Tuesday, March 25, 2014

My Parkson Store Visit in KL (Part Two)

Let's move on to Part 2 of my Store Visit in Parkson, Kuala Lumpur.

For my readers who miss part one, you can find the information here: http://www.ktwealth.blogspot.sg/2014/01/my-store-visit-parkson-kuala-lumpur.html

In-store Promotion, Marketing and Branding

There are some catalog and booklets available that showcase the latest deals. During the Chinese New Year, Parkson launches hamper sets to mark the auspicious Year of the Horse. There are also discounted offers for various merchandises.

The problem is, the promotional materials are placed at the Customer Service Centre. One whole stack. It's not distributed to potential customers or placed in prominent points of attraction in the department store. For example, the decorated entrance of Parkson where you can have a table to place them or get Promoters to give out and talk about it. This is in consideration of the festive mood. The advertising visuals are printed in attractive designs and colors. Sadly, in my humble opinion, the implementation needs further improvement. This explains why few people (based on observation) take copies and walk around. If they do, they would probably spread via word of mouth communication, take photos, upload and share with their friends via social media platforms.

Secondly, I did not see any standees or signage pointing to any strong promotion. Neither did I heard any interesting deals mentioned in the store. For instance, "Deal of the Month". Footfall is lacking and the best period to boost sales is through seasonal period. So, the short term marketing hype may facilitate traffic but I did not witness any of them. However, Parkson does have loyalty card membership which I find it interesting. You can check it out through their website or drop by any outlet to find out more details. Probably it's better if the card membership marketing is a little more aggressive, considering the highly competitive retail landscape in Malaysia.

Service Staff

I do not expect any first-grade service like what you see in 5 star hotels. At least the minimum of serving customers with a smile is important, especially the warmth, making sure customer experience and mood are co-align positively. Such gestures come naturally. One has to take a pinch of salt as there are different ways of customer interaction. Think of Robinson. In Singapore, when you buy shoes, the Robinson staff gladly serves you, of course when you treat the service staff with similar respect. In Parkson, although the crowd is thin, I notice staff are not really that enthusiastic or take the initial approach to greet customers. A few did when customers inquire more questions. Not sure but a successful brick and mortar store needs these intangible for better recognition - get customers to remember you. Most want that level of personal connection.

Merchandise Mix

The crockery and pot section appeals to me because of the wide varieties and brands. In the apparel and footwear section, there is no popular premium to middle class brands, except a few which may not be familiar with the general public. In the Pavilion mall of Jalan Bukit Bintang, there is Armani Exchange and Zara standalone outlets. Question is, how will Parkson bring in unique brands that has the pull factor? You need specialty to highly sought-after brand offerings to increase concessionaire sales, part of Parkson revenue streams.

In the Beauty & Cosmetics section, as many brands are evident in other outlets like Estee Lauder, Clarins, Laneige, therefore the outlay and display counters may make a difference. Just imagine a U-shaped layout where perfumes are placed strategically to trickle one of your five senses.....are you attracted to stop, take a look and browse around? Another alternative is to built in fancy counters for individual brands that do not represent the common design. It's to catch the attention of the shopper and indulge him/her with the latest products. Takashimaya Singapore revamps their surroundings and more shoppers turn their heads to the perfume area. I hope Parkson may look into this and capture the wild imagination of the customer.

Conclusion

There is no foolproof way to ensure retail sales will remain consistent. A successful store depends on factors like deeper service engagement between customers and staffs, great atmospherics, excellent in-store promotion, continuous loyalty card awareness, wide merchandise mix and appealing layout. Parkson, in my sample store visits, did not perform to what I thought it may be, thinking that the Chinese New Year period may drum up something special. Honestly, I am disappointed.

On the contrary, it does not mean I am not sticking with them. I believe in the business fundamentals of Parkson, for instance their low debt level and concessionaire sales business model. Just that, I dress up as a mystery shopper, providing a real life perspective from consumer standpoint. It may not be 100% accurate for sure but can be used as a guideline for Parkson to innovate and readily adapt to fast moving consumer trends. Hopefully, Parkson will take concise plans to strengthen long standing relationships with current customers while aggressively capture new customers (middle income groups) through their ongoing Parkson Elite Card membership program.

Monday, January 27, 2014

My Store Visit @ Parkson, Kuala Lumpur (Part One)

I was on a business trip in Kuala Lumpur about two weeks ago. Part of my agenda was to make a store visit to Parkson. I have brought my self-made store survey sheet with me and narrowed down to two Parkson outlets for sampling – The Pavilion at Jalan Bukit Bintang and Suria KLCC. It made perfect sense since one was centrally located and the other a popular shopping street. I would use Parkson, The Pavilion, Jalan Bukit Bintang, Kuala Lumpur.

Considering the festive season during this month, I was expecting a sizeable dose of crowd in the department store, buzzing in-store promotions, aggressive promotion and enthusiastic staff. My brief analysis is found below.

