...Welcome everybody to this special briefing of Jollibee Foods and their recent acquisition of South Korean coffee chain, Compose Coffee. The company would like to give us a bit more detail and explain the strategy and rationale behind the transaction, and we're very fortunate to have with us today Jollibee CFO, Mr. Richard Shin. He is joined by his IR team, Cosette and Mona. So without further ado, I'd like to pass over the floor to Richard to start a quick presentation, which will be followed by Q&A.
Thank you very much, Clarissa, and thank you once again, Regis, for kindly hosting us this morning. A very good morning to everyone, and thank you for taking the time to dial in. I hope it's informative, and the way we've structured the next hour, I'll give you a quick update using some slides. That should pretty much capture most of the information that are necessary to share, but of course, we'll have another 40 minutes or so of Q&A, so that we can address all the questions that you may have for us. So without further delay, let me just... Just confirming my screen is coming up in full.
Yes, Richard.
Okay.
We can see it, yeah.
All right. Thank you, Clarissa. All right, so, let's get going. So, this, in fact, is the business that we've acquired. It's 2 components. There's 1 component, 1 legal entity called... Sorry, Compose Coffee Limited, which of course holds all the contracts with its 2,600+ franchisees. It's a 100% franchise model, single market in Korea, and it, the business also holds another company called JMCF, which is the procuring, the blending, the roasting, and the distributing of, the highest quality coffee beans in Korea, and it is the largest, coffee bean, high premium coffee bean distributor in Korea at the moment. So this is the business we're going to speak of for the next hour.
I wanted to just put up here what we had disclosed to the Philippine Stock Exchange on July 2nd, literally 10 minutes, within 10 minutes of signing the SPA with Chairman Yang. It is a single owner sale. I also want to make the point here that it's an intent to acquire, because the Korea Fair Trade Commission will then provide us approval within 40 to 45 days of that signing date. We anticipate sometime in mid to end August. To be conservative, let's just call it end August. So we're waiting for that, and upon which, on that date, the deal will be officially closed. Okay? So I think you some of you may have seen this or seen bits of it, but let me just, again, just to bring everybody on board what it is.
We've JFC have signed a definitive agreements to acquire majority shareholding of effectively 70% in Compose Coffee Company Limited and JMCF Company Limited, collectively called Compose Coffee. The remaining shareholders shall be held by Titan Dining Investment Pte, and this is Titan Fund number two, which I spoke of, little while ago. They'll take a 5% position. This deal was brought to us by a local Korean private equity. They are called Elevation Equity Partners Korea Limited, or Elevation for short, and they will take a 25% equity holdings in this venture. Elevation is a private equity firm focusing on mid-market buyouts, as well as growth capital opportunities in the consumer space in Korea and the rest of Asia. Its founding members have over 30 years' experience investing in Asia and Korea, and mainly within the consumer sector.
You know, we've been approached by Elevation as they sought us out as a good strategic and as well as financial partner for this deal. So effectively, we were given a certain amount of time to look at this opportunity without bidding, and sort of, in that sense, it was a very direct approach from them to us, and that's how this deal came onto our radar. Similarly, on the sell side, they used a one sell-side agent with an exclusive mandate. So in the end, both the sell-side and the buy-side had exclusive mandates. So, that's where we get to, and I'll refer to that later on when we address the valuation and the... what we believe is a favorable multiple.
Compose Coffee also ranks number one or first in the industry for having the highest and the fastest growth rate in the number of franchise stores and in terms of brand satisfaction among the Korean coffee brands. So this lens is over five, the last five years. It's two thousand four hundred and seventy stores as reported, and I've just added here further that it says, "As at the end of February 2024," and later I'll show, share with you the number as at the end of June of 2024. So they're fully supported by Korea's largest in-house coffee roasting plant down in Busan, enabling the highest quality beans, in fact, at the lowest cost when it gets to the franchisee.
So Compose Coffee is on track to be the largest, fastest-growing, and leading value coffee player in South Korea... And, a little bit of, fun fact here. We've signed up V of BTS less than a year ago as the current brand ambassador. The total consideration for the acquisition is KRW 470 billion, or circa $340 million. That breaks down, of course, into KRW 70 billion cash. There is no debt on the balance sheet, so it's 100% debt-free. And the remaining KRW 400 billion, this was the price that Chairman Yang had asked for, non-negotiable. And when he had come upon this price sometime in 2022, at that time, the multiple would have been around 10, based on 2022 financials.
