Soon after Britain’s Tesco abandoned its retail business in Thailand and Malaysia in early 2021, its buyer, Thailand’s Charoen Pokphand Group, merged it with its Siam Makro wholesale arm. Makro, the biggest cash-and-carry operator in Southeast Asia, was already something of a beast in wholesale and retail terms: it operated 154 warehouse-style units with an average size of just under 5,400sqm, selling to both retailers and end consumers in major cities and secondary locations, mostly in Thai
land and Malaysia. Its marriage with Tesco Lotus virtually doubled it in importance, by making it the operator of nearly 2,700 hypermarkets, supermarkets, convenience stores and malls. That was in October a year ago now. The business has had a full year to get through the initial struggle against indigestion that usually takes place when one large retail entity absorbs another. And in this case, to complete a rebranding from the old Tesco Lotus to the new moniker: Lotus’s. The synergies that drove the merger are now beginning to show. The retail and wholesale businesses accounted for a roughly even split of the company’s 219.6 billion baht ($9.4 billion) in sales through the first half of the year. Sales for the wholesale business grew by almost 7 per cent over the first half of 2021. Year-on-year sales growth on the retail side, which is now mostly accounted for by Lotus’s, is not available, since the base period was prior to the Lotus’s acquisition. More than likely, growth would have flat-lined or been negative on a same-store basis because of higher food production and transport costs being funneled into shelf prices, pressurising Lotus’s largely non-affluent customer demographic. Quarter-on-quarter growth, which doesn’t account for seasonality and new store openings, was 8.7 per cent. There’s a buzz in the malls Mall income added another 6.2 billion baht to the top line during the first half and should at least double that by year-end as the company puts a sharper focus on mall rental growth and occupancy out as a growth vehicle. Lotus’s malls, which are anchored by its own hypermarkets and supermarkets, are referred to by the company somewhat opaquely as “hybrid, self-operated malls”, and account for 1 million square metres of net leasable area across the region. Occupancy is around 90 per cent in both Thailand and Malaysia and has significant upside over the next few years, which will drag mall income with it. Lotus’s existing malls are configured in a manner that allows space to be leased within the hypermarket box itself (for example, along a straight line beyond the checkouts at the front of the store) and around the racetrack that comprises the main mall. The inline specialty space is leased primarily to restaurant chains, banks, telecoms, pharmacies, phone sellers, gold jewelry outlets, a food court, and a cinema. But that isn’t all: the external perimeter of the mall and under-used sections of the parking lots are also leased to small tenants selling food, apparel, footwear and automotive accessories, among other things. Harnessing the synergies The synergies that had investors so excited about the coupling of Makro’s wholesale business with Lotus’s retail operations are slowly being realised, although inflation has adversely affected some of Lotus’s less well-heeled customers and caused them to pull back. In Thailand, the Makro-Lotus’s combination is now very much the dominant retail player in the large-format grocery segment, and competes fiercely with market leader 7-Eleven, Central Retail’s Family Mart, and Big C smaller formats at the convenience end of the market. (Incidentally, 7-Eleven, which is far and away the biggest convenience chain, is run by CP All, another arm of Charoen Pokphand Group.). The challenge to 7-Eleven’s pre-eminence will only grow, however, as Makro and Lotus’s both continue to open small-format stores. In the second half of this year, the company has already opened or expects to open five wholesale units in Thailand, along with one in Delhi and one in Phnom Penh, Cambodia, which will be the second Makro in the Cambodian capital, where it has virtually no competition in the cash-and-carry space. On the retail side, another two Lotus’s hypermarkets, a supermarket and 45-50 small formats will have been opened in Thailand by the end of 2022, together with three supermarkets in Malaysia. Prospects look bright over the longer term. The massive increase in scale resulting from the merger has given the company a far greater and more diverse platform for the distribution infrastructure existing within the broader CP Group. The combined Makro-Lotus’s entity now has a 2,815-store network consisting of multiple complementary formats with their own complementary customer bases. Lotus’s by itself has 270 hypermarkets that typically anchor its own malls, 220 supermarkets and 2,171 convenience stores. Makro has been able to upscale its existing supply chain onto Lotus’s store shelves, improving the quality and range of its food products, particularly in the fresh-food department. This is evident across all Lotus’s formats. More cause for optimism The company also has other reasons to be happy about its growth prospects. For one thing, this is Southeast Asia, not by any means a mature market and one with immense potential in terms of servicing a large and rising population that is set to enjoy a galloping rate of household income growth. This will suit companies with strong supply-chain management capabilities and the ability to operate multiple formats in the whole hierachy of locations from major metropolitan areas through to provincial cities and towns, all the way down to rural locations. Siam Makro can also anticipate growth in its online-to-online business. Currently, it has relatively low online penetration but that is another area where the company is focused on improvement. By the end of the first half of this year, its online business accounted for 13 per cent of sales on the wholesale side (up from 11 per cent in 2021) and 4.5 per cent (up from 2 per cent in 2021) on the retail side. The company is also enjoying cost savings through rationalisation of its back office following the merger of operations. Finally, there are prospects for growth outside of the business’ main markets in Thailand and Malaysia. Siam Makro already has a small beachhead in Vietnam (since 2012, with Makro Food Service), and others in Singapore, Hongkong, Dubai (through its acquisition of Indoguna in 2017), Cambodia (since 2018), India (also since 2018), China (2019) and Myanmar (2020). Given its exceptional supply-chain capabilities, strong brand and diverse retail and wholesale platform, this is one company that will be hard to stop.