Part one:

External Layout and Location, Store Appeal @ Entrance, Atmospherics, Displays, Lighting, Fixtures and Fittings

Part two:

In-store Marketing and Branding, Service Staff, Merchandise Mix and Final Conclusion

Please note that I am not a store expert. I used my intuition and observation, taking the perspective of a regular mid-class shopper who liked fashion trends. Therefore, it’s purely a humble opinion. I can’t also possibly show all pictures, just published a few for explanation.

External Layout and Location

At The Pavilion, Jalan Bukit Bintang, the store was visible, location prominent and easily accessible in the shopping mall. To find Parkson was not difficult as the signage stood out clearly. On the 2nd level, Pedro, Charles & Keith were situated just beside Parkson. I pranced around Charles & Keith to observe the traffic flow. Several shoppers were trying the shoes or walking in and out to browse the latest designs. It could be imaginable that they would drop by Parkson to shop due to the direction of footfall out from both stores. Especially when there were Chinese New Year decorations, flowers and lanterns hanging at the entrance of Parkson. Unfortunately, few people took the steps to venture towards Parkson.

Store Appeal @ The Entrance

In my opinion, it was enticing to take a step forward into Parkson. Parkson arranged a set of flower combination to grab shoppers’ attention. There was calligraphy at the entrance, asking people to write their surnames, nicknames or funny names for a fee.

That said, I did not have a magical feeling upon entering Parkson. No aisle promotion, no Chinese New Year offers, no special merchandise counters, neither any fast-moving item that shoppers could buy on impulse. For example, small perfume bottles wrapped up or “buy as you go” food & drink hampers. Actually, more awareness and interest could be created if Parkson displayed their catalogue at the store entrance or get a group of Promoters, at certain timing, to distribute them out. Increase the vibe smartly, get the crowd trickling in.

Sadly, I realized about the hamper offers and in-store discounts when I dropped by at the customer service booth. Imagine if I did not….so, it seemed that I was getting into a typical department store which did not raise the marketing hype.

Isn’t it Chinese New Year mood now?

There was no unique store appeal that differentiated Parkson against the rest of the retail outlets. If I were to do a direct comparison to Isetan, it’s slightly different. Isetan had a Chinese New Year promotional standee, indicating that you would get something upon purchase. One would not miss before entering the store. This might incite any individual or family to explore Isetan further.

Store Navigation, Flooring, Fixtures, Displays and Atmospherics

Parkson has clearly-defined perimeters that helped shoppers move around at ease. It’s also easy to find your choice of apparel and cosmetics in well-arranged selection of goods. Cosmetics and perfumes were found in the first level followed by women’s apparel at the next level and men’s clothing next. The flooring were polished and shiny, clean and sparkling at the cosmetics and fragrances level (after all, who does not wish to look good!). The sales counters were brightly lit while brands were large enough to be spotted from afar (e.g. Laneige, Estee Lauder). Spotlights strategically placed to make the merchandise appeal to the eyes. Fixtures appropriately installed to showcase the perfumes and cosmetics on displays. It’s about the scene, feel and sight. This explained why cosmetics and toiletries make up the second bulk revenue contributor of Parkson concessionaire sales.

At the apparel level, lights started to dim and the tiles became dull but non-slippery. At the outlook, this section looked like a normal department store. Apparel stood out as per normal with mannequins decked out. There was a lack of attractive color combination used in lightings, tiles and fixtures - for any individual counters and in-store layout. Moreover, design of the furnishings and fittings were standardized, nothing extraordinary. Should your goods be marketed to the young, a good dose of trendiness would provide an experience and positive impression to them.

Yes, the keyword here is “Shopper’s Experience”. It’s powerful to get your wallet out. Certainly, I was not enticed from my walkabout, as you can see from the image above.

Allow me to provide an example to talk about “Experience”. In the new Robinson department store at Heeren Orchard, Singapore, the perfume counter attracted several shoppers to browse around due to the open concept, quirky furnishings and bright lights. Perfume Promoters were able to interact freely and re-enforce their product offers while shoppers took the time to move from side-to-side, admiring the packaging and new product development of each brand. Every detail of the atmospherics cumulated into a fun and engaging feel and your first thoughts might think “oh people, look at how the cabinet display is!”

Remember the five senses?

A picture of Robinson perfume section below:

In short, he overall atmospherics in Parkson did not manage to capture any particular essence that might exemplify the perception of the brand. The in-store graphics and signage were not attractive. The music backdrop played the repetitive Chinese New Year songs which could be a little irritating to the ears. Not that I dislike, I loved them completely. Just that, a mix of classical music or whatsoever and Chinese New Year pieces must blend in subtly into the store environment, giving shoppers the surreal feel – such that they would return back again for the EXPERIENCE.

