RealMoney

Southeast Asia gets richer, urban and more wired every time I visit. Countries that once relied on the warung corner shop or local equivalent replace them with chain convenience stores. It's a shame, and less charming, if you ask me. But whatever I think, the conversion from mom-and-pop store to chain format is going to happen anyway.

While it's tempting simply to buy the stocks of convenience-store chains, there may be an even smarter way to play that trend. Convenience stores in Southeast Asia currently get very little of their revenue from providing consumer services. But consumer-service income is substantially more profitable than traditional retail sales. By honing in on the companies that are best set to build their service income, you gain from increased income, urbanization, e-commerce and the shift to the service economy all in one.

Service revenue comes in several forms, most of which were pioneered in Japan, the investment bank Nomura (NMR) notes in a report on the topic. Although service sales have slowed in that developed economy, they account for around 5.25% of revenue at companies such as Seven and i holdings (owner of the 7-Eleven franchise in Japan), Lawson (LWSOF) and Family Mart (FYRTY) . Since services are more-profitable than traditional sales, they account for a much larger chunk of convenience-store profits.

E-commerce, while a threat to conventional retailers who don't adapt, is an incredible opportunity for convenience stores. They can provide the service solution to the "last mile" problem, acting as the pickup point of contact for goods ordered online.

Other services include commissions from selling mobile-phone cards, loading cash cards, providing bill-payment services, receiving or sending remittances, and acting as a collection point for other consignments.

For Southeast Asia, Thailand is leading the way in the generation of service revenue for convenience stores, as you might expect from the region's most-developed economy (excluding Singapore).

The Thai 7-Eleven chain is run by CP All (CPPCY) , Nomura's top pick in the sector. Service income accounted for 1% of sales from 2010 to 2015. But net profit on that portion climbed from 3% to 5% of total profits in that period. CP All looks set to become Thailand's largest "omni-retailer" thanks to its network of 10,000 stores and link to True Corp., one of Thailand's largest phone companies.

It stands to be a key beneficiary of e-commerce deliveries. Chinese tech giant Alibaba (BABA) also recently bought Lazada, the main Thai e-commerce platform, which gives it huge financial backing. Alibaba also invested in Ascend Finance, a True subsidiary that serves as an e-payment system and mobile wallet.

CP All's services income therefore looks set to surge. It already posts a net profit margin of around 25% on those sales. Besides conventional service income, it recently benefited from the move in Thailand to pay school and university fees through convenience stores.

The best method of accessing service income in Indonesia may be through Sumber Alfaria Trijaya JK:AMRT, which runs the Alfamart chain. It only gets 0.3% of sales from services, thanks to its huge conventional-sales volume. It also gets relatively thin profit margins on its service income compared to other Southeast Asian companies. 

The company is set to benefit from ramped-up sales of transportation tickets and the payment of utility bills at its 12,700 stores. As a result, service income is set to grow at 15% each of the next few years, Nomura figures. Alfamart has hardly tapped e-commerce, a move that would substantially boost service profits.

Alfamart and its competitor Indomaret, part of the Salim Group JK: SALIM each capture around a 30% share of the mini-market market in Indonesia. They have the power to create strong barriers to entry for new players. There's almost no incremental cost, as Alfamart builds up service sales and profits should see the concomitant boost.

By Southeast Asian standards, service sales are comparatively large in Malaysia. They account for around 3.5% of convenience-store revenue at the 7-Eleven Malaysia KL:SEM chain, and around 2% of business at Bison KL:BISON. The gross margin on that activity, though, is 1.5x to 2x that of conventional sales.

Both Bison and 7-Eleven should see compound annual growth of 9% to 14% in service sales over the next three years, according to Nomura. That will be driven by new tie-ups with retailers and service providers, the idea being to make the convenience store a one-stop solution.

E-commerce is growing at an 18% annual rate in Malaysia. The traffic is often terrible in Southeast Asia, where the capitals are normally sprawling cities that evolved from farm towns. With the congestion only intensifying in Kuala Lumpur and Malacca, e-commerce provides a pleasant alternative to sitting in a stationary car.

Bison benefits from selling top-up cards for mobile-phone service and the Touch 'n Go quick-pay card, bill payment, cash remittances, photocopying, money changing, courier delivery and ATM services. It looks to have better prospects than 7-Eleven Malaysia in Nomura's eyes, with weak operational trends and a disappointing earnings outlook at 7-Eleven.

The Philippines is one of the most unsaturated convenience-store markets in Asia, with around 35,000 people per store last year, similar to mainland China. Compare that to Malaysia, Indonesia and Thailand, where that figure ranges between 5,500 and 10,000 people. In developed Asia, Japan and South Korea have around 1,700 people per store.

Per-capita income is growing around 5% per year though in the Philippines, and approaching the $3,000 level. Benefiting from that growth and rapid urbanization, the number of convenience stores has risen by 21.5% per year over the last five years.

Convenience-store sales have shown a similar spurt, up 20% each of the last five years, double the rate of normal retail sales. Nomura figures the growth will be consistent over the next five years, too, through 2021, given the fast-pace lifestyles Filipinos prefer in the cities.

Not surprisingly, given its historic ties to the United States, 7-Eleven led the way in the Philippines. The chain is licensed locally by Philippine Seven PH:SEVN, which owns 45% of the 1,995 stores and franchise out the rest. Store numbers are growing as fast as sales, up 26% per year over the past five years.

Nomura prefers to gain exposure to the sector through Robinsons Retail Holdings (RRETY) , which has a U.S. listing and has exclusive rights to the Ministop chain for the Philippines. Ministop is known for its quick eats, and services account for a minimal amount of sales, less than 1%. Following a cleanup of its under-performing stores in 2016, it is growing outlets at only 8% annual rate, something that the company is well positioned to speed up.

Robinsons Retail, in a net cash position and with $419 million in investment assets, has the funding to back expansion. What's more, the Gokongwei family owns the company and also owns Robinsons Land (RBLAY) , one of the biggest property developers in the Philippines. The convenience-store chain should be able to grow as the developer expands its portfolio of malls, offices and hotels.

Only 7-Eleven has anything of an e-commerce presence in the Philippines, delivering goods from the country's largest online-sales platform, Zalora Philippines. There's therefore room for Ministop to ramp up service income there, as well as to earn increased commissions from other service sales, with an increasing number of utilities offering digital bill payment at their branches. Cash remains the default method of payment for almost everyone in the Philippines, so convenience stores are the first point to benefit as the country move to digital payments.