Risky business


  • Business
  • Saturday, 21 Feb 2009

THE non-renewal of a bottling and distribution contract from The Coca-Cola Co to Fraser & Neave Holdings Bhd (F&N) demonstrates a major risk some companies on Bursa Malaysia are exposed to.

Motor stocks have borne the brunt of such risk but consumer-related stocks too have from time to time been rattled over the prospect of having their franchise rights taken away.

“We always watch out for single customer or supplier risk,” says CIMB Research head of research Terence Wong.

The loss of the bottling and distribution contract to F&N is a blow the company may take some time to recover from but the inability to rebound unfortunately has hit a number of other listed companies hard.

Predominantly, that impact on a company’s profitability has been seen in the motor industry where once high flying stocks have never recovered.

Daimler took control of the distribution business of Mercedes-Benz from Cycle & Carriage Bintang Bhd in 2003 and Oriental Holdings Bhd lost control of the distribution of Honda vehicles in Malaysia in 2000.

Furthermore, Edaran Otomobil Nasional Bhd (EON) lost its distributor rights with Proton Holdings Bhd when it was appointed a super dealer to sell Proton cars in 2003 and BMW took control of the wholesale business from Sime Darby Bhd in 2003.

The profits of some of those companies that had seen their wholesale business converted to that of a dealer, especially in EON and Oriental, have slumped. Oriental today, however, has bounced back in terms of profits by selling Hyundai cars.

Tan Chong Motor Holdings Bhd had to, in the past, handle talk over the future of its Nissan franchise but it has been given the assurance that its franchise right is safe.

But its subsidiary, Warisan TC Holdings Bhd, has had its sole rights in Wacoal and Shiseido in Malaysia replaced by joint venture agreements.

“The motor industry is exposed to such risks when the principal wants a bigger slice of the value chain,” says Maybank Investment Bank Bhd head of research Vincent Khoo.

While that was true in the early part of the decade as auto companies globally took over the wholesale business of their operations in a number of countries, Khoo says such risks for the motor industry are however negligible in the short term as principal companies around the world might not want to spend precious cash to take over the Malaysian distribution business unless there is a compelling reason to do so.

One consumer company that over the years has encountered rumours of its franchise rights being taken away is KFC Holdings (M) Bhd, but recent developments such as the company’s expansion into Cambodia to grow the KFC brand suggests that its business is safe.

While the risk to business is prevalent in companies that rely on franchise or major distributor rights, analysts said companies like Nestle (M) Bhd, Carlsberg Brewery Malaysia Bhd and Guinness Anchor Bhd, which were controlled by their foreign parents, have no risk of their business being eroded by key brands being taken away.

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