But of course, by the time we got to 2023, the trailing EBITDA multiple was 8x. And if you were to look at 2024, we believe this will be sub-7x. Further, Compose Coffee... Sorry, I just mentioned that, so let's move forward. I think the key point here is the superior cash returns, given that they have a very favorable dividend policy of divvying out its debt-free cash. And of course, the profit margins on this business are extremely lucrative. So I'll share some of that data on the next upcoming slides. Okay. So net-net, the impact to JFC will be around one-third increase in our store count, so we'll be cracking the 10,000-store barrier.
Of course, what I really love about this deal is the 2% top line of revenue contribution creates a 12% EBIT bottom line contribution. So fantastic gearing, so we're happy with that. The acquisition is also aligned with our commitment to coffee and tea segment, and of course, what we've been talking about for the last year and a half, our franchising initiatives. So capital light expansion in the segment, one of four segments that we are focused on. The strategic rapid growth, financially lucrative investment serves as a gateway in unlocking the fastest-growing international value coffee market in South Korea, which ranks number 3 globally in terms of coffee consumption per capita. I'll show you a slide on that a little bit later as well.
JFC's resources and expertise in F&B, brand development, combined with Elevation's entrepreneurial mindset and local market expertise in the value coffee segment, will provide synergy in securing a sustainable future for Compose Coffee that will enable it to grow for many years to come. So, later I'll speak about focus. I'll also talk about how we are setting up governance to manage this business without distracting our number one priority, which is still, which still remains expand Jollibee internationally, Jollibee, the brand. And, we'll speak a little bit more about concentrating on the Korean market and why we believe for the next five years, that is the right strategy. So moving on, Compose Coffee summary on a page. Key points I wanna reiterate is they are known as the highest quality coffee bean provider.
Consumers have told us the same in terms of taste and in terms of quality, and we are positioned in the value price segment. So the Korean coffee market has three segments, as most countries would: the premium, the mid, and the value. What is deteriorating quite rapidly is actually the mid segment. There's a brand or a company called Ediya, and they seem to be losing the fastest market share. The premium segment, still relatively healthy, with a slight growth, is led by, of course, Starbucks, with over 1,800 shops. And then the value segment, there are about four main players, of which Compose Coffee would be ranked number two in terms of number of stores, right after a brand called Mega. So this is the landscape.
Just to give you some context, at the end of 2022, there were 1,900 franchise stores in Korea, and by the end of 2023, we got to a number of 2,342. The 2,470 stores that I referred to earlier, that's as at February of this year, and June this year, you can see 2,612. What do all these numbers mean? They, it means that Compose is able to actually sign up franchisees and have them open stores at a rate of around 30-40 stores per month. The exact number was 37 per month from 2022 to 2023.
It also means that the net worth growth rate from 2022 to 2023 was 26.5%. Contrasting that with the EBITDA growth, which was 34.1%. So that gives you an indication of how much growth is really coming from expansion, with a high or best estimate, high single digit, same store sales or rolling base growth rate, which we believe that there's more opportunity there for us to grow even faster, and, and I'll come up onto that a little bit later when we talk about the menu architecture. What else to share with you? Yeah, it's about a 10-year-old company, founded in 2014. The employee base, 111. This is a very lean company for what it produces.
I say that because of the 111, circa 70 is really out there in sales and managing the franchisees. So many of the functions has been outsourced, and they're getting quite a bit of value in terms of G&A spend per revenue. Okay, shifting to the right-hand side, the number I just wanted to share with you here is a 42% EBITDA cash margin rate, and it comes off of KRW 58 billion or circa $42 million of audited financial statement EBITDA number of 2023. Let's shift gears a little bit to products. So their best sellers are here. The Iced Americano is clearly the number one seller. What's interesting is, in Korea, you have different price points for Iced Americano, which is the number one drink across all segments.
It's important to use this as a reference point just to sort of have an idea of what we're dealing with. So Starbucks would sell their Iced Americano, similar size format, at 4,500 KRW. And the Iced Americano that Compose sells at equal, if not better quality, is sold at 1,500 KRW. So that's to say that, when you start to trail the consumer behavior of consumption, you see that in the morning, peak hour rush, right after lunch, they grab a coffee to go, peak hour rush, and then around three or four o'clock in the afternoon, when they come, when employees come down for a cigarette break or just a break, they tend to grab a coffee as well. So you can get three high-quality Iced Americanos for the price of one of Starbucks.
This is an important factor, and this is where a lot of our consumers are giving us positive feedback. In addition to Iced Americano, you can see you have smoothies, you have variations of iced tea, variations of fruit-based drinks, and of course, local drinks. This is the red bean, very local. The price point of these other four items are higher, and I'll show you on the next slide what that means. So KRW 1,500 Iced Americano over here, and then you can see the other products are KRW 3,300, ranging up to KRW 4,200. So that is to say that Compose Coffee is known to be a black coffee or high-quality coffee company, but certainly there is plenty of opportunities in the menu architecture to work with the higher price, unit point.
