Village Grocer poised to outpace overall retail growth

Village Grocer poised to outpace overall retail growth

This article first appeared in The Edge Malaysia Weekly on July 1, 2024 - July 7, 2024

GROCER TFP Retail Sdn Bhd — which operates the Village Grocer, Ben’s Independent Grocer (BIG) and The Food Merchant chain — is projecting robust growth in the current financial year ending Oct 31, 2024 (FY2024), driven by store expansion, limited competition and rising disposable income among the middle class. Its performance is also expected to outpace the growth of the country’s retail industry in 2024.

TFP Retail, majority-owned by private equity firm Navis Capital Partners, has forecast a 16% year-on-year jump in revenue to RM1.35 billion in FY2024, from RM1.16 billion; and Ebitda (earnings before interest, taxes, depreciation and amortisation) is expected to improve to RM110 million from about RM99 million in FY2023.

In an interview with The Edge, TFP Retail group executive director Ivan Tan says he expects this solid growth trend to continue until Dec 31, with revenue projected to reach between RM1.45 billion and RM1.55 billion and Ebitda, between RM120 million and RM130 million.

TFP Retail’s revenue growth is commendable, compared to the growth forecast for the overall retail industry this year. The Malaysia Retail Industry Report (June 2024) by Retail Group Malaysia, released on June 18, made a downward revision for retail growth this year to 3.6%, from 4% forecast earlier, owing to rising cost of living.

The report also said the supermarket and hypermarket category grew 2% in the first quarter of this year and is estimated to expand 1.4% in the April-to-June period.

“There is less competition in the premium segment,” Tan says, when asked to comment on TFP Retail’s projected growth, which far exceeds that of the retail industry. “Generally, Malaysia’s grocery market is quite competitive, with several players across different segments, but almost all in mass-market segments. As a premium grocery group, we operate in the mid-range to high-end space, serving mainly family customers who want the best quality and healthy food for their families. They are generally not affected by economic headwinds.”

Currently, TFP Retail operates a total of 46 stores under five brands. Forty-three stores are premium grocers — Village Grocer (30), BIG (six), The Food Merchant (six) and BSC Fine Foods (one) — and the remaining three (under Pasaraya OTK) cater for the masses.

Three stores were opened in the first half of the year — in Kiara Bay, Kepong; Pearl Shopping Gallery, Old Klang Road; and IOI Mall Puchong, Selangor — and three more have been scheduled for the second half in Tasek Central, Johor Bahru; 168 Park Selayang, Selangor; and LSH33, Kuala Lumpur. Twenty stores — six to seven stores annually — have been slated to be opened between 2025 and 2027, which will bring the total number of stores in its portfolio to 69 by end-2027.

While most of the openings will be in the Klang Valley, Penang and Johor, TFP Retail is keen to make its debut in Perak, Melaka, Seremban, Kedah and Pahang.

Notably, growth is coming not only from new-store openings but also from existing ones. TFP Retail enjoys an annual same-store sales growth of 7.5% to 9%. Its best-performing store is Village Grocer in Bangsar Village, followed by BIG in Publika and The Food Merchant in Pavilion Bukit Jalil.

“The Malaysian premium grocery market still has strong growth potential for our premium business model. Malaysia’s growing middle to upper class has more disposable income, leading to increased spending on premium goods such as groceries, and Malaysians are becoming more health-conscious, driving demand for high-quality, healthy food options,” says Tan, who has been with the TFP Retail group for 27 years.

“Success in this market segment hinges on established and trusted premium grocery brands that can curate a unique product selection, offering high-quality fresh produce, speciality items, healthy foods and a wide variety of imported products. This has been our strength and business model for the past 28 years.”

Tan points out that the group does not believe in “one size fits all” and is thus a multi-banner grocery group specialising in curating grocery models to cater for different demographics, expectations and lifestyles of residents in all neighbourhoods.

Being a multi-banner also provides the group with the advantage of market reach and diversification, economies of scale, sharing of resources and expertise, innovation and adaptability, and the ability to attract higher footfall. For example, by combining its purchasing power, TFP Retail is able to negotiate for better deals from suppliers and thereby lower its product costs, which potentially leads to higher sales and profit.

Apart from store expansion, TFP Retail is also looking at revamping its existing stores to offer better customer experience. The cost of opening a store ranges from RM8 million to RM11 million, depending on size, concept and location. He adds that in most cases, landlords will provide capital-­expenditure contributions for the opening. Depending on the store, asset enhancement is an estimated RM1 million to RM2.5 million per store.

