This article first appeared in The Edge Malaysia Weekly on May 23, 2022 - May 29, 2022

NEW local and foreign convenience stores continue to mushroom across the nation, reflecting dynamic shifts in consumption trends, notwithstanding the economic impact of the Covid-19 pandemic.

The rapid expansion of convenience stores such as 7-Eleven, MyNews, FamilyMart and CU over the last decade, and most recently emart24 — South Korea’s third largest player which debuted in Bangsar, Kuala Lumpur, last June during the pandemic — may well be attributed to their novelty offerings and ease of accessibility.

Convenience stores, along with mini-markets, provision shops and wet markets are, after all, among the essential trades which have been allowed to operate throughout the pandemic.

A glance at the latest chain to jump on the convenience store bandwagon, South Korea’s swanky emart24, is telling of what appeals to consumers of today. The outlets are technology-­enabled and feature striking interior design as well as an array of imported goods from its country of origin. Street food such as bulgogi chicken cupbap, K-spice cupdak (finger food), claypot ramyun and snow bingsu make for a quick and attractive pick-up, which Malaysians are familiar with thanks to the popularity of South Korean entertainment. There are currently 17 emart24 outlets in Peninsular Malaysia, with its operators planning for up to 50 outlets by year end, and a total of 300 outlets in five years.

The master franchisee behind Shinsegae Group’s emart24 — private equity firm Karin Associates and United Frontiers Holdings (UFH), a company controlled by Mamee-­Double Decker managing director Tan Sri Pang Tee Chew — decided on emart24 when their existing relationship with the (Shinsegae) group presented the opportunity.

Shinsegae carries brands such as private label No Brand, which is sold at local emart24 outlets. Karin Associates and UFH believe their association with the group will lend credence to branding and provide accessibility to launch Shinsegae’s other brands in Malaysia.

Retail analysts and consultants observe that ready-to-eat selections at convenience stores have created a new avenue of growth, contributing significantly to store sales. In the past, outlets had typically relied heavily on the sales of tobacco and other dry items.

“Overseas, it’s common to grab a box of lunch from a convenience store to eat at the desk on a busy day. The grab-and-go trend has taken off here, thanks to FamilyMart’s example when it debuted in Malaysia in 2016 and shook up the industry. Local consumers have since been receptive to buying fresh meals from convenience stores as opposed to waiting in line for takeaways from restaurants in the city or highly populated areas,” says an analyst with a bank-backed research house.

QL Resources Bhd’s wholly-owned Maxincome Resources Sdn Bhd is the master franchisee of the FamilyMart chain.

MyNews Holdings Bhd followed suit with a processing centre in Kota Damansara for the preparation of ready-to-eat meals and confections. In addition, MyNews’ undertaking of the CU franchise had been hoped to give the group an edge in the convenience stores space with its promotions and collaborations with well-known figures and brands.

Meanwhile, 7-Eleven Malaysia Holdings Bhd launched its own café — 7-Café — offering imported drinks and over-the-counter meals and desserts, while consumers turn to foreign brands such as Mix Mart, CU, emart24 and FamilyMart for food products from China, Japan and South Korea.

“Such novelties have contributed to the chains’ popularity as most people have not been able to travel during the pandemic,” Retail Group Malaysia managing director Tan Hai Hsin points out.

He adds that the popularity of the ready-to-eat meals concept even prompted mini-­mart players such as KK Mart to launch several KK Concept Store outlets in the Klang Valley focusing on ready-to-eat meals, while confections player Moonlight Group tested a similar idea known as Moonlight Concept Store in Johor Baru. Also in the mix is the Uncle Don’s restaurant chain, which debuted with UD Express, a food and beverage express store retailing pre-packed food products and a fast food counter.

Chris Eng Pooh Yoon, chief strategy officer of Etiqa, Maybank’s insurance and takaful arm, notes that the growth of convenience stores is happening amid a downsizing of retail formats.

With hypermarkets declining in attractiveness globally over the last decade, retailers have progressively downsized shopping formats to smaller stores and marts to appeal to patrons who value convenience and time saving. In the 1990s to mid-2000s, large-format stores were popular as they offered the convenience of shopping for numerous household items at discounted prices. However, the attraction has waned with the rise of niche offerings at smaller outlets, available in commercial centres and residential areas, and at competitive prices.

In addition, Eng notes that affluent patrons favour shopping at upmarket stores. While the offerings of grocers and convenience stores vary vastly, their popularity reflects the sustained downward shift to small-­format stores, a trend which he believes is here to stay. High-end grocery and convenience franchise chains debuted in the Klang Valley, followed by second-tier cities such as Penang and Johor Baru, he adds.

