With the pandemic creating a lot of uncertainties to the economy, many have wondered how Micro Connect’s businesses and investments have been faring. I would like to use my recently launched blog to share our views and some key takeaways from the experience.
We have certainly felt the disruptions that the pandemic has brought to the brick-and-mortar economy. Our more than 20 investments in Shanghai suspended operations for some time, with the portfolio receiving zero revenue share from the region. However, this has not had a significant impact on the performance of the overall portfolio.
Why is that the case? As we invest in physical stores using a revenue-sharing format, what really matters are the stores’ revenue trends over the next three to five years. Having some of our invested stores closed for a month or two would only prolong our investment recovery period by 1-2 months and would not have a significant impact on the value of the broader portfolio. We also expect pent-up demand to trigger a “revenge spending” splurge as the pandemic subsides, with dramatic revenue improvement at these stores helping us make up for the lost time.
As expected, the pandemic has caused disruptions to our day-to-day operations and growth plans. Our people have not been able to travel, and we have had to cancel many in-person meetings and events, slowing the progress of our business development. But every cloud has a silver lining. While the pandemic has made everything more challenging, it has also presented us with longer-term benefits and an opportunity to shape our business model into a more sustainable and resilient one.
1. By effectively allowing business owners to open stores at half cost without giving up any operating control, our investment model has been gaining wide acceptance among brand owners and franchisees. By funding up to half of the store opening expenses, we enable brands and franchisees to double their number of store openings with the same amount of capital, accelerating revenue growth and strengthening brand value. The downward adjustment in our revenue sharing ratio upon investment recovery also provides further leverage to store owners. Rather than being a loan, our equity-like product features free store owners from the obligations of interest and principal repayment.
Traditional lenders and investors provide capital to the brand level and are exposed to the performance of the entire brand and all their stores. When these investors react cautiously to the downturn brought about by the pandemic, they retract from the entire brand or even the broader sector altogether, making fundraising very difficult even for the better performing brands. At Micro Connect, we invest at the store level rather than the brands themselves, allowing both the store owners seeking capital and us to cherry pick the stores / cash flows to be financed. While their stores in Shanghai are affected, these brands could shore up their capital base by raising financing from Micro Connect using revenue streams from stores in other regions. Increasingly, consumer and retail brands recognize the benefits and flexibility of this new alternative to traditional equity and debt products that Micro Connect has to offer. More importantly, we have always stood by our brand partners in their hour of need and hope to thrive together in the good times ahead. We never retracted from our commitment during the toughest times, and this has reinforced the confidence our brand partners have in Micro Connect.
2. Our experience with the pandemic has reinforced our conviction in building a highly diversified investment portfolio. Even with just over 100 stores, our investments are distributed across more than 20 cities in over 10 provinces, and in partnerships with more than 10 different brands / chains. While our Shanghai locations have suffered, most of our other investments have continued to perform and generate healthy cash flows for the broader portfolio.
3. One of our key investment strategies is to “follow the winners” and identify the best brand partners to work with. In a way, the pandemic has helped us do just that – it was effectively a stress test that helped to highlight and strengthen the strongest businesses.
4. The pandemic has also turned out to be an opportune time for quality brands and us to expand. Favorable store locations have become more readily available at lower rents, presenting opportunities for both Micro Connect and its brand partners to ramp up store openings and scale our investments.
5. The pandemic was also a stress test for our management team and operating systems. As the pandemic continues to upend the way businesses operate around the world, we have stepped up our use of technologies and automations and turned our focus towards work flow optimization. Our operations, supported by our Micro Connect Chain system, has withstood the pressure and we have managed to continue our capital deployment at an accelerated pace – we invested in another 56 stores in the month of April, following 109 investments in the first quarter of 2022.
Only the fittest would survive this challenging period. This applies not only to our prospective brand partners and their stores, but also Micro Connect. We have been able to come out of this even stronger than ever, and this would not have been possible without the hard work of our team. I want to express sincere gratitude to every member of Micro Connect.