Best World’s Response to the BT article

Sales of DR’s Secret in China: Best World’s best-kept secret?

The Business Times on 18-Feb-2019 morning published an article titled “Sales of DR’s Secret in China: Best World’s best-kept secret?” (link) which sent the share price of Best World International down nearly 17% in about 2.5 hours after market open, followed by a trading halt for 3 days which was further ‘extended’ for another 2 days.

It took Best World a week to “prepare, finalise and release a clarification announcement”. The clarification announcement was published via SGXnet on 23-Feb 9:36pm. 

Following is the key responses extracted from the announcement. (link)




1. 

Statement in The Business Times Article:

“Best World says it has 28 franchisees spread across 10 provinces and one municipality in China. However, not a single one is listed on the company website.”

“Mr Huang declined to disclose the names of the 28 franchisees and their exact store locations: “We don’t share that. Now is not the right time. I’m in the blackout period. After results maybe we can talk more.”

Best World’s Response:

At the time Mr Huang was queried regarding the Franchisees, the information on the locations of the Franchisees had not yet been made public on SGXNet. To avoid selective disclosure of information and in view of the expected release of the Company’s FY2018 financial results on 26 February 2019, Mr Huang declined to disclose the information on the Franchisees at the time.

Having considered the concerns raised in the Article in connection with the Franchisees, the addresses of the BWL Lifestyle Centers operated by the Franchisees are now listed on the Company’s website at http://www.bestworld.com.sg/franchise.html.

Further, the Company would like to inform shareholders that in carrying out its internal controls review, the Company’s internal controls consultant conducted physical inspections of ten BWL Lifestyle Centers operated by Franchisees, as well as performed certain agreed upon procedures in respect of Franchisees, including conducting background and qualification checks, reviewing sales and promotions records, inspecting inventory and compliance management systems, and performing contract and license reviews.

The Group’s management also periodically visit the Franchisees to physically inspect physical premises, and has contacted certain customers of Franchisees for various purposes.




2.

Statement in The Business Times Article:

“The person who answered a telephone call in Best World’s subsidiary’s office in Hangzhou city said she was not sure how to locate the franchisees, and reckoned they were based in Hunan province.”

Best World’s Response:

The Company has undertaken an internal investigation of this matter and would like to clarify that the employee contacted is employed at the Group’s manufacturing facility in Hangzhou, China, which manufactures the “Aurigen” ( 全 金 ) line of health supplements. The relevant employee was therefore unable to provide information on the location of the Franchisees, as the employee was involved in a different part of the Group’s business and was not privy to the information requested.




3.

Statement in The Business Times Article:

“But a check by BT showed that the licence covers only six health supplements under the Aurigen brand, and no skincare products – something Best World did not clarify when analyst reports stated otherwise.”

Best World’s Response:

Although the Group obtained a direct selling license from MOFCOM in June 2016 covering certain health supplement products over a limited geographical space in China * (see http://zxgl.mofcom.gov.cn/front/getEnterpriseInfo/330100400049586), the Group does not rely on the direct selling licence for the Franchise Model or Manufacturing/Wholesale Model, or the Export Model previously employed in China. Since obtaining the direct selling licence in 2016, the Group has not conducted any sales in reliance of the direct selling licence.

While the Group was waiting to receive approval for its direct selling licence, it was also exploring alternative strategies to evolve its business models in China, given the growth momentum it was experiencing at the time. Although the Group transitioned to the Franchise Model, it believes that the grant of the direct selling licence by MOFCOM serves as a testament to the Group’s product quality, corporate governance and business behavior.

The Company had obtained legal advice from its legal counsel, one of the largest law firms in China, confirming (a) that the operation of the Franchise Model is lawful, (b) that the Group has obtained all material licences for the conduct of such operations in China, and (c) the business of the Group under the Export Model and Franchise Model did not and do not constitute direct selling activities in China.

* Please refer to the Company’s announcement dated 1 July 2016 on the award of this direct selling licence, as well as Section 10 of the Company’s announcement dated 22 February 2017 of its financial results for the year ended 31 December 2016 (“FY2016”) and page 6 of the Company’s annual report for FY2016.




