TOBACCO lobbyists may have every reason to rejoice now that that proposed ‘Generational End Game’ (GEG) policy that comes with the Tobacco and Smoking Control Bill 2022 has been referred to a parliamentary special select committee for further scrutiny.
This is because generally speaking, the passing of the bill is most likely negative for convenience store (CVS) players who would no longer be able to display both tobacco products and smoking-related items in their stores, according to CGS-CIMB Research.
“(This will) further hurting their tobacco sales,” projected analysts Khoo Zhen Ye and Walter Aw in a retail sector update. “On top of that, this could lead to a long-term decline in tobacco sales.”
Based on CGS-CIMB Research’s channel checks, tobacco sales form circa 7%-35% of CVS operator’s sales at this juncture. “Nevertheless, we expect the impact on margins and bottom line to be smaller given that cigarettes are typically a low-margin sales product,” added the research house.
Among the CVS operators under its radar, the research house expects Mynews to be the most impacted (vs FamilyMart and 7-Eleven) given Mynews generates all of its revenue from its CVS business with tobacco sales’ contribution being the highest among its peers.
Meanwhile, 7-Eleven Malaysia Holdings Bhd generated 62% of its 1Q FY2022 revenue from its CVS business while QL Resources Bhd (via Family Mart) generated only 13.4% of its FY3/2022 revenue from its CVS segment.
“Nevertheless, even if the bill were to be passed, there will be no immediate impact given that it will only become effective on Jan 1, 2025 and will only affect potential smokers below the current age of 15 (legal smoking age is 18 and above),” reckoned CGS-CIMB Research.
“Based on our sensitivity analysis, a 10% decline in tobacco sales is expected to lower convenience store operators’ CY2022-2024F revenue forecasts by 0.1-3.5%.”
Interestingly, the research house observed that the contribution from tobacco sales has been declining for convenience store operators over the past few years. In its estimation, tobacco sales accounted for circa 40%-45% of convenience store sales during 2017-2020 vs circa 30%-35% currently.
“This is given convenience store players’ push towards fresh food and ready-to-eat products which generate higher margins,” justified CGS-CIMB Research. “For example, 7-Eleven and Mynews have been rolling out 7-café and CU outlets respectively which carry a larger proportion of higher-margin fresh-food items since 2021.”
Moving forward, the research house expects CVS operators to continue focusing on other higher-margin products which could offset the potential loss of tobacco sales in the longer term. – Aug 5, 2022
Main photo credit: The Edge Markets and The Borneo Post