So, this is something that's very exciting for us and will probably add quite a bit of value post-acquisition. Here is a picture of Compose next to the leading brand in the value segment in Korea called Mega. We didn't purposely take this photo because there are no customers in Mega, but we took this photo because this was an actual live photo at lunchtime. The one on the far right is, excuse me, also quite well-known top five brand called Paik's. So all three you can see are really competing in similar price points. Oh, my apologies. 8:00 A.M. too, not lunch. This is what the store format looks like.
So a typical Compose, not all, but a typical Compose store will be around 33 square meters or around 330 sq ft, and the payback for the franchisee is about a year. Most of the sales happens through pickup or grab-and-gos. And you can see in the back, very limited seating. Of course, there are stores with more seating in university areas, et cetera, but typically, this is the format that most franchisees prefer. So, now let me just try to address some of the key questions that we've been receiving and also are top of mind for many stakeholders. So first and foremost, why the acquisition, when we already have other coffee and tea brands such as CBTL, Highlands Coffee, Milksha, Common Man Coffee Roasters? So let me address this. Let me start with Milksha.
Milksha is not a coffee brand. It is a tea, fruit, and milk based brand. And of course it has its strength in Taiwan with a limited international expansion. Sorry, limited international exposure at the moment. We're bringing Milksha into the U.S., of course, into the specialty tea category. So very much different to Compose Coffee, where it sits as a really Americano coffee brand. Excuse me. CBTL it sits with Starbucks in the premium segment, so we do have over 200 CBTL stores in Korea. But it's in terms of geography, in terms of locations, in terms of price point it is a very different brand or business, although it is still in coffee and tea. Highlands Coffee is majority in Vietnam, and the beans are very different.
It's not Arabica, it's Vietnamese Robusta bean, and it's a, in our minds, a specialty coffee, which is the Vietnamese coffee.... Yes, there are some thoughts around expanding, but it's probably in markets like Middle East and elsewhere that makes sense, but it is not a direct competitor, nor would it ever go into a market like Korea. Common Man Coffee Roasters, very limited, less than 10 stores, super premium positioning, but it's really also driven very much by food. So again, we have a portfolio of coffee and tea. We have different strategies for each one of them, but there is a space, clear space that's missing, and that's in the value segment in the world's number 3 coffee market, and hence, Compose Coffee fits that role for us in our portfolio strategy very nicely.
So, on top of that, I just wanna reiterate some of the key messages that I've been providing the stakeholders recently. One, all present and future acquisitions shall be only if there is a strategic fit to one of the four pillars that we all speak of, which is chicken, coffee and tea, Chinese cuisine, and better burger. And this is an example of the coffee and tea. Very lucrative, very high margin pillar. And it must be value accretive. So what I mean by that? I mean by that on two fronts. One, it must be cash return accretive, meaning that the EBITDA margin, both dollars and rate, must be superior to JFC as an enterprise.
And you can see here, the 42% EBITDA margin rate is indeed significantly superior to our current blended rate around 13%. Second, accretive multiple, meaning the EBITDA multiple, so trailing 8, which I mentioned, and most likely forward sub-7, is accretive to the JFC's 12 multiple currently. And the fourth point here is a very significant important point. I do wanna address the question around focus, capabilities, and ability to win in that local market, in that local space. And you know, as I mentioned, Compose is the fastest growing value segment coffee in a very, in some ways, competitive market, but nonetheless, still a growth market in Korea, which gives testimony to the current team in Compose who are migrating with the deal to us, and they're very excited about that.
In addition, we put Elevation to the mix, who just before this, and I'll get to some details later, but has also done another major deal in the F&B space, so they have plenty of experience there, and of course, the contributions that JFC will make. It will be a very sort of JFC light touch, if you will. We'll have governance, we'll have board control, of course, but in terms of management, we do want the locals to really drive the business forward. Locals being the Koreans and with coffee experience. Why invest in Korea? As I mentioned, number three, but here's the charts. So Italy comes number one, this is 2023 per capita spending. It's almost $900 billion. Is this right? Let me just get the currency right. My apologies.
Yeah, it's 900, with Canada, understandably, with Tim Hortons and the large scale and dominance that they have in Canada, is number two, and Korea comes number three at 208. Within Asia Pac, there are a few other markets, but a distant next one would be Singapore, and of course, Japan also is quite a coffee-consuming market. But clearly, you can see per capita, Korea over-indexes. How significant is this acquisition to JFC's business? It's debt-free, so it does not add anything in terms of debt-equity imbalance.
