Faster food at Manila minimarts challenges McDonald's

At lunchtime in Manila, Isha Vida avoids fast-food restaurants and joins thousands of other workers and students buying ready-made meals at minimarts across the Philippine capital.

The 29-year-old recruitment coordinator's preference for the steaks, fried chicken and salads at convenience stores is typical of an increasing number of Filipinos, who say the outlets are cheaper and faster than McDonald's Corp. or Jollibee Foods Corp. Annual revenue at Philippine Seven Corp., operator of 7-Eleven shops, has grown an average 22 percent in the past five years, while Jollibee's Philippine sales rose 10 percent.

That outperformance will extend as the appeal of minimarts grows, says Robert Ramos, the chief investment officer at Union Bank of the Philippines. Euromonitor International estimates sales at the country's convenience stores will climb at a 12 percent pace through 2017, while Standard Chartered Plc predicts the number of outlets will jump more than 10-fold by 2030.

"They are providing consumers with a substitute," said Ramos, whose $70 million UBP Large Cap Philippine Equity Portfolio is the nation's top-performing equity fund, with an annualized 35 percent return over the past five years. "The proliferation of convenience stores could lead to slower growth for fast-food companies."

Call Centers

Ramos favors shares of Robinsons Retail Holdings Inc., owner of the Ministop franchise, and Puregold Price Club Inc., a supermarket operator expanding into minimarts. He's avoiding Jollibee Foods, which runs the Jollibee, Chowking and Mang Inasal fast-food outlets.

Alliance Global Group Inc., owner of the venture that holds the local McDonald's franchise, sank 4.6 percent at the close in Manila, the sharpest loss since Dec. 12. Jollibee rose 2.9 percent. Robinsons Retail fell 0.1 percent while Philippine Seven slumped 7.6 percent.

Philippine Seven, whose shares have lost 14 percent this year, is valued at 59 times reported earnings, while Robinsons Retail, which has gained 19 percent, trades at a multiple of about 17. Jollibee is valued at 39 times profit after climbing 7.8 percent in 2014.

Expansion in the Philippine call-center industry, where employment rose to 900,000 people last year from 240,000 in 2006, has been the "predominant force" spurring demand for minimarts, Robinsons Retail said in its 2013 share-sale prospectus, citing Euromonitor. Call-centers typically operate 24 hours a day and "convenience stores with 24-hour operations are well-positioned to capture the increasing demand," it said.

Southeast Asia's fifth-biggest economy will probably expand 6.4 percent this year and 6.7 percent in 2015, according to World Bank forecasts.

Tougher Competition

Minimarts will be the country's fastest-growing retail segment over the next 16 years, according to Standard Chartered, with the urban population classified as above the poverty line forecast to double to 64.6 million by 2030.

There could be more than 16,500 convenience stories in the country by then, compared with about 1,600 now, the bank said in a July 15 report. Annual minimart sales will climb to 31.2 billion pesos ($715 million) by 2017 from 20 billion pesos in 2013, according to Euromonitor. The industry had 10.5 billion pesos of sales in 2008, it said.

The proliferation of minimarts has led to tougher competition and may curb the industry's profitability, said Noel Reyes, the Manila-based chief investment officer at Security Bank Corp.

"They might kill each other before affecting Jollibee," Reyes said.

Expansion Plans

Philippine Seven, the nation's biggest convenience-store chain with 1,121 7-Eleven outlets, is doubling spending this year to add 300 new stores and upgrade 100 existing ones. The company said second-quarter profit jumped 23 percent from a year earlier to 224 million pesos.

Robinsons Retail, which has more than 400 Ministops, plans to open as many as 360 stores by 2016. FamilyMart, a venture of Philippine builder Ayala Land Inc., targets 700 stores by 2018, up from about 54 now.

Billionaire Henry Sy, the nation's richest businessman, is bringing in Indonesia's Alfamart. Lucio Co., owner of Puregold, the nation's biggest publicly traded food retailer, has entered into a joint venture with Lawson Inc., the Japanese minimart operator. Puregold will open its first Lawson store this year and plans to have 500 outlets by 2020.

Ayala Land rose 1.9 percent in Manila today, the highest close since May 22, while Sy's SM Investments Corp. gained 0.6 percent. Puregold sank 5 percent.

Minimarts and fast-food companies may increasingly supplant the traditional mom-and-pop cooked-food providers known as carinderias, according to April Lee-Tan, the head of research at COL Financial Group Inc.

'Wider Variety'

"The competition hasn't yet reached a point that it's bigger than what they can tap through expansion," Lee-Tan said. "The untapped market is still big enough for all of them."

Uncle John's Fried Chicken is the top-selling item at Robinsons Retail's Ministop, according to Robina Gokongwei-Pe, the company's president. Ready-to-eat meals now account for about a quarter of sales, she said by phone on July 24.

Ready-made rice meals at 7-Eleven, which opened its first Philippine store in 1984, sell for as little as 29 pesos. That compares with about 47 pesos for a chicken fillet rice meal at McDonald's and 49 pesos at Jollibee's Mang Inasal chicken- barbecue house.

Minimarts "offer a wider variety of food and you don't have to spend as much on meals to get full," said Vida, who works as an administrator at Talent2, a human resources outsourcing company in Manila.

Food Queue

The threat from minimarts isn't lost on Ernesto Tanmantiong, the chief executive officer of Jollibee. They pose a greater challenge than more expensive restaurant chains such as Bon Chon Chicken and Ramen Nagi, he said in an interview on July 28. To maintain growth, Jollibee is expanding outside the Philippines in markets including China and the U.S., while adding more outlets at home.

An assistant for Kenneth Yang, the president at Golden Arches Development Corp., which owns the Philippine franchise of McDonald's, said he wasn't available to comment. Calls to spokeswoman Adi Timbol went unanswered.

At one Ministop in Makati, the nation's main financial district, cashier Mark Arpon says the biggest lure for his customers is the ready-made meals.

"Food sells faster than soap or shampoo," he said. "Our customers only go to McDonald's when our queue is too long."

To contact the reporter on this story: Ian Sayson in Manila at isaysonbloomberg.net To contact the editors responsible for this story: Michael Patterson at mpatterson10bloomberg.net Allen Wan