I would continue my second part of my store visit commentary soon. To be continued…

Sunday, September 15, 2013

3 trends to watch out for

I just returned back to Singapore from the Scandinavian islands not long ago. It has been a wonderful trip personally, culturally and historically. As I marvelled over the great natural wonders of Iceland, I am completely intrigued by the formation of the lava fields, hot springs, hot mud, gorges, glaciers, icebergs to waterfalls over the years.

There are no words to describe the stunning landscape. Just like the rush of the waterfalls, the financial stock market is filled with quick opportunities for us to capitalize.

So, I will like to write about 3 trends to watch out for in 2014 and beyond. Do kindly note that the information is consolidated in a nutshell. It is based on my personal observation only.

(a) 3D Technology

Forget about 4D, 5D for now. Let’s look at 3D. 3D LED TV has been disappointing although it has been launched in the market for quite some time. This does not mean other 3D equipment, hardware and software will falter. In fact, a deeper look into some of them may yield positive surprises. 3D Printers, 3D Holograms are some examples. 3D Printers, after patented, may revolutionize manufacturing as goods produced on a new platform. In 2012, China’s Ministry of Industry and Information Technology launched an initiative to fund ten research houses devoted to 3D Printing. Do you happen to find regional/niched technology firms that specialize in specific areas of 3D research? If so, it may be worthwhile to take a magnifying glass and study the company further. Make sure your lenses are 3D as well!

(b) Data Storage

From portable HDD and CDs, we move to cloud computing. We transit to digital storage like Dropbox, so that files can be shared intermittently. It seems the social community and corporate environment needs to store large chunks of data and images - with ease and convenience as we get highly connected globally via virtual portals. Companies have sought to ride on the demand by building data centres or design storage software that offer security and added features. Firms sell their software licenses to business through subscription without incurring huge fixed overheads. With a need to store more information and to pull details out easily through dedicated servers, probably this is a trend to watch out for in the next future.

(c) Health & Wellness

There is an emphasis to maintain a healthy lifestyle as there is an increase in cases of cancer and cardiac arrests due to stress factors like high work expectations. To keep fit, Singapore organizes several large-scaled marathons. In some parts of Scandinavia, their lunch diets are mainly salads and fruits. Australia places focus on organic vegetables and food. Therefore, OTC (over the counter) drugs and vitamins that highlights the health benefits will become a necessity for health-conscious buyers. This also includes aliments sold in retail pharmacies. Regional pharmaceutical firms that produce prescription drugs have also diversified into tonic and herbal drinks. The challenge here is to produce an applicable, licensed healthy product that harnesses worldwide acceptance and scalability. In our local market, firms like Cerebos and Haw Par have taken their brands global. The key idea is to spot a similar company that anticipates future medical predicament in specific countries while taking control of their cost-based supply chain and distribution network.

More trends to come and I will blog about them soon.

Tuesday, January 15, 2013

Interview with FFN - my investment life

I was asked by FFN, a fellow acquaintance in the investment community, to share my thoughts on investment (thanks FFN!)

Below is the interview extract:

FFN: How did you get interested in investing and who inspired you to get started?

Ken: It started off with my former colleague in the education industry about five years back. He hinted to me that the opportunity had arrived as there was widespread negativity in the worldwide markets.

When I queried further, he strongly encouraged me to take the year-end bonus and buy into shares of companies. At that time, I have almost zero knowledge about investment and thought that the stock market was a risky game of money.

I was a salaried worker and the point of purchasing something that can’t be touched and felt was not attractive to me. Few days later, his words of wisdom struck me when I self-reflect. Something came upon me. I researched online and discovered that my perception was one-sided. Slowly, my interest and knowledge developed when I continuously studied about the dynamics over the past two years. I bought into property stocks as I figure the time to buy is at the trough of the cycle – the trend is shaped by foreclosures and debt overruns.

Ironically, I met my same colleague two years back and he did not put his words into action, thus missing out the chance of cheap valuation during the global financial crisis!

FFN: What was your life like before investing and how is it now?

Ken: My belief was to work hard like any normal employee while getting my pay cheque every month. However, I found that my life was no different than a rat on a wheel. When the motion stopped, my income drastically dried up. And how would the rat survive?

Now, I am delighted to create multiple streams of income via dividend from my shares, my full-time job and other ad-hoc tasks. I do not need to solely depend on a single source and worry strongly about the financial lid. The key is to ensure that you are managing your investment like a holding company where the firm, like yourself seeks opportunities to grow her bottom line – for example enter new markets (new source of income such as buying assets to create more assets).

FFN: Where and how do you look for companies to invest in?

Ken: The world is full of information. However not many is able to extract the essence and develop into an investment thesis. You do not need to be a qualified analyst. Look around you and notice that we live in a marketing zone. The various products and services offered would paint a trend as demand increases for specific goods. For example, luxury timepieces and jewellery are well sought after, not just the wealthy but the growing middle class segments as their wages rise across Asia.