In fact, later I'll speak to how we're financing this, but it barely moves the needle for us in that sense, because we are going to go mix between cash and debt, and also there are very strong dividend opportunities in Compose Coffee will go to service our debt 100%. In addition, we pick up our share of the KRW 70 billion cash from day one. Secondly, in terms of margin increase, I mentioned earlier what that looks like. We do not invest anything in CapEx because it'll be a 100% franchise. There is a factory, which I'll speak to a little bit later on, that has been purchased, and the capacity there is good for minimum another 10 years at this growth rate.
Consolidation impact, 2% to revenues, 34% to store counts, and 12% to EBIT. How is JFC financing this purchase? It's 47% debt, so this has been lined up. Cash, we have excess cash, plus we have some cash that we've parked from our earlier debt raises, so we'll be using some of those excess cash to to get that nice balance between debt to cash. What about loss of focus? How does JFC plan to manage this new business, and why Elevation? What are they bringing to the table?... So as I mentioned to you earlier, this is not a loss of focus. We are predominantly focused on, and the talent on the ground, in addition to a governing board.
The way I think we're going to manage this is very much within one of our values, which is entrepreneurial, but of course, as a listed company, we'll make sure the governance is there. And why Elevation? Again, as I mentioned to you, I do want to share with you that the last exit is BHC. This is in the Korean fried chicken space, where I think until today, it's Korea's largest and most successful F&B exit. It was a 10x exit. Switching gears a little bit, putting on the lens of competition and from the franchisee point of view, why invest in Compose? How much investment do I need? You can see the initial sign up is very light at KRW 7 million. That includes KRW 2 million of training.
The store CapEx is around $65,000, so payback, as I, as I mentioned, within a year. In Korea, in the value coffee segment, there is no variable royalty fee based on system-wide sales, but rather there is a nominal or minimum fixed royalty fee, which is KRW 200,000 per month. The majority of the income stream and the 42% margin that I've shared comes from the sale of the coffee beans, the continuous sale of the coffee beans to our franchisees. What do you think are the main competitive advantages of Compose Coffee? So this is where I'll, I'll speak a little bit about the manufacturing capabilities and what all that means. So first and foremost, we had an opportunity to go down and take a look at this plant.
It's run by seven people, so it's quite automated. As you can imagine, in Korea, they're quite into the technology, so the blend formulas, everything else is proprietary, and it is data that we own. What's very interesting here is that, I think around $10 million was spent a few years back, top-notch equipment from Europe, in particular Italy, to not only roast, but also there's an assembly line that gives the capacity of around 5,000 metric tons on a single shift. So earlier I mentioned... I showed you a slide of about 3,600 metric tons sold in 2023.
So, plenty of capacity there, especially if we were to increase to a second or even third shift, which is not necessary, but this is to say, there will be very minimum CapEx on the back of house support. Highest quality beans are lowest market price. I know it's a bit of a busy slide, but let me walk you through. This was very interesting to us. So top line here is industry average. The second is our number one competitor, Mega. The third line here is Compose. So let me start with the bottom here. From a bean purchase point of view, green beans before roasting, you can see that Compose, in fact, invests in higher and better quality beans, spending KRW 9,000. I believe this is per kg.
So, what that means really is they go to the classic nations of Ethiopia, Colombia, and Brazil, and they have their special blend, and it's not a single origin dependency, procurement. So the bean, compared to Mega, is a little bit higher. However, post-roasting, why? Because we own our own roasting facility, which I just showed you in the previous slide. Mega does not, and the industry buys their roasted beans from wholesale, so they buy it at a higher cost. So post-roasting, you can see it's KRW 19,500 versus Mega's KRW 20,000. So already starting to take the lead there. And then the third component here is distribution. Others are using third parties, wholesalers, even retailers. Mega is using a third-party, 3PL. What we are using is a 4PL.
And the difference there, the 4PL that we're using is, one of, Korea's top five, dairy, this dairy company that has its own distribution, but still needs a bit more volume and scale to get their, cost investments right. So we piggyback off of that. And of course, there's a lot of synergies when milk is delivered, to stores in town as the coffee beans get delivered to, cafes in town. So because of that, we have the lowest distribution cost as well. And so post all that, the industry, the industry will be running somewhere over, 30,000 KRW. We are significantly under. So, this is the reason why we believe that we'll continue to be able to attract franchisees, highest quality beans at the best price.
At the moment, again, the menu architecture is such that there's plenty of opportunity beyond the Americano. What's the rationale of the selling shareholder, shareholders? So it's really Chairman Yang. He does have a wife in the business, but he's really the only shareholder. Why did he sell this at eight, given the growth margins? I think earlier I mentioned to you that he had a certain price in mind, which was KRW 400 billion, and then that was derived back in 2022, when the multiple would have been closer to 10, which, in his mind, was a fair multiple, not too high, not too low. But nonetheless, he is a coffee man.
