Feeding the roots: Even as political unrest holds back sales, the retail sector is investing

The Thai retail sector is a study in contrasts. On the one hand, it is suffering acutely as the political protests drag on and consumer spending and confidence continue to fall. Investors are worried about the country’s economic future, in the near term at the very least, and are holding their breath and their money. On the other, Thailand is one of the leaders in retail, in the region if not in the world. Its department stores are seen as benchmark-setting, and as likelier to expand, acquire and lead than lose business to others or yield to a takeover. The country’s shoppers, meanwhile, are some of the most active and engaged in Asia, especially at the high end. Growth in rural areas is robust. So while retail sales may be soft, the retail sector itself is strong and on a path to growth. When the demonstrations end, retail outlets stand a good chance of seeing consumers to return in force, as they have often done. Over time, furthermore, the major department store and supermarket groups are likely to find growth outside the country, both in the region and beyond.

12-Year Low 

Since protests began in Bangkok in November 2013, consumer confidence has been dropping fast, with the index hitting 69.9 in February 2014. The long-term view is especially worrying. Confidence is now at a 12-year low and, save for spurts of intermittent optimism, has been on a downward slope since it reached 112.4 in late 2003. Consumer spending has been falling every quarter for a year, and though still above 2012 levels has clearly stopped growing. The economy is not expanding as fast as it once did, which is both a cause and an effect of weaker consumer confidence. GDP grew just 0.6% in the fourth quarter of 2013, and full-year growth came in at 2.9%, down from 6.5% in 2012. The National Economic and Social Development Board of Thailand says it expects 3-4% growth in 2014, but the rate could prove much slower if the unrest continues or worsens. The protests, which began and died down in late 2013 but then reignited and persisted into the new year, have scared away tourists, caused many businesses to close, reduced confidence in Thailand’s economic future and prevented the government from conducting business.

Side Effects

Shopping malls have been hit especially hard. Protesters organised around the Ratchaprasong intersection, which is a centre for retail, and three people were killed in an explosion in February 2014 at the protest site near the shopping centres and outside a Big C supermarket. At or near this intersection lie the Paragon Mall, MBK, CentralWorld and Siam Square.

Sales sank. CentralWorld said in February 2014 that shopper numbers were down by about 40%. Siam Future said that the number of visitors to its Chaeng Watthana Road community mall, which is near the protests, have likewise dropped 40% as a result of the demonstrations. While fear of the protests and reduced spending were factors in this drop, congestion where the demonstrators were congregated also added to the mall’s problems. The Central Group reported in December that sales at its two outlets near the site were down 10% on the previous year, and predicted slower sales growth in 2014 if protests should continue.

Some vendors in the malls noted that business was brisk in protest-related gear – sunglasses, bottled water, whistles and the like. They also noted that the situation was better this time round compared to those in 2010, when the protesters were of a poorer status. Overwhelmingly, though, they felt that the demonstrations would be a negative for business.

Cautious Optimism

In March 2014, a wisp of optimism began to return. Protesters moved from the major retail intersection in Bangkok and traffic was able to flow normally there again for the first time in six weeks. As the demonstrations continue, it helps to bear in mind that while the outlets at the protest site are large, landmark stores, business has not stopped elsewhere in the country, nor in other parts of the world. Retail in Thailand is growing, evolving and above all spreading more evenly around the country. Many department stores, convenience stores, supermarkets and hypermarkets are going up in the suburbs and in rural areas.

New Investments

All of the sector’s main players have plans for significant investment in growth. In early 2013 the Central Group of Companies, the country’s largest retail corporation, announced a massive $1.3bn expansion programme over a three-year period. While some of these funds will go toward the company’s other businesses (hotels, food, fashion), much of it will be spent building up its retail portfolio. Also in early 2013, the company said that it would open five Robinson department stores and 350 FamilyMarts that year. The most important domestic project, however, is Central Embassy, located on former British embassy property and set to open in 2014. The complex will include a hotel tower and a seven-storey mall, and will host 70,000 square metres of retail space. By some estimates, it is the country’s first true luxury mall, with iconic design and a roster of high-end retailers.

The company is also active overseas. After buying an Italian mall group and a Danish department store and opening three stores in China over the past few years, it is taking a hard look at its ASEAN strategy and may expand in the region along with business partners from Japan, said Sudhitham Chirathivat, the company’s chairman, in 2013. The group is also opening malls in Indonesia in 2014, in Malaysia in 2016 and is fast building a presence in Vietnam. Finally, it plans to open operations under the “Robins” brand name in 2014, with its first such outlet in the Royal City mall in Hanoi. A second is to come in Ho Chi Minh City later in the year.