“Most convenience store operators intended to open in shopping malls but after Covid-19 hit, many mall-based convenience stalls were shuttered, leaving players to focus on standalone units instead for better flexibility,” Eng recalls.

Tan points out that within the segment of small-format stores, operators branch out into niche shops specialising in snacks as well as fruit and vegetables. In addition, there are operators of ethnic supermarkets such as Jaya Grocer’s Korean Grocer in 1 Utama E, and Don Don Donki, which sells a wide variety of Japanese food.

“The success of every small-format stores’ business model hinges on their focus and product mix. One player entered the market with a smorgasbord of everyday goods, but it has not taken off,” observes a bank-backed research house analyst who does not want to be named.

In spite of the increasing competition from new foreign arrivals with exciting value propositions, existing players continue to be optimistic about the growth of their brands.

“Yes, it is a competitive market but it still has legs. There is room for growth in the industry as the operators’ success depends on each brand’s value proposition and business strategy. Fresh foods are where the high margins are compared with dry goods, which typically formed the bulk of convenience store offerings in the past. Although some operators are still doing that, most players are pivoting their business models to focus on sales items that can defray overhead costs,” says the analyst.

MyNews’ ambition to have 500 CU outlets within five years of opening its first store on April 1, 2021, however, has drawn questions. The group is charging forward despite the fact that it marked its eighth consecutive quarter in the red after registering a net loss of RM8.84 million for its first quarter ended Jan 31, 2022 (1QFY2022). This came on the back of a 40% increase in revenue to RM139.44 million from RM98.65 million previously. The group opened 18 CU stores last October, after the lifting of the full lockdown, and then 40 more stores in 1QFY2022.

Currently, the group has 465 myNEWS outlets, 88 CU stores and 14 WH Smith stores.

Analysts have pointed out that MyNews’ underperformance was mainly attributable to a triple whammy of higher-than-expected operating cost (RM34.6 million), depreciation of property, plant and equipment (RM6.4 million) and lower-than-expected gross profit margin of 31% because of heavy start-up costs in establishing the CU brand and outlets.

In addition, the gestation period for CU’s business operations is expected to be prolonged as MyNews grapples with rising costs of labour, renovation and heavy marketing expenses during the initial stages of store expansion for the South Korean brand.

“Traversing through the pandemic, we had been closing a large number of stores that were badly affected by the pandemic and had little recovery potential. Our normal pre-pandemic annual rate of closures was between 6 and 10 stores but in the first year of the pandemic, we closed 100 stores. No doubt our new openings rate is rather aggressive and has hit our bottom line, but it is a scrap-and-build approach which has sped up our business recovery. We are preparing for the future by staying competitive by increasing our scale and introducing new concepts. Thus our confidence in quickly rebuilding for recovery instead of waiting,” MyNews founder and group CEO Dang Tai Luk explains to The Edge, stressing that the group’s losses sustained in 2020 are temporary.

The group’s strategy to return to profitability within a year includes extended business hours, improving its product mix and offerings to increase customer count and ticket size, growing more CU outlets to improve the utilisation rate of its food processing centre to improve its profitability as well as enhancing its e-platform by working with more delivery partners.

Over at FamilyMart, underpinning its rationale for expansion is its top-line growth. UOB Kay Hian research analyst Philip Wong pointed out in an April 22 note that FamilyMart, from its first store launch in November 2016 to the present day, had not only caught up with established competitors, but exceeded some of them by measure of its revenue base of more than RM500 million, overtaking that of MyNews (FY2021: RM401 million) and forming 25% of 7-Eleven’s operational revenue base.

Wong said the Japanese franchise, which has been categorised under QL Resources’ integrated livestock farming segment, will soon be disclosed as a standalone segment now that its revenue base makes up more than 10% of the group’s. In terms of store footprint, FamilyMart had 285 stores as at end-March and is due to reach 300 stores by mid-year.

Wong added that the chain operator is due to open 80 stores per annum, skewed towards residential suburban and Tier-2 cities, while its franchise programme to accelerate the stores’ nationwide footprint is still being reviewed.

For arguably the oldest player in the country, 7-Eleven Malaysia Holdings Bhd, the analyst who does not want to be named forecasts a positive outlook given its higher store traffic and average revenue per store amid the easing of movement restrictions. The group is understood to be opening about 100 new stores this year.

“As consumers readjust to post-pandemic routines, dry and fresh food uptake at its stores will continue to increase, potentially leading to margin expansion,” he says.

Year to date, shares of MyNews are down 21.56%, closing at 65.5 sen last Thursday for a market capitalisation of RM447 million. 7-Eleven has slipped 6.7% to RM1.40 from RM1.50 but QL Resources is up 5.9% to RM4.84 from RM4.57. The market values of the companies are RM1.73 billion and RM11.78 billion, respectively.

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