He started his journey really carrying bags of coffee and then sort of moved into this, value segment, business. But his ambition really is to take the cash or some of the cash from the sale and, go into the super premium space, where he still wants to stay in coffee, but not necessarily scale value, segment play. So, and hence, his desire to cash out and start again in a very different segment. I think I mentioned earlier also, that the, the two other factors, leading to this favorable multiple was that it was an exclusive both for the sell side and for the buy side, so there was no bidding to drive up, any goodwill in this purchase. Okay? So, I will stop sharing and take on some questions now.
Okay, thanks, Richard, for that very extensive presentation. Yeah, we have a couple of questions. We'll alternate between the Q&A box. I also got some questions on email and on chat. So, maybe I'll just combine the similar questions so we can answer them as efficiently as possible. And probably for the questions that were already addressed earlier, we won't go through them to save time. So just since your last slide touched on the rationale for the seller, there's a question here on the other buyer that you're buying it with, Elevation Equity Partners. So, is there an exit strategy for them? And would you be considering an IPO for this business at, by a certain time?
Okay. So thank you, Ken, for the question. So let me start with the second part of the question. We have no thoughts. Never say never, but we have no thoughts at the moment for an IPO. The reason is because the complexity of running a public listed company in Korea is not something we see as value add, and we're not looking to raise capital in that sense. The exit for Elevation will be a classic exit for all private equities, so they're looking at a time horizon of around 5-7 years to exit. Earlier, I mentioned to you, Titan Fund 2 is also going to be an investor, so they'll probably have a similar strategy because they're also a private equity. So, that'll be that.
We don't know yet whether JSU will buy the combined 30% or whether we'll leave it to the market and maybe another very solid partner for us. We also know that there are larger private equities out there who would not look at smaller deals, but if you're to 2x or 3x on exit, then you'll be a sizable deal size to attract some of the larger global private equity. So we think the market is very liquid from what we've seen, and we think there's quite a bit of appetite for growth segments like value coffee. So that's the bit on the exit.
Okay. Thanks, Richard. Next question, let's go into the manufacturing and operations. So there's a question here on whether JMCF, sorry, is the sole supplier to Compose at the moment. Why would it consider supplying to other markets, or would you keep this as a proprietary operation?
That's a great question. I don't know is the answer. We do know there are synergistic upsize in how we distribute coffee, even within our brands, within Korea, so meaning CBTL, but we have not had that conversation with our franchisee there. Of course, there are competitors out there who would love to buy beans from us, but we have to weigh the pros and the cons of making money and also giving them competitive advantage as well. So, we'll analyze that. In due time, you know, we'll do a proper analysis of that. Exporting coffee beans is a possibility, so there's a very small example. So right now, Compose Coffee, on a test basis, has opened up two stores in Singapore. And the format is. I say test, 'cause the format is different.
It's not a small size, it's a larger size. One is in Suntec, so those of you who might wanna go check it out, please do so. It has a higher proportion of food as well. So the beans are actually logistically, you know, moved from the Korean JMCF to Singapore. So we'll continue to look at opportunities within our brands, but at the moment, we're very much focused on making sure we get the right geographies, the real estate and the right franchisees signed up. So that would be our focus, I would say, coming out of this approval process.
We have a question on the line from Tunde. Tunde, you may now ask your question.
Okay. All right. Can you hear me?
Hi, Tunde.
We can, yeah.
Okay, great. Okay, great. Thank you so much, and I appreciate the presentation. Two questions for me, and, and let me just start with the first one, is I was just curious, you know, you've-
... highlighted some important points about Korea being the one of the highest consumer of coffee, you know, currently in the world. So which to me already suggests it's, you know, in terms of saturation, in terms of growth potential, it's not gonna be pretty high because, you know, there's so much coffee you can actually consume, you know, in the body on a daily basis. And also, if you look at the industry structure that you've described, right? There's a lot of big competitors in the market, you know, already, and the chairman who is selling to you is planning to be your next competitor in the market very soon.
I'm just wondering, in terms of growth potential here, for the market, how do you view the market as a whole in terms of growth, and also you being able to compete favorably, given all these powerful competitors and a new one, which is gonna be your competitor, which you just passed, which is gonna pass some money to the chairman? I'm a little worried about your competitive environment and what you think about future growth. You know, given that the past growth has been very supernormal, I'm wondering, do you expect that to be sustainable? Thanks.