Therefore, prior observation may help. Another possible way is to pick out top five reading sources to grasp investment ideas. These are your daily newspapers, online journals to short business articles. Pick up an interesting commentary from your top five, write it down, reflect and find out the growth drivers behind it. Do you understand about the story and where this leads to?

This would help to start off a topic of your interest (if you know what’s going on) and probably the next potential story to reap future returns while Mr. Market has not taken any notice yet.

FFN: You are well-known for your brand of qualitative analysis. What are the things you look out for when researching into companies?

Ken: To put it short on qualitative basis, I would ask the basic questions first such as how does this business operates, the origin of their revenue, how majority of the company funds are spent, the company track record and in what way does the management plan to take the company forward (forecast).

Most importantly, what’s special about the firm’s capabilities such that the drawing power to generate revenue is great? For instance, it could be cost leadership to product differentiation.

Combine with the state of the industry to future trends expected, so that you will gain a wider perspective. Lastly, if you can, don’t be an armchair researcher only.

Talk to professionals in the particular field, invite them for coffee or link up with them via social media, so that you can ask questions (give something in return like a barter trade). Cross-regulate the details with your primarily observation and secondary research.

The truth is – if I do not understand the dynamics of the above, I will not be able to comprehend their business model. I will invest through my circle of competence and key areas that I know well. At least, I will sleep comfortably and focus my energies on other worthwhile things in life!

FFN: What are the mistakes you have done pertaining to investing and what are the lessons learnt?

Ken: When I first started, I bought into shares of companies based on the recommendation of brokers. I did not realize the true nature of certain businesses such as soy-based businesses. What made it worse was I did not exit early and that the advice by analysts changed fast. When I reflected back, I realized that my knowledge in this field was minimal. Furthermore, I did not stick to my principle but was lured to the promising returns by looking at the depressed share price only. The price went lower and lower and I sold it at a loss. Eventually, the company was suspended from the stock exchange due to corporate governance lapses. I believe the fundamentals of the company to the business model remains essential in the first step towards sound investment.

FFN: What psychology do people need to succeed in investing?

Ken: Be confident of your own abilities in investment and avoid the market noise. If you have a sound plan and did prior research, stick by it as you know your strengths well.

Wealth comes at a price, not a gift.

FFN: How has the investor in you evolved over the years?

Ken: I have learnt to invest based on my strengths, not to overly diversify and to void out the unnecessary destructive market noises. You just need a few “ultimate winners” in your portfolio.

FFN: What advice would you give for beginners who want to start investing?

Ken: Set aside a small fund to buy up the common shares of the companies. The objective is not to make a profit but to put your strategy into real-time action. Through the experiences and mistakes made, you can find out the type of investor profile while polishing your investment skills. Then, you can cater the relevant asset class to your goals and expectations. You can have a wonderful reference figure to learn and replicate but your investment style is uniquely YOU.

FFN: What do you thing is the biggest misconception people have about money?

Ken: To be rich is to take shortcuts and this explains why money scams exist always!

FFN: What is the one thing, in your opinion, do people need to succeed in investing?

Ken: EDP– Effort, Patience, Discipline

FFN: A parting shot for the readers?

Ken: Have fun while investing because true interest breeds success

You can visit FFN (financially free now) investment blog at: http://financiallyfreenow.wordpress.com

Tuesday, January 1, 2013

Parkson Retail Asia

Happy New Year to all my readers!

I will like to touch upon an interesting company – Parkson Retail Asia. As usual, my article focuses on the qualitative insights since there are sources on the firm’s financial health.

The roots begin when Parkson Holdings Bhd was incorporated on 26 August 1982 as a private limited liability company under the name of Amalgamated Cement Mills Sdn Bhd. In 1988, it changed its name to Amalgamated Containers Sdn Bhd.

It was publicly listed on Bursa Malaysia in 1993. It is now an investment holding company with stakes in Parkson Retail Asia and Parkson Retail Group Limited, listed on the Singapore Stock Exchange and Hong Kong Stock Exchange respectively. Lion Group owns Parkson Holdings Bhd.

As a major department store retailer, Parkson is Malaysia second largest operator with 37 stores, 20% market shares as of 2012 (source: The Edge Singapore, December 31, 2012). The number one is The Store Corporation with 26% market shares as of 2012, the only local retailer with outlets established in every state of Peninsular Malaysia. Parkson key focus is in emerging growth markets across Southeast Asia. Apart from Malaysia as their stronghold, Parkson has overseas presence in

1) Vietnam - 7 stores, number one department store retailer in retail market shares

2) Indonesia - acquisition of Centro Department stores from Indonesia Sentosa’s Group

According to Parkson company data as published in DMG report, majority is fashion and apparel (55%), 27% is cosmetics and accessories, 14% household and 3% is groceries. Parkson private label apparel products include Linea and Alexander, Dis Direction and Weekenders which are positioned to middle and high end consumer groups. This would be Parkson market segmentation. Southeast Asia middle class professionals will continue to grow as wages rises which make business sense for Parkson to target their loyalty campaigns to them. Therefore, Parkson offers them unique shopping environment and premium brands such as Gucci, Diesel, and Replay. In addition, imported cosmetics are highly sought after by this range of income class.