The Mall Group, Central’s main competitor, has not been shy of expansion either. In early 2013, it announced it would be investing BT3bn ($90m) in its business in a single year. The company’s stated goal is to double its turnover from about BT50bn ($1.5bn) to BT100bn ($3bn) in five to seven years. It is totally refurbishing its 16-year-old Emporium Mall at a cost of BT4bn ($121m) and building a new mall across the street, the EmQuartier, for BT9bn ($2.7bn). The EmQuartier will be the country’s first mall with an automatic car-park system. Both the revamp and the building of the new mall are to be finished by late 2014. Also, nearby will be another outlet called the EmSphere, a BT7bn ($212m) project to be completed by 2016. The three malls will be linked together by a walkway.

Big C, too, is expanding. In 2013, the retailer said it would spend BT8bn-9bn ($242m-272m) on growth, opening 219 new stores, taking its total to 567. Most of the company’s efforts are aimed at expanding its convenience store portfolio. Its plan was to take the total from 126 to 276 by the end of 2013. Two trends justify the move, the company says. As people become busier and more mobile, their shopping habits are shifting, first, from traditional retail to modern, and second, from super and hypermarkets to convenience stores. Even so, the company is increasing its stock of larger stores as well. Its 2013 expansion programme included six hypermarkets, bringing the total to 119; 13 supermarkets, bringing the total to 31; and 50 new Pure Pharmacies, bringing the total to 141.

Tesco-Lotus has similar plans. The company said it would invest BT18bn ($545m) in fiscal year 2013, which ended in February 2014, and be opening 10 new hypermarkets and 300 express outlets. Finally, it is upgrading a number of supermarkets to its Extra format.

Siam Future, a developer of community malls, aims to keep pace. It is spending BT350m ($10m) in 2014 to develop two malls and refurbishing four. One new mall will be in Pathum Thani’s Rangsit district and the other in central Bangkok, while the sites being refurbished are malls at Bang Bon, Pracha Uthit, Sukhaphiban 3 and Ratchadaphisek. When the two malls have been completed, the company will have a total of 30 outlets. The firm is investing in new trends and attractions to stay ahead in a highly competitive market – for example by bringing a Korean art museum to one of its malls.

Growing Market

The broad picture of the market is one of steady expansion and growth. As of the third quarter of 2013, Bangkok and its environs had 6.5m sq metres of retail space, according to Colliers International, a global real estate company. While the city added only 3000 sq metres of space in that quarter – the BGallery Fashion Arena in Pratunam, built by Baiyoke Group – the company estimated that another 270,000 sq metres would be brought on by the end of the year. In the second quarter, total space had risen by 63,337 sq metres, according to CBRE Group, a US commercial real estate company. CBRE says four news malls were added in that quarter: Nihonmura mall in Tonglor, Green Plaza, The Walk and Imagine Village. It also notes that plans are in the works to develop Platinum Market, a 50,000-sq-metre retail space in Rajadamri.

Colliers is optimistic about 2014 and 2015. It estimates that more than 600,000 sq metres of shopping malls will be added to total capacity in 2014, and more than 700,000 in the following year. It also sees almost 400,000 sq metres of community malls being built in each of those two years. Occupancy rates have been particularly strong in almost all categories and areas. The rate for the city area rose from 94% in the first quarter of 2010 to 97% at the end of 2013. In suburban Bangkok, it has gone from under 95% to well above 97%. Rental rates have held firm across the board, rising slightly over the past three years.

Expansion vs. Evolution

The story is one not only of long-term expansion but also of evolution and development. The sector has indeed been growing and advancing. According to Maybank calculations, the number of hypermarkets went from 77 in 2000 to 340 in 2014. The number of modern home products stores went from six to 102 over the same period, and convenience stores went from 1600 to 10,000.

Expansion helps the sector in at least two ways. It follows changes in consumer taste, as the average Thai begins to shift from traditional sales channels to modern ones; they are demanding more supermarkets and convenience stores. Second, the coverage of new patches of the country allows the largest retailers to gain more leverage over vendors. This helps their margins.

Demand for space comes from both local and international brands. As Colliers notes, demand from foreign names has only strengthened as Bangkok becomes ever more recognised as the shopping haven of Asia. The company observes a number of innovations in the market. Mobile retail, for example, is on the rise. Customers are using QR codes to learn more about products as they shop and are buying and paying online, with local delivery and pickup. Community malls another trend to watch. Many tracts of land in Bangkok are family owned and underutilised. Building community malls on these parcels allows the owners to earn a return on their land for little or no investment. Such malls often fail, notes Colliers, because those building them do not understand the business well. They also often lack a major anchor tenant. The result is less traffic.

