August 6, 2008

Convenience Stores Take Aim at Fast Food

By Darwin G. Amojelar, The Manila Times, Philippines

Aug. 7--WITH inflation hitting doubledigits and the economy slowing down, the Philippines' two largest convenience store chains are eyeing to cash in on a growing number of middle-income consumers dropping out of the fast-food circuit in search of more value for their money.

Last month, the inflation rate accelerated to a 16-year high of 12.2 percent. The higher-than-expected price increases forced the Bangko Sentral ng Pilipinas to recast its whole-year forecast to a higher 9 percent to 11 percent range from the original 7-percent to 9-percent estimate.

First-quarter economic growth also slowed to 5.2 percent from the scorching 7.4-percent expansion in the fourth quarter last year, leading the country's economic managers to downgrade this year's growth forecast. Personal consumption expenditures alone eased to 5.1 percent in the first three months this year from 5.9 percent in the same period last year.

As low-income families shy away from dining out, fast-food chains like Jollibee are moving up the market to capture those from the higher-income set opting to scale down their tastes. For the two convenience store giants, this shift in the fast-food demographics presents a challenge and an opportunity.

With the middle-income consumer on the prowl for cheaper yet filling meals, convenience stores are scampering for a piece of the action.

To be sure, the opportunity to encroach into the fast-food market was thrust upon convenience stores partly by the difficult economic environment.

Sari sari stories growing

Jose Victor Paterno, chief executive officer of Philippine Seven Corp. said sari-sari stores are likely to put a dent on the company's operations, despite growth projections of between 8 percent and 10 percent this year.

"For me that's my barometer of underemployment. If the economy gets worse, sari-sari stores are growing. This year we could feel the impact of inflation and [a] weakening economy," he told The Manila Times.

So far, the local operator of the 7-Eleven chain has held up relatively well. In the first three months, sales reached P1.45 billion, a 13-percent increase over the P1.29 billion in the same period last year. This translated to a net income of P5.6 million, a turnaround from the P22-million loss in the same three-month period last year.

But Paterno said store sales of late had been flat compared with last year. He said 7-Eleven has to offer new products to maintain existing customers if not cater to new ones.

Robinsons Convenience Stores Inc. (RCSI) is in the same boat, according to its President Johnson Robert Go Jr.

"The wallets are getting smaller. It's inevitable that they will come to purchase items, [but] it is not as much as they did," he told the Times. RCSI operates the local chain of Mini Stop convenience stores.

Go said the company's top line margin has been squeezed "a little bit.""[But] we've been performing according to expectations. Despite the relative difficulty of the economy, the business has been able to withstand the [hostile] environment," he added.

The company's available financial data showed that it posted a net loss of P5.32 million last year, lower than the P40.21 million in 2006. Revenues however climbed to P2.34 billion from P1.62 billion year-on-year.

New product rollouts amid price hikes

Both convenience store chains have already raised their prices to cope with the rising cost of inventories. Paterno said 7-Eleven hiked prices by 5 percent, adding the company passes on to customers these costs particularly for manufactured goods.

"There may be additional increases, but the bulk of the price increases was over and done with," he said.

Go said Mini Stop also undertook price adjustments of between 7 percent and 15 percent for some products.

"We try not to pass on the price increases to the customers. If ever, we provide very marginal increases," he said.

But where the two giant chains have been spending more time and resources on is the roll out of fast-food products to compensate for the possible loss of customers due to high inflation.

Go said Mini Stop does a lot of promotions to attract more customers. "It's a matter of creatively coming up [with] a promotion that will still keep them interested [since] we know that the disposable income is not big now," he said.

The executive said the company introduces a new product every month especially for its fast-food category. "We have to be able to come up [with] innovative products like new desserts, sandwiches and rice meals to attract more customers," he said.

At present, fast-food items such as fried chicken, sandwiches, dim sum, and beverages like C2 and soda are Mini Stop's best selling products.

The operator of 7-11 is also betting on the company's food services. "We're experimenting with new products, toward value orientations," Paterno said.

The executive said the company is catching the spillover from the fast-food chain and restaurant market that shifted to low-priced stores. So far, 7-Eleven customers have responded favorably to the new products offered, such as rice meals and sandwiches, he said.

"Rice meals are especially important as they are our entry to the lunch and dinner [markets], after building on our strengths in snacking to enter the breakfast segment some years back," Paterno said.

He said proprietary merchandise led sales and margin growth in its stores, adding that cup drinks, such as Slurpee, Gulp and Cafe 24/7, were the best performing items.

Focus on BPO market

Given the shrinking purchasing power of their traditional customers, 7-Eleven and Mini Stop are focusing on the BPO market, which has embraced their fast-food offerings.

"I think generally, they [contact center agents] have more disposable income. Most of them are not married, so they spend for themselves," Go said.

"Our observations are that we have higher transactions and more regular traffic of people in the stores that are located near the BPO," he said.

The executive said cigarettes, cell phone loads, energy drinks and coffee are the fastest-moving items in the call center market.

"Usually that's the profile and you have to be efficient because what happen[s] is they only have 10 minutes to 15 minutes to get their food and back to work," he said.

About 12 percent of Mini Stop stores are located near BPO offices. At end-June, it had more than 200 stores.

"We're ending this year with 250 stores and next year another 100 stores," Go said, adding the company has allotted P200 million in capital expenditures for the additional 50 stores.

He said the company plans to increase its franchise stores to 95 percent from the current 85 percent.

"The best way to really grow the model in most countries is to increase franchise stores because you share investments. You can't grow as fast if you don't franchise. If you go to Japan, Taiwan and Korea most of them are franchise," Go said, adding that only 5 percent to 10 percent are company-owned.

Paterno said 7-Eleven is also focusing on the BPO market, but provided no details.

The company ended the first quarter with 318 stores, a 12-percent increase from 283 last year.

By year-end, the company aims to spend P650 million to put up 400 stores, of which 70 percent would be franchisee-run.

Still very young industry

"The management believes that the strategic directions committed to in the crucial areas of franchising, development, and marketing were validated by the company's performance in 2007," Paterno said. "By the end of 2008, we expect that more than 60 percent of our stores will be operated by franchisees."

In the next five years, franchised 7-Eleven stores may reach 85 percent of the total, he added.

The local Mini Stop operator agrees. "I think the convenience store in the Philippines is still very young compared [with] matured markets in Thailand, Indonesia and Malaysia. Those places have thousands of conveniences," Go said.

"I would still predict growth in terms of revenue and bottomline. It's really how you creatively use the resources that you have. There's a way of getting over the humps without necessarily spending more money," he added.


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