In the News: 2003

Central Pattana's Great Leap Forward

The Far Eastern Economic Review - June 19, 2003

Thailand's Central Group, Southeast Asia's largest department-store operator, is shedding noncore businesses to fund the rapid expansion of its shopping-mall and store-leasing empire

At a time when many Asian companies ponder the value of taking on foreign partners to help restructure their operations, Thailand's Central Group--Southeast Asia's largest department-store chain--shows how a traditional, family-run company can modernize without yielding management control to outside investors.

Bouncing back from Asia's 1997 financial crisis, Central has nearly doubled its pre-crisis share of Thailand's retail market to around 30%, twice the share of its nearest competitor, the Mall Group. While many Thai businesses remain mired in overcapacity, Central is in the process of expanding its shopping-mall empire, with plans to increase the number of outlets from eight to 14 over the next six years.

That's a significant turnaround for the Sino-Thai majority-owned company, where business has always been a family affair. Indeed, with more than 160 members of the founding Chirathiwat family as shareholders, Central's boardroom could easily be mistaken for a family reunion.

For generations, the Chirathiwat family name was good enough to secure funding to set up subsidiaries under the group's corporate umbrella. Over the years, those interests spread wildly into more than 200 different businesses, ranging from selling ice cream to importing designer jeans to manufacturing sports goods.

When the Asian financial crisis hit, the lack of centralized control and financial accountability strained Central's bottom line, as the company's debt ballooned and its core department-store business sputtered with the economic downturn. Ambitious expansion plans for the provinces overestimated future economic growth and consumer spending power and were subsequently put on ice.

But family traditions are changing fast at Central. On the advice of a family friend with hands-on restructuring experience at Anglo-Dutch consumer-goods company Unilever, Central has recently undergone its most sweeping managerial and operational overhaul since its founding in 1958. For instance, to streamline operations, a family council of elders was established to rein in their over-enterprising offspring, resulting in the closing of more than 120 loss-making subsidiaries.

For those that remained, family managers are now made accountable for their budgets and bottom lines. Noncore operations, such as security and maintenance, are being subcontracted out rather than run in-house, saving the company around 30% of its operating costs, according to company executives.

Core businesses--of which shopping-mall development and operation contribute around 83% of the group's total revenues, and hotels and marketing the rest--are now more clearly defined and better integrated, eliminating conflicts among business interests. Larger strategic decisions are being made at twice-monthly board meetings rather than at the family-elder dinner table, while a new generation of family managers is being groomed to run day-to-day operations.

"We were scattered all over the place just like a big conglomerate," says Kobchai Chirathiwat, chief executive officer of Central Pattana, the group's flagship company. "But when the elders said we can no longer do things as in the past, that we need to stick to one strategic direction, everyone got into line. We are much more disciplined now."

Many analysts agree: Central is one of the few good-news, corporate-restructuring stories to emerge from Thailand's 1997-98 financial crash. "Central has tackled the challenge of restructuring the family business better than most," says Vikas Kawatra, head of research at Kim Eng Securities in Bangkok. "It can be challenging to get the market price for rent when the tenant you're collecting from is your own brother. They have managed to discipline themselves rather than calling on foreigners to do it for them," he adds.

Those changes, it appears, are paying off financially. Since restructuring, net operating profit has nearly tripled, rising from 598 million baht ($14.4 million) in 1998 to 1.54 billion baht last year. Along the way, Central has also weaned itself off foreign debt, paying off all of the $80 million it owed foreign creditors after the crisis. Tenant occupancy rates, meanwhile, are now running at near capacity at 95%, making Central one of the chief beneficiaries of Thailand's consumption-driven economic recovery.

The Chirathiwat family has long defined the Thai retail vanguard. Like many Chinese merchants, company founder Chen Tian Chirathiwat sold his goods from a modest shophouse in the 1950s. To get ahead, he began peddling his goods from a small boat to people living along Bangkok's canals, allowing him to outsell his rivals and accumulate capital for expansion. In the 1960s, he was the first to introduce fixed prices in his stores, a radical departure from the practice of haggling that still characterizes many of Thailand's traditional open-air markets.

