Demographic and economic factors bode well for Papua New Guinea's retail sector

With a mood of cautious optimism, Papua New Guinea’s retail sector is recovering from a period of uncertainty caused by the devastating earthquake in Hela Province in early 2018. That same year was marked by sluggish growth before the APEC Leaders’ Summit in November 2018 triggered an upturn in the hospitality and general retail sectors, and encouraged businesses to invest with more confidence. Adding to the positive sentiment, the $13bn Papua LNG project and two multibillion-dollar copper and gold mines are pegged to come onstream in the next few years. Such developments are driving retailers to expand, diversify into parts of the country outside Port Moresby and invest in new logistics facilities. There are also hopes that a series of critical ICT infrastructure projects – underpinned by the commitment made at the APEC summit to bring the number of PNG citizens connected to the national electricity grid from 30% in 2018 to 70% by 2030 – will unlock e-commerce opportunities for domestic retailers.

Structure & Oversight 

The Department of Commerce and Industry (DCI) is primarily tasked with overseeing the retail sector and legislating trade. Among other duties, the DCI is also the driving force behind government efforts to empower small and medium-sized enterprises (SMEs) by encouraging links with larger businesses under the ongoing SME Master Plan 2016-30. Key retail and wholesale initiatives supported by the state-owned SME Corporation, aim to significantly increase the proportion of SMEs that are owned domestically, as at the end of 2018 more than 90% of SMEs in PNG were owned by foreigners. The government’s goal is to bring the number of locally owned SMEs to 500,000 by 2030, representing a more than 10-fold increase. In doing so, it seeks to create 2m jobs. This will be done by offering PNG retail businesses discounted rent, improving financial inclusion and boosting access to trading opportunities.

The Independent Consumer and Competition Commission (ICCC) is the country’s principal economic regulator and consumer watchdog, overseeing licensing, corporate governance and retail industry regulation. A key duty is to administer and implement the ICCC Act 2002, which ensures that consumers can benefit from a healthy competitive business environment and that industries invest effectively. Other areas administered by the ICCC include advertising and labelling, product safety – including the enforcement of bans and product recalls – and consumer awareness.

Key non-state actors include the PNG Chamber of Commerce and Industry, which plays a leading role in representing the interests of local businesses to the government, and assists in developing policy and maintaining global trade links; and the Business Council of PNG, which represents the private sector and runs programmes mainly focused on improving law and order, technology, trade and investment. Both organisations are effective in lobbying the government in the interest of established businesses.

Customs & Illicit Trade 

Import trade is regulated by the PNG Customs Service Act 2014 and enforced by the PNG Customs Service, which screens cargo for illicit and counterfeit goods, and works with industry partners to counter smugglers and raise public awareness of harmful goods. It is also responsible for auditing cargo and collecting revenue.

Retailers have recently ramped up pressure on the authorities to reduce illegal imports of fake products and copyright infringements. In September 2018 Wera Mori, the minister of commerce and industry, called for a ban on imports of counterfeit textiles. The response came after public outcry from local business owners alleging that traditional textiles were being copied and mass produced in foreign countries, thereby undercutting PNG’s profits. Shortly after opening a new Jacks of PNG retail store in Mount Hagen, Mahesh Patel, managing director of City Pharmacy Limited (CPL), which owns the clothing retailer, told OBG that the company had asked for tougher action from the authorities to crack down on counterfeit clothing coming from China. Meanwhile, in December 2018 local beverage firm South Pacific Brewery indicated it had become aware of fake lager cans sourced from Asia being sold in Port Moresby, and later thanked the authorities for apprehending two people behind the sales. Meanwhile, in January 2019 local media reported that police had uncovered a counterfeit cigarette and tax evasion operation in Port Moresby. The company involved, Chinese-owned Goldensborough, was able to produce a trade licence, but this was insufficient to prevent more than a dozen of its staff from being deported as a result of the raid. The controversy as to whether Goldensborough was trading illegally encapsulates a wider dispute between established, duty-paying traders and predominantly Asian newcomers that are accused of competing unfairly, either by evading taxes or illegally importing pirated goods.

In the past, some of the businesses in the country had faced challenges competing with knock-offs circulating on the market. However, positive developments have taken place in this arena as PNG Customs has been more active in cracking down on counterfeit goods, and there has been an upswing in successful lawsuits against illegal importers, deterring their activities. These included two trademark infringement cases brought before the courts in December 2018, in which South Pacific Brewery and Paradise Foods prosecuted defendants for copying their products.

Performance 

Retailers rode out some significant challenges in 2018, but there are reasons to be optimistic for growth in the years ahead. The Department of Treasury said in its 2019 budget that in the first half of 2018 employment in retail trade declined by 6.3%, while sales in the first nine months of 2018 declined by 8.9%, compared with an increase of 12% in that same nine-month period in 2017. This was led by lower sales of vehicles, medical supplies, hardware goods, stationery supplies and other general merchandise, according to the Bank of PNG, the central bank. However, the wholesale segment bucked the downward trend, with sales increasing by 24% in the year to September 2018.