Okay. Thank you, Tunde. We're gonna grow through two key measures over the next 5 years. One is a store expansion, so we think there is enough space, and we've in fact identified 1,000 locations. Of course, we can't build the 1,000 stores overnight, so we're gonna go on that path. But in total, we think that we can get up to about 4,000 stores. So in terms of growth by network, we see that as a 3- to 4-year journey out.
Mm-hmm.
Excuse me. I'm not sure what happened to my voice, but let me try to clear it.
Sure, you can take your time here.
All right, there we go. Maybe it's my excitement. The other area of continuous growth beyond the five years will be same store sales. Again, when you look at the menu architecture, if you take Iced Plus Hot Americano, it's a significant part of the business, meaning, around, you know, over 50% of our business comes from that price point of KRW 1,500. Whereas, we believe that with the right menu architecture, with the right innovation, so line extension on the Americano to premiumize it within that space, and also the non-Americano, we believe the unit sales per cup, the price per unit, will also go up. So we're gonna increase our, rolling base sales, mainly through menu architecture. Now, in terms of saturation, competition, and growth potential, we have a very different view.
So, I happened to spend 20 years in tobacco and alcohol, in my previous life, but what is very interesting about Korea in all those segments is that it usually ranks very high in terms of consumption over many, many years. So that is to say, if you go back, you know, about 10 years, the way Koreans drank coffee was completely different. It was very watery, and their main drink actually was boricha, which is a barley tea. And, everyone right now sees the Americano kinda as the new boricha, meaning it's like water to them. It's just something that they have in the morning, something they have in the afternoon, et cetera. So the consumption, we don't think will slow down.
I think the opportunity for us really is, when we look at MEGA in particular, their coffee contribution to their total sales is significantly smaller. And we have to ask the question, you know, do we wanna be in that space, or do we wanna be in the space of coffee, but with more innovations around coffee? And I think the answer is, we wanna be a coffee player. In terms of Chairman Yang, we have a very comprehensive non-compete and the rest of it. This is his baby. He's grown this, and his name's on it as well. He is not going to be a competitor. In fact, he'll be an ally to us in many ways. We are very amicable terms. It was a one-on-one negotiation. We've spent quite a bit of time with him as well.
His ambition isn't to be another value segment coffee player. It's very different. Ediya in the mid, the value, and Starbucks in the premium are very, very different occasions, and also locations, and also in terms of consumers' ability to purchase on a regular basis. So, he wants to sit even above that as a super premium, so, you know, like an $8-$9-a-cup coffee. So it's a very different ambition, and so we don't see him as a competitor. But we do see other competitors. It is a competitive market. So, that's why, for us, what was so important was the quality, not only of the coffee but also of the people that we're purchasing. The last thing I'll say, Compose Coffee is not a brand yet.
It's a coffee franchise company, but it's not a brand yet. It's only less than a year ago that they started thinking about marketing and branding. So I think there's plenty of growth for us.
Got it. Thanks. That's very helpful. Just follow up on the chairman's situation you mentioned, right? So he's not allowed to sell coffee at a certain price point. That's the non-compete you're talking about?
I cannot-
So he can sell coffee at a... Yeah, go ahead.
I cannot get into the details of the non-compete, 'cause it's,
Got it.
It's under confidentiality, but, yeah, it's... He won't be a competitor.
... It won't be a competitor. Okay, good. Fair enough. The second question for me is on synergies, right? I'm just wondering if you have any sort of synergies that you've quantified or analyzed while doing this transaction. I know you like it the way it is right now. They're growing, they're profitable, the cash return is good, but do you see any sort of synergy? Because I was thinking earlier that you might be taking this outside of Korea, but you've already said it outside during this presentation that that's not happening. So I was just wondering, what other thing makes it so attractive to you to buy this-
Yeah.
You know, from the chairman? Yeah. Thanks.
So, again, I wanna qualify my statement. Within the next 5 years, our focus is 100% on Korea. And I say that because 5-7, we'll potentially have new partners, we'll potentially own the whole thing. There'll be some form of exit happening between 5-7. We have plenty of growth opportunities that are lower-hanging fruit, if you will, and that are more constant.
Yeah.
So number one, for example, number one, it's Busan. So I don't, I don't know if you're familiar with South Korea, but there are two major cities. So Greater Seoul is the largest, and then there's Busan down in the south. It's a port city. This business was founded in Busan. We have stores in Greater Seoul, but we're definitely under indexed compared to MEGA's distribution, for example. So we are actually moving head office up to Seoul, and we're attacking that geography with our strength, meaning best pricing, best quality beans to our franchisees. So that will be the focus. The second reason why I think it is too early to talk about expansion in Southeast Asia or other places is because the brand is not strong enough, in my view.