Parkson refreshing concept

Case in point – In early December 2012, Parkson launched the Shape Sensation Concoon by lingerie maker Triumph at the women’s undergarments section at its KLCC store in downtown Kuala Lumpur. Female shoppers are able to try on Triumph’s latest Shape Sensation range in the privacy of an enclosed cocoon and receive fitting consultations by qualified sales assistants.

To sustain the competitive advantage in the crowded store-based retailing marketplace, primarily the non-grocery sector, Parkson believes in creating new concepts and layouts just like the example above. You can’t simply just price the goods cheaply through bulk volume or import foreign brands, have year-end sales and hope for revenue to jump two to three fold. Simply put, innovation with tenacity to capture the typical shoppers’ mind is the key to gain repetitive customers and this is what Parkson has done while monitoring the markets closely. It is a double edged sword because if you do not meet the customer’s expectations and focus on the declining product/marketing mix, you can probably end up frustrating your bottom line (think of Marks & Spencer women wear – any style?).

Online shopping

One may mention about the rise of online shopping against brick and mortar shops. Yes, there is the explosion of group buying website in China and parts of Asia. Yes, there is the convenience of finding what you need or probably head down to your nearest apparel shop, get the information and purchase through the internet since the goods are cheaper.

Mr. Alfred Cheung, group CEO of Parkson Retail Asia, figures that online shopping in Asia will eventually make up 8% to 14% of the entire market (and that’s not huge). In October, Parkson has launched an e-commerce portal that enables customers in Malaysia to order merchandise online. Cheung plans to replicate similar systems over time across the overseas markets.

What this means?

As of now and probably the next few years in Asia, due to host of factors like household nucleus, consumer demographics, shopping patterns and most importantly, the sense of touch, feel and be complemented by your friends when you match with different designs of clothes - give the possibility of department store format to exist. Predominantly, department stores have the ability to capture much larger market shares. A general observation of apparel retailers is to take a walk down the cashiers’ queue, H&M in Orchard, Singapore. Overseas, families shop for clothes and footwear in malls at Indonesia.

Parkson recognizes the e-commerce threat, takes the first course of action in local market yet understands that consumers prefer to shop in groups or with loved ones, so their strategy concurs with store openings.

There is an exception with specific products like books and music. No matter how you flip the book, the contents remain unlike fashion where different personalities carry different characteristics. Looking through the fitting room mirror combined with excellent atmospherics, a piece of scarf, wrapped with a long sleeved shirt and tailored light pants weave the magic in a particular individual. You can't get that experience through online. Then, there is the unknown cyber crime

Secondly, larger Apparel Retailers are complementing their merchandises with their exclusive websites – not to shift the buying completely online but to introduce new merchandises and induce their customers to head down to the stores to buy. Social media builds up the hype.

Downsides of Parkson:

1) Foreign exchange since earnings are captured in local currencies

2) Overly dependable on concessionaries (see explanation in later paragraphs)

3) Country risk such as main revenue contributor is from Malaysia

4) Competitive pressures from major department store operator like Isetan, Takashimaya

5) Unlikely profitable in short term - department stores take 3 years to entrench their position

Expansion pipeline

1) In September 2013, Parkson will open its first full-fledged department store at the St Moritz, an upmarket shopping mall, Puri Central Business District, West Jakarta, Indonesia

2) Foreign operator - expand to the recently liberalized economies of Myanmar (slated to open in March 2013) & Sri Lanka through partnerships with Yoma Strategic Holdings and Odel respectively. Parkson forms a joint entity with Yoma with 70% stake

3) In 2013 - 2014, Parkson likely to be the first department store opened in Phnom Penh, Cambodia

4) More stores opening up in Malaysia and possibly Cambodia etc.

Why Parkson is appealing

1) Potential growth story in Asia in mid/long term plans - first mover advantage and experiences in penetrating across emerging markets of Asia as Parkson built a track record in Vietnam and China over the years

2) Methodology of how revenue is earned - The Group enters into concessionaire agreements with certain suppliers (known as concessionaires) who display and sell their products in designated areas of the stores. After collecting the payment from the customers, Parkson draws out 15-30% commission (excluding groceries and perishable products) from the total sales of the concessionaires and remit the rest to them

3) Asset light business model – the concessionaires bear the inventory costs, fit-outs, selling and shrinkage charges, repair and maintenance as ownership belongs to them. What Parkson provides is the general lightning, space, and customer service training