PNG’s economy entered 2019 in much improved shape after recovering from the February 2018 earthquake. In setting out its 2019 budget, the government forecast economic growth of 4% for 2019, with a stable inflation rate of 5.4%, down from 5.6% in 2018. The budget also contained provisions for the continuation of vital infrastructure projects, including an 8% spending allocation for transport, up from 6.4% in 2018. The state fiscal plan, meanwhile, reinforced tariff measures to support domestic manufacturing and encourage investment in the non-resource economy (see analysis). These better economic conditions provided a stable environment for retail activity to pick back up.

Project Pipeline 

The government’s assessment of the economy bodes well for retail, as the oil and gas, and mining and quarrying sectors both recover from the earthquake and new extraction projects get under way. The Treasury said it expects to feel a direct impact from the mobilisation of resources for new extractive projects – including labour, vehicles, machinery and food – as well as an indirect multiplier effect on local spending. The Treasury expects wholesale and retail trade to expand by 3.8% in 2019 as a result of higher spending driven by project-related income, while the accommodation and food services sector is forecast to grow by 2.8% as hotels and food catering companies meet the needs of project participants.

Indeed, according to Greg Baker, group sales and marketing manager of BNG Trading, the largest distributor of grocery products in PNG, in the first half of 2019 sales outperformed the previous year, largely as a result of diversification into food services and catering. “We are positive that the resource projects coming on-line in the medium term will continue encouraging growth around the Pacific region, allowing us to extend our warehouse network beyond its current footprint in major provincial capitals in PNG,” he told OBG.

Diversification 

Industry players are optimistic that developments outside Port Moresby will drive sector activity. According to Ian Clough, chairman of retail suppliers Brian Bell Group, sentiment improved in the 12 months to mid-2019 in traditional and corporate retail, however, with the change in government, investment by corporate firms stalled. “Since mid-2018 we’ve built a 16,000-sq-metre warehouse facility in Goroka in the Eastern Highlands Province, which is one of the biggest in the country,” Clough told OBG. “Longer term, in addition to the 3000-4000 sq metres of mixed retail space that should open in early 2020 in Gordons, Port Moresby. We are looking at opening new retail space in Kimbe in October 2019. Lae, PNG’s second-largest city, also has considerable retail potential, provided the planned PGK9bn ($2.7bn) Wafi-Golpu copper and gold mine project gets final approval.” However, as of August 2019 an agreement between of Morobe Province, Australia’s Newcrest Mining and South African’s Harmony Gold was suspended.

Nevertheless, there are opportunities for growth outside the capital city. CPL, for example, has opened four retail outlets in Madang Province. “There is a lot of demand coming from the health care sector. Pharmacies can serve local populations where their needs are most immediate,” Patel told OBG.

Challenges Abound 

Most diversification efforts have yet to be felt within the regions, however. While the Asian Development Bank’s $3bn redevelopment of the Highlands Highway project augurs well for the growth of commerce in Mount Hagen, it will likely be a decade before significant impact is noticed, according to Brad Barlow, general business manager for PNG at Nestlé. “We haven’t really seen exceptional activity in any particular region, and with the highway in its current state, we cannot capitalise on the Highlands,” he told OBG. Indeed, the disparity in terms of development and retail trade between the capital and outlying areas of the country remains significant.

There are also issues with securing sufficient foreign exchange. In 2018 Dutch multinational AkzoNobel announced that it would be shifting its business model away from domestic manufacturing towards a distribution-focused model, in part as a result of difficulties obtaining the foreign exchange necessary to buy raw materials on international markets. However, following acute problems in the first half of 2018, access to foreign exchange improved in 2019. “In 2018 we were struggling to pay bills, but this year we can clear them in a week rather than two months,” Everett Chue, corporate manager at beverage manufacturer Pacific Industries, told OBG, adding that PNG’s successful $500m sovereign bond issuance ahead of the APEC summit helped ease the situation. “However, dividend payments are still not open yet, and that’s an issue for foreign investment – you have to know you can get the money out before committing to spend here,” he added.

Developments 

Favourable demographic factors are set to play a role as retailers position for ongoing population growth of 3.1% per year, according to data in the Medium-Term Development Plan 2018-22, as well as increasing urbanisation. These trends should act as underlying drivers of growth in retail trade as a predominantly young population and a nascent, vehicle-owning middle class slowly shift away from traditional markets towards modern shopping centres and global products. “PNG receives a lot of imported products from Australia and Malaysia,” Sergey Mosin, general manager and founder of Vitis Industries, a local company that deals mainly in food-related products, told OBG. “Imports have raised standards and expectations, and local companies need to show local consumers they can compete on quality.”

