DFI Retail Group Holdings: Positioning to be a major QSR player in Asia
- On-ground 7-Eleven store visits indicate (i) diverse RTE offerings, (ii) competitive meal pricing, and (iii) process automation, all of which support convenience margin uplift
- Extending hot pizza and smoothies to more stores should broaden appeal, while installation of self-checkout counters can reduce labour costs and lift store-level profit
- South China growth remains intact, underpinned by superior margins compared to local peers and store-expansion headroom beyond Tier 1 Guangdong cities
- Maintain BUY with TP of USD3.90
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What are the offerings at 7-Eleven stores?
There are a few 7-Eleven mainstays, namely onigiri, sandwiches, burgers, set meals, and coffee. Our team visited outlets nationwide and sampled the various RTE options on offer. We summarised our key findings below.
Variety – The range of offerings varies by store, but the mainstays were available in all locations visited. Smaller outlets offered fewer flavour variants. Slurpee machines were present only in selected stores.
Taste – We sampled onigiri with hot coffee, a Thai basil chicken rice and soymilk set, chicken biryani with green tea, and Andes beef balls with mushroom sauce (see Figure 1). While taste is subjective, the food was generally palatable, though portions tended to be small.
Price – Pricing is competitive, especially with meal bundle discounts. For example, onigiri with coffee costs SGD3.50, and the Thai basil chicken rice with soy milk set costs SGD5.50. The more premium Andes beef balls are priced at SGD7.90 (comparable in taste to standard IKEA Swedish meat balls priced at SGD11.50). Overall, price points are comparable with affordable food court options (SGD3.50 for a kaya toast, egg, and hot coffee set at Kopitiam) and fast-food options (SGD5 for a McChicken value meal).
Who patronises 7-Eleven stores?
Based on our on-site observations of certain stores, we believe the key customer demographics can be divided into three groups:
Students – Typically seeking a beverage or snack after school or tuition. Outlets near schools and tuition centres often have Slurpee machines to serve this segment.
Office workers – Usually seeking light bites at breakfast, lunch, or tea. They tend to pick up sandwiches or other small bites with a drink. Stores near the CBD carried solid stocks of RTE items and beverages, although the smaller stores had a more limited range of flavours.
Tourists – Looking for grab-and-go snacks or drinks. The Changi Airport outlet offered the widest range of RTE items and beverages, likely tailored to visitors.
How is the company planning to drive profitability?
We visited a revamped 7-Eleven at The Metropolis, an office catchment area, and noted changes that could be extended to other stores to enhance profitability. Key takeaways include:
Broaden RTE offerings to include sliced pizza and smoothies to cater to wider demographics. The company has partnered with Korean brand Go-Pizza to offer instant pizza at SGD5.50 per slice, versus roughly SGD7-10 at pizza chains (Figure 5). Regarding taste, our pepperoni slice was decent and comparable to Pizza Hut. According to Go-Pizza’s website, this offering is available in 17 of 467 7-Eleven outlets as at end-2024, ~4%, implying ample room for scalability. The store also sells smoothies at SGD4.50. This represents good value compared with a similar Boost drink at SGD5.50, and should appeal to health-conscious students and adults.
Installation of self-checkout counters to reduce labour costs. We observed self-checkout counters at UE Square and The Metropolis. At The Metropolis, there was one staff member on duty, versus the typical two, with one at the till and another restocking. At UE Square, there were two staff members, and the self-checkout was unused despite a long queue, suggesting a learning period as customers adapt to the new process.
Strategically, the company is moving in the right direction to enhance its RTE mix by broadening the offering range and improving cost efficiency through self-checkout. We expect margins to improve progressively as adoption scales and consumers become familiar with the format.
South China
Near-term challenge with competition from food delivery platforms. JD’s entry into food delivery in Feb 25 has sparked a food delivery war, with companies offering massive subsidies on food and beverage at very low prices. This indirectly reduces foot traffic and negatively impacts convenience store businesses. Accordingly, investors are justifiably concerned about the company’s expansion plan in the region. Recent industry data also indicates increased profitability challenges in 1H25 (refer to Chart 1) likely linked to the ongoing food delivery war.
Why we believe China remains a great opportunity
There are three key reasons: (1) current food delivery war is unsustainable and transitory, (2) sales mix and value chain integration provide a margin buffer to outlast competitors, and (3) headroom for growth exists outside Tier 1 cities.
Delivery price war unsustainable and likely to ease sooner than later. History suggests that price wars in China typically last around two years. This pattern was observed in previous cases such as Didi versus Uber and Mobike versus Ofo. However, the current food delivery war may prove to be shorter. The government intervened early in May 25, calling for fair competition across the industry. In response, all three major players – Meituan, Alibaba, and JD – have publicly committed in Aug 25 to curb aggressive pricing tactics. With this regulatory pressure and industry alignment, we believe subsidies are likely to start winding down in the coming months. As promotions ease, foot traffic is expected to recover gradually, with a clearer pickup by late 2025 or early 2026.
Superior margin profile versus industry due to much higher RTE mix. Foreign convenience stores are not permitted to sell cigarettes in China. This restriction has contributed to a significantly higher RTE product mix in South China operations. As of 2024, we understand that RTE accounts for about 40% of sales for DFI in South China, compared to an 18.3% industry average (which includes fresh food, coffee, and own-brand offerings). Although DFI does not disclose South China profitability separately, the higher RTE mix (with much higher margin relative to cigarettes) suggests a stronger margin profile. Its EBIT margin is likely among the top 20% of peers at an est. 4%. This compares favourably to the est. industry average of 3.3% (see Chart 2).
Vertical integration with RTE supplier provides further indirect margin headroom. The company sources certain RTEs directly from its 50% associate in Maxim’s, which has existing central kitchen facilities. This provides an additional source of indirect margin headroom versus its competitors, which largely rely on independent external suppliers. Should the delivery price war be prolonged, we believe DFI, with its margin headroom is well positioned to ride through the war and emerge stronger.
Headroom for growth beyond Tier 1 cities. Based on population per store statistics, we believe there is significant store network expansion headroom outside Tier 1 cities with a population count of 3,800 to 4,000 per store. This is relative to Tier 1 Guangdong cities (Guangzhou and Shenzhen) and Dongguan, which have a lower average population count of ~2,770 per store. In total, we believe there could be headroom for >2,100 new stores outside Tier 1 cities (Zongshan, Huizhou, and Foshan), supporting multi-year store network expansion at ~200 stores per annum.
Traditional franchise model to support rapid store expansion. Under this model, franchisees bear the rental costs and the majority of capex. This positions the company to expand rapidly with limited capex outlay. With rapid store network expansion, we believe the company could benefit from procurement and distribution economics of scale.
Overall, we expect store expansion across under-penetrated South China to position the company for a return to top-line growth from FY26F. In addition, its scaled-up RTE strategy will be a key driver of multi-year high-single-digit to low-double-digit earnings growth (Appendix 1: USD137mn in operational efficiencies upside will materialise over four to five years, implying an 8%-10% CAGR).
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