4.

Statement in The Business Times Article:

A search on Taobao that sorts skincare products by sales volume reflected a slower sales record for DR’s Secret over the last 30 days, relative to its apparently smaller rivals like Clarins and Chanel.”

Best World’s Response:

The Group does not directly conduct any sales transactions in China through online stores or social media, including Taobao. The Products are primarily distributed in China by Franchisees directly to consumers through BWL Lifestyle Centers in China.




5.

Statement in The Business Times Article:

When Best World completed the switch from an “export” to a “franchise” model in China in July last year, it was able to charge franchisees a huge mark-up to the wholesale price that export Import Agents had paid.”

Best World’s Response:

Under the Export Model employed in China until the second quarter of 2018, the Group sold the Products to third-party Import Agents at the export prices, which were lower than the prices of Products sold under the Franchise Model. The difference in price partially reflects the margins earned by the Import Agents under the Export Model, where the Import Agents bore investment and operating costs as well as inventory risk.

In the transition to the Franchise Model, BWL China took over the role of the Import Agents in China. Taking over the role of the Import Agents eliminated the need to accommodate the Import Agents’ margins, and allowed the Group to sell the Products directly to Franchisees at the Franchisee wholesale price, which increased the Group’s gross profit and gross profit margins, while Group’s cost of sales for the Products on a per unit basis was not materially affected by the transition.

In addition, the difference in the prices charged to Franchisees under the Franchise Model reflects the support that the Group provides and risks that the Group assumes. Under the Export model, the Group sold the Products to the Import Agents, and provided limited support in marketing, logistics and customer services. Operations and marketing were handled by the Import Agents who also take on inventory risk, as ownership of the Products transfer upon delivery of such Products to the Import Agents. Under the Franchise Model, these costs and risks are borne by the Group, which bears the costs of cross-border shipping, importation and warehousing of the Products, costs of operations. Furthermore, the Group would be responsible for managing inventory levels in China.

Under the Franchise Model, BWL China is responsible for inventory management and logistics, and the Group also provides support to Franchisees through marketing and customer services. The Group also provides training for its Franchisees to ensure their quality of services are consistent with the Group’s standards. These additional undertakings resulted in higher operational expenses under the Franchise Model (as compared to the Export model where most of such operational expenses were borne by the Import Agents), which are thus reflected and translated into the higher prices the Group charges the Franchisees as compared to the Import Agents under the Export Model.




6.

Statement in The Business Times Article:

“Unlike typical franchise agreements where the franchisor takes a cut of the franchisees’ sales, Best World’s agreement with its Chinese franchisees allows it to recognise revenue upfront, because they must make payment before any inventory is shipped. (Recognising revenue upfront was an issue flagged by DBS’ Ms Tay as she had problems reconciling it with underlying consumer demand.)”

Best World’s Response:

The term “Franchise Model” was adopted by the Company to refer to the Group’s distribution model for premium skincare Products in China for the purpose of reporting, and should not be interpreted narrowly. The term was used in replacement of the term “China Wholesale” due to its similarity to the Manufacturing/Wholesale Model used for “Aurigen” (全金) Products.

The term “China Wholesale” was used in the Company’s announcement dated 14 May 2018 of its financial results for the 1Q2018.

The Franchise Model developed by the Group incorporates elements of authorised distributorship and franchise arrangements, where the Group sells the Products to the Franchisees, and the Franchisees on-sell these Products to consumers. The term “Franchise Model” was adopted as it describes the franchise elements of the arrangements, under which the Franchisees may only sell the Products (to the exclusion of other brands) and are permitted to use the Group’s trademarks in operating BWL Lifestyle Centers, as well as comply with the Group’s brand standards and operating manuals.

The Group recognises revenue upon delivery or completion of the sale to the Group’s direct customers. These direct customers under the Franchise Model are the Franchisees, who are generally required to pay in cash before delivery and are subject to a no returns policy (except for defective goods). Accordingly, under the Franchise Model in China, the Group records its sales at the time the Products are sold to the Franchisees, which is when control of the inventory is passed to the Franchisees with cash payments received. This revenue recognition is in line with SFRS(I), the accounting standard of the Group.




