Note that there are 2 F&Ns. 1 is listed in Singapore, the other in Malaysia. The one I am talking about is F&N Malaysia which has its operations mainly in Malaysia and dairy products in Thailand. F&N Singapore, the holding is much bigger and both are just as well run.
All the good things will not come to an end but one very significant factor will derail F&N's competitive advantage for quite a while. What is that?
The Coca-cola company factor
Once a good partner, now a major nemesis in Malaysia. Why is that? F&N used to be the bottler for Coke - for more than 50 years remained that way. When Coca-cola was just happy with building its Cola range and maybe Sprite's market share in every country that it goes to, F&N of course was just as happy being the bottler. Along the way, F&N used the partnership and distribution strength it has built in Malaysia to introduce several drinks of its own brand. Hence, we in Malaysia are introduced with 100Plus, F&N carbonated drinks, Seasons and several other brands - all owned by F&N. Problem is that Coca-cola has the same flavoured drinks. But F&N doing the bottling and distribution so well and Coke, the marketing master was still growing at a nice pace that both were happy with this arrangement for a while. Until both Coca-cola and Pepsi realized that they cannot just rely on carbonated drinks for growth as they are not growing as much anymore as before.
Hence the multi-drink strategy. To have a multi-drink strategy, you will need a multi-marketing strategy and to be able to test out the market for acceptance of any new drinks that they introduce. F&N with its own brands are just not going to do that. Imagine they are bottling for Fanta, Minute Maid while F&N is also selling its own brand of similar range. Surely, Coca-cola being the tai koh (big brother) is not going to allow that as well. Malaysians who do not know, Coca-cola actually has over 100 types of drinks, just that they are not here - yet.
All good things came to an end in 1 September 2011. In fact, the termination was announced much earlier - sometime in 2009 but it took Coca-cola more than 2 years to build its plant in Nilai and together it has to build a distribution channel as well. Remember, Coca-cola did not need to worry about that when F&N was doing the hard work for them.
Good marketing however, is much tougher than good distribution. Coca-cola, is not what it is today (and made Warren Buffett very rich) if not for it being the best marketing company in the world. Apple took over that realm for last 10 years I should say.
Just look at all the strategic shelf space it took over the last year. It has the might. And some time around last year, Fanta (owned by Coca-cola) was brought back. I foresee Coca-cola is not going to stop there having built a 30 acre plant. It will be fighting for market share in the sports drink market and everything else it can make from selling water.
From that, the Malaysian soft drink market is to have 3 major players - Coca-cola, PepsiCo and over time I foresee F&N will drop to be that 3rd player.
So what is the effect to F&N? Tremendous if you look at the contributions the soft drink business brought to them.
|Blue Color shows the contribution from soft drink to F&N in FY2011 (30 Sep)|
Operating Profit from soft drinks dropped more than one fold (RM88.36 million to RM41.17 million) . Note that the drop in dairy business in Thailand may be short term though due to massive flood last October - November around Bangkok.
I believe this one quarter impact is not a short term thing. It is going to be a long fight for F&N - one that may turn out to be a big headache for F&N.
Hence, at the current price of RM18.18 valuing F&N Malaysia at more than RM6.56 billion and over 20x FY2011's profit - I think is going to be tough for F&N to maintain in near future. No major property project or any immediate diversification is going to change the immediate loss from Coke's business so soon.
Note: The theme for F&N's Annual Report last year was "Sustainability through Diversity" - hence, you can already guess what they are thinking!