Managing During a Slow Down
Thursday, November 6, 2008
There are many ways to cope?? with hard times and a financial meltdown. Three companies, San Miguel Corp., Ayala Corp. and Vista Land provide templates.
One is have a good cash hoard. This is the San Miguel example.
Another is pay attention to the low end of the market. This is the tack ironically of the Ayala Group, a group associated with high end products and services for the snooty segment of the consumer market.
?Third is the old-fashioned way, what Senate President Manny Villar calls ?sipag at tyaga.? Hard work and diligence. You work hard, you eat. You have diligence, you succeed in business.
San Miguel, under Chairman Eduardo Cojuangco Jr. and President Ramon Ang, seems to have seen the signs of slowdown way ahead of the pack. They divested early on, boosting net profits in the first half of 2008 to P19.7 billion, a whopping 199 percent jump from a year ago, and raising a formidable cash stash.
San Miguel?s cash heap has enabled it to buy the 27-percent Government Service Insurance System equity in Meralco for P30 billion and to bid for majority control of Petron Corp. owned by venture capital Ashmore Holdings.
Buying into Meralco and Petron gives San Miguel a lot of strategic and syner-gistic benefits. The country?s largest non-energy industrial company has 100 plants and is a huge user of electricity. Petron has about 1,600 retail gas stations which San Miguel can use as outlets for its beer, ice cream, soft drinks, processed foods and snacks. San Miguel also runs the country?s largest trucking fleet which can use Petron gas and thus get wholesale discount.
During 2008, San Miguel made the following divestments:
? It sold niche brewer J. Boag & Son Limited (J. Boag) to Lion Nathan Ltd., receiving A$277 million as payment of purchase price and making a gain of P5.665 billion, net of deferred income tax.
? On Jan. 30, 2008, San Miguel sold its 35-percent stake in its domestic packaging businesses to Nihon Yamamura Glass for P4.317 billion while its San Miguel Holdings Ltd. (SMHL) sold its 35-percent stake in the regional packaging businesses to Nihon Yamamura Glass for $21 million. San Miguel made a total gain of P152 million.
? On May 12, 2008, San Miguel Brewery Inc. (SMB) listed its shares, gaining P5.654 billion for San Miguel Corp.
? San Miguel Corp. made net forex gain of P8.786 billion from the restatement of its dollar-denominated cash and cash equivalents and long-term debt. It incurred marked to market loss of P6.771 billion from its currency forwards, swaps and options.
? The parent company partially paid off its long-term debt by $277 million, decreasing its loan balance from $1.2 billion to $923 million.
Most San Miguel businesses registered revenue growth versus 2007. With higher sales performance and managed fixed costs, together with increasing input costs, consolidated operating income rose to P0.14 bllion, 28-percent higher than last year.
San Miguel Corp.?s operating profits increased to P14,465 million, which included beer IPO income.
Including income from discontinued operations of P5.665 billion in the first quarter, June year-to-date consolidated net income amounted to P20.130 billion, significantly higher than last year.
On the other hand, Ayala looks at the base of the consumer pyramid, which presents what Jaime Augusto Zobel de Ayala calls ?a market opportunity and a new era for development.?
Jaime Ayala notes that ?the bottom 90 percent of all households earn less than $600 per month on average, but represent 60 percent of the country?s purchasing power.?
Accordingly thus, Ayala?s Globe Telecom has gone low-end, chalking up 22.7 million in wireless subscribers. Rival PLDT Smart has 33.24 million. Without going low-end, Globe would have been unable to catch up with Smart. Globe made P13.27 billion profit in 2007 on revenues of P68 billion and another P6.2 billion in the first half 2008 on revenues of P32.62 billion.
Explains Jaime Ayala: ?A powerful insight in doing business at the base of the pyramid is that first, people at the bottom of the wealth pyramid need access to the same products and services as the rest of the world; and second, they are necessary to sustain growth, especially for businesses operating within emerging market realities where anywhere from 40 percent to 90 percent of consumers belonging to low-income communities command anywhere from 25 percent to 50 percent of the purchasing power.?
?The bottom of the pyramid thus presents a potentially massive source of growth for firms that can ?crack the code? or find the right business model to effectively serve and penetrate this market in an enlightened and productive way,? explains the chief executive officer of Ayala Corp.
Meanwhile, Manny Villar?s holding company, Vista Land & Lifescapes Inc. has built over the past 30 years more houses than any other property entrepreneur?130,000 homes, starting with a paltry P30,000 when he sold his first house and lot package.