Consuming interest: All signs suggest spending levels will continue to rise

Buoyed by consistent economic growth, a rising population, rapid urbanisation, low unemployment and a burgeoning middle class, Malaysia’s retail sector is continuing its strong run in the face of a cooling global economy. Total retail sales – excluding large-scale purchases such as cars and homes – for 2011 were valued at $26.8bn by Retail Group Malaysia, up 8.1% year-on-year (y-o-y), with fourth-quarter sales up 11.5%. Growth was more subdued in 2012, with second-quarter sales up 5.8% y-o-y, compared to the 9.1% rise registered in the same quarter in 2011.

Inflation is also at manageable levels, with the Department of Statistics reporting a 2.3 point y-o-y rise in the consumer price index in March 2012. In April 2010 the central bank narrowed its inflation forecast to 2.5-3%, from previous estimates of 2. 5-3.5%, and in July stated that it expected headline inflation to remain moderate for the rest of the year, reasoning that the strength of domestic demand was not expected to result in inflationary conditions due, in part, to excess capacity in the economy.

SPENDING POWER: Already classified as an upper-middle-income nation by the World Bank, Malaysia’s GDP per capita is targeted to increase from $9686 in 2011 to $14,020 in 2015, when the population is expected to pass 30m. The government’s 10th Malaysia Plan targets an increase in the monthly mean income of the bottom 40% of households from the $465 of 2009 to $740 by 2015. The rapid urbanisation and related lifestyle changes associated with these demographic shifts are likely to have a big impact on the retail sector as younger, more mobile consumers see their disposable income rise. According to UN projections, 76% of Malaysia’s population will live in urban areas by 2015.

These forecasts represent a continuation of long-running and widespread trends in personal consumption habits. Collection of service and sales tax, for instance, averaged annual growth rates of 11.1% and 6.8%, respectively, from 2000-11, according to the central bank. Over the same period the total outstanding balance on credit cards increased by an average of 16.2% per year, while loans issued by banks for consumption credit increased by 12.9%.

The appetite for imported consumption goods has also been growing at a steady clip, by 9.7% and 19% in 2010 and 2011, respectively, and averaging 9.1% y-o-y growth from 2000-11.

CONFIDENCE: Consumer confidence in Malaysia was ranked as the 10th-highest among the 56 surveyed countries in a poll for the last quarter of 2011.

The Nielsen Global Online Consumer Confidence Survey measures the confidence, concerns and spending intentions of over 28,000 internet consumers. It showed that 64% of Malaysian respondents rated their job prospects as excellent or good over the next 12 months, which ranked seventh of the 56 countries. Another 61% of respondents described confidence in their personal finances over the next 12 months as good or excellent, for ninth place.

On the other side of the coin, the main concerns of respondents were the state of the economy, with 23% citing this as their biggest worry, followed by job security, food prices and debt. These concerns were also manifested in personal buying intentions, as 85% of online consumers indicated that they had altered their spending patterns to save household income, up 6% from the previous quarter.

“Online consumers are uncertain that the jump in public expenses and private consumption, as well as future contributions under the Economic Transformation Programme (ETP), will fully offset the bearish external conditions,” said Kow Kuan Hua, the managing director of Nielsen Malaysia.

The survey showed that 64% of Malaysian respondents rated their job prospects as excellent or good over the next 12 months, which ranked seventh of the 56 countries. Another 61% described confidence in their personal finances as good or excellent over the next 12 months, for ninth place. The principal concerns of respondents were the state of the economy, with 23%, followed by job security, food prices and debt. These concerns were also manifested in terms of personal buying intentions, as 85% of online consumers indicated that they had altered their spending patterns to save household income, up 6% from the previous quarter.

REFINED TASTES: One of the healthiest retail sub-sectors is fast-moving consumer goods (FMCG), particularly food and beverages. While population growth has led to consistently rising consumption of these products, the value of goods purchased has also seen a major uptick. Malaysia’s growing middle class is not just splashing out on one-off purchases but also on more refined tastes in day-to-day living, resulting in higher overall spending. “In the past you did not see people spending money on expensive foods, but that has been changing in the past five years,” said Poh Ying Loo, the executive director of corporate finance and investor relations at Aeon.

This trend looks set to continue, with food retail worth $15.7bn in 2011, according to Business Monitor International – 31% of the total retail sector. These sales are predicted to increase to $21.2bn by 2015, with per capita food consumption projected to reach $689 by the same year. Nonetheless, the share of the food segment relative to the retail sector as a whole is expected to shrink to 27.3% as the growth of other segments outpaces that of food. Consumer electronics sales, for instance, are expected to grow by 26.8% from 2011-15 to reach $13.5bn, with the personal computer market in urban areas set to be particularly strong. Rising demand from both foreign tourists and domestic consumers, combined with the increasing popularity of shopping malls, is expected to boost the footwear and apparel segments through to 2015, while cosmetics and toiletries are also expected to do well.

