Mr. DIY: How Two Brothers Turned One Store Into A $5B Empire

MRDIY is a low-cost retailer with three main store concepts: Home Improvement, Toys, and Fixed Price (think dollar store). Its flagship home improvement store, Mr. DIY, offers 18,000+ products at the lowest possible cost. Products include hardware, household, electrical, and other DIY-based items. Everything a home could need minus the groceries.MRDIY owns over 840 stores throughout Malaysia and Brunei and serves millions of customers annually through its in-store and e-commerce channels.Today's stock price isn't cheap. You're paying ~37x normalized earnings and nearly 6x sales for the business.That said, MRDIY is an incredible entrepreneurial case study on how two brothers became billionaires by taking a straightforward idea very seriously. We'll discuss:

• MRDIY's Humble Beginnings
• Always Low Prices: The Formula For Retail Success
• MRDIY's Growing Economies of Scale
• Growth Drivers In Home Improvement
• Branching Out: Mr. Toy & Mr. Dollar

MRDIY's Humble Beginnings

In 2005, two brothers -- Tan Yu Yeh and Yu Wei -- opened their first home improvement store in Jalan Tuanku Abdul Rahman. They called the place "Mr. D.I.Y. ("Mr. Do It Yourself").It's important to note that the brothers had no real experience in retail stores and certainly not home improvement concepts. Tan Yu Yeh, for example, was a physics major who worked as an engineer and stockbroker early in his career. It wasn't until Yeh left his stockbroking job and pitched the idea of starting a small utensil shop.Unlike the clean, fresh, and inviting store concept the company enjoys today, MRDIY's first store looked, well, terrible. You can see for yourself below.Despite looking like a murder set from Breaking Bad, Malaysians loved the first Mr. DIY store. The company added two more stores and ended its first year with three outlet locations. MRDIY slowly expanded its store count between 2005-2008. But it wasn't until it entered malls that the concept really took off.In 2008, the company diverged from its standalone concept and opened its first store inside an AEON shopping mall. Soon after, it partnered with other leading stores like Tesco and Giant. This mutually beneficial relationship made sense as MRDIY couldn't yet leverage its brand name to attract customers. So, customers would visit Tesco or Giant for their groceries and then use Mr. DIY for their home-related purchases like light bulbs, batteries, or electrical cords.Andy Chin, MRDIY's Marketing VP, explained the strategy (emphasis mine):

“Some might say we are partnering with the competition, but we believe that we are filling a gap in their businesses. Our stores are a one-stop centre for everything that a home could need—except groceries, which is the specialty of the large retailers."

Grocery stores also had a vested interest in seeing MRDIY's brand grow. The more customers shopped at MRDIY, the closer they were to their grocery stores, reinforcing the partnership's virtuous cycle. We can see the results of this strategy in the company's store opening growth rates.By 2014 (six years later), MRDIY opened its 100th store inside a Giant Hypermarket in Shah Alam, Selangor, Malaysia. Three years later, the company opened its 250th store. MRDIY celebrated its 500th Mr. DIY home improvement store opening two years later. Finally, the company opened 100 net new Mr. DIY stores between 2019 and 2020 to reach 600 Mr. DIY retail locations.Check out those improved store aesthetics, too!The exponential growth rates are incredible (see below):

• Years to get to first 100 stores: 9
• Years to go from 100 stores to 250: 3
• Years to go from 250 to 500: 2
• Years to go from 500 to 600: 1

Note: these are only for the Mr. DIY Home Improvement concept stores.Besides partnering with anchor stores, there were a few other main drivers to MRDIY's growth. Let's break down its business model by focusing only on its home improvement stores.

“Always Low Prices”: Customer Success, Economies of Scale & Ecosystems of Control

Home improvement retailing is a simple business where customers tend to care only about three things:

1. Price
2. Convenience
3. Assortment

The former utensil business leads its industry in the above categories, which feed off one another to create highly sticky customer behavior.MRDIY wins on price. A Frost & Sullivan survey noted that the company's products are "generally cheaper" than the same or comparable products. Generally, cheaper is good enough when you combine it with industry-leading convenience and assortment.MRDIY wins on convenience as it boasts the largest store network in Malaysia. Large store networks are essential because it simplifies the customer's decision process. Customers choose MRDIY because they know they're getting generally cheaper products at a more convenient location.Additionally, MRDIY offers various types of stores to meet customers where they are. While most (406 as of IPO) stores fall between 6,000-12,000 square feet, the company also offers Mr. DIY Express models. These Express models are smaller (<6,000 square feet) and are sometimes built inside local gas stations. The company also launched its e-commerce business in 2017, bringing further convenience to its customers. Customers can either get the product shipped to their house (in 2-5 days) or pick it up in-store with its "Click-and-Collect" model. Another win-win for the customer.Finally, MRDIY wins in assortment. The company offers over 18,000 products with main categories including hardware, household and furnishing, electrical, stationery, and sports equipment.Each customer driver feeds off one another to create a durable competitive advantage. Customers prefer MRDIY because they offer the lowest prices on the most extensive assortment of products while operating in the most convenient geographical locations.

MRDIY's Increasing Economies Of Scale & Ecosystems of Control

This is the power of increasing economies of scale. The more stores MRDIY opens, the more products it can buy in bulk from its suppliers (with whom it buys directly). Larger purchase orders allow MRDIY to command lower per-unit costs, which it passes through to its customers in the form of lower prices.The company explained its scale advantages in its IPO Prospectus (emphasis mine):

"We are focused on a strict adherence to cost discipline and on streamlining our operations to lower per unit cost of sales. We also benefit from economies of scale and continually seek to purchase our products at attractive prices while maintaining our focus on quality. These efforts have allowed us to pass on our cost savings to our customers by selling our products at competitive prices while maintaining a desired profit margin."

