Retailers are taking it on the chin this summer in Asia. Consumer confidence is low in South Korea, where sales appear heading into a downturn. Elsewhere, two of Asia's best-known consumer brands have been punished for their moves to diversify.
Kirin Holdings (KNBWY) makes most of its money from food and booze. The beer Kirin Ichiban just its most-notable brand out of dozens that generate US$20 billion in sales.
The least-known of its business segments is in pharmaceuticals and biochemicals, which generates 18% of revenue. It's this area that the company is looking to boost with its latest acquisition. Kirin is paying ¥129.3 billion (US$1.2 billion) for a 33% minority stake in the makeup company Fancl T:4921.
Kirin says its Kyowa Kirin pharma subsidiary wants to work with Fancl, which also makes kale juice, on products like anti-ageing skin creams. Fancl, boosted by sales to China, saw revenues grow 12.4% last year, while Kirin saw a measly 3.6% increase in sales in 2018. But Fancl's 9.9% operating-profit margin is lower than Kirin's 10.4%.
Moody's called the deal "an unexpected new strategic direction to monitor," while small enough not to make a huge difference to Kirin - or its credit rating. The bottom line is that Kirin, as Japan's second-largest brewer, is diversifying away from an ageing drinks market in Japan that generates half its sales. That's unlike Sapporo Holdings, its larger rival, which keeps buying brewers.
Kudos to Kirin. It doesn't deserve the 5% dip in its shares that came with the Fancl deal on August 6. They're down 15.7% since the spring, but worth watching.
Jollibee Foods (JBFCY) is arguably the best-known brand out of the Philippines. The fast-food chain is beloved by Filipinos the world over, and there are a lot of them. Remittances alone from people working overseas account for a double-digit chunk of the entire economy, 10.2% for 2018 according to the World Bank.
The company said in late July that is buying 80% of the Los Angeles-based chain The Coffee Bean and Tea Leaf, for US$350 million. It is Jollibee's largest-ever acquisition, one that substantially increases its international reach, bringing 1,189 coffee shops in 27 countries. That's a 26% boost to Jollibee's total network, which rises to 5,732 outlets.
It makes sense for Jollibee to branch out into healthier food items. Its main menu is heavy on the lard. The company is also set on boosting international sales to 50% of total revenues within the next 5-7 years. Jollibee also intends to boost its market capitalization so much that it ranks among the top 5 largest food companies in the world. It's No. 13 now.
But Jollibee has been punished in the stock market for its buy. Its shares are down 18.2% since word of its deal for The Coffee Bean.
The deal is expensive, at 14.8x 2018 operating earnings, a 17.5% premium to the 12.6x global food-service average, Nomura calculates. The L.A. chain is nursing a bottom-line US$21 million loss for 2018, although that narrowed from US$27 million in 2017.
Analysts compare the deal to the purchase Jollibee made of Smashburger, another loss-making U.S. food chain, which dragged on Jollibee's Q1 results.
The international diversification definitely leans in the direction of the United States. But South Korea actually accounts for 25% of The Coffee Bean's branches. The 292 stores in Korea narrowly outdo the 284 in the United States, another 24% of the network.
South Korean shoppers are feeling sickly as I noted. Household debt levels are high, there's a glut of the country's leading export, computer chips, and a trade war with Japan. I'm hearing particularly gloomy forecasts for the country's largest retailer, the department-store chain Shinsegae KR:004170, as well as the big-box budget retailer it began, E-Mart KR:139480. Mind you, maybe those Korean shoppers need a coffee pick-me-up ...
For The Coffee Bean, the Philippines is its third-largest market, and Southeast Asia combined accounts for another 38% of The Coffee Bean's tea and coffee shops. That area, where incomes are rising and discretionary spending on items like food is practically a new invention, offers the most promise for growth.
I reckon Jollibee will pull it off, and make a success of Smashburger, too. Each step in a diversification direction also teaches it lessons about how to adapt its existing stores.
I'll be heading to the Philippines this weekend, so I'll let you know what the take is on the ground. Not coincidentally, Kirin Holdings owns 48% of the only brand out of the Philippines to rival Jollibee in name recognition: San Miguel (SMGBY) . Although it's a brewery, the Philippines holdings brings a much younger market than Japan, so it's another part of Kirin's diversification.
Of course, retailers are having a particularly tough time of it here in Hong Kong, as well.
My trip out of town means I will be contending with a three-day sit-in at the Hong Kong International Airport, which began this morning. Black-clad demonstrators are occupying the arrivals hall, greeting newcomers with signs like "All You Can Eat Tear Gas Available in 12 Districts."
They also have mock travel alerts in their hands, warning of the risk of rendition to China, random arrests by the police, and triad attacks. The United States, the United Kingdom, Japan, Singapore and Australia have issued real travel alerts for Hong Kong. That's because our protests have become unpredictable, like flash mobs, and there are often scuffles with police at the end.
Honestly, you needn't worry if you are heading this way. Hong Kong remains incredibly safe. Aside from requiring a little more time to check in, I should not be overly inconvenienced by the protests.
Demonstrations have been peaceful so far, like every gathering I've attended since late April. In a very real riot about Britain's Poll Tax that I witnessed in London in 1990, I saw someone use a piece of scaffolding to try to hit a mounted policeman off his horse, mass looting, and random destruction. Hong Kong demonstrators have been incredibly polite and well-behaved.
Retailers like cosmetics-store chain Sa Sa International HK:0178 are having a bit of a tough time. Its same-store sales fell 15.3% in the June quarter, while Hong Kong cosmetics sales fell 4.1%.The Hong Kong administration is blaming demonstrators for a worsening economy - but it was worsening in the first quarter, before any protests started. Stores here do face disruption, but only on demonstration days, and only in a tiny part of this city. Sa Sa, which stocks Fancl products, may soon have Kirin-backed goodies to bring back the shoppers. The more the merrier, as Asia's retailers look to diversify their range.