Compose Coffee, as I said, we need to work on the branding aspect of it. 'Cause they're coffee people, and they've always positioned it around the Americano, the iced Americano. For me, for us to be able to take this outside, we'll need to develop this, like a Starbucks. Starbucks is a brand-
Yeah.
Then coffee, whereas Compose is 100% known for its quality and taste of coffee. So I think there's some work to be done before we can consider other markets. And again, we’re 100% committed to being capital light. So therefore, if we do take it outside after the 5-7-year period, then we have to make sure that it's with a franchisee that's really, you know, has the capability of doing something with this brand.
Got it. Understood.
Um-
Thank you so much. Appreciate it.
Thank you.
I'll get on.
Thank you, Tunde. Yeah, great question. Thank you.
Thanks, Tunde. Okay, there's a couple of questions here. I'm just kind of picking up from that, on the outlook. So, two things. You thought touch a little bit on store expansion, but what about for SSSG expectations moving forward? And how have you been managing your raw material costs, given... Or how has Compose been managing raw material costs, given the recent surge in coffee prices?
Yeah. So forward-looking financials are a little bit difficult to disclose, but year -to- date, we're very excited from what we're seeing. It's something very interesting happening right now, and maybe it's a combination of things. So I'll give you an example. When we signed up... I shouldn't say we, when they signed up BTS' V, there was, I think, 11-12 million app subscribers overnight. How much of that translated into consumers who consume on a regular basis? That type of analysis and data we'll get into, but we don't have it, so I don't want to make that correlation that that immediately impacted volume. But of course, there's gonna be some impact to sales from something as, you know, evident as that. So the growth is there and continues to be there.
We're still relatively small in the context of the entire coffee market. So, the other thing that's also very helpful is the price consciousness and the requirement to really consider value, especially for those who are drinking this on a frequent, regular basis. So there's a functional need, there is a social need to have a coffee, you know, and spend with your colleagues and do coffee talk and so forth. So therefore, we think the value segment will grow faster than the other two segments. Definitely the mid-tier, because that's the one the value segment is taking shares from. And I think there was another component to that question around the bean price, was it?
Yes. So, so we've seen a recent surge in,
Yeah.
Yeah.
Yeah. Absolutely. This is, I would say, an opportunity and a threat to all players in the coffee industry globally. It's not just a Compose Coffee phenomenon. What I've seen so far, the natural hedges are the following: They do buy very long, 12-18 out. They do get very good terms because of the, the volume. They're using one of the, the top-notch, procurement houses in Korea, and because we're a significant part of that, you know, the sales volume of this third party, we do get top-notch, traders and attention. That's one. I think, also the non-dependency on a single origin market is, something else that we've seen coming through in their pricing, so they're able to relatively, keep that.
The retail selling price to consumer, KRW 1,500, has not changed in a while, nor is there any reason to change that, because that's a very strategic positioning. What we have seen with others is we have seen people do KRW 1,500 as a promo, but not necessarily be able to stay there as an everyday low price. So we do see people, you know, KRW 2,000-KRW 2,500 range in the value segment. So I think that's very important for us. And as you can see with the, the margin rates, there's plenty, plenty to support the franchisees with. So our number one motivation, of course, is not to increase retail selling price, but to drive volume and mix.
As we get the different consumer base coming in because of brand ambassadors like V, we're starting to see the non-Americano components also starting to pick up as well.
Okay, thanks, Richard. On that note, there's a question here on how, well, we talked about competition earlier. So how sustainable are the margins considering the intense competition and the volatility in the prices? Yeah.
Yeah, um-
Sorry, the competitiveness in the pricing.
At the moment, what we're seeing with the competition, because they're 3PL and not 4PL, the way they do accounting on gross and net revenue, we do see that our numbers and their numbers do look different. So, I don't wanna call that out. So we are looking at that. However, if you were to adjust it as if they also had a 4PL and were able to look at net revenues instead of gross revenues as a denominator to your EBITDA, then, you know, they'd be running, I would say, somewhere around 30%-35%. Again, it's not a royalty play in Korea. It is a markup or a margin on the beans, and it's not raw beans.
It's actually the whole, you know, value chain is from purchasing at the best price, hedging it out, getting that blend with multi-markets, origin, roasting, distribution costs, and so forth. And again, I mentioned that as one of the Q&As, because I genuinely think this is a strength and will continue to lean on to this strength. Because for others to get there, they would have to invest quite a bit, and it would take time to get up to speed. So we'll continue to do that. And as we get larger in terms of footprint and franchisees, I think the synergies gets even larger because we always get the best negotiated bean price for the same quality, like for like.
Okay. I mean, that being said, it's related—I guess—to this question here about what can you see in Compose that you can apply to your existing coffee brands, whether if it's on the manufacturing and procurement side or whatever operations?
