Metro Retail: New play on the trading block

Frank Gaisano

Long before the Sys and the Gokongweis started building their nationwide shopping mall empires, there was the Gaisano family of Cebu.

And from this entrepreneurial family with a history in retail dating back to the 1930s came the line of Victor, who decided to strike out on his own.

Together with his wife, Sally, he opened his first store in Colon, Cebu, in 1982.

At that time, there were seven other department stores operating in the area but the couple were unfazed by the competition.

From the start, Victor and Sally Gaisano envisioned a world-class retail store that will offer quality service and products at competitive prices.

That was the beginning of Metro Retail Stores Group Inc. (MRSGI), which didn’t use the storied surname as part of a deliberate strategy to carve its distinct identity and avoid being confused with the similar businesses operated by relatives.

That first department store of Metro Retail in Colon—said to be the oldest street in the Philippines—started with only three floors, which then expanded vertically to seven floors, and then horizontally until an entire block was occupied.

The group ventured to Luzon in 2001, setting up shop in Legazpi. It debuted in Metro Manila in 2003 with the opening of a department store at Ayala’s Market! Market!

These days, MRSGI, now run by the second generation, is the biggest retailer in the Visayas and the fourth largest in the country after SM Retail, Puregold Price Club and Robinsons Retail.

It has 9,700 employees nationwide and a footprint of 46 stores with a total net selling space of about 197,873 square meters. It has three retailing formats—department stores, supermarkets and hypermarkets—and it plans to double this footprint in five years.

Revenues last year amounted to P28.54 billion while net income stood at P628.9 million.

Tomorrow, MRSGI is set to become a publicly traded company with a market capitalization of P13.86 billion.

The motivation for listing on the local stock exchange is not just to raise fresh capital.

The Gaisanos envision that being subjected to the rigors of being a public company will instill discipline and a strong culture of good governance in MRSGI.

MRSGI’s initial public offering price of P3.99 per share puts the size of this stock debut at about P4.04 billion.

At this price, investors will pay a bit less than 15 times the kind of money Metro Retail is likely to make in 2016.

Peers like Puregold Price Club Inc. and Robinsons Retail Holdings Inc. are respectively trading at higher valuations of 17.7 times and 20.58 times their expected earnings per share next year.

Getting a higher valuation may just be a matter of time as the group plans to continue opening five to 10 stores each year, sustaining the pace of growth started in 2010.

The aspiration is to soon break into the roster of the country’s top three retailers.

“I think their knowledge and experience in the Visayas area set them apart. Branding and location as well—they are not something that any new player can copy,” says April Lee-Tan, head of research at leading online stock brokerage COL Financial. “I think the fact that they are able to survive in [Metro Manila] despite the more competitive environment also shows that they are not going to be a push over to the other big boys.”

Sibling power

Victor and Sally’s four children—Margaret, Jack, Edward and Frank (by order of birth)— were initiated into the family business early.

“It’s like we’re already born into retail,” Frank Gaisano, MRSGI chair and chief executive officer, tells the Inquirer.

As a grade-schooler, Gaisano took on little tasks in the family store.

“Before, there was a role called runner. So you bring the merchandise from one place to another. I was 11 years old,” he says.

“That was more for fun, I guess. When you are little and you get paid one peso a day, that’s a big deal,” Gaisano adds.

Their parents also trained them to not just get chocolates or candies from the shelves or money from the cash register. They had to pay for everything.

The siblings were later educated and trained in different disciplines, all of them passing the board in their respective fields.

Margaret became a Certified Public Accountant and Jack, a Chemical Engineer. Edward became a doctor while Frank is a civil engineer by training.

All of them are now focused on MRSGI.

In 2008-2009, the Gaisanos decided to professionalize the family business, enlisting the help of Arthur Emmanuel, a retailing veteran from US retailing giant Walmart.

