1/2017 Survival of the traditional businesses

by Tan Thiam Hock

Saturday, 14 January 2017

THE year 2017 started off with a spark of price increases across the board for fuel and many imported items.

It has certainly been a busy period for many marketing and accounting experts computing the new cost due to price increases from suppliers and the devaluation of our ringgit. The biggest headache of all is what exchange rate should be used for the 2017 forecast? If you believe the financial analyst, they have boldly announce that the ringgit will recover to 4.2/4.3 to a US dollar citing domestic GNP growth of 4%-4.5%.

For the disbelievers, the forecast of 4.5 to 4.7 will be adopted, citing loss of confidence in our government and net sale of our national debt. As it stands, it will cost you around 4.5 to a US dollar when you import so I will advise you to use this minimum number in your forecast. Do a simulation exercise of what if the US dollar goes to 4.7, 4.8, 4.9 and 5. If you can still show a net profit at 5, then you are in the safe zone for 2017.

After accepting an invitation from a friend in 2016, I was a speaker in a KLCCCI Chinese Chamber of Commerce event which was sponsored by the Credit Guarantee Corp, held on Jan 7. I was tasked to speak on “How traditional retail businesses see the future”. I was obviously the dinosaur speaker as the earlier speaker was a young qualified aerospace engineer talking about his parcel booking website, Easy Parcel.

While thinking about what to speak for the event, I recalled many happy memories of the early years of my trading businesses when life was so much simpler and business was a straightforward transaction between a willing seller and a willing buyer. Always a win-win situation. Everybody is happy.

Nowadays, the modern trade way of doing business is I win-U lose. Trading terms heavily stacked in favour of retailers, the last mile contact with consumers. Distributors have to scrap for a living.

With the advancement of technology, availability of broadband wifi and smart phones, will e-commerce eventually replace the traditional distribution channel of distributor-retailer-consumer? My guess would be the emergence of a hybrid model – O2O, offline to online and online to offline. Online business having the need to have brick and mortar presence and traditional brick and mortar retailers having the need to go online.

In UK, Sainsbury Argos just announced that their online sales is now 18% of total sales. I believe this O2O hybrid model will be adopted by most retailers as an adjustment strategy not knowing how severe the e-commerce disruption will be. Only time will tell.

Traditional retailing since the Stone Age has always involved the market place, where sellers and buyers meet and transact, Logistics – delivering goods to the consumers/distribution channel – decisions and payment methods. Cash or Credit terms? There is no difference with e commerce. It is still a market place – virtual and the goods are delivered direct to the consumers. Payment terms are prepaid via online credit cards or cash upon delivery.

The main difference is no credit term, no brick and mortar presence and no distributors required.

Again our traditional distribution channel will be disrupted. It has been disrupted or has evolved through the last 40 years or so. When I first started trading in 1985, there were few importers and much fewer brands offered per product category. I would classify the late 80s and 90s as the golden era of retail distribution growth in Malaysia.

If I remember correctly, thousands of retail stores like pop and mum grocery shops to mini markets were sprouting up all over the country as distribution efforts intensified through the emergence of Chinese wholesalers for various kind of goods. From dried goods to foodstuff, the van operators work day and night, going from town to town, stocking and distributing to all these new retail stores.

Even the Chinese medical hall evolves into part medical hall and part mini market hybrid. We had wholesalers supplying the single grocery shop in faraway Felda schemes and logging camps. Yeo Hiap Seng even had a boat supply service in Sarawak, a weeklong supply and selling trip for the crew going upriver. In those days, canned food sales in Sabah and Sarawak was 40% of national sales. To me, the wholesalers were the unsung heroes of this retail growth era.

A typical wholesaler startup would be to rent a double-storey shoplot with the family living upstairs, and storage and office downstairs. Normally he is a Chinese male, ex-salesman with 10-15 years experience and with contacts to set up a credit account with major brands owned by foreign corporations. From Colgate Palmolive to Unilever to Nestle to Dutch Lady, these were the biggest companies with the most leading brands that the wholesaler crave for as he goes about setting up his distribution network.

His operation has to remain lean as margins for major brands were a standard 4%-5% of sales and the extra margins can only be earned from trade offers, normally 12 plus one or baker’s offer as they called it then. His wife and children will help to man the store while he is out selling on his daily rounds.

As his business grows, he will hire additional sales personnel to cover a wider area with the ultimate aim of covering an entire state. Then he can bid for exclusive distribution for a particular company covering the so-called general trade. Most companies will cover the key accounts or modern trade directly.

As the modern trade evolved and expanded across the nation, the hypermarkets took market share from the neighbourhood mom and pop stores, single mini market operators and Chinese medical halls leading to a shrinking market for wholesalers. Most wholesalers just retire and close shop.

The more successful ones have grown to become major corporations with the second and third generations now managing it professionally. Top of my mind would be Lein Hing Group in Kepong and Kim Teck Cheong (KTC) in Kota Kinabalu. While KTC listed on the Bursa Ace Market, Lein Hing remained private with annual sales of over a billion ringgit. Lein Hing will be celebrating its 40 years of existence this year with KTC just a few years behind.

Just as history will show that Chinese wholesalers played an integral part in the retail distribution growth of this nation, we must not forget the other unsung heroes. From the capable civil servants and trade ministers of yesteryears to the even handed police force giving us a secured environment to prosper. Righteous people with first class integrity.

Unfortunately just like the wholesalers, these unsung heroes have all disappeared, disillusioned and corrupted by double faced political leaders. Online or offline, the fabric of nation building has been disrupted that will set this nation backward while other nations move forward.

We have to decide on what is right and what is wrong. There is no hybrid model for national conscience.

Published: http://www.thestar.com.my/business/business-news/2017/01/14/survival-of-the-traditional-businesses/

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