Portfolio: CDH, Mekong and Mobile World

Plenty of retail chains in China have failed after failing to achieve scale. With a commanding provincial position, the ambitious entrepreneur sets his sights on establishing a nationwide franchise but the challenges of taking on new local competitors in unfamiliar geographies - while hamstrung by middle management that lacks either quality or empowerment - prove too great.

There are also examples of retailers that have made the grade with the assistance of PE capital and expertise. Several companies in CDH Investments' historical portfolio went from regional bit-part player to Hong Kong-listed heavy hitter and now the Chinese GP is looking to ride a similar evolutionary wave as it branches out into Southeast Asia, notably Vietnam.

"We find a huge number of similarities between China and Vietnam in the consumer sector, driven by similarities in political systems, religious attitudes, consumer behavior, and entrepreneurial mindset," says Thomas Lanyi, deputy head of Southeast Asia at CDH. "When we present an opportunity in Vietnam, the team shares feedback from what they have seen in China. It's a bit like looking into the future."

For its debut investment in Vietnam, CDH bought a 19.88% stake in Mobile World - a mobile phone and consumer electronics retailer - in March 2013 for approximately $20 million, allowing partial exits for company management and existing investor Mekong Capital.

The private equity firm was entering familiar territory. Mobile phone retailer Digitone and consumer electronics business China Paradise are current and former portfolio companies, respectively. And then there was Lanyi, who before joining CDH in 2012 spent four years at Mekong, where he was responsible for the Mobile World investment.

The transition to organized retail and resultant shift from fragmentation to industry consolidation that has characterized the company's 10-year history invites comparisons with China and other emerging markets.

Mobile World CEO Nguyen Duc Tai explains the motivation to start the business as follows: "I tried to buy a mobile phone but couldn't find a proper shop with good service and a trustworthy environment. There were only mom-and-pop operators selling out of small kiosks. Customers didn't know if the products were real or fake, new or old, with warranty or without."

But there are two critical differences between the countries' respective retail sectors that explain why Mobile World has carved out a dominant market position, increased revenues more than threefold over the last four years, and is now set for a public listing that will value the business at as much as $280 million.

First, Vietnam is a fraction the size of China so achieving nationwide scale is a less time-consuming task, letting operators realize economics from better bargaining power more quickly. Second, retail sector consolidation is not happening as quickly in Vietnam as in China, which Lanyi believes is in part due to the relative scarcity of good management teams.

Collective decision-making

Tai is one of five co-founders of Mobile World and three remain actively involved in the business - a rare dynamic in Vietnam and one that drew Mekong to the company in the first place.

This was no patriarchal, family-led governance structure. With the exception of the chairman, the co-founders were in their mid-30s and came from relevant professional backgrounds; their CVs include stints with Japanese and Korea multinationals in Vietnam, such as SK Telecom and Sony Ericsson, as well as sales and marketing experience with local companies.

"They were entrepreneurs," says Chris Freund, partner and founder at Mekong. "There was a lot of open debate and discussion and they didn't always agree with each other, which was a positive."

The private equity firm invested $3.5 million in Mobile World in 2007, taking a 32.5% stake, which was subsequently reduced to 25.8% when CDH entered. Back then the company - which operates under the The Gioi Di Dong (TGDD) brand - had just seven stores in Ho Chi Minh City but Mekong was emboldened by the strong performance it was seeing from consumer-related companies in its portfolio.

There was also the expected explosion in mobile phone demand and the belief that a professionally-managed outfit could take market share from the mom-and-pop players.

According to the Vietnam Ministry of Information & Communications, there were 18.9 million mobile phone subscribers in 2006. This became 131.6 million by 2012. Mobile World, meanwhile, received a shot in the arm from Mekong. The founders provided initial start-up capital and each new store was financed through cash generated by existing outlets. No longer dependent on this cycle, the number of stores rose to 31 in 2008 and then 211 in 2011.

Mekong helped the company recruit middle management and introduce modern reporting systems, such as measurable targets through which to set out clear long-term goals - although the goalposts had to be moved several times as growth came in faster than expected.

Mobile World expects to have 253 stores by the end of this year. It established a foothold in Vietnam's six largest cities and now covers all 63 provinces. The company controlled more than 20% of the mobile phone retail market in 2013 - the next largest player, VTA, is on less than 10% - and wants to be at 30% by 2016 as the mom-and-pop share is further eroded.

"Several chains have followed us, such as VTA and FPT, but we had a few years' head start and have expanded our lead over time," says Tai. "We estimate about 50% of the market is now controlled by modern retailers and most of the other 50% is in the countryside. We plan to attack that market segment this year and next, and consolidate further."

