Malaysia - Parkson Retail Asia bullish on growth

Alfred Cheng, managing director of Parkson Retail Asia, was all smiles during the listing ceremony of his company at the Singapore Exchange on Nov 3.

Shares of the department store operator got off to a good start that morning, commencing trade on the Mainboard at S$1.04 (RM2.52) each, 10.6% above their IPO price against a 1.1% drop in the Straits Times Index.

That makes Parkson Retail Asia one of the few companies in the world to have braved a listing on the local bourse this year. Others — such as gym operator Fitness First and celebrity soccer club Manchester United — have either delayed or cancelled their plans to go public in the light of the financial uncertainty plaguing the global economy. Meanwhile, others that have listed, including port operator Hutchison Port Holdings Trust, continue to trade below their IPO valuations.

Cheng is confident, however, that Parkson has what it takes to ride the volatility and grow. “We are in the retail business, which is one of the industries that is less susceptible to financial volatility,” he tells The Edge Singapore in an exclusive interview.

“Retail trade is about domestic consumption and we are operating in developing countries where per capita income is rising with the middle and upper-middle classes. This gives us the foundation to do very good business.”

With 158.2 million shares offered to institutional investors and the public at 94 cents apiece, Parkson Retail Asia has raised proceeds amounting to S$148.7 million, about half of which Cheng intends to use to expand his business in Southeast Asia, where domestic consumption is on the rise.

The company had initially planned an IPO of 147 million shares, but exercised the option to issue an additional 22 million shares because of the high demand. Over the next three years, Parkson plans to open eight to 10 stores a year in Malaysia, Vietnam and Indonesia, where domestic consumption as well as tourist demand is on the rise.

According to market consultancy Euromonitor, retail sales by value in the department store sector are projected to grow 4.5%, 9.1% and 10.7% for Malaysia, Vietnam and Indonesia respectively between now and 2015.

Established 24 years ago in Malaysia, Parkson is now the nation’s second largest department store operator, with a chain of 36 stores in 24 cities and a market share of about 20%. It also operates stores in Vietnam, where it controls about 36% of the department store sector.

Earlier this year, it entered the Indonesian market through the acquisition of Centro Retail, a local chain of department stores focused on the middle class. Cheng expects to see “dramatic growth” in Indonesia over the next few years, and plans have already been drawn up for more Parkson stores across a dozen cities in the country.

Indonesian expansion

With a current market share of just 2.5% in Indonesia, however, Parkson Retail Asia could face a tough time establishing a foothold in the middle- to upper-middle-class consumer market there.

Indeed, it faces head-on competition with other department store operators such as Sogo, Debenhams and Metro as well as local players such as Matahari and Ramayana and other specialty stores or standalone outlets offering the same products. That could see Parkson Retail Asia struggle to gain headway in the world’s fourth most populous nation.

Cheng isn’t worried, though. To take on his rivals, he intends to have the company focus on fashion and cosmetics for a young, contemporary market, particularly in Jakarta and Bali.

Meanwhile, he plans to pursue a dual-brand strategy in Indonesia, which will see it leveraging on the widely known Centro brand to capture the “underserved” middle-class market and expand its network to at least 12 or 13 cities in Indonesia.

Cheng will also open new Parkson department stores to meet the demands of the Indonesian upper class in first-tier cities such as Jakarta, Medan and Surabaya.

Cheng believes that Parkson’s size and reputation will enable it to attract a wider base of international brands into its fold.

“We have a large network of stores across our markets that will give us an advantage with Indonesian customers and international retailers as well because they know that, by placing their brands with us, they get to be more visible,” he says.

“Also, the Indonesians already know our brand, since they tend to travel a lot in Malaysia and they have been asking for our brand for a while now. So, that will shorten our brand-building process in Indonesia.”

Lessons from China

To successfully enter the Indonesian market, Parkson can also use the experience gained from its operations in China, which is controlled under a separate company listed in Hong Kong — Parkson Retail Group — of which Cheng is also managing director.

Parkson is the first department store operator to set up successfully in China, where it is now the largest player in the sector. It set up its first store in 1994 in Beijing and now operates 50 outlets in 23 provinces across the country.

How did Cheng manage to build this Malaysian brand into the most successful department store operator in China? “One of our advantages was being there early,” he says.

To be sure, when Cheng brought Parkson to China, the department  store sector in the country comprised a handful of fragmented operators.

“We were the first to introduce a brand with a personality and, over the years, we have developed standards of consistency and ser­vice that set us apart from our rivals.”

Parkson also hires mainly local talent, which allows it to better understand the needs of each market and tailor the merchandise according to customer demands.

Indeed, even differences in the weather in each city in China plays a part in influencing the size and colour of the apparel customers look for. Parkson currently hires some 13,000 staff across China, of whom just 40 are expatriates.

“At the end of the day, it’s the merchandise that draws the consumer and we have the platform and experience to offer our customers what they need,” says Cheng.

“Understanding your customers better than your competitors is the key to success in this sector. Coming out on top in the Chinese market gives us the confidence to operate in other countries.”

That experience will certainly help Singapore-listed Parkson Retail Asia, which will hold all of its department stores outside China. Indeed, Parkson is also exploring opportunities for growth in other Southeast Asia markets and will become the first department store operator to enter Cambodia when it opens its first outlet in Phnom Penh in 2013.

In total, Parkson runs about 50 outlets across Southeast Asia, with profits hitting S$36 million for FY ended June 30, up about 60% year-on-year (y-o-y) on the back of S$367 million in revenues, up 10% y-o-y.

“We have branded ourselves as a fashionable, family department store targeting the middle to upper-middle classes in the markets that we are in,” Cheng says.

“In each country, we have tailored our merchandise to appeal to the local consumer, even though certain more high-profile stores such as the Parkson outlets in [Suria] KLCC and Pavilion Kuala Lumpur see a higher volume of tourists.”

Parkson Retail Asia closed its first day of trading at S$1.13, with 35.5 million shares changing hands. At these levels, the stock has a market capitalisation of S$765 million, or 19 times earnings.

After the listing, parent company Parkson Holdings Bhd — which is controlled by Parkson Retail Asia chairman Cheng Heng Jem — will hold a 70.5% stake in the company.

“Listing in Singapore at this time is the right thing to do because we have just entered Indonesia and announced a new store in Cambodia,” Cheng says.

“Based on our growth profile and ability to execute, we are bullish on the longer term and believe our equity value will be worth a lot more when the market recovers.”

Kang Wan Chern             

The Edge Singapore

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