DIRECT SELLER Best World had over a dozen analysts and fund managers at its FY08 results briefing last week, and its management shared candidly how it is meeting the challenge of the tough economic climate.
The company netted S$10.6 million in earnings for FY08, had net margins of 11.1% and sits on S$30.6 million of cash.
Best World’s revenues come from the sale of skincare, health supplements and other lifestyle health and beauty products to its members.
The members are provided with sales training as well as commissions for recruiting members and promoting sales.
Best World’s member-get-member platform has grown its membership base to 186,759 (customers) in about 10 countries in the Asia-Pacific region.
Indonesia, Malaysia and Singapore are its key markets.
Indonesia is its largest market, with revenue contribution of 46% in FY08. While Indon sales have been robust – growing 14.5% yoy - a weaker rupiah resulted in sales contribution falling by 3.6% in Singapore dollars.
Best World recently encountered a hiccup in obtaining licensing for direct selling in China. A proposal to acquire 51% in Chinese direct seller Joymain lapsed after the Chinese party failed to obtain approval from the Ministry of Commerce.
Below is a summary of issues addressed by Best World’s executive director, Mr Huang Ban Chin, and its group financial controller, Ms Chew Nam Yeo.
Sales
Q: What is your best-selling product category?
A: Skincare, as most of our distributors are ladies. This contributes about 60% to our revenues.
Q: What is your longest selling product?
A: Health supplements. Our products do not have a limit on their life cycle. The popularity of a product line depends on how much commission it can generate for distributors.
Q: What will your advertising & promo expense look like for FY09?
A: A&P expense is booked as part of distribution cost, which together with commissions and other sales related expenses is about 40% of revenue.
We are not planning any substantial increase in our A&P expense.
Our advertising is prudent; that is, media channels chosen are specific to audience target rather than blitzes. For example, we may advertise in Lianhe Zaobao to reach the Mandarin speaking community but not in the Straits Times.
Q: Why are sales per member declining (from S$668 in FY07 to S$514 in FY08)? How do you deal with this?
A: Our product structure is such that members usually make big-ticket purchases at the point of recruitment. Subsequent purchases are usually to replace consumable supplies.
For example, selling prices of some products like our negative ionizer and water filter are in the high hundreds but these are not consumables that generate replacement sales.
Thus, as our membership base grows, the existence of earlier recruits who buy less than the new recruits for the year will average down sales per member.
To address this, we are constantly rolling out new product lines and phasing out the older models in response to changes in market trends, regulations and cost of ingredients.
In 2009, we have a new product - first milk (Colostrum) health supplement, and Pureflo - a new generation of our water filteration system.
We also smooth out revenue by providing installment payment schemes.
Q: Do members pay to join as distributors?
A: There is a nominal once-off membership fee of S$25. This is payable upon recruitment and is used to offset costs of sales kits which include product and price catalogues, CDs etc.
Q: In your membership structure, what is the proportion of ‘business builders’ versus passive consumers?
A: The number of business builders (members who actively recruit new members and generate high-volume sales) is growing.
Indonesia
Q: Have you maintained retail prices in Indonesia?
A: We raised prices twice in Indonesia last year. The first was for passing the burden of value-added tax to customers. The second was to offset the foreign currency loss we would incur as a result of the Indonesian Rupiah’s depreciation.
Q: What is your cash conversion cycle in Rupiah?
A: About 5 months.
Q: How are you planning to offset a decline in revenue from Indonesia?
A: Taiwan is a very resilient market and its people are very solution oriented in hard times. It is one market where direct selling recruitment rises during recessions.
Relationships are very important in China, Hong Kong and Taiwan. For example, they would rather buy from someone they know than from a retail mall.
Taiwanese have a natural affinity for selling in China and we see potential in the Greater China market.
China
Q: What are your plans for expanding in China?
A: Joymain has been dropped but we are exploring other business partners. We are no longer considering joint ventures with Chinese direct sellers in order to sell under their license. Rather, we will apply for the license under the Best World corporate name.
Hong Kong is a tough market due to the relatively lower proportion of members who want to be business builders. However, it is important as an entry point to the China market.
Guangdong residents, for example, use established Hong Kong brands as a reference for product acceptance.
Q: Have you recovered your Rmb 20 million prepayment to Joymain for the acquisition?
A: Our prepayment is secured by Joymain’s unencumbered properties independently valued to be worth about Rmb 40 million in April 2008. Currently we are going through the necessary procedures to recover the prepayment.
Outlook
Q: Have any of your competitors closed down?
A: A private company named WBG closed shop recently. The closure was due to a management problem rather than market conditions.
Q: Does this present opportunity for Best World?
A: Yes, we certainly see an opportunity there.
Balance sheet and cash flow
Q: How did you improve receivables turnover (from 45 days in FY07 to 22 days in FY08)? Is that sustainable?
A: We had better credit management and receivables collection.
Q: Why did payables turnover fall (from 54 days in FY07 to 24 days in FY08)?
A: There are certain vendors with shorter payment terms.
Q: Are you holding your S$30 million of cash reserves in any structured products?
A: We are very prudent in cash management and mostly hold deposits in banks. We do not hold any stocks or bonds for speculation purposes.
A small proportion (S$3.5 million) is in principal-protected variable interest rate notes issued by banks.
We will need cash resources for our expansion as well as business opportunities that may arise in the course of the year.
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