4) Management is optimistic yet not overly aggressive in entering new frontier markets like Sri Lanka, Indonesia and Myanmar. Their acquisitions and partnerships enable Parkson enter untapped markets in the region quickly with lesser risk, thus managing their debt and preserving effective cash reserve for attractive opportunities. For example, the first store opened in Myanmar is relatively small (one-third the size of a typical Parkson store, which spans 100,000 to 150,000 sq ft) and is a good platform to test the market, build up a talent pool, launch advertising and promotional campaign and assess local consumer trends and behaviour before developing further plans. If Parkson proceeds ahead to open a larger outlet, their CAPEX will increase alongside with new stores and refurbishments

5) Caring service to strong consumer loyalty programs – for instance, Parkson has enhanced the shoppers’ experience by including an escort service to the multi-storey car park, as well as porter, wheelchair and delivery services

Conclusion

In summary, the point of Parkson venturing into high growth areas like Myanmar to Sri Lanka make the investment attractive. For me, I am vested into Parkson and have taken into account the advantages and disadvantages. In future, I hope is that the proportion of revenue streams of Parkson can be increased through house brands (student Fashion Designers, linking with design schools), rental income (sublease to fast food outlets, restaurants, salons etc.) and retail consultancy fees. Thus, Parkson earnings will not be impacted largely by concessionaires as the agreements are renewable and there is always the slightest chance of the suppliers moving out to their exclusive stores.

As of now, I do not expect earnings to increase in FY2013 but await the story to ripen in the next few years- value to significantly grow and unlock over the longer term. 2013 is a year to watch for Parkson with their new store openings. I am not too overly concerned over the current sluggish price but will add more to my position should the share price drops further.

Friday, November 2, 2012

Hotel Room Investment

I sold Ho Bee recently and earned some profits as news and layout of Metropolis was publicized and featured by the local media. Previously, I bought more Ho Bee post ABSD announcement (Additional Buyer Stamp Duty), so the price locked in was relatively "under-valued" against revised NAV (net asset value)

Back to properties - today, I will like to touch base upon the idea of "buy and lease out a hotel room". Ignore the details below if you prefer hospitality REIT.

Please do your due diligence - this article is for reference only

OVERSEAS HOTEL ROOM INVESTMENT (INCLUDES SERVIED APARTMENTS)

Picture the concept - invest in a fully-furnished hotel room overseas, so that you actually own it and you turn over to a Professional Operator (i.e. Property Manager/Developer) for a medium to long term to manage it. In return, they pay you a monthly rental income

Here are the benefits given to you, as an investor:

1. The property/hotel operator offers guranteed returns, as much as 6% annualized yield for the first 4 to 6 years

2. You might be thinking of your next travel gateaway because there is free stay given for x limited of days/weeks

3. To make it attractive, some firms will offer free 2 years maintenance

4. The property/hotel operator will indicate that the chance of zero occupancy for that hotel is rare, so there will be medium to high chance for your room to be leased out

5. You are the proud owner of a well known hotel room/serviced apartment

Such hotels and serviced apartments for investments are common in Australia, New Zealand, Malaysia, Thailand, Philippines, Britian and America.

Let's look at the considerations:

1. The hotel should sit on a prime site that is near to transport, food & attractions as demand is stronger. Therefore, your room leased out can command a higher rental fee and thus provide you with healthy monthly cash flow

2. After first few years of "guaranteed yield", you might need to re-negotiate with the Hotel/Property Operator for a new "sales & lease agreement". Hence, you need to anticipate, after the lock in yield period, will the property climate of the local market weak or growing which is one of the few reasons where the Operator may discuss terms favorable to them.

3. Expenses such as stamp duty, legal and title registration fees, applies. It is no different from residential or commercial unit. You will also need to pay monthly upkeep (i.e. hotel expenses) - it is deductible from the total revene.

4. Till date, a check with local banks in Singapore does not offer loans on hotel room investment. Usually, you need to find the banks where the property is based. For example, if the hotel is located in Australia, Westpac could offer financing to Singapore investors.

5. Property investment outside Singapore cannot be funded by CPF savings.

6. Check if the Professional Operator is an established player and has good track records/well experienced in such transactions

7. Read the fine print of the agreement and find out in details the expense breakdown. For example, housekeeping are charged to investors at a huge percentage, despite the Operator getting a large cut of the profits

8. Rental return rate is dependable on occupancy rates, so it fluctuates from month to month, unless there is a guranteed fixed return (i.e. most operators will provide such incentives to you). Good thing is, rarely there is zero occupancy for hotels or serviced apartments

9. Investors should note that the market for the sale of hotel rooms is less developed and therefore they may find it LONGER to sell off their investment. When this happens, you will incur monthly upkeep expenses and opportunity costs. What you get is probably monthly rental income only. Do your calculation and assess if your initial outlay + maintenance will be more than your returns for a specified time period

Personally, I find the guranteed yield attractive for a certain period of time. However, I have to study the risks involved. Overall, the nature of the investment and returns should match my profile and objective. For instance, if I am looking to sell my properties 10 years from the date of purchase, I am not sure if my hotel room can be sold to another potential buyer since some local markets are less developed. Plus, the longer I wait, the more monthly expenses incurred (i.e. rooms are well maintained). Not to mention my cashflow is tied down and not possible to release for other attractive opportunities (unless I am wealthy :)).

