SIAM MAKRO: Thailand is one of the few countries in Asia where selling to small retailers and food-service operators seems to be a ticket to success

Though it has already achieved its long-term goals, Makro SHV of the Netherlands, the parent company of Siam Makro Plc, remains bullish on the future prospects for cash-and-carry retailing in Thailand.

‘We feel that Thailand has the potential to open more than the original number of branches we had anticipated. It’s a country the size of France, and France currently holds around 120cash-and-carry stores, so why can’t Thailand be near that number?’
A.M.L.TOBAC
President, Siam Makro Plc

"We had anticipated in 1989 that the Thai market held potential for around 18 to 20 branches of Makro. We are about to open our 17th branch in Charun Sanitwong, and our notion of 20 branches now seems to be changing," said A.M.L Tobac, president of Siam Makro.

"We feel that Thailand has the potential to open more than the original number of branches we had anticipated. It's a country the size of France, and France currently holds around 120 cash-and-carry stores, so why can't Thailand be near that number?"

With an initial investment requirement of about 800 million baht per store, Makro has so far invested more than 13.6 billion baht in the 17 outlets now under its umbrella. The investment will continue to rise, as Makro has firm plans to open at least two more branches a year for the next few years.

The cash-and-carry pioneer has long had a major presence in Europe, and by the end of the 1980s the company decided that the next logical step would be to expand into Latin American and Asian countries with their burgeoning popula-tions of middle-class consumers.

Mr Tobac believes the timing of the company's entry into Thailand in 1989 has proved to be right. Among other things, he points out that just nine years into its presence in the country, Siam Makro Plc is considered to be a blue chip on the Stock Exchange of Thailand.

"We sent a team to Asia [in 1989] as it was considered to be a booming market during those times. We went to different countries but in the end it was decided to start operations only in Tai-wan and Thailand," he recalled.

The, company had chosen two quite different markets, Taiwan had a very high gross domestic product but a population base of only about 20 million. Thailand's economy was booming but per capita GDP was still relatively low. There were already a lot of well-established retailers.

But the plus, from Makro's point of view was that there was a population base of 60 million and a developing middle class.

These are the factors Makro looks for when its enters any market, Mr Tobac said. The core of the business is servicing small retailers. In Thai-land, Makro now derives 63% of its turnover from sales of food to these customers.

"That's the difference between us and hyper-markets. Hypermarkets are serving end con-sumers, while we focus on retailers and catering customers," he said.

New kinds of supply chains have begun to emerge in Thailand, and consequently the number of small retailers is going to shrink, the company believes. This has caused it to start planning for a shift in focus from retailers and more to-ward the catering and food-services field. The same pattern can be observed in many other countries where Makro operates.

Working on low margins and high volumes, the company believes it can remain the market leader in the cash-and-carry business for years to come.

"For the end consumer, a difference of one or two percent may not amount to very much, but if you take it on bulk sales, this amount is signifi-cant and therefore we have continued to attract volumes even during bad times," Mr Tobac said.

Siam Makro Plc is a joint venture between Makro SHV, a family-owned retailer from the Netherlands, and the Charoen Pokphand Group, the country's largest agribusiness conglomerate.

The CP Group later went on to open hyper-markets and invited Makro to become a joint-venture partner. But according to Mr Tobac, Makro declined the offer as it was not the kind of business in which the company had any expertise; better to stick with what you know, he said.

One thing that Makro SHV tried in Thailand and Brazil was to list the stock markets, and Mr Tobac said that in both countries the shares had performed remarkably.

Makro is now looking to acquire land in Bangkok for two new stores to be opened by 2000, but is still negotiating with potential sell-ers. In Mr Tobac's view, land prices are still high, and therefore the company was planning to take a wait-and-see approach.

"The problem right now is not money but timing, and the fact that land prices have not fall-en to the levels that we expected them to go to."

Bangkok now has five Makro branches, which account for nearly 45 % of the company's total sales volume in Thailand.

Despite all the problems in the economy, Makro continues to invest in upgrading its systems and employee skills. This in due in large part to the rise in competition from hypermarkets and other large-scale retail outlets in many parts of the country.

Stores are being renovated, technology up-graded, products added and more promotional activities arranged to keep customers heading back to Makro stores.

According to Mr Tobac, the membership card system would continue to be a core policy since Makro's target customers were not end con-sumers who bought products piece-by-picce. He said the main revenue stream was from cus-tomers who bought products in bulk, and selling smaller quantities at such low margins would not keep the company profitable.

Profitability and liquidity are strong just the same. In 1997, the company reported a profit of more than 500 million baht, down from 700 mil-lion the previous year. The decline was attributed to losses at two affiliates, Makro Auto Care and Makro Office Centre.

Makro Auto Care and Makro Office Centre, in which Siam Makro holds 99.99%, were intro-duced in the market in 1992 and 1995 respective-ly. In retailing jargon, they are known as " catego-ry killers" - stores that sell one range of prod-ucts with a degree of variety and prices that can-not be matched by smaller outlets. In many countries, such stores have been the retailing phenomenon of the 1990s.

According to Mr Tobac, category killers usual-ly take anywhere from three to five years to start showing profits in good economic conditions, so the company is prepared to be patient while it waits for an upturn in the Thai economy.

Meanwhile, the company remains in a solid fi-nancial position and has excess of liquidity. Thus, it will have the luxury of funding the expansion of its branch network with its own cash rather than having to rely on loans.

The healthy cashflow situation also means that there are no plans for Siam Makro to increase its capital in the near term. Overall, the Dutch par-ent is pleased with developments in Thailand, and less bullish on countries such as Indonesia or Taiwan, due to economic decline and market po-tential respectively.

With the downturn forcing many competitors to consider selling some assets or other drastic strategies, Siam Makro has been able to maintain a steady focus on its core business, Mr Tobac said. In Makro's case, that means making sure the customer base can be maintained and even ex-panded. As far as Mr Tobac is concerned, more businesses should be shifting their attention away from mere survival and getting back to concen-trating on profitability.

The focus includes not just customers but also the company's nearly 4,000 employees. Makro offers extensive training based on the individual needs of each staff member or group, and Mr To-bac believes training has a direct relationship with market share. These days, he said, it's not just prices that determine where customers buy their supplies, but also the environment in which they shop.

Assistance from Makro SHV in this regard has been crucial, given its long experience in tracking customer behaviour. The parent company also advises on up-to-date financial-management strategies and assures a steady transfer of the best technology, he said.

The parent company's interest in Thailand was underlined when it decided to choose Bangkok as Makro's operational headquarters for the whole of Asia.

The ultimate prize, the company believes, may well be China, and it has started to make inroads there. But outside of China, Thailand remains the one market where Makro believes it will continue to have a dominant presence.

Siam Makro Plc
Established: 1989
Major shareholders: Makro Holding Asia NV, Makro Holding (Thailand) Ltd, CP Group
Main businesses: Cash-and-carry retailing
Subsidiaries: Makro Auto Care Co Ltd, Makro Office Centre, Makro Properties
Number of employees: 4,000
Assets at end-1997: 14,178 million baht
1997 gross revenue: 32,738 million baht
1997 net profit: 2,718 million baht