This article first appeared in The Edge Financial Daily, on April 13, 2016.

KUALA LUMPUR: QL Resources Bhd has budgeted for an investment of RM100 million for its venture into the FamilyMart convenience store chain. And profit is expected to be in the seventh year of investment.

QL told The Edge Financial Daily the group projects the investment to be around RM80 million to RM100 million for the first five to six years. This translates into an average of RM15 million to RM20 million a year, which is less than 10% of QL’s annual capital expenditure.

The investment amount will be funded via internally generated funds.

The group opines that the convenience store business is expected to have a long gestation period, but it believes it will contribute positively to shareholder value in the medium to long term.

“Based on FamilyMart’s track record in other countries, profitability is anticipated to be in the seventh year, barring unforeseen circumstances,” it said, adding that the group’s primary target is to grow the business and meet consumer expectations.

Unfazed by concern about stiff competition, QL is confident of the new venture, based on the population demographics, per capita consumption and lifestyle trend in Malaysia.

“Today’s consumer lifestyle increasingly demands convenience with a comfortable and enjoyable experience. The convenience and proximity retail market is growing, and there’s still opportunities for differentiation and additional players,” it said, adding that there will be demand for convenience-store chains like FamilyMart.

QL noted that the number of population per convenience store is not high when compared with neighbouring countries, such as Thailand.

“There are also opportunities for differentiation from current players to serve consumers better. We will differentiate on quality and [the] variety of food offerings, and consumer experience,” it added.

Meanwhile, QL emphasises that it does not see this move as a diversification, but an extension of the group’s food manufacturing and distribution business.

“Convenience stores are a scaleable business and this is a synergistic way to scale up our Malaysian business in the long term,” it added.

Nonetheless, QL’s share price fell after the announcement of the new venture. It fell 12 sen or 2.7% to close at RM4.32 yesterday.

Analysts have raised concerns about QL’s move into the convenience store business, which is already facing intense competition from the two largest domestic convenience store operators, 7-Eleven Malaysia Holdings Bhd and Bison Consolidated Bhd.

An RHB Research analyst commented that the plan may not bode well for QL in near term as convenience stores are a completely new business for the group, and it takes time for the group to improve business efficiency, margins and gain market share.

As competition will be intensified naturally when FamilyMart enters into the market, he anticipates Bison to be the winner simply because Bison has better margins as it does not need to pay loyalty fees, and it has also optimised its operating hours effectively as only 20% of its stores are operated 24 hours a day.

In terms of expansion plans, he said 7-Eleven has a more aggressive expansion plan as it is going to open 200 stores per year, while FamilyMart will only expand about 60 stores per year.