It was the second generation of family managers that made the move into more modern shopping complexes, replete with movie theatres, food courts and the latest in imported designer wares. That strategy allowed the company to keep pace with the fast-changing consumer tastes of Thailand's burgeoning middle and upper classes throughout the 1980s and 1990s, building Central's brand name as a local byword for high-end shopping in the process.

More recently, third-generation managers have taken a more active role in managing the company's leases and the tenant mix, moving towards more short-term contracts to increase flexibility and help hedge against the vagaries of the market. "They have managed to shield themselves from the broader consumption trend," says Paworamon Suvarnatemee, a retail analyst at ING Barings in Bangkok. She says that the new mix means less than 30% of the Central's revenues are now contingent on the sales of its tenants, well below the company's pre-crisis exposure.

That store of market knowledge and local connections, management contends, has helped Central keep new foreign competitors at bay. While the likes of France's Carrefour and Britain's Tesco have made heavy inroads into Thailand's grocery-store market after liberalization of the retail industry in 1998, so far there have been no new foreign entrants into the department-store market.

Moreover, foreign retailers with a presence in the Thai market, such as Japanese-owned Sogo and Jusco, are presently beating a retreat due to financial troubles at home, or because their older, fading stores have fallen out of favour with today's Thai tastes. "We aim to be the No. 1, supreme department store in the Thai market," says Kobchai, representing the third generation of family managers. "We believe we understand the Thai customer better than Japanese managers."

Now the Chirathiwats are leading the latest Thai retail trend: industry consolidation. While many of Thailand's big-business families remain mired in red ink and at loggerheads with their creditors, Central has leveraged the financial gains of corporate restructuring to go on a shopping spree, snatching up many distressed assets from its former business partners and competitors.
For example, Central upped its 20% minority stake to 100% in the massive Central City shopping complex on the outskirts of Bangkok in 2001, buying out the once-influential, now-indebted Todsapol family's stake. In a more aggressive takeover, Central recently took a controlling stake in Robinson's Department Stores, a heavily indebted, second-tier retail chain catering to the lower and middle classes. After years of working together on equal terms, Central recently moved Robinson's founding family out of their senior management positions and replaced them with their own kin.

Most recently, Central won the right to overhaul Bangkok's version of the World Trade Centre, which rests strategically at the heart of Bangkok's central shopping district, but has grown noticeably dilapidated since the 1997 crisis (see story below). "The latest acquisitions have strengthened Central's position as the dominant market leader in the industry," says Pote Videt, managing director of Thailand's Private Equity Company, a Bangkok-based mutual fund. "As the biggest multi-mall operator in the market, [Central] is well positioned to benefit from Thailand's overall economic recovery and increase in consumer spending."

Chirathiwat elders are looking to the third generation of family managers to carry out that mission through the company's most aggressive expansion plans yet, a strategic blueprint that aims to almost double the company's local presence in six years. In that direction, last year Central opened a new branch in Bangkok's gritty but up-and-coming Rama II district, while also laying the groundwork for a new environmentally sensitive branch on the resort island of Phuket. The company also put the finishing touches on a major renovation and expansion of its existing branch in the northern city of Chiang Mai.

The big question, though, is whether or not Central is moving too aggressively to capture only the top end of the market. That's a risky proposition, considering Thailand's still stark disparity in wealth--less than 3% of the population earns more than 15,000 baht a month. Mirroring the company's pre-crisis expansion plans, Central is placing a bet that Thailand's present credit-charged consumption boom, which is leading rather than tracking economic growth, can be sustained over the long term.

More competition is heating up for the higher end of the market that Central is aiming for, with many posh new shopping complexes set to come on line in Bangkok next year. "As business picks up, it looks like Central is trying to do everything again," says Kawatra of Kim Eng Securities. But after restructuring "it appears they have a more flexible, floating strategy than before."

Central's management says that with its operational and managerial overhaul, the company is now in a better position to meet those market challenges than before the crisis.

"We have learned the lessons of 1997," says Kobchai. "We have re-adjusted our old plans. In the past we were luxurious, now we are more conservative"--in line with the Chirathiwat family's new and improved family values.