A TAXING ISSUE: A hot topic for the best part of a decade has been the issue of replacing the current sales and service tax with a wide-ranging goods and services tax (GST). The new 4% broad-based GST would be applied at each stage of the supply chain, from supplier to distributor. Depending on where the taxes are applied, certain transactions may be exempted or recovered through tax refunds.

According a March 2012 statement by Idris Jala, the CEO of the ETP’s Performance Management and Delivery Unit, the government could take in an additional $2bn per year through implementation of the GST. “We can then reduce personal and corporate taxes and reduce sales and service taxes,” he said, noting that despite 8.5m Malaysians being registered as taxpayers, only 1.7m actually pay taxes.

Discussed in official circles as far back as 2005, the implementation of a GST was finally tabled in Parliament for a first reading in December 2009, only for the second reading, scheduled for March 2010, to be postponed. The topic was revisited in mid-2011 and the tax was widely expected to be enacted in 2012, although further delays – for what the authorities described as a consultation period with the Malaysian public, the business community and the private sector – mean implementation is unlikely until after the next election.

Although the government touts a number of lasting benefits – such as enhanced transparency, equality, compliance, global competitiveness and a lower cost of doing business – from implementing this new revenue stream, the immediate effect on the retail sector will likely be more volatile, at least initially. Many believe the greatest impact will be seen in the first six months of implementation, before a levelling out to normal consumption patterns. This is due to an anticipated initial spike as customers stock up on goods before the tax is implemented, followed by a trough in spending as consumers exhaust their stockpiles. Other short-term issues which will need to be monitored include the expediency with which the GST is implemented. If the system is not efficient it may well cause disparity, with vendors reaping a windfall if prices are moved to accommodate the new tax before it is implemented, boosting their margins by 4% during the period between announcement and imposition of the tax.

INTRODUCTION OF A MINIMUM WAGE: The government has introduced another major legislative change in the form of a national minimum wage. The new rate may increase operating costs for retailers, as most retail service workers earn at or near the minimum level, but there could be a ripple effect from the consequent increased earning power. The hypermarket sub-sector – already highly price sensitive – will likely feel the strongest impact.

Liberalisation of energy prices could also affect the manufacturing – and by extension retail – sector. Although the timetable and monetary increase have yet to be finalised by the government, a relaxing of subsidised electricity and natural gas prices is expected to increase production costs, which will mean dollars will buy less at the register. Finally, the country’s luxury retailers also began benefitting from the abolition of import duties on around 300 luxury items, which took effect starting January 2012.

SOCIAL ASSISTANCE: With another election cycle ramping up in 2012, both the incumbent and opposition political parties were competing for the favour of voters. One tried and true method is increasing public spending on large infrastructure projects, which can stimulate the economy, create jobs and, through social assistance programmes, benefit those in the lower-income bracket. Examples of such programmes implemented in the past include Melaka’s Urban Transformation Centre, Jelajah Janji Ditepati in Jalan Hang Tuah, 1 Malaysia People’s Aid (BR1M), 1 Malaysia Public Housing, 1 Malaysia Clinic and the Rural Transformation Centre. These funds act as a vehicle for governments to fund high-profile social welfare and development programmes designed to assist specific segments of the population.

For instance, in 2010 the government distributed $161 each to 5.2m households earning less than $970 a month. Totalling $837m, the handouts were made under the BR1M programme to offset the rising cost of living. In June 2012 the deputy prime minister, Muhiyuddin Yassin, announced a fresh round of payments for low-income households ahead of a Muslim festival in August. The government has also splashed out on various other expenditures during the run-up to the next election, including wage hikes for civil servants and cash payouts for students.

TIS THE SEASON: As in any market, local retailers are captive to the ebb and flow of traditional spending seasons. In Malaysia’s case, the diverse religious and ethnic population results in steeper peaks and dips than those generally seen in Western markets.

The second quarter of the year is traditionally the slowest before a wide array of religious and national holidays stimulate demand throughout the rest of the year. The most conspicuous spending sprees revolve around the religious holidays that occur from June through to August. These are complemented by a number of different festivals and holidays which are often cause for Malaysians to spend a bit extra.

Continued urbanisation has resulted in the highest levels of retail growth and consumption being found around the larger cities, such as Kuala Lumpur, Penang, Johor Bahru, Ipoh and Kota Kinabalu. With these hotspots nearing saturation, retailers are casting a wider geographic net in their attempts to reach a broader consumer base. While this strategy means profit margins are often pressured as a reflection of lower population density and incomes, along with increased transportation costs, access to new consumers often outweighs these drawbacks. These newer areas of interest include secondary towns and cities, particularly on the east coast of Peninsular Malaysia and in the more remote eastern provinces of Sarawak and Sabah.