MRSGI is focused on the ‘aspirational C’ market

Emmanuel has over four decades of retailing experience, three of which were spent with Walmart. He headed Walmart’s operations in Latin America, particularly Mexico, Brazil and Argentina.

Emmanuel joined MRSGI in 2010, when the group had only eight stores.

Transforming from a family—to a professionally-run corporation is seen supporting the group’s aspirations, pointing to Walmart as a role model.

“If you look at Walmart back in 1972, their sales were only $78 million dollars. Look at them today. (2014 sales stood at close to $500 million). They moved beyond their family,” Gaisano says.

Asked how the siblings are preparing the next generation to take over, Gaisano says the young ones are being trained and encouraged to work outside the family business and pursue higher education.

“We have this so-called trainee roll,” he says, noting that three of 13 kids from the next generation are now part of the pool.

Outside of MRSGI, the family has other business interests: Property development and financial services (AB Capital, Wealth Bank, Vicsal Securities, Filipino Fund).

Ready for expansion

As MRSGI sets its course to expand further, the group has strengthened not only its management team and people but also its infrastructure backbone. Instead of setting up shop anywhere, it’s selective with its location.

“All our stores have very, very good locations. So even from day one, we were already able to compete with all the retailers in Cebu. And Cebu is the hottest marketplace,” Gaisano says.

To date, more than half of MRSGI’s revenues still come from outside Luzon, given that the group has 26 stores in the Visayas and only 20 in Luzon.

“We will be adding more stores in the Visayas. We’re going to Samar. We’re going to Leyte, Iloilo, Bacolod,” Gaisano says. MRGSI also plans to enter Mindanao by 2017 or 2018.

Local stock brokerage Regina Capital Development says MRSGI’s IPO offered a bargain compared to the industry and that prospects for the leading Visayan retailer were sweetened by the Christmas season and election spending, which could boost sales. The brokerage also noted the group’s same-store sales growth.

On the other hand, the key challenges seen by the brokerage include outside threats penetrating its Visayan hometown and barriers to entry posed by malls in regions it plans to enter.

Does the group feel the heat from rising competition as other retailers are now putting up community malls all over the country? “We’re used to that (competition),” Gaisano says, noting that MRSGI has been able to grow at a faster pace than competition in terms of same-store sales growth.

“So it means we’re doing something right. As of June, we’re about 9 percent. I think the industry is within 3 to 4 percent. So that means we’re doing well compared to our competition,” he says.

But because the company is spending a lot for the future, head office expenses are higher than industry levels at present.

“We are investing a lot in logistics. We’re investing a lot in technology. We are working on the end-to-end enterprise software that we have. We are investing in our talents. We shifted from family [-run] to professionalizing. You’re going to incur higher overhead because of professionalizing. But as it stabilizes, you’re going to go faster,” he explains.

In terms of operations, the clear differentiation between MRSGI and competitors in terms of product offering is that this company sells more merchandise than those hawked by concessionaires.

About 75 percent of the products it sells in its stores are goods that the group itself had bought.

“In concession, you’re the landlord, you give them the space. In terms of outright [merchandise], you buy and sell. And we’re used to that because we’re from Cebu. It’s a natural thing that you have to buy and sell. Logistically, you have to be good as well. Just like Walmart, it is in Arkansas, they have to be good in terms of logistics and IT. Being in Cebu you are also more frugal. You watch your Opex (operating expenditure),” he says.

But outright retailing does not necessarily translate to higher margins because the retailer carries the inventory and pays for higher overhead cost.

“But the main difference is how you operate. Your service to the customers will be different. You’re in control of the inventory,” Gaisano says.

As for the target market, MRSGI aims for the mass market, which forms the bulk of the real economy.

This is what Gaisano calls the “aspirational C” market, or those with incomes above $5,000 per capita.

For now, MRSGI has no plan to break into other retail formats, like operating convenience stores.

“We would like to have bigger stores first. But maybe in the future [we’ll look at other opportunities]. …We have to be focused on the target segment that we have and offer them the best customer service,” he says.