The history of TFP Retail can be traced back to the 1950s, when the Ong family started a small sundry shop called Kedai Runcit Ong Tai Kim in Gombak. In 1997, the family opened its first modern supermarket called Pasaraya Ong Tai Kim. With expansion came success and the store was rebranded as Pasaraya OTK. In 2004, the Ong family partnered with the founders of Bangsar Village to establish its first premium grocery store — Village Grocer.

Incidentally, Tan, who is Ong Tai Kim’s son-in-law, has been with the group since 1997.

In 2014, TFP Retail partnered with Navis Capital. TFP Retail is wholly owned by The Food Purveyor Sdn Bhd. A search on the Companies Commission of Malaysia website shows that Navis Capital holds a 71.1% stake in the retailer via Foodshop Capstone Sdn Bhd, which in turn is owned by Foodshop Holdings Ltd. Armani Wealth Sdn Bhd, which is wholly owned by Pasaraya OTK (Gombak) Sdn Bhd, holds a 23.25% stake in TFP Retail.

The remaining 5.65% is owned by several individuals, including Benjamin Yong Kwet Yue (0.62%), Ong Ah Kuei@Ong Kim Too (0.53%), Khor Geik Mei (0.53%) and Tan (0.53%).

In 2021, Tan Sri Desmond Lim Siew Choon of Pavilion Mall fame entered into a 40:60 partnership with TFP Retail to set up Global Food Merchant Holdings Sdn Bhd for the opening of The Food Merchant chain of premium supermarkets. Tan is also the managing director of Global Food Merchant.

Meanwhile, Tan has made several observations about Malaysia’s grocery scene and its players.

“Malaysia’s retail scene is undergoing a transformation, with both physical stores and online retailers vying for market share. The e-commerce sector has seen significant growth in recent years, driven by the pandemic. However, physical stores remain preferred by many Malaysians, especially for groceries and furniture,” he says.

Consumers are also moving away from hypermarkets and supermarkets, as evidenced by the closure of hypermarkets and the fewer openings. As for minimarkets and convenience stores, Tan says they serve a different purpose, including offering convenience and basic essentials. As they have always been around, he contends that the impact on supermarkets has been negligible. Instead, he reiterates, “We see them competing with mass-market supermarkets. In premium grocery, we do not consider them as competitors.”

On the issue of rising cost of living, which is seen as affecting overall retail sales, Tan says even with rising inflation, some consumers are willing to spend more on high-quality items. “This trend is particularly prevalent for categories such as fresh produce, meat, seafood and prepared meals.”

Nevertheless, he acknowledges that economic uncertainty and rising costs of living are making Malaysians more price-­conscious. As such, TFP Retail is doing its part by holding weekly bumper harvest sales, which attract many customers.

Navis Capital seeking better valuation for TFP before exiting

Private equity (PE) fund Navis Capital Partners, which acquired a substantial stake in TFP Retail Sdn Bhd a decade ago, is said to be in no hurry to exit its investment in the grocer.

Typically, PE funds tend to exit the business or asset they invest in upon expiry of the fund, which could be just five years or up to 10 years.

Navis Capital reportedly invested US$68 million to buy the Village Grocer chain in September 2014 and another US$14 million to buy Ben’s Independent Grocer (BIG) in 2017.

In 2022, Navis Capital picked Rothschild & Co to help seek potential purchasers, but nothing transpired from this move.

Asked what happened to Navis Capital’s exit plan, TFP Retail group executive director Ivan Tan says, “The price did not meet their expectations and thus Navis Capital decided to hold on to the investment for a little longer to obtain a better valuation.”

He adds that Navis Capital benchmarked TFP Retail against the sale of Jaya Grocer. Grab Holdings Ltd is said to have bought the Jaya Grocer supermarket chain — TFP Retail’s closest competitor — for an estimated RM1.8 billion.

“Jaya Grocer managed to obtain an 18 times Ebitda (earnings before interest, taxes, depreciation and amortisation). Our store numbers and financial performance are very similar. They (Navis Capital) are in no hurry to exit and are waiting for a better valuation,” he says.

This means, based on a RM120 million to RM130 million Ebita projection (see main story) by end-2024, TFP Retail would be valued at RM2.16 billion to RM2.34 billion.

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