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Low profit margin and assets valued at multiple billions?

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Sometimes, we look at the the price of a certain product during a sale and we know that it’s IMPOSSIBLE that the product could be priced so low. Surely the seller needs profit? Well, it may be sold at a loss and this is actually a real marketing strategy adopted by many, especially when competition is tough or when a newcomer just joined the market and needed the extra attention and hopefully their price offering becomes a viral marketing. It’s also known as ‘loss leader strategy.’

If we look at the definition of ‘loss leader strategy’ in investopedia.com, this is what it says. “A loss leader is a product or service that is offered at a price that is not profitable, but it is sold to attract new customers or to sell additional products and services to those customers.” This is why for hypermarkets where the competition is strong, there are many products being sold at a loss with the hope that when customers step into the store to buy that product, they will also be buying other products where the profit margin is higher. This is precisely why the profit margin for hypermarkets are in low single digit numbers.

Article in edgeproperty.my “Could it be that the new investor is interested in the retail business or is it interested in the assets Tesco holds?” Another agent who spoke said that Tesco’s “real estate value is high.” Based on financial reports on non-current assets, Tesco has some RM3.43 billion in assets. The Edge also reported last year that the retailer was mulling a venture into property development at its larger stores as an alternative source of revenue.

Some sources also told the business weekly that “about 10 of Tesco’s stores in the Klang Valley alone are worth about RM1 billion”. It also has “some eight stores” in Ipoh and Penang, and more in Johor. Another estate agent said that it may be better off investing RM100 million (estimated value of Ara Damansara store) into commercial assets which could provide a 6% yield instead. Please do refer to the full Article in edgeproperty.my

Do you know why developers with deep pockets prefer to buy land and hold on to it instead of holding just cash in hand? The cash in hand may appreciate by a few percent per year, maybe. Meanwhile the land’s potential value in the future, even at just a few percent per year is going to be worth much more. The land’s value depends on the development value of the land.

If the residential units being built on the same piece of land is now priced higher, then the land price will go higher. In brief, higher gross development value (GDV) will be the catalyst for land price. Thus, if a developer intends to develop only 5 years later, buying that same piece of land today will definitely be cheaper than buying it 5 years down the road when the GDV is likely to be higher than today. It gives the flexibility to the developer who owns the land as well versus having to look for a similar piece in the future should the same piece of land is no longer available. It’s a huge decision for Tesco definitely. It used to be the store I frequent most of the time. These days, there are so many new competition which has also upped their game too. Happy following.

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Next suggested article: Retail sale growth Malaysia. Growing higher

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