Nonetheless, it's good to know that such property investments are available.

Saturday, August 11, 2012

The Hour Glass

It has been a while since I last pen out my thoughts about companies as I have been busy with my coaching work.

Today, I will like to put out my 2 cents thoughts on “The Hour Glass”

Financials aside (I am sure there are bloggers who provide deep insights into the numbers), I will like to concentre on the advantages and risks of The Hour Glass. Things have changed after their horrendous investment in Gems TV Holdings that results in impairment loss of $14.1 million (FY2009, the Group posted a 57% drop in NPAT)

Please note that below is my personal observation only.

First of all, allow me to introduce the business of The Hour Glass:

Extracted from their corporate website – “Established since 1979, The Hour Glass is the most geographically diverse, multi-brand specialist luxury watch retailer in the region, representing a stable of over 50 brands across 23 boutiques in eight cities throughout the Asia Pacific.”

You can refer to further details on the brand of watches such as Cartier, Rolex, Omega, Patek Philippe, Longines, Tudor, Raymond Weil, TAG Heuer, Bvlgari.

Next, let me point out the 6 key criteria in The Hour Glass:

1. The intangibles – reputation, credibility and brand power as a retailer

The watch industry is a trans-generational business, so once the above is broken, it is very difficult to repair and claim back. The Hour Glass, knowing that the luxury watch industry builds on trust and credibility, has fostered long-term professional relationship with their existing clientele. Where business rapport is concerned, this will translate to repeat watch sales and referrals, thus reducing the need to depend on walk-in customers. Therefore, The Hour Glass commands a brand premium based on the intangibles.

2. Value Chain

In the value chain, to name a few, The Hour Glass owns exclusive distributorship rights to Hublot in Singapore and is a long term carrier for Patek Philippe and Rolex. It signifies how their suppliers value them due to The Hour Glass focus on product integrity and for customers, strong emphasis on service delivery that will be explained in my following point.

So, The Hour Glass has managed both sides well at the moment in the value chain. Of course, one can argue that other stores like Emperor Watch in Hong Kong holds similar watch brands and that there is no “moat” in The Hour Glass since exclusive distributorship lies in geographic splits. There is also the fear of mono-brand boutiques and exclusive outlets launched by the watch manufacturers.

According to Henry, he sees it as “harmoniously co-existed” as The Hour Glass had been approached by several international brands to manage their stand-alone boutiques in key Asian cities (e.g. Hublot boutique in Singapore). It seems to me that the watch manufacturers prefer to tap into their expertise as far as cost and local market knowledge are concerned – not just Singapore only.

It goes back to my original point of suppliers’ trust in The Hour Glass. That said, the trend of standalone mono-brand boutiques mushrooming in Hong Kong poses a threat where the minimum inventory requirements are much higher than those multi POS. What The Hour Glass did is to concentrate their strengths back in multi-brand watch retailing, for instance divest both their Montblanc distribution and franchised stores in Australia and solely deviate their time to take control and grow their market positioning as a dependable Luxury Watch distributor – Hong Kong has one shop only and not multiple POS (point of sales), so there is exclusivity provided to the mainland Chinese and they simply love it!

Yes, the prestige and status.

On the contrary, I am curious to know the future financial development of Richemont direct owned stores as part of their wholesale distribution strategy than The Hour Glass multi-brand retailing against brands directly opening up their own stores. I take this something as competitive risk for The Hour Glass – point taken. There is always a certain degree of risk in investment isn’t it?

However, in my opinion, the retail penetration for direct owned stores could be costly (rentals, A&P etc.) and may not yield excellent financial results than leveraging one like The Hour Glass who intimately knows the Asian consumers. Their past 5 years NPAT (net profit after tax) justifies this and hence probably explains why The Hour Glass is also ultra conservative in debt (gearing is 1x as of FY2012), so as to manage the cash flow and achieve superior earnings over a period of time.

3. Impeccable service

I know this is hard to measure. However, I noted the management has invested in their people to deliver top notch service. I believe in observation, so I did my site visit to “Malmaison”, The Hour Glass latest upscale boutique located at Knightsbridge, Orchard. For instance, when you walk in, the staff greets you and ensure your needs are well taken care of (for example, at their fingertips, they know the edition of Cartier, why the watch features are unique) till you bade goodbye to them.

In no means you will feel diminished by their attitude, perception and knowledge of watches. I did the same round in Cortina – I will not mention much but sadly, the personal touch, service excellence is missing. It is important in this industry to achieve recurring income through robust client networks and referrals.

4. People

Need I say more?