He also wants to boost Mobile World's online business. While the market leader, only 6% of revenues come via e-commerce and the goal is to double it by 2015.

Three years ago the company expanded into the consumer electronics space, under the Dien May brand, and has built up a network of 13 stores. Twelve more will be opened this year, and although Dien May is unlikely to match TGDD for market share, it will likely become a larger revenue contributor simply because consumer electronics is a broader space.

Mobile World recorded $452.3 million in revenue for 2013 and the company is looking to reach at least $600 million this year and $900 million by 2016. Profit is forecast to come in at $21 million for 2014 - up from $12.3 million last year - and then $32.1 million by 2016.

Growing pains

Progress has not been entirely smooth, however. After a period of rapid expansion, Mobile World's profits began to tail off, falling from $7.5 million in 2011 to $6 million in 2012. This underperformance stems from a struggle to accommodate the growth spurt of the previous few years: New stores were opening at a faster pace than the supporting systems and infrastructure they required.

Inventory selection and management were the root cause of the problem, and it took the best part of a year to bring holdings costs back under control, work out poor purchasing decisions and ensure the best-performing products were displayed in the best places. By August 2013 a more streamlined and consumer-oriented Mobile World was back on form.

Mekong's Freund argues that these growing pains would be more keenly felt by other retailers that don't have the same quality of management.

"There might be five areas in which you have to manage growth and Mobile World can handle 3-4 of those concurrently whereas the typical Vietnamese company might only be able to deal with 1-2 concurrently," he says. "Opening new stores, for example, can be handled by the regional teams and requires no top-level approval. In the typical retailer, the CEO would be intensely involved in opening every new store."

More recently, consumer electronics business Dien May has required some recalibration. The unit was not meeting its potential so the independent management team was absorbed by the mobile phone division in January, resulting in a number of personnel changes.

Store layout and category management were again at the forefront of reforms. Freund describes a transformation from "what looked like a discount store that was kind of messy and wasn't clear what it was trying to be" to a more compelling brand strategy with "televisions and home appliances as the key broad categories and no halfway categories like alarm clocks and power adaptors."

Mobile World's management team is supported by Robert Willett, a retail veteran who previously served as CEO of Best Buy International, where he was chairman of CarPhone Warehouse, Europe's largest mobile phone retailer. Originally introduced by Mekong to consult on Mobile World, Willett was invited to join the board as a non-executive director and became a shareholder in early 2013. He now also sits on Mekong's advisory board.

"He has been a tremendous resource to Mobile World," says CDH's Lanyi. "Many companies in Vietnam are not open to that at all - they are worried about people interfering in their business practices."

First at Mekong and now at CDH, Lanyi has busied himself establishing ties between Mobile World and other retailers across the region so the business can learn from the experiences of counterparts. Executives from Digitone have visited Vietnam on two occasions. There have also been exchanges with consumer electronics retailers Edion of Japan and Courts of Singapore, as well as two mobile phone players, India's Univercell and Indonesia's Erajaya.

At time of publication, the Mobile World team was in Indonesia for an Erajaya site visit. The company is seen as particularly important because it has successfully managed to roll out a network of small stores in rural areas, a key area of focus for Mobile World this year.

"CDH, because of its network in Asia, is able to introduce us to many potential partners in the region," adds Mobile World's Tai. "Several times each year we travel somewhere to meet someone in a similar industry to learn from each other and explore possible cooperation."

Long-term plans

Mekong and CDH are in process of selling a small portion of their holdings ahead of the IPO on the Ho Chi Minh exchange in order to meet free float requirements. The placement is said to be substantially oversubscribed with both local and international investors interested.

Another partial exit will come with the IPO itself but neither PE firm is in any hurry to fully sell down their interests once public trading begins.

Mobile World's past growth has been entirely organic but now domestic M&A options are being examined - and PE investors can help by conducting initial diligence and discussions, saving the company from making a direct approach immediately. Beyond that, expansion into new geographies is a possibility, with Laos and Cambodia under preliminary consideration.

More retail concepts are also likely once Dien May has been scaled up.

"We have a team of people that looks into new ideas, which we can develop over time. Our basic assumption is that retail in Vietnam continues to be below both its potential and the global standard. This is our opportunity," says Tai. "The key question when we choose our next category is always ‘How big can we grow this business?' We want to serve the masses, not some niche market."

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• Topics
• Consumer
• Southeast Asia
• Expansion
• Consumer
• Vietnam
• CDH Investments Management
• Mekong Capital
• Growth capital
• IPO