Rural Areas

The development of retail “up-country”, as the regions north of the capital are known, continues. Of all the branches run by top retailers, 69% were up-country as of the third quarter of 2013, up from 54% in 2004, according to Maybank research. In a 2013 survey by Thai-American Business, a magazine published by the US Chamber of Commerce, 80% of Thai businesses said they wanted to expand outside of Bangkok, and 65% of these said their decision was driven by customer demand. The report also said that the number of urban consumers in the provinces was growing three times faster than in the Bangkok area.

Stores are beginning to adjust. Many are changing their top-down structures to meet the needs of rural and small-city Thailand. Tesco Lotus, for example, is opening a distribution centre in Khon Kaen as part of its expansion plan. However, the chamber and others note that, outside Bangkok, many challenges remain. Logistics are harder, training is a challenge and the management (and management principles) are not easily transferred beyond the capital city. CBRE, meanwhile, has noted slow growth in 2013 and declines in actual sales for some retailers in up-country markets.

New Combinations

Another trend is a raft of mergers and acquisitions. In late 2012, the Central Group acquired OfficeMate by way of a share swap. The parent company then started to merge its own brands of office supplies, including Office Depot, under the OfficeMate name. For its part, OfficeMate – which had been listed on the Market for Alternative Investment stock exchange – was moved to the main board.

The biggest recent transaction of note was CP All’s $6.6bn purchase of Siam Makro in 2013, the country’s biggest acquisition ever. CP All owns Thailand’s 7-Eleven chain, while Makro has 57 supermarkets in the country. The CP Group, despite its involvement in Makro’s founding, sold down its holding after the 1997-98 Asian financial crisis. According to Bloomberg data, CP All paid a premium for Makro (on a price to earnings ratio basis), but the company said the purchase would bring value by combining the two businesses. Makro, in particular, would help the group prepare for the ASEAN Economic Community, it said.

Convenience Stores

Considerable activity is occurring in other formats – in particular, convenience and home improvement stores. The Central Group plans to expand FamilyMart, a convenience store chain, by opening 240 stores in 2013, bringing the total to 1000. The chain is working to innovate and is experimenting with mobile sales and franchising (though initially the push will be for company-owned stores). FamilyMart is working closely with its Japanese parent to bring more products and concepts from Japan. It is trying to give the store more of a Japanese feel, which is popular with Thai consumers. Along these lines, it will introduce a wide range of ready-to-eat foods, including bento boxes.

The country also has some new entrants in the convenience store sector. In early 2013, Japan’s Lawson entered the market as a joint venture with Thailand’s Saha Pathanapibul (50%) and Mitsubishi Corp (1%). The company planned 50 Lawson 108 stores by the end of 2013 and 1000 nationwide within five years.

Home Improvement

HomePro is showing particular brawn. Its strategy includes the opening of six to eight outlets in 2014, on top of its existing 63. To accomplish this, it is doing some creative financing. The company plans a baht-denominated bond in the latter half of 2014 and is considering the listing of a real estate investment trust. Its parent company, Land and Houses Group, would take three of its mall properties and package them into an investment vehicle on which shares would be sold. HomePro itself has been listed on the Stock Exchange of Thailand since 2001. HomePro’s strategy is quickly evolving, notes CIMB, an Asian bank. It is revamping its stores and beginning to target the low-end home improvement market.

The Risks 

The chief risk for the sector is not so much growth as increasing competition. Maybank says that the aggressive expansion plans of many outlets have weakened margins, especially in the hypermarket segment. This is somewhat offset by better negotiating power with vendors, but there is a limit to how much vendors can be squeezed.

Foreign participation in the market has also been a challenge. The Foreign Business Act of 1999 codifies protectionist measures for retail, and requires a special foreign business licence. However, investments above BT100m ($3m) or BT20m ($600,000) per store (or those protected by treaty) are exempt. Foreign retailers are thus working to gain access to the market through partners and by exploiting loopholes in the law. This is likely to keep competition intense.

Outlook

The outlook for the sector is generally good. Once the protests end, consumer demand is likely to rebound. Development will continue regardless of what happens in downtown Bangkok, and expansion overseas is a given for the larger and more aggressive groups. Growth is a near certainty, so long as balance sheets are carefully managed and retailers do not overcommit to markets they don’t fully understand. The sector has built up many strengths, assets and talents over the years. If properly managed, retailers’ expansions promise growth that is new, fast and sustainable.