Megamalls and Bummer Banks

[Guest BKKvisitor]

(FROM THE MOTLY FOOL WEBSITE)

 

This summer, I was in Bangkok, the capital city of Thailand. Now that I've moved to the other City of Angels, I'll relate some of my Foolish observations while living there.

 

Unlike the Motley Fool Global Gains team, which recently took a whirlwind trip to Asia, I didn't travel to Thailand with the express purpose of investigating local companies. I did a little poking around, but I hit a fair amount of dead ends. The most salient scuttlebutt I have centers on two great American franchises. But first, I'd like to share my search for a hot Thai stock.

 

Megamalls, bummer banks, and a power play

 

Thais are really wild about shopping malls, and they have some of the nicest ones I've ever seen. You need a Ferrari? Just drop into the Ferrari store. I thought my hometown mall was fancy because it had a carousel. Now I know not to bring any Thai visitors there. My mall-going scuttlebutt was of limited use for investing because the best mall developers are privately held, like The Mall Group, or do not have tracking stock on a U.S. exchange, like Central Pattana. It did show me that there's a lot of baht flowing around Bangkok, however.

 

After my mall thesis was mauled, I figured the financial sector was worth a sniff. Banks tend to be a great proxy for investing in overall economic growth. The Global Gains team visited HDFC (NYSE: HDB) in India for this very reason, and I've got an Argentinean bank, Grupo Financiero Galicia (Nasdaq: GGAL) in my Motley Fool CAPS stable as a play on an economic turnaround in land o' tango. Thailand's economic situation is in many ways closer to that of Argentina. The Land of Smiles was ground zero for Asian Contagion a decade ago, and a full-fledged rebound has yet to materialize. Recent troubles include a military coup, increasingly violent democratic rallies, and a botched plan to restrict capital flows. But still, those malls are packed and the luxury high-rises keep rising. The Bangkok-based banks have to be doing all right ... right? Unfortunately, no. Every bank I looked at had scary-high nonperforming loan ratios, of 7% to 10%. Those bad loans are bad news, and the offending banks' shares don't look cheap enough to warrant a turnaround bet today.

 

My final foray was a look at wholesale power generation. I discovered a company, EGCO, that has been in the merchant power business since the sector was partially privatized 15 years ago. EGCO sports some very fat operating margins compared with American independent power producers like Dynegy (NYSE: DYN), Mirant (NYSE: MIR), and NRG Energy (NYSE: NRG). The Thai government accounts for a good chunk of revenue, which along with country risk may explain the low valuation there. That wouldn't stop me from considering this solid dividend-payer for my portfolio. The deal-breaker is that once again, there are no shares listed here in the U.S. Not even on our dear Pink Sheets. Drat.

 

OK, so I won't be tipping you off to a Thai ticker. I feel bad about that, really. If it's some consolation, I do feel that I have some useful insight into the on-the-ground reality of two companies whose shares are quite a bit more accessible to American investors.

 

A tale of two franchises

 

It didn't take me long to conclude that there is a glut of Starbucks (NYSE: SBUX) in Bangkok. I was able to walk out of my residence and hit three of them in short order. A look at the company website confirms my intuition: 72 stores. So why do I use the word glut? Because every Starbucks I ever visited was nearly empty. The first time, I figured it was just the time of day. But after unscientifically varying my scuttlebutt hours, I consistently found Starbucks locations to be seriously lacking in foot traffic.

 

Of the meager patronage that did exist, I found that no more than half of the customers were Thai. The rest were American tourists, European expatriates, or East Asian businessmen. Now, the tourist/expat/business traveler dollar -- or baht, rather -- is decidedly a strong niche in a place like Bangkok. But Starbucks isn't a niche business. It's a huge franchise that's supposed to be dominating the retail coffee market the world over.

 

This led me, of course, to speculate about the apparent failure of the Starbucks brand to entrance throngs of young, upwardly mobile Thais. Let's be clear -- Starbucks is priced way beyond the budget of the average Bangkok resident. Coffee from a street stand costs 20 baht -- less than $0.70. A regular tall coffee at Starbucks went for 70 baht. So price may be an issue, but it's far from the only one.

