CP All: The Case of the Foreign Licensing Agreement Turned Value Web

Dr. Bryane Michael has over 20 years experience in emerging markets, including work with the World Bank, OECD, a top 3 Wall Street investment bank and advisorships to over 100 companies. He has taught over 900 senior executives in over 20 countries, and worked for over 20 governments. He has done his doctoral work in economics at Oxford and Harvard, is a Certified Internal Auditor, and Series 7 (stockbroker) as well as Series 66 (investment advisor) licensed. https://users.ox.ac.uk/~scat1663/ or https://web.hku.hk/~bmichael/

Dr. Bryane Michael has over 20 years experience in emerging markets, including work with the World Bank, OECD, a top 3 Wall Street investment bank and advisorships to over 100 companies. He has taught over 900 senior executives in over 20 countries, and worked for over 20 governments. He has done his doctoral work in economics at Oxford and Harvard, is a Certified Internal Auditor, and Series 7 (stockbroker) as well as Series 66 (investment advisor) licensed. Website at Oxford University and Website at University of Hong Kong

No modern manager can avoid the theories of US and European-based management gurus like Michael Porter, Peter Drucker, and Kjell Anders Nordstrom. They developed theories based on the US and European companies they studied. Yet, emerging markets have grown companies which promise to change the way we think about management. In this series, I will explore the companies investors and theories alike should keep their eye on. Throughout the series, we will focus on those companies that have applied Paddy Padmanabhan and Vinika Rao’s Five Steps. So without further ado…

CPALL

The Company

7-11ThailandCP ALL brought the ubiquitous 7-Eleven brand to Thailand in 1989. By the end of 2012, its 7-Eleven network comprised over 6,800 stores. The company has located roughly half these stores in and around Bangkok — and the other half around Thailand. Roughly 8 million customers (or 12% of the country’s population) visit these stores every day. Everyone knows what a 7-Eleven is. But not everyone knows how CP ALL does it. The company has a tie-in with PTT ga s stations (for about 15% of its stores). This tie-in gives the convenience stores access to a growing motorist segment.

The company’s fit into a huge integrated agro-industrial web that ensures that Thailand’s 7-Elevens provide far more value than their US or foreign equivalents. Above CP ALL sits Charoen Pokphand, Thailand’s largest private company. Charoen Pokphand Foods produces livestock and seafood — giving these 7-Eleven stores far better access to fresh food then the often-processed food found in their US peers. Companies like C.P. Pokphand control the “upstream” feed, while companies like C.P. Fresh Mart provide the wider array of “downstream” grocery options. As part of the company, the former Siam Makro stores, a cash-and-carry originally owned and operated by the Dutch company SHV Holdings, represents a deepening into the grocery space. The company’s subsidiaries attempt to use 7-Eleven’s close retail touch to sell other products. CPALL has developed subsidiaries which deal with bill payment (Counter Service), selling frozen food and breads (CPRAM and Kudsan), and smart payments (Thai Smart Card). Taking advantage of its customer interface, the company has branched into distributing and repairing retail equipment (CP Retailink), distributing products from catalogues (7-Catalog Order), distributing books and magazines (Book Smile), as well as health and beauty products (eXta). The company has also spun off profit centres from traditional business processes — offering information technology services (Gosoft),  consulting on marketing (MAM Heart ), logistics services (Dynamic Management), and a host of educational services (through a range of companies) providing what might have been in-house training before.

What’s so unique about their business model?

CP ALL has challenged the way we think about organisation, strategy and structure in emerging markets. First, the company has mastered the art of developing companies out of the activities it performs and the goods and services it offers through its 7-Eleven stores. At last count, CP ALL has developed almost 15 subsidiaries out of activities that take place (or can take place) at a 7-Eleven. In developed economies, these companies would emerge as entrepreneurs get new ideas, find money and set up companies. In Thailand, CP ALL acts as an incubator, funder and consolidator for these new companies. Second, organisation provides CP ALL (as 7-Eleven in Thailand) a sustainable competitive advantage. Many of my colleagues have written about the value of people in establishing retail competitive advantage. Yet, few have considered the bespoke construction of an organisational environment which gives these 7-Elevens their competitive advantage. Charoen Pokphand dominates much of the food industry (as an input to Thailand’s convenience and grocery stores).  A business model innovation does not need to involve high tech, solar panels and electric cars. The CP ALL example shows that business model innovation can occur anywhere.

CP ALL — at the risk of sounding hyperbolic — challenges us to rethink the traditional value chain. Most business schools teach us the value-chain targets only one product, service and want. Yet, CP ALL builds “value webs” —  with clusters of companies providing complementary goods and services. Lacking the legal, financial and other institutions which make for a vibrant innovative business eco-system in developed markets, companies like CPP ALL must replicate these conditions within the boundaries of their extended firm. As the figure shows, emerging market companies often do not even understand the organisational and business model innovations they produce… showing their value chain in linear fashion. Such integration also makes foreign entry difficult — as a recent study about Indian retail found.

ValueChain

In the good old days of management theory, value chains (and supply chains) looked like chains. Inputs got converted into outputs and ultimately happiness. CP All converts a range of inputs through a web of companies to satisfy Thai people’s wants and needs at a profit.

Why Is Its Price So High?

Everything about the company screams different — including its share price. The company’s revenues and profits have dived. Recent Thai political upheavals explain much of the revenue and profit bumps. Yet, the shares’ price has continued to climb (see figure). They still trade at 42 times earnings and its debt-to-equity ratio comes out at a resounding 640%! We have argued that the company’s business model generates value. But something else is probably at work. The company’s shares list on the Bangkok Stock Exchange. The limited variety of investments available (compared to the US, Hong Kong or Singapore) probably drive up demand for these shares. Even CP ALL’s listing model is innovative. By choosing a less liquid market, the company seems to generate more money for itself and its investors. CPALLPrice Padmanabhan and Rao have argued that successful emerging market companies “seek a collaborative solution.” CP ALL shows how new forms of collaboration, between input providers, sellers, and even equity markets, help drive more than just Slurpee sales.

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