This article first appeared in The Edge Malaysia Weekly on December 30, 2024 - January 12, 2025

THE year 2024 has been more challenging for some consumer companies than others, with boycotts in the country hurting the bottom lines of companies perceived to be linked to Israel such as Nestlé (Malaysia) Bhd (KL:NESTLE) and Berjaya Food Bhd (BFood) (KL:BJFOOD), which holds the exclusive rights to operate the Starbucks coffee chain in Malaysia.

When news of the boycotts against Western brands broke in the fourth quarter of last year, the share prices of the two companies fell, but most market experts believed it would be a matter of time before the situation ran its course.

Fourteen months on, however, the cumulative financial impact on the consumer players’ bottom lines has proven severe.

When Nestlé Malaysia announced on July 25 that its net profit for the second quarter ended June 30, 2024 (2QFY2024) shrank to RM93.6 million from RM181 million a year earlier, on a 13% year on year (y-o-y) decline in revenue to  RM1.5 billion, its stock price on Bursa Malaysia fell 5% the next day to RM115.90. It dropped a further 6% to RM108.50 by the end of the month.

Its 3QFY2024 net profit of RM85.4 million on revenue of RM1.45 billion did not reflect a marked improvement compared with the RM133.7 million on revenue of RM1.77 billion a year earlier.

For the first nine months of the year, Nestlé Malaysia’s net profit of RM374.5 million was 27% down from the RM511.77 million posted in the corresponding period last year.

Nevertheless, the group announced a second interim dividend of 35 sen per share for 3QFY2024, albeit 50% lower quarter on quarter and y-o-y.

Nestlé Malaysia — whose brands include Nescafé, KitKat, Maggi and Milo — anticipates a return to healthy growth by the first half of 2025. Shares in Nestle Malaysia have fallen 17% year to date (YTD) to close at RM97.80 on Dec 23, giving the company a market capitalisation of RM23 billion.

Note that Nestlé Malaysia never said nor implied that its business was affected by the boycott. In fact, such has been the observation of analysts and market experts.

Similarly, BFood has had a rough year with its share price down 43% to settle at 35 sen on Dec 23. Its market cap stood at RM672 million.

The group, controlled by tycoon and Berjaya Group founder Tan Sri Vincent Tan Chee Yioun, slipped into the red in its second financial quarter ended Dec 31, 2023 (2QFY2024), posting a net loss of RM42.58 million compared with a net profit of RM35.49 million a year earlier. It recorded a net loss of RM33.7 million in 1QFY2025 — its fourth consecutive quarter of losses as the group saw its revenue for the same quarter drop 55% y-o-y to RM124.19 million.

BFood said in August that it had been granted the rights to operate Starbucks stores in Iceland, Denmark and Finland, suggesting that the group has been exploring other markets to shore up its revenue.

Market experts whom The Edge spoke to point out that the boycott situation has come during a period of heightened competition in the market during which consumers have many more options that cater to changes in taste and purchasing power.

“Consumers who have been boycotting these brands are now entrenched in more affordable alternatives (in part also due to taste). Two trends have arisen from this: First, retail chains that have benefited, such as [homegrown coffeehouse chain] Zus Coffee, will probably accelerate the expansion. And, [second], in some cases, the same consumers may now be used to slightly cheaper alternatives,” UOB Kay Hian director of strategy Vincent Khoo tells The Edge.

The Edge in July reported that Zuspresso (M) Sdn Bhd was close to securing RM250 million in private equity funding to support its global expansion, while also weighing a billion-ringgit initial public offering (IPO) on Bursa. It secured the investment from a consortium comprising KV Asia Capital, Retirement Fund Inc (KWAP) and Kapal Api Group in September.

Companies Commission of Malaysia data shows that the coffee chain operator generated a net profit of RM10.15 million on revenue of RM204.12 million for the financial year ended June 30, 2023, through more than 200 outlets.

Another coffee player reportedly coming on stream is US-listed Chinese coffeehouse chain Luckin Coffee Inc, which will be brought in by Datuk Eddie Ong-controlled Hextar Industries Bhd’s (HIB) unit Global Aroma Sdn Bhd (GASB) via a strategic partnership with Luckin Coffee Holding Singapore Pte Ltd. The group is understood to be embarking on an ambitious expansion plan over the next five years, beginning with the launch of a few outlets in Malaysia in the first quarter of 2025.