Recognising the trend, global architecture firm Benoy announced in November 2018 that it had been appointed to deliver a 130,000-sq-metre mixed-use development – including shopping and restaurant facilities – in Port Moresby along the main road connecting the central business district with Jacksons International Airport. Meanwhile, in September 2018 workers broke ground in Port Moresby on a PGK296m ($89.8m) commercial and residential precinct opposite the Vision City Mega Mall. The 10,923-sq-metre complex is being constructed under a public-private partnership model, with the National Capital District Commission providing the land for local developers Nambawan Super and Lamana Development. The project is expected to be completed before the end of 2020.

In April 2019 local politicians joined Xue Bing, the Chinese ambassador to PNG, in celebrating a deal to construct the $414m Chinatown development led by Baosen International Holdings. The project is earmarked to include 170,000 sq metres devoted to supermarkets, retail stores and restaurants, as well as a cinema and entertainment areas. Xue said at the ceremony that PNG now hosts 20,000 Chinese nationals, with direct investment from China reaching $5.06bn in 2018, providing major stimulus for investment and consumption growth in PNG. In addition, CPL-owned Prouds, a duty-free goods and travel operator, expanded from its base at Jacksons International Airport to open its first domestic store, offering PNG customers access to international brands in the Waigani Central Shopping Complex in the suburbs of Port Moresby.

The increase in retail outlets also proved a boon for security firms. According to Rain Lin, the director of Wintop Investment, the local distributor of Chinese video surveillance brand Hikvision, in recent times the company secured several contracts, bringing its client base to around 50 firms. However, Lin expressed concern about the impact of the trade tensions between the US and China on Wintop’s ability to sell and maintain Chinese-owned Huawei and Hikvision systems.

Trends 

The shopping habits of PNG consumers remain heavily dependent on prices, though customers have a reputation for remaining loyal to their brand in certain areas, according to Barlow. “Retailers can only depend on a brand-conscious middle class in Port Moresby and to a lesser extent in Lae. Retailing in the rest of the country focuses on affordability, accessibility and availability,” he said, adding that marketing spend is split 50:50 above and below the line. “Below-line advertising targets in-store customers or innovative merchandising solutions, while above-line strategies target urban audiences via TV slots and sports sponsorships. Radio is the primary medium for reaching audiences,” Barlow added. While Port Moresby is undoubtedly more urbanised and prosperous, retailers are alert to opportunities emerging elsewhere in the country. “Cities like Mount Hagen have developed significantly when compared to five or six years ago. The customer base is growing and there is a lot of demand,” Ravendren Kanniah, country manager at AkzoNobel, told OBG.

E-commerce 

Much is being made of the impact the Australia-led Coral Sea Cable System (CSCS) could have on the e-commerce market. Once the CSCS is fully operational in early 2020, it will provide an additional fourfibre-pair link and add 20 Tbps of data capacity to PNG (see ICT analysis). The CSCS will be complemented by the Huawei-led National Transmission Network, which together should significantly improve internet speeds, reliability and affordability as 4G services become available in urban centres nationwide.

However, securing power supply remains a primary logistical challenge, particularly for retailers of perishable goods. “We still incur a lot of losses even with backup generators,” Patel told OBG. “Having said that, we’re betting big on digital, and have a three-year digital strategy in place, including looking at e-commerce, microbanking and digital currencies,” he said, adding that the group had already completed home deliveries via online orders. Other stakeholders agreed digitalisation will likely be transformational, but cautioned that realistically it will be at least five years until anything approaching seamless e-commerce can be achieved. “ICT improvements will unlock huge benefits in terms of cost effectiveness,” Clough told OBG. “It will be easier to compare and place orders, and find local alternatives to imports. In addition to cost reduction, there will be new marketing opportunities.”

PNG has 780,000 active social media users, the vast majority on Facebook, providing substantial potential for digital marketers. “However, for now ICT is more about engaging with corporate partners than promoting e-commerce,” Clough said, suggesting that more could be done by the central bank to provide a secure digital payment infrastructure.

Outlook 

Given the low base provided by a challenging 2018, PNG’s retail sector is on track for a solid rebound throughout the course of 2019 and beyond. A series of natural resource projects are slated to lift growth, while discretionary spending has retailers investing in shop floor space, storage and logistics facilities. There are incremental signs that PNG is at the start of an upswing, which should aid plans for a digital commercial marketplace, as long as the country can resolve basic issues faced by retailers revolving around fair competition, reliable access to power, and cost-effective and timely transport infrastructure. For the time being, PNG’s policymakers and business community can help retailers capitalise on resource project success, digital connectivity and steady population growth.