I will be away for 5 days to understand about Thailand’s culture and business practices. The guys from Precession Effect will meet me there.
Thailand has roughly a population of 68mil and most of them are rice farmers living in rural areas. The domestic consumer demand is strong, and there are a lot of thriving businesses. My experiences in Thailand include analysing Bumrungrad Hospital, JWD InfoLogistics, Airports of Thailand, Big Camera, After You, Major Cineplex, MK Restaurant, Charoen Pokphand Foods and Taokaenoi Food.
A few years ago, my girlfriend found the company which is my favourite business from the Land of Smiles.
In 1999, there was a business that started selling imported cosmetics retail shop called “Neo” at Siam Square. Gradually, as Thailand’s economy strengthens, the business started to bring in more products to suit the customers need. By 2004, there were 20 branches. Finally, in 2008 – 2011, their brand of “Beauty Buffet” gotten wide market adoption and the sales were brisk. By the end of 2011, the branches grew to 120. In 2012, it created a new brand called “Made in Nature” to target premium mass market. To top it off, the company went for listing on the Stock Exchange of Thailand. The business competes with Shiseido, POLA Orbis, L’Oréal, The Estée Lauder, Amore Pacific, and L’Occitane International on the global scale.
Introducing you to…
It is founded by the admirable Dr Suwin Kraibhubes. After the Asian financial crisis, he set up this company with the last bit of money he had. Today, it is a success. Together with his wife Tanyapon Kraibhubes, they own 26% of the US$1.6b company. The stock is part of SET 100 index. At this moment, their shares look expensive to me.
Beauty Community sells products under various brands such as Beauty Buffet, Beauty Cottage, and operates beauty mini-stores under the Beauty Market name. For higher-end products, it is parked under Made in Nature. Currently, they have roughly over 330 retail stores in Thailand, Vietnam and the Philippines. Their overseas store presence in Taiwan, Indonesia, Hong Kong, Cambodia, Vietnam and Myanmar. They are focusing on mass market with affordable prices.
Their transformation occurred because they took the courage to come out with their private brand called Beauty Buffet. If the business continued with imported goods only, it’d be under risk of their suppliers choosing another distributor and Beauty Community will be placed out of the picture. The process revealed the foresight of the management to mitigate this risk.
You know, it is often said that women are willing to pay to look good.
That’s very true. For the past few years, the company has been growing very well. The cash flow was good as well.
Backed by growth and fundamentals, the market capitalisation of the market grew by >850%! However, the valuations are not cheap now.
Success does not happen by chance, but it is by choice. What were the growth drivers for the company? (shop, expansion, same-store sales growth, new product and new channels)
- More Chinese tourists entering the country, fueling the sales of growth of their physical stores.
- Tapping onto online channels such as Alibaba’s Tmall to build their brand awareness
- Adding offline channels include FamilyMart, 7-11, Big C, Isetan, MaxValu, Villa Market, Tesco, etc. They also work with King Power which is a dominant player in airport shops.
- Utilisation of smart social media strategies to drive store traffic.
- Using CRM data to understand to drive appropriate product offering and increased sales.
Using the FY2017 figures, it will leave you speechless….
- Net debt to equity: -76.6% (flushed with cash, zero debt!)
- ROE: approx 70% (despite having so much cash which earns close to nothing)
- Cash conversion cycle of approx ~80 days (which is improving)
- Gross margins of 67.7% and net profit margin of >30%.
- Capex % of CFO is somewhere 2-3%, about 20-30% in the past few years. Low capex needs.
Let me illustrate it further on the ROE.
Return on equity simply means net profit after tax divided by shareholders’ equity.
As of FY2017, their equity was THB$1.7m and the cash holdings were THB$1.3b. The actual money that was used to generate profits was a mere figure of THB$0.4b. Yet, the business generated a figure of THB$1.2b. I was simply amazed by the dynamics and low capital needs of the business.
The capex constitutes 20-30% of free cash flow while the remaining are excess cash for the management to consider dividend payouts to reward the shareholder.
I’ve also seen how Beauty Community evolved over time. The business started using technology to manage inventories better and improve their marketing campaigns. The company is tech-savvy. Despite holding more than 7k SKUs in 9 categories, they managed to quicken their inventory which is an amazing achievement. Very good controls.
Beauty Community also recognised the value of social networks. They took time to patiently produce their high online content and engaged their customers consistently. This drove e-commerce sales as the number of “Likes” and “Shares” grew on their Facebook page.
For more information on them, click on this link here.
In an article “Women Are Never Too Young For Anti-Aging Creams in China“,
“Anti-aging only works when you start early,” said Fan Fan, a 25-year-old HR manager who lives in Beijing. It’s the secret to sustaining her baby-smooth skin. She spent half of her 4,000 RMB monthly salary on her very first anti-aging purchase, a 75ml bottle of Advanced Night Repair serum from Estée Lauder. She was 22 years old.
“I know it’s a bit pricey, but at least this is a better investment than a Louis Vuitton bag,” she said. Fan told us she is not alone, with many of her young professional female friends dropping 20-40 percent of their annual salary on high-end skincare products such as SK-II, Clé De Peau, and La Mer.
I am not surprised. Supported by the explosive growth of social media app, all of us are living in a self-obsessed world where appearances are everything. There are Instagram, WeChat, Facebook where some of us hope to look good on, push out selfies and gain massive followers. It is likely that beauty-related companies will continue to do so well given there is a recurring need to look good and youthful.
Time to find out what are your female friends using! Is it Biore from KAO also known as the P&G of Japan?
- Go for businesses with a strong franchise brand
- Go for businesses where customers have the recurring need for its products or services. Look at Facebook, we open up the app daily. We have the social need.
- Go for businesses where the management has skin-in-the-game, meaning high ownership stakes.
- Go for businesses that are able to scale globally. This is a strong evidence of their execution capabilities.
PS: If anyone knows how to convert my website into a full domain and host, let me know! My email is firstname.lastname@example.org.