Meanwhile, QSR Brands (M) Holdings Bhd, which owns and operates the fast food franchise for KFC and Pizza Hut in Malaysia, has been laying low since news broke in April of more than 100 KFC outlets being shuttered amid the pro-Palestine boycott.

As for Al-Salam REIT, which leases real estate to QSR for its KFC and Pizza Hut outlets, the trust has been almost unaffected by the slowdown in QSR’s sales as indicated by Al-Salam’s 3QFY2024 results.

Noting that the outlook for Nestlé Malaysia and BFood remained weak, Hong Leong Investment Bank (HLIB) Research in a Dec 19 report affirms the view that local fast-moving consumer goods (FMCG) players have indeed gained traction amid the prolonged boycott.

The research house points out that brands like Choco Malt and Cream Hauz ice cream by Farm Fresh Bhd (KL:FFB) as well as Gardenia’s NuMee instant noodles have been gaining popularity as consumers opted for domestic options.

HLIB Research also notes that local café chains, including ZUS Coffee, HWC Coffee, Kenangan Coffee and Richiamo Coffee, have been thriving, appealing to a younger and more discerning demographic.

“This dual trend highlights both the vulnerabilities of international brands linked (perceived or otherwise) to geopolitical controversies and the growing resilience and innovation within Malaysia’s domestic consumer market,” HLIB Research says. The research firm has a positive outlook on Malaysia’s consumer sector as it still believes there will be strong growth in 2025, supported by consumer-centric policies, rising tourism and shifting consumer trends.

Kenanga Research is hopeful for better days ahead for players affected by the boycott, with its head of research Peter Kong saying: “We sense the worse is over, but to some extent the recovery [for the players] is differently paced.”

Kenanga Research observes, in its latest report on Nestle Malaysia, that the boycott’s impact is dissipating and that while cost challenges were present, it believes these were mitigated by top-line recovery as demand gradually improves.

(For an idea of the potential upsides for consumer stocks, see table.) The analyst calls and consensus target prices based on Bloomberg data provide clues as to how other research houses view consumer stocks and how heavily the boycott situation actually weighs on the companies’ prospects.

Meanwhile, analysts continue to be hopeful that Putrajaya’s introduction of expansionary policies including a minimum wage increase, civil servants pay hike and EPF Account 3 withdrawals will stimulate spending.

CIMB Securities in a Dec 11 note expects a seasonally stronger fourth quarter boosted by festive demand, which should lead to higher sales volume. Looking ahead, CIMB Securities, which has a “neutral” call on the consumer sector, expects it to register a stronger half-over-half performance in the first half of 2025 as it believes that the earlier timing of festivities in the new year will likely have consumers “front-loading” their spending.

“Overall, we believe that consumer spending power, especially for lower- to middle-income households, will be boosted in 2025. This is thanks to the civil servants salary hike by an average of 13% and potential minimum wage hike to RM1,700,” the research house says, adding that it expects more inflationary pressures towards the end of 1H2025, with the government highlighting plans to rationalise petrol subsidies by the middle of the year.

“This could lead to higher prices for consumers, with consumer names likely to increase selling prices to pass on the additional operating costs.”

Asked whether the effects of the boycott have bottomed out, private investor and seasoned market watcher Ian Yoong says: “The good news is that internet trends have short lifespans, often lasting weeks or months. The boycott will most likely peter out by 2025.”

He adds that because other fast food chains have been observed to have been quick to launch many new outlets and promotions, he believes that a couple of the once-dominant players will not recover their once dominant market share because of the “pretenders to the throne”.

Asked if there could be respite for the players affected by the boycott, Yoong says: “Nestlé Malaysia has experienced boycotts in the past. There were concerns about Nestlé Malaysia’s aggressive marketing of infant formula. The impact of the boycott on the company was mild [by comparison, even if it] lasted a couple of years.”

“The key to surviving a boycott is having a strong balance sheet and diverse strong brands including Kit Kat, San Pellegrino, Perrier, L’Oreal, Maybelline, Alpo and Purina. Nestlé Malaysia will most certainly survive this current boycott. I am less certain about other consumer companies affected by this humanitarian crisis.” 

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