In 2012 Chairman Statement, Mr. Henry Tay mentions that the average tenure of staff employment is 9 years. They aim to be a “Model Employer”. Till today, I have yet to read a similar Annual Report that dares to put out their turnover rate straight off the mark.

To validate this point, he states that one of the Managing Director for Singapore (head of an international luxury brand) could not afford to hire The Hour Glass retail staff; primarily they are amongst the best rewarded in the industry. If the internal manpower is recognized and treasured by the leaders, assuming their career is in retail, why would they leave?

On the management, they are

(a) Not interested in the short term ebs and flows of the capital market

(b) Not in the business of generating short term market excitement

(c) Not keen to take the position as the biggest watch retailer in the world

(d) Not keen to hold the title with the most number of stores POS

(e) Not known to produce champion sales people but championship team

But they believe in the long haul of long term planning and aspire to be the best in class, quality and service standard. So, that takes time to unlock the business value and by then “Mr. Market” to price it. (share price has shot up already!)

I would imagine that the earnings will grow since the folks managing The Hour Glass duly concentrates on 2 things – happy employees and intangibles in point 1, supported by watch collectors who knows that the price of premium watches will appreciate over time. So the loyal buyers are always on the lookout for special edition in The Hour Glass. Also, the management has handled the last financial crisis well – de-stock and manage their inventory level while increasing their current cash holdings.

This aside, I am also wondering why Henry has 13% stake in Cortina, considering it is their direct competitor and could potentially have conflict of interest.

Anyway, if you are buying the shares for 12 months target, I would say “don’t try to think about it as there will not be any share price excitement."

5. Overseas presence

Talking about their nearest neighbour China, the management of The Hour Glass admits it will be na├»ve for them to enter and take incoherent risk, especially on scalability – the two largest specialty watch retailers in China opened an aggregate of 130 stores in the last twelve months in 2011 whereas it will take The Hour Glass three decades to open up 24 standalone boutiques!

Despite their acknowledgement on China that accounts for 16% of their Group revenue in FY2012, up 6% from FY2011. To my understanding, China is a no-no for them and they prefer to tap into outbound Chinese tourists who willing to splurge on luxury travel items, for instance Hong Kong, Singapore and Australia.

To me, I see this like a double-edge sword.

First of all, I applaud the strategic move in not committing to China, maintaining a lower gearing and offering attractive ROE back to shareholders (otherwise store closure when business turns bad!)

But not to penetrate deeply into Greater China where the wealth of middle income Group is rising, it can probably jeopardize the chances of maximizing current opportunities in the luxury segment. For a parallel comparison, look at the results of Pernod Ricard and Moet Hennessy, luxury fine wines, champagne and spirits industry players. They did their calculated risk assessment and understanding China is the world largest consumption of luxury goods, they went in to cement their market presence. Can The Hour Glass, having acknowledged “income disparity” is a driver to their revenue, not having a strategic foothold in China where there is a huge gap between the rich and the poor? How about indirect investments to mitigate risks?

I also discovered that South Korea, in terms of retail sales of luxury timepieces, is expanding stronger against Singapore for the past 10 years; yet The Hour Glass main revenue generator remains in the local market as the management deems fit.

No doubt high net worth individuals are increasing in Singapore, making Singapore their next home as we aim to be the world’s leading asset management hub in 2020 – there needs to be a cushion for income diversification once the footprint is strongly entrenched. In addition, Japan is poised for decreasing growth because the Japanese curbs luxury spending due to natural disasters like tsunamis and earthquakes.

The Hour Glass has an outlet in Ginza, Tokyo the expensive belt of shopping and I am not sure how this will equate to lower earnings – wouldn’t it be better off to deploy better cost-based resources to China and South Korea?

I am debating this decision. (reason why I hold back previously in buying The Hour Glass shares) because there has to be a fine balance of over-expansion and under-expansion. I must say, as of late, the latest results of The Hour Glass surprise me, coming from a luxury watch retailer.

On the positive side, I am happy to hear the relocation of their outlet in Gold Coast to Edward Street in Brisbane. I lived in Brisbane for 1.5 years, thus I would say this is a great move to tap into the affluent Professionals in the central area, near Brisbane Central and Roma stations. At least the demographics are larger than Gold Coast, tapping into locals and foreigners - it is where premium hotels are located too.

Yes, we are talking about exclusivity again.

In short, hoarding too much cash in the long run and remain idle is not going to be helpful for capital gains, unless they plan, which I think they will, focuses on yield only and hopefully return the excesses (plus special div) to the shareholders.

6. Family-run business

I am a little concerned about the sensitive nature of a family run business, considering the publicity known marriage dispute. More information is found online.

Conclusion

To summarize, I foresee their earnings to expand in their current markets due to the Asia spending power on luxury products. In my past article on “top 5 trends”, I talk about “luxury goods” as a key focus to watch out.

If I include the considerations, I would probably say the advantages outweigh the disadvantages which makes it an interesting option to invest in The Hour Glass.

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