Federal Furniture all set to get a slice of Starbucks pie in China

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This article first appeared in The Edge Malaysia Weekly, on January 16 - 22, 2017.

EVERY day, at least one new Starbucks outlet will open in China, the world’s second largest economy. The Seattle-based gourmet coffee chain aims to have nearly 5,000 stores across the country by 2021.

The aggressive expansion plan will open a window of opportunity for Federal Furniture Holdings (M) Bhd (FFHB), the sole approved vendor of store sets for Starbucks Corp in 15 Asia-Pacific countries.

After lengthy talks with Starbucks Corp in the past 12 months, FFHB’s plan to venture into the China market and become the fourth supplier of the fittings in Starbucks outlets there will materialise soon.

FFHB is eyeing a slice of the China pie and sees the venture as the next growth catalyst in the near future.

“The China market is huge. We are talking about 500 stores in the next three to five years. They (Starbucks) have told us that there is space for a fourth vendor, more so for a vendor that they have known for 16 years,” Datuk Choy Wai Hin, FFHB managing director, tells The Edge in an interview.

But to tap the lucrative market, FFHB needs to move fast as Starbucks is planning to open 500 stores. While the existing three local vendors have established their footprint there, FFHB has yet to set up a manufacturing facility.

Choy acknowledges that he is now racing against time, but stresses that the company will not miss the Starbucks boat in China.

FFHB will initially lease a tract in Zhejiang, an eastern coastal province, to set up temporary production facilities while searching for a suitable site for a permanent plant.

“The final location will be determined by where our customers are. Starbucks’ growth has always been in the coastal cities, mainly in Shanghai, Beijing and Guangzhou. Now it is pushing inland,” says Choy.

FFHB — which was founded by Choy’s father, executive chairman Datuk Dr Choy Fook On in 1962 —shipped out close to 400 store sets for Starbucks in the Asia-Pacific region last year. These sets were made in its plant in Banting, Selangor.

Over the years, the Starbucks contract has provided a steady income to FFHB. Notably, its export and manufacturing division, which contributed RM31 million or 30.4% to the group’s revenue in financial year ended Dec 31, 2015 (FY2015), derived RM29 million or 90% of its sales from Starbucks.

Considering the logistics costs, Choy says it is not viable for FFHB to ship the store sets to China from its Banting plant.

“To start supplying to China, we will have to begin operations there. Starbucks is expanding into the second and third-tier cities, so we need to set up our plant in the right location,” he says.

It is learnt that one of the three local vendors in China is based in Shanghai and the other two in Guangzhou. As the fourth vendor, says Choy, FFHB needs to gain a foothold in the interior of China, which will allow the company to reach out to the rest of the market.

“We are looking for a suitable site, with a built-up of 10,000 to 15,000 sq m, for our plant in Zhejiang. What we are looking for is a quick start, where we can lease for two to five years, so that we can start producing soon,” Choy says.

He adds that FFHB has set aside RM10 million to RM12 million for the start-up costs, including buying new machinery.

“We need to show our commitment to Starbucks. As a ballpark figure, we are going to spend RM30 million to RM40 million in the next two to three years,” he says.

The Zhejiang plant is expected to commence operations by the second half of 2017 before it makes a financial contribution to FFHB in the first quarter of next year. For the first year, the group aims to supply store sets to at least 10% to 15% of the 500 new stores in China.

At the same time, FFHB has also cast its eyes on another potential massive market — India.

For this venture, FFHB is teaming up with Tata Group, the sole franchisee of Starbucks in India. Choy says this will pave the way for the group’s entry into the Indian subcontinent.

“We need to have all the strategies in place, because India could be moving as fast as China in the next five to six years. But Starbucks needs to build the brand and create a coffee-drinking culture, as India is predominantly a tea-drinking country,” he says.

Choy says it may be a matter of time before Starbucks helps promote a coffee-drinking culture in India as it did in China.

“The younger generation in Bangalore, with its booming information technology industry, is receptive to the coffee culture.”

Besides furniture export and manufacturing, FFHB also undertakes interior fit-out (IFO) projects for hotels. The group operates Kitchen Plus, Malaysia’s largest kitchen and appliances superstore.

While the China venture is expected to generate income next year, FFHB has another income booster in the immediate term — the newly acquired construction business.

In August last year, FFHB proposed to buy a 60% stake in Pembinaan Masteron Sdn Bhd (PMSB), a construction outfit wholly-owned by the Choy family, for RM33 million.

FFHB changed its financial year-end results from Dec 31 to June 30, hence, its next set of results will be from Jan 1, 2016 to June 30, 2017 — a period of 18 months (18M FY2017).

The group is expected to make a profit of RM7 million on revenue of RM200 million to RM250 million, with higher contributions from its construction and export and manufacturing segments, which is likely to be offset by lower contribution from the IFO division.

“Our strategy is to secure two to three major IFO projects a year, so we don’t go all out for the smaller projects; we are rather choosy,” says Choy, adding that the group’s outstanding order book stood at RM8 million to RM12 million.

He says FFHB is finalising a new contract worth RM8 million to undertake major renovation and refurbishment works for JW Marriott KL. The group has just finished an IFO project for St. Regis, and work at YTL’s Hotel Stripes is almost done.

Choy says PMSB will become a major earnings contributor to FFHB in the future. His family is giving a net profit guarantee of RM7 million a year and FFHB’s 60% share of the profit would effectively work out to RM4.2 million.

PMSB draws 100% of its work from Masteron Sdn Bhd, a property firm controlled by the Choy family. Masteron currently has a total gross development value (GDV) of RM6 billion in the pipeline.

One of its major projects is a high-rise luxury condominium, dubbed Aurora Residence, which has a GDV of RM500 million. Aurora Residence is the first phase of the 150-acre Lake Side City development in Puchong, that has a GDV of RM2 billion.

“The construction job for Aurora Residence has been awarded to PMSB, and is expected to be delivered by November this year. The later phases will be launched and PMSB is poised to take up these projects,” Choy says.