 

What struck me most about popular, up-market retail destinations in Thailand was that there was the Western influence, but they still retained Thai elements. Starbucks strike me as carbon copies, regardless of your coordinates. Tom Waits still plays on the stereo system.

 

Wai bother assimilating?

 

I think the most striking contrast between Starbucks and McDonald's (NYSE: MCD) was the degree of assimilation. With Starbucks, that degree was essentially zero, save for some Thai script below the English signage. In the case of McDonald's, you're seeing Thai culture reflected before you even walk in the door.

 

Out front stands Ronald McDonald, giving the wai. This is a polite Thai gesture of greeting, in which you place your palms together and bow. Inside, Thai pop music plays on the speakers. There are fried taro desserts and other regional menu items. The signs are mostly in Thai. And guess what? The McDonald's are full of Thai customers.

 

Coffee at McDonald's costs the same as it does on the street. But like I said, it's hardly about the price. The two companies obviously don't target the same demographic, after all. But the difference in marketing is truly worlds apart, and with Starbucks, I think that strategy isn't working.

 

http://www.fool.com/investing/internationa...nd-bangkok.aspx

[Guest wowpow]

What and interesting survey.

 

I think that they do Starbucks an injustice and that they are trading rather better than you suggest - even at prices which are enormous to the average Thai.

 

The ones in Pattaya have a steady trickle of business but the ones in Bangkok that I see do quite well. I am thinking of the ones in MBK. the 3 in the Siam Center, Siam Paragon, Central World Plaza, Central Chitlom, Soi Convent and Emporium. These all seem to trade quite well and it is sometimes difficult to find a seat. They do good business with rich Thais, rich students and Foreigners.

 

My Doctor tells me that the tiny one in the Bumrungrad hospital has the highest turnover per square meter of any Starbucks.

 

I do have problems with the product. The coffee and drinks are always pretty good but the food items I find dire and very expensive so I rarely buy. Starbucks in Malaysia and Singapore have terrific cakes and sandwiches.

 

Before Starbucks hit Thailand it was extremely difficult to get a decent coffee. Since that time the standard of coffees available have improved enormously.

[Guest fountainhall]

As a reasonably regular patron at Starbucks in Soi Convent, I agree it is often quite full. But look more closely. A lot of students use the upstairs section just for study, staying there for 2 or 3 hours and rarely buying more than one drink. I have also often seen families there who bring in their food from outside and purchase just some drinks. Not far away in Rama 4 there is one in the U Chu Liang Building (HSBC) when there are sometimes never more than 2 or 3 people. I agree BKKvisitor and would not think of investing the local franchise partner. And I agree with wowpow about much of the food. Bangkok should take a tip from Chiang Mai where they serve the most wonderful mango meringue concotion.

[Guest BKKvisitor]

Please bear in mind that my posting was from the Motley Fool website run by a pair of successful investment advisers who mimic the style pioneered by Fidelity Investment guru Peter Lynch who ran the firm's flagship Magellan Fund for many of its best years.

 

I share most of the comments by posters above about Starbucks in BKK. I'm most familiar with the Soi Convent location and have used it as a meeting place because most Thais can easily find it and they enjoy visiting a shop they usually don't frequent for all of the reasons posted above. Personally, I am not a big Starbucks fans. I find their coffee too bitter and too expensive (I much prefer the Au Bon Pain coffee).

 

This is probably an appropriate jumping off point for a brief discusiion of where you can get a good, western-style (meaning drip brewed) coffee in BKK. Other than at Au Bon Pain, most places simply use hot water and Nescafe (now there's a stock to consider if you're interested in a slow but steady grower with great worldwide exposure...it's part of massive Nestle, a Swiss company that trades as an ADR and is currently buying the Gerber baby food line from Novartis). McDonald's, which serves a very respectable brewed coffee in its US locations, uses Nescafe in Thailand. The coffee at Dunkin Donuts in Siam Square's coffee is nothing like the Dunkin Donuts coffee served in the US and seems to attract mostly students who go to chat, drink sugary concoctions and eat gooey donuts.

 

The coffee stands that set up along sidewalks are your best value but they most all use a combination of Nescafe and sweetened condensed milk.