Another way MRDIY uses its economies of scale to save costs is through its tenant agreements. Remember how MRDIY relied on anchor tenants like Giant, Tesco, etc., at its founding? Today, MRDIY is an anchor tenant. As an anchor tenant, MRDIY receives more attractive lease terms with its landlords, which reduces its rental expense. Reduced rent expenses allow MRDIY to charge lower prices for its products while maintaining industry-leading profit margins.MRDIY also creates an Ecosystem of Control between its suppliers and its customers. Suppliers love MRDIY because they receive large order commitments paid upfront (no credit) from a reliable and growing retailer. Customers love MRDIY because they enjoy lower prices on the largest selection of non-discretionary household/DIY items at locations close to home.Over time, these feedback loops have resulted in 30%+ organic revenue growth, 20%+ EBIT margins, and nearly 35% market share (up from 15.5% in 2016). These are metrics its competitors can't match (see below).However, all of that growth is in the past. What matters is how much the company can grow going forward.

Future Growth Drivers in Home Improvement

Malaysia's home improvement market remains highly under-penetrated compared to country peers. For example, Malaysia sports ~0.75 square feet of home improvement retail space per capita. This pales in comparison to Thailand (1.66), Japan (1.94), and the United States (5.78). Said differently, there are ~216 home improvement stores per million people in Malaysia. This again falls short of the UK at 217, Japan at 237, and the United States at 370.Today's under-penetration is tomorrow's higher growth. Frost & Sullivan note that home improvement retail sales should grow ~11% over the next five years, nearly twice the retail sales growth rate. MRDIY is best positioned to capture most of the industry's double-digit growth rate as it flexes its economies of scale.How does that translate into MRDIY growth? The company expects to open ~180 new stores by the end of 2022 to reach >1,080 Mr. DIY stores. Let's use 2019 data to get a picture of per-store unit economics. MRDIY generated 2.275B Ringgit in revenue with 593 stores. That gets us 3.83B Ringgit in per-store revenue. Each store also generated 840M Ringgit in EBIT (~22% margins).Assuming 2019's unit economics, next year's stores will add 690M Ringgit in revenue and 151M Ringgit in EBIT. Suppose MRDIY captured 60% of its local DIY/home improvement retail market. That would get us ~1,300 stores (not including Mr. Toy and Mr. Dollar). These stores should have higher margins as the company shifts from growth cap-ex to maintenance (think mid-to-upper 20s). Holding our 2019 unit economics fixed, 1,300 stores would generate ~5B Ringgit in revenue, 1.25B Ringgit in EBIT and 500M in FCF.Remember, this doesn't include any revenue or profits from its other two store concepts. Nor does it assume any increase in per-store revenue from 2019 levels.

Repeating The Playbook: Mr. Toy & Mr. Dollar

MRDIY launched two new store concepts over the past two years: Mr. Toy (2019) and Mr. Dollar (2020). Both stores carry the same "Always Low Prices" motto from the company's flagship home improvement store. It's an interesting model, and time will tell if they'll work.You can think of Mr. Toy as a Five Below (FIVE), where each store offers quality children's toys at affordable prices. The company has 47 Mr. Toy stores throughout Malaysia (as of October 2021), costing ~RM 1.04M to build. CEO Ong Chu Jin Adrian explains the new store concept (emphasis mine):

"The short attention span of today’s young generation and their access to digital content are changing toy buying behavior. Toys-of-the-moment are commanding their attention, leading to a shift in volume. Value-conscious parents are buying more toys in the course of the year but prefer to pay less for each purchase. This shift in consumer behavior, coupled with the underserved suburban markets where larger big-name toy stores are not represented, provides a solid growth opportunity for MR TOY."

MRDIY's founders recognized that the concept works in other regions (like the US) and saw an opportunity to fill a need in Malaysia. They did the same thing with Mr. Dollar.Mr. Dollar is Malaysia's version of Dollar Tree/Dollar General. Stores sell items between RM 2- RM 5, well below the price points of existing fixed-price retailers. The company launched Mr. Dollar in 2020, so the brand is still in its infancy. However, according to management, "early indicators are that consumers resonate with the brand's promise of value at fixed prices."Like I said earlier, time will tell if these new concepts work (and generate profits!) with Malaysian customers. The underlying premise of both ideas -- quality products at the lowest prices -- gives me hope that both Mr. Toy and Mr. Dollar will add meaningful revenue and profits over the long term. Additionally, the three stores shouldn't compete with one another as they serve specific-enough niches (home improvement, children's toys, and dollar-store).

Closing Thoughts

MRDIY is yet another example of two founders who took one idea (quality home improvement products at affordable costs) very seriously and made a ton of money in the process. It's the story of a former physics graduate who turned one dungy store into a $5.6B enterprise and a spot on the Forbes Wealthiest List.The company leverages economies of scale and is a testament to delighting both suppliers and customers along the way. Moreover, MRDIY won its spot as one of Malaysia's most valuable companies by doing something straightforward. It sold the largest assortment of quality goods at the most affordable prices across the most convenient store locations nationwide.Watch out for ideas that seem "too simple." Those ideas might be worth billions one day.