7.

Statement in The Business Times Article:

“When BT showed Best World’s league table to Euromonitor, a Euromonitor spokesman expressed surprise.”

“We are not sure about how they rank themselves by the reference of Euromonitor’s source. Indeed, according to our research methodology in 2017 they were not significant enough to be tracked,” she said.”

Best World’s Response:

The Company obtained the market data and industry ranking used in its 3rd quarter 2018 corporate presentation directly from Euromonitor. In late-2018, the Company commissioned Euromonitor to conduct an industry analysis and research on the markets in which the Group operates. As part of this engagement, Euromonitor performed “customized research” involving primary research (such as trade surveys with leading market participants), secondary research (such as review of published sources), review of the Company’s audited financials and operating data, cross-checks, modelling and data review.

Euromonitor was not able to ascertain the Company’s ranking prior to conducting the “customized research”, as the Company was an emerging player operating in the fragmented premium skin care market in China. The Company’s ranking was ascertained based on the additional market information and industry data obtained by Euromonitor through “customized research”.

The scope of “customized research” is narrower and more company and category focused than the research methodology used in producing “published research” of Euromonitor, which covers the entire Beauty industry, the basis of the data quoted in the Article. Euromonitor had not previously reported on the Company in its 2018 edition Passport database researched end 2017. Euromonitor focuses its annual research programme on capturing the top ten players in each category and best representing other players of significance thereafter. As an emerging player operating through a franchise model in the Chinese market, capturing a minor share of the fragmented premium skin care category, the Company had not formed part of Euromonitor’s conversations with industry at the end of 2017.

Euromonitor has confirmed to the Company that they will confirm the same to The Business Times.




8.

Statement in The Business Times Article:

“When Best World shifted to the franchise model, it also stopped reporting the number of “consumer members” it had in China since revenue is booked when the franchisees take inventory, which renders consumer member numbers irrelevant. Mr Huang declined to comment on the size of the franchise salesforce, stating only that each franchisee has its own page and followers.

After the numbers from China were stripped out, Best World’s total direct selling membership shrank from 500,259 members at the end of March last year to 97,892 at the end of June.”

Best World’s Response:

As previously announced by the Company7, the total number of members previously disclosed comprised (a) members under the Direct Selling Model, and (b) consumer members under the Export Model in China. Consumer members in China were members of reward programs (frequent customer programs), and not members of the Direct Selling Model. With the transition to the Franchise Model, management was of the view that the number of Franchisees would be a more accurate indicator of the Group’s distribution capabilities in China. Accordingly, the numbers of consumer members from China were stripped out as they do not represent members under the Direct Selling Model.




9.

Statement in The Business Times Article:

“Separately, Best World said last Friday that independent director Chan Soo Sen has resigned to focus on work commitments and responsibilities outside of the company. He joined the board in 2016. The board has appointed Hong Kong-based Chester Fong Po Wai as his replacement.”

Best World’s Response:

As disclosed in the announcement of Mr Chan Soo Sen’s resignation on 15 February 2019, the Company would like to highlight that there were no unresolved differences in opinion on material matters between Mr Chan and the Board, and that there was no other matter in relation to his resignation or relevant information to be provided to shareholders in connection thereto.

The Company is pleased to welcome Mr Chester Fong Po Wai to the Board. Mr Fong is a Senior Advisor at McKinsey & Company and was previously a Senior Advisor at Actis LLP, a private equity firm. He was also Chairman & CEO of Greater China and CFO of Greater Asia at Colgate-Palmolive, where he also gained more than 30 years of experience in general management and corporate finance roles. The Board believes that Mr Fong’s extensive experience in the consumer products industry in the Greater China Region will be relevant to the Group following its transition to the Franchise Model in China and the continued focus on the market. In addition, his experience with Actis LLP will also be valuable to the Group as it seeks to explore potential opportunities for inorganic growth through mergers and acquisitions.

Source: SGXnet (link)




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SGX Observer’s Take: 

Don’t smoke, or else you may be caught in wild fire. 🧯







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