Reasons for success
Aside from the economic growth of Malaysia, five key factors supported the continued strong growth of AEON and made it fundamentally more attractive than many other retailers:
1) Leveraged into spending trends
Jusco stores are positioned at the premium end of the middle-class market. Any shopper, once inside, would be hard pressed to distinguish between an AEON store and the best of those found in the same area. This premium positioning is important because as Malaysians become more affluent over the last decade, premium products have achieved faster growth than lower end ones.
Psychographics has a huge influence over middle class shopping habits. Lower income consumers buy merchandise because they need it but the middle class tends to buy better quality and higher priced merchandise as a matter of ‘nice to have rather than actual needs’. Charles Revson, the founder of Revlon, once said “in the factory, we make cosmetics; in the retail store, we sell hope.” Income enables people to buy hope and that is critical to AEON.
Moreover, premium strategy is characterised by less intense competition than the lower end. Jusco branding becomes more important the higher up the value-chain and brand strength represents a significant entry barrier.
2) Risk of price wars lower than in other retail sectors
Price wars amongst retailers are common given the preoccupation of many retailers with market share gains. This has been most evident at hypermarkets. However, AEON is much less susceptible to price wars because of the positioning of its in-house brands such as SAM, Arcadia and Jusco Selection carried in the stores. This helps reduce price discounting.
3) Favourable locations, brand loyalty
The level of foot traffic within a store is a function of five main factors:
- The population and degree of affluence of local consumers.
- The location of the store.
- The age of the store with a typical large ramp-up in sales in the first three years.
- The quality, diversity and pricing of merchandise within the store.
- The strength of the store brand and the loyalty of its customers.
The population and degree of affluence of local consumers: All AEON GMS stores are located in major cities where the populace income, on average, is considerably higher than for the country as a whole.
Location: AEON has secured some of the most favourable sites in the cities in which its stores are located. All the stores are strategically located at the middle-upper income township, reflecting the “Community Shopping Center” concept. This ensures a steady flow of relatively high quality customers.
Store age: AEON has a relatively young store profile. At the end of 2005, AEON had an average store age of 9.2 years. Based on its store opening schedules, the company will likely maintain its average store age over the next few years. As with all retailers, the trick is not to have too many new stores, which will drag down overall profitability given a typical breakeven period of 12-18 months, but at the same time, not to have too many old stores where there is limited growth.
The strength of the store brand and the loyalty of its customers: The strength of AEON store brand should not be underestimated. Evidence for this can be found in the J CARD Loyalty programme. As at FY 2/2006, its membership has grown to over 500,000 principal members and 60% of monthly retail sales were accounted for by its card members. Aside from helping to foster customer loyalty and enhance the brand, the scheme also enables management to maintain a database for direct marketing and sales promotion.
In November 2005, together with its related company, AEON Credit Service (M) Sdn Bhd, AEON launched a co-branded credit card under the logo of “JUSCO”, through which J CARD members are given more incentives to shop using the co-branded credit card in the form of increased J CARD bonus points.
4) Shopping-centre Management mitigates the volatility of retail business
AEON has two revenue sources, namely retail and property management focusing on shopping-centre management. Revenues from the latter are the charges imposed on tenants occupying AEON’s rental space and continue to be steady and reliable.
AEON’s shopping centers enjoy high occupancy rates at average 99% as opposed to the industry average of 80%, attributable mainly to the tenants’ confidence in the Jusco brand to pull in the crowd. Although the revenue from property management is only about 8% of the total sales, it accounts for 35% to 40% of AEON’s operating profit and thus provides an insulation to the bottom line should there be a weakness in the retail business.
5) Negative working capital requirements strategy, strong cash flow generation
When AEON makes a sale, the cash or the credit card payment from the sale accrues firstly to AEON. It then waits two to three months before paying the supplier. When combined with shorter days to sell inventory (about 30 days), that is a measure of the number of days it takes to sell the average inventory in a given year, and the low receivable collection period (about 7 days), that is the number of days it takes to collect its receivables, AEON has been enjoying negative working capital requirements over the last five years, a proof of its well managed cash conversion cycle without increasing costs or depressing sales. |
