Keeping pace: As income levels increase, the retail sector prepares for growth

As Papua New Guinea prepares to enter an unprecedented resource boom fuelled by massive resource investments, retailers are optimistic the influx of investment dollars and subsequent revenue streams will translate into a corresponding rise in consumption. Proceeds from the $15.7bn liquefied natural gas (LNG) project are expected to be as high as $150bn over its 30-year lifespan, while roughly one-third of the 15,000 workers recruited for the project are locally based.

Signs of conspicuous consumption are already sprouting up around Port Moresby, which has benefitted from a good portion of the country’s LNG investment. A new modern shopping centre has recently opened and construction can be seen across the city, while fleets of new white Toyota Land Cruisers cruise the streets.

CITY CENTRES: Fuelled by a GDP growth rate that has exceeded 6% in recent years, income levels are rising while ongoing urbanisation continues to drive up consumption in PNG’s population centres. These areas are served primarily by local retail and wholesale traders. On a national level, the most successful of these are Steamships Trading Company, Brian Bell Company, KK Kingston and the Kenmore Group. These businesses primarily deal in goods, including automotive, hardware and industrial products as well as fast-moving consumer goods. “The formal economy is driving growth in urban areas as more people drift in,” Michael Kingston, the general manager of KK Kingston told OBG. “There is real potential for a long boom, but it is by no means a given. The economic growth spurt will last as long as it is credible to invest in PNG.”

FURTHER AFIELD: Through late 2011, the growth in sales appears to be holding strong in the larger cities, while lagging in underdeveloped regions more reliant on the informal economy. According to the central bank’s “Business Liaison Survey”, issued in the third quarter of 2011, total sales (excluding the mineral sector) rose by 8.3% over the 12 months to June 2011, and by 8.9% when compared to September 2011. The Highlands, National Capital District, Morobe and Momase regions led the growth trends, while the more isolated and less urbanised southern and islands regions recorded decreases in sales.

Although the recent influx of investment and resulting rise in employment have been a much appreciated economic boost, there is concern local businesses could be hit hard once construction sites fall silent and their 5000 temporary workers no longer have paycheques to spend. Despite the apprehension over the impending elimination of those jobs as of 2014, optimism remains that the revenue from resulting energy exports will soften the blow. “Sure it will have an impact, but PNG will continue to get money from the sale of the gas, which should trickle down to the retail sector,”

Kevin Kelly, the group logistics manager for BNG Trading Company, a local importer and distributer, told OBG.

In addition to the LNG revenue streams, there are numerous large-scale, multi-billion dollar resource investments in the pipeline, such as the Ramu nickel mine and the Wafi gold mine. There are also two more potential LNG projects that should continue to bring in both crucial foreign investment funds and new sources of longer-term income.

GROWTH TRENDS: Because of this optimism, retailers are betting heavily that recent growth trends will continue and that there is still enough room in the market for further retail stores despite the addition of new shopping centres. Retailer operator CPL Group, for instance, told OBG it intends to build on its existing chain of supermarkets by constructing at least two new larger outlets in the coming years. These new stores will also reflect the sector-wide trend of larger outlets offering a greater variety of goods, as the firm’s existing stores average around 50 sq metres and the two newer ventures will both measure over 2000 sq metres.

Indeed, there has been substantial uptick in the construction of new shopping centres, and high-end retail space in particular. The largest of these projects is the 31,435-sq-metre Vision City Waigani mall, which opened in October 2011. Located in Port Moresby, the PGK1bn ($475.9m) centre houses 52 retail units, ranging in size from 110 to 390 sq metres, and is anchored by the Vision City RH Hypermarket. Vision City also provides entertainment options, including a food court, nightclub and PNG’s first multiplex cinema, which opened in February 2012. The lead developer for the project was Dynasty Development, a subsidiary of Rimbunan Hijau PNG, owner of the RH chain of RH-brand retail stores and supermarkets. A second large retail development, the Harbourside Shopping Centre, is also being built along Port Moresby’s waterfront.

Complementing the rise of these new shopping centres is a similar proliferation of retail, wholesale shops and supermarkets. Some of the most prolific of these companies include Super Value Store, TE (PNG) and RH Hypermarkets. As these companies have expanded their reach, the number of employees in the country has risen dramatically in recent years. The central bank employment index (baseline of 100 in March 2002) rose from 117.2 in September 2007 to 134.4 in September 2011, while the wholesale segment registered the largest employment gains of any sector after increasing from 155.1 to 200.8 over the same time period.

Manufacturers of consumables are also betting heavily on sustained levels of high demand, with PNG heavyweights SP Brewery, Lae Biscuit Company, Coca-Cola, Amatil PNG and Paradise Foods all implementing major expansion programmes. For the moment, these local retail operations appear safe from the high-volume, low-cost hypermarkets that can enter developing markets and undercut competition due to higher efficiencies of scale. With a population of some 6.85m – and a large portion of that far from population centres – large international hypermarket chains such as France’s Carrefour and Australia’s Best and Less have shied away from the domestic market. While these firms tend to enter a new market with the intention of opening dozens or even hundreds of stores nationwide, the reality is the PNG market may only bear less than 10.

KEEPING UP: Following established economic growth trends for developing countries, this rise in income and the expansion of a middle class is also affecting consumer-spending habits. From 2004 to 2010 per capita GNP rose from $1500 to $2420, while over the same period the consumer price index for wages increased from 788.1 to 10.63.9, according to data from the central bank. As a result, demand is beginning to shift from traditional shopping patterns into modern shopping malls, supermarkets and other outlets offering a greater variety of goods, including luxury items and other nonessential purchases. “The middle class in PNG was not buying vehicles just three years ago,” David Purcell, the CEO of Ela Motors, PNG’s leading automotive distributor, told OBG. “Now this new segment is starting to buy family or used vehicles, while the growing expatriate population and business class is boosting the demand for luxury and work vehicles.”

CHALLENGES: Despite the gains being made, there are still a number of challenges to be addressed to ensure unhindered growth. For starters, in PNG domestic consumption is still dominated by the informal economy, which supports an estimated 85% of the population. The evolution of these small and micro economies into a single regulated system of taxpayers will not happen overnight. Other significant impediments include a woefully inadequate transportation infrastructure and import tariffs on a wide variety of goods. These logistical problems were compounded by a dramatic rate hike in on-site storage at the port, with storage fees jumping more than 100% in late 2010 and a smaller additional increase occurring in January 2012.