Yeah. Again, I said earlier, I wanna be very transparent. We think we'll learn a lot in the next 100 days after we get full access, after the acquisition, because quite a bit of what we know right now is based on information sharing, et cetera. But once, you know, we have the business in full, we can really see all the opportunities. So not to dismiss synergies, it's a very important component of M&A, I realize that. But Compose Coffee represents the largest brand in terms of store network we have today. 2,600 is larger than Jollibee's 1,700.
So, we've now acquired this business, and I think we should really focus on driving that business forward and getting the shareholders return through getting really good at it, and then the synergies of exporting or expanding and the rest of it. The low-hanging fruit, of course, is the beans. Any brand or business that we have in our portfolio that uses Arabica beans from Colombia, Ethiopia, and Brazil, except for the logistics cost to ship, of course, there is an opportunity. But right now, we haven't done the one plus one equals five exercise with our mothership brand, CBTL, because we've got 1,200 CBTL stores as well. And logistically, I'm not sure how easy or complicated it is.
So, if it's okay, give us some time to work through that. But right now, let us just focus on gaining market share.
Okay, fair enough. I mean, Yeah, there's also a question here, and I guess this relates to your comments earlier on, you know, competition, that, you know, how would you deal with imitation brands moving forward? It's really more of a brand building exercise.
Yeah.
Forward for you.
I think it's no different than any other brand that is sustainable and that stays for a long time and grows. You have to have a clear strategy, and you have to execute consistently with focus. And I say that because there's so many overnight coffee brands. We know that. We see them pop up everywhere, not just in Korea. Some make it, some don't. There's a lot of kiosk plays, there's a lot of value that, you know, brings you in. But ultimately, I haven't seen too many with real coffee at the core center. And I don't mean to dismiss Luckin Coffee. I think they've grown to be an incredibly significant business. But even Luckin Coffee, one-third of that business is, you know, coconut latte and so forth.
So we understand the flavor and the coffee drinks or quote, unquote, "coffee drinks" out there, but we wanna stay core to the essence of coffee, and we think there's a lot of line extension within the coffee before you go vertical with within the drinks option. So again, I mentioned this, but I'll say it again, menu architecture is gonna be incredibly interesting in unlocking the potential of average daily sales, average cost per cup, et cetera, on a sustainable go-forward basis. So, yeah, we're super excited, but we wanna build both a brand and a business. Right now, we have a business that is profitable, which is good, but we still have, you know, some work to be done to make this a really great brand one day.
Okay. I'll just take these last two questions on Compose's financials. There's a question here on: What is the reason for the more than 50% decline in net income from 2022 to 2023? Not sure where... Yeah.
Let me just fact-check that first before-
Yeah. Maybe Cosette can get back to this, later on. But you mentioned earlier that, you do expect... I mean, the Compose has a very high dividend payout. So what kind of dividends are we looking at, and what is, what is a typical payout ratio for, for this business?
Okay. We'll get back on the net income, 'cause I'm not seeing that number on the slide. But in Korea, you're allowed to dividend out twice a year. Whether we'll keep that frequency or not, we're not sure. Dividends will be very important to our private equity partner because they are, of course, as private equities do, they're doing this deal on a 100% leverage base. For us, dividends are important, and we'll probably have a very similar thinking around repay back our debt, make sure we get our payback, and the rest of it, we'll consider reinvesting into the business as necessary.
But because we're not building stores, which is predominantly where your CapEx gets spent, we think this is gonna be a very cash lucrative business, other than the marketing efforts that I spoke of, and so forth. We're not there to, you know, build a big infrastructure. It's proven for 10 years to work very effectively, so we'll be smart with the G&A component. We'll take a look at tech. Korea is a very tech-important market, and I say that because delivery as a channel at the moment is around 8%, which is a bit lower than where the other drinks brands are in other parts of the world. So we'll take a look to see whether there's enhancement opportunities on the apps, et cetera, to increase that.
That is to say 92% of the transaction happens at the store, of which majority of that is happening through Grab and GoSend. So yeah, these to me are all pro, productive measures to increasing more from that store box. But yeah, dividends, the way I see it, if it's not for capital investment or brand investments, it's for shareholders to return back to our shareholders.
Okay. It's good to hear. Okay, I think that's it for now. Some of the other questions were already discussed earlier, so yeah, so that's it for now. I think that's it for now. Thank you, Richard and team, for taking the time to be with us today. Cosette will try to get to those questions that we didn't get to answer earlier. But we also have another session later at 3:00 P.M. Manila time, for those who would like to dial in again. So, thank you, and good morning to everyone. Thank you again, Richard and team, and have a good day.
Thank you, everyone. Thank you.
Thank you.