.

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