The distributive trade sub-sector – which includes wholesale and retail trade, hypermarkets, supermarkets, department stores, direct selling and franchising – received approval from the Malaysian Investment Development Authority for 1498 investment projects totalling $806m in 2011. Foreign investments edged out those made by domestic firms, with $485m (60%) for the former and $321m (40%) for the latter. Accounting for nearly half of all approved investments for the year with 736 projects, wholesale and retail trade investments totalled $258m, or 32% of the sector total. Direct selling accounted for another 231 projects for a combined total of $142m, followed by 14 hypermarket and supermarket investments totalling $108m, three department stores ($64m) and 169 franchise investments with a combined value of $10.7m. One of the largest schemes on the list is a factory outlet mall to be located in Melaka. The $103m investment is modelled on similar projects in the US and Europe, and will cover 160 ha. A number of other significant projects representing a variety of retail businesses have also recently opened their doors to the public. The 16,260-sq-metre Johor Premium Outlets opened in December 2011, with 80 separate shops. Japan’s largest retailer, Aeon, also announced in 2011 plans for a $113m expansion and refurbishment in Malaysia, to include two new shopping centres.

These expansion projects are yet another link in the aggressive growth in primarily urban areas by retailers from the UK (through the Tesco brand), France (Carrefour) and Japan (Aeon). Aeon alone plans to open 100 stores across the country by 2020, in addition to the 28 locations (24 general merchandise stores and four supermarkets) it has already established. The company further solidified its position in the market in November 2012 when it agreed to purchase the Malaysian operations of the country’s fourth-largest retailer, Carrefour. The RM990m ($319m) deal to buy the 26 hypermarkets catapults Aeon into the leading position in the market.

Active in the country since 1994, Carrefour’s Malaysian operations netted sales of €400m over the 12 months up to June 30, 2012. The sale by the world’s second-largest retailer of its Malaysian assets is consistent with recent moves by the company, which has also agreed to sell off its operations in Thailand, Colombia, Singapore and Greece. Tesco also held its own, with its 38 stores in Malaysia racking up £794m in revenue for 2011.

Another trend is the spread of specialty stores, in both standalone shops and larger shopping centres. Catering to a more targeted market, these venues are now competing with traditional supermarkets and hypermarkets as customers are provided with more choice as to where to spend their money.

CHALLENGES: Despite the strong forward momentum in the retail sector, challenges remain. Although the country has so far remained relatively insulated from the global economic slowdown, partly due to the government’s ongoing domestic expenditure, continued drag on global demand would inevitably have an effect on the Malaysian retail industry.

A second issue for retailers is the increasingly competitive marketplace. Local vendors are feeling the pinch as established brands continue to exert their influence, particularly in the fiercely price-sensitive hypermarket sub-sector. Global supermarket and hypermarket powerhouses, including Carrefour, Aeon and Tesco, are well entrenched in Malaysia, and compete with home-grown retailers such as Giant, Store Corp and Econsave Cash & Carry.

The addition of more and more retail outlets has also brought increased competition for qualified human resources. While the country is churning out an increasing number of college graduates, these alumni now have higher expectations and greater options, leaving retailers with problems regarding recruitment, retention and quality of employees. As a result, companies are often reduced to employing less-qualified staff, leading some to entertain the concept of formalised training or further education programmes to provide workers.

HOME ADVANTAGE: On a regulatory level, the Ministry of Domestic Trade, Cooperatives and Consumerism, which oversees the wholesale and retail sectors, imposes some restrictions on foreign companies operating in the country.

One policy which particularly tilts the playing field in favour of domestic competitors to the detriment of foreign companies is the local equity rule, which requires hypermarket operators to offer a 30% equity share to ethnic Malaysian and other indigenous peoples. Other measures hampering the development of large chains include the restraints placed on both foreign and domestic retailers, with the expansion of hypermarkets restricted and all hypermarkets, supermarkets and department stores prohibited from operating 24 hours a day.

Finally, although inflation has been mostly kept in check in recent years, there are various factors that could create upwards pressure on domestic prices. These include liberalisation of domestic energy prices, wage inflation resulting from the implementation of a minimum wage, and possible disruptions to global energy supplies or other inputs. Should the market see protracted price inflation for raw materials, consolidation among larger FMCG suppliers may occur as companies look to capitalise on economies of scale to counteract high prices.

OUTLOOK: Despite the European debt crisis, a stagnating US economy and the cooling of economic growth in China, Malaysian consumer sentiment remains strong. With a sturdy stock market, stable government, substantial ongoing domestic infrastructure expenditure and a low unemployment rate, citizens are continuing to spend, with Retail Group Malaysia projecting retail sales to grow by 6% in 2012, for a total of $28.5bn. Looking further ahead, the Economist Intelligence Unit estimates y-o-y retail sales growth rates of 5.3%, 4.5% and 4.4% in 2013, 2014 and 2015, respectively. This average of 4.73% puts Malaysia’s growth rate on a similar level to those of other nations in the region, including Indonesia, with an average rate of 4.76%, the Philippines, with 4.67%, Singapore (4.63%) and Thailand (5.83%).