Home Product Center

Home Product Center Plc (HMPRO)
What’s new?
We attended the opening of the first Mega Home store, HMPRO’s new format catering to small contractors, project owners, retail shops and low-end consumers—the same market positioning as GLOBAL and Thai Watsadu. The outlet is located in Rangsit, opposite Bangkok University. In our view, the location is not an issue, as the catchment area covers one of the largest residential zones in northern Bangkok, but we think the new format may need adjusting, both in terms of merchandising and store layout, because we don’t think it looks attractive or friendly enough to draw contractors, its main customer target group.
Merchandising mix makes store positioning unclear
HMPRO is trying to differentiate Mega Home from its competitors by offering unrelated items for sale, such as stationery, food packaging, toys, electrical appliances, car accessories, even Buddhist paraphernalia. These extra product categories make for ambiguous store positioning, weakening the focus on the main target customer group. Given that 15-20% of the total sales area of 20k sq.m (versus GLOBAL’s 25k sq.m) is allocated to these unrelated items, we are also concerned as to whether Mega Home has a sufficient number of each SKU to supply contractors. Unlike end-consumers, contractors do not wait for product delivery at a later date. If the product is not on the shelf or there aren’t sufficient numbers available, they will find somewhere else from which to buy supplies.
Store may not be friendly for contractors
Our first impression was that the store’s ambience is geared for end-consumers rather than contractors, while its layout isn’t optimized for contractors to easily find the products they need. For example, the tool equipment department and the painting department (which both primarily serve contractors) are relatively distant from each other, separated by shelves of consumer products, such as car accessories and gardening. As such, we think the firm’s sales target of Bt103/sq.m/day (versus GLOBAL’s Bt70-80/sq.m/day) is too aggressive and unlikely to be achieved. We, thus, assume sales of only Bt55/sq.m/day for Mega Home during its first operational year.
Gross margin a bit slimmer than GLOBAL’s
With regard to pricing strategy, Mega Home is trying to match the prices of products available at competitors’ stores, but for house brands that are also sold at HomePro, the firm will employ a single-price approach in order to avoid cannibalizing sales from HomePro. Management guides that the gross margin of Mega Home should be around 13-14% during the initial stage of its operation (versus GLOBAL’s 15-16%), in line with our estimate.
Working capital management
Besides having 100,000SKUs in-store, Mega Home has to build a large stockpile of items to ensure that there are products available on shelves for contractors, which makes for a long inventory turnover period. However, management targets controlling inventory turnover at 80-100 days (versus GLOBAL’s 150 days), which would make for a cash cycle of -10 to +10 days. During our store visit, management showed us the merchandising management system, which monitors inventory on a real-time basis and should enable the firm to optimize inventory levels to match demand for each product. However, there would be some risk of inventory turnover being longer than the firm’s estimate if sales were to fail to achieve its sales target.
Plans for 20 stores within four years
In its initial phase, HMPRO is trying to avoid head-to-head competition in order to maximize return. It will open stores in locations where demand is strong and where no modern-trade vendor is currently located. The second Mega Home outlet is scheduled to open in Mae Sot (a town on the border with Myanmar) next month. The third location will be in Nongkhai (across the Mekong River from Laos) in February 2014 and the fourth in Chonburi in April 2014. The firm targets rolling out 4-5 stores a year during FY14-16. CAPEX per outlet is set at Bt500m. However, there is risk of the expansion being pushed back if the stores need to be re-formatted.
Losses initially, but great long-term potential
In summary, Mega Home now looks unlikely to perform quite as well as we previously expected, due to its merchandising mix and store layout issues. But over the long-term, we believe the firm will fine-tune the mix to meet customer preferences, which will enable sales expansion and profitability. Management expects Mega Home to break even within three years as an operation, but in only one year at the store level. The loss is estimated to be in the region of Bt80-100m in FY13 (mainly pre-opening costs) and is likely to rise slightly in FY14. We are not concerned about losses during the initial phase, as they will squeeze HMPRO’s earnings by only 2-3%. The long-term potential is great. The market size is estimated at Bt300-400bn, but the aggregate sales of modern-trade vendors in this category (which includes GLOBAL, Thai Watsadu, Do Home and Home Hub) are estimated at only Bt45-50bn, indicating huge room for expansion.