There is one famous chicken rice stall in PJ Old Town foodcout, just opposite the PJ Old Town wet market. Everyday around lunch hour you can see long queue in front of the stall, people waiting for their turn to place order of their favourite chicken rice. The guy chopping the chicken have rarely seen to be able to stop for a short break. He just can’t affort to stop. I am one of those queing, usually during the weekends. Let’s call this Chicken Rice Stall A.
One day while queing, I started doing some mind math, estimating how much money this one small stall can make everyday.
| Average price per plate of chicken rice | RM6.00 |
| Average plates sold per day | 500 |
| Average sales per day | RM3,000.00 |
| Average sales per month (30 days) | RM90,000.00 |
| Average sales per year (350 days assuming some off days) | RM1,050,000.00 |
| Net profit per year (assuming 20%) | RM210,000 |
Not bad for a chicken rice stall to make RM1.05 million in sales and RM210,000 in net profit per annum.
Then I started to wonder if I like this business so much, how much would I offer the Owner for the business that he will consider selling it to me? On a normal day like that, I will probably offer him RM2 million cash, being 10 times the annual earnings and 2 times the sales. Well, probably the Owner will take it if he thinks that it will save him 10 years of hardwork and use the cash for his early retirement. But there is still a chance that he will not take the offer. Maybe doubling the price to RM4 million will increase the chance of him taking my offer. That of course was the dream that have played in my mind while I was waiting in the queue for my turn to order my chicken rice. I of course do not have the money to buy out this chicken rice business.
Then one day, the world has gone crazy about chicken rice, for whatever reason. The queue at the chicken rice stall got longer and longer, and rumours started to circulate around that the orders placed for the chicken rice from this stall has been up until next year!! Analysts have predicted that the profit from this chicken rice stall will double in the next quarter. People have started asking the business Owner to sell its business for as much as RM20 million, being 100 times the earnings it has made the past year. The Owner is hasitating, speculating that someone will come to him tomorrow offering RM30 million, RM40 million and even RM50 million. At least this is what most of the professional analyst thinks his business is worth now. So how much should he sell his chicken rice stall?
The market has gone so crazy that the other not so famous chicken rice stall at the other corner of the foodcourt (let’s call this “Chicken Rice Stall B”) which rarely have customers during the normal days started seeing more customers in its stall, but still not anywhere close to this famous stall. Even so, there are already investors wanted to buy out this Chicken Rice Stall B at RM2 million!! This Chicken Rice Stall B hardly serve more than 50 plates of chicken rice a day because it doesn’t taste good.
| Average price per plate of chicken rice | RM6.00 |
| Average plates sold per day | 50 |
| Average sales per day | RM300 |
| Average sales per month (30 days) | RM9,000 |
| Average sales per year (350 days assuming some off days) | RM105,000 |
| Net profit per year (assuming 20%) | RM21,000 |
The market has suddenly gone crazy.
As you can see, the market is willing to pay the price for Chicken Rice Stall B that I would have paid for Chicken Rice Stall A in the past. Even with the sudden craze for chicken rice, the same stall can only chuck out at most 20% more chicken rice compared to the normal days. It can raise prices due to its high demand, but it cannot double the price or the customers will go away and choose to eat something else like wanton noodles or nasi lemak. Assuming 20% additional capacity (600 plates per day) and price increase from RM6 per plate of chicken rice to RM10 (an increase of 67%!!), Chicken Rice Stall A is expected to increase its annual sales to RM2.1m (a whoping 100% increase in sales) and net profit to RM420,000 per annum. Paying RM20 million for this business is still paying 47.6 years of annual profit. Is this sustainable? Will the world craze for chicken rice forever? Should the business Owner sell its chicken rice stall at RM20 million now or should he wait for a higher price?
One thing for sure is that nobody knows what will happen in the future. But if you ask me, if I am the business owner, I will definitely take that RM20 million and go away investing the money into some other businesses that are priced rationally. Maybe buy out that furniture manufacturing company in Muar that is selling at 5 times the annual net profit of RM4 million?
One more thing to ponder. What if suddenly the market craze for chicken rice disappears? Those whom had bought Chicken Rice Stall A at RM20m at least still have a business (with good recipe) that continues to generate RM210k a year and in 100 years, you’ll get your money back. But for those whom had bought Chiken Rice Stall B, will find themselves owning a strugging business that does not have a competitive advantage and will likely go out of business within the next few years.
The above is not a true story but what I am trying to illustrate here is how irrational Mr. Market can become at times.
Compare the above story with the recent market’s craze for rubber gloves manufacturers. Not all are comparable, but you get the idea.
Chua Financial Blog 