Mass market: Consumers revel in the influx of high-end retail, but room for growth remains

Sales staff at the Montblanc shop in Central Tower say that business is brisk in $600 pens. While this is an interesting isolated trend, what is happening everywhere outside the luxury shops on Sukhbaatar Square is the real story for Mongolia. For in the space of a few short years, habits have changed and the country suddenly has a consumer culture. After six decades under socialism and two decades trying to get over the crash that followed, Mongolians are finally shopping. They are not buying merely because they have to, rather they are buying because they want to.

“It seems like the consumers are willing to change,” said S. Gan-Erdene, project manager at Nomin Holding, a diversified retailer and owner of the iconic State Department Store. “They used to be price conscious; now they buy what they want.”

HIGH END: The boom in the very high end is certainly most visible and getting the most attention. The opening of the Louis Vuitton shop in 2009 at Central Tower was a symbolic moment for the country and garnered worldwide headlines. It was also not a one off. The high-end retailer has been joined by other similarly placed brands, including Hugo Boss, Burberry, Omega, Emporio Armani, Shiseido, Ermenegildo Zegna, and Bang & Olufsen. There is some depth to the trend as well. High-end brands are not just found in Central Tower. Some are in other parts of town. The Ulaanbaatar Department Store has Hugo Boss, Donna Karen, Giorgio Armani and Gucci. The activity is not only at the very high end, but also at the mid-high-end. Second-tier brands, such as Diesel, Lacoste and Tommy Hilfiger, also have a presence in the city.

High-end retail is especially apparent in the electronics sector. The first official Apple reseller, Bodi Electronics Apple Retail Store, opened in 2011. Samsung was not far behind: it began offering the Galaxy Note II in cooperation with Mobicom in November 2012, shortly after the product was made available in Europe. The grey market for these and other products was active for years prior to the opening of official channels. Electronic goods that found their way into the country were sold at high premiums due to high demand.

According to Mobicom, low-end Chinese-made tablets may not find much popularity or a good market in the country as the consumers prefer the top brand names, such as Apple and Samsung.

WAITING IN THE WINGS: While this segment of the market is important, and may set the tone for the whole country (as it has done in China where “mass luxury” has taken off). It is still not clear whether the trend is set, whether it will hold, and whether it will be meaningful. It is, for example, largely mining dependent. The retail boom got started as a result of developments in the minerals industry, and it could easily be snuffed out if resource nationalism gets the upper hand and investment stalls again. The boutiques in Central Tower tend to have few customers, but big orders from those who do shop, suggesting that it is “coal rush” money that is driving sales. That could be a volatile proposition.

Lee Cashell, the CEO of Asia Pacific Investment Partners, recently published an analysis on the market in his Mongolia real estate blog. According to Cashell, the number of people earning between $1500 and $3000 a month is about 10,000, so the market size for high-end shops is limited for now. He also notes several other factors at work. Infrastructure is poor so logistics is difficult, for example, while some of the retail spaces are not appropriate for A-list shops. Most major brands are sitting on the sidelines waiting for the mining boom to be confirmed before they make a commitment and tackle these issues. Cashell estimated that some malls are currently only at 75-80% capacity.

In addition, J. Ganbaatar, director at Circle, a Mongolian retail group, told OBG, “For the middle income customers purchase decisions in the retail segment are still made 60% because of price, 40% due to the brand. It is therefore still a challenge to position foreign brands profitable which tend to be more expensive.”

MASS MARKET: History and economics have long held back consumption in Mongolia. In the middle of the 1980s, a full 95% of purchases were made at stateowned stores, and prices were fixed by the government. The country has a weak consumer tradition. After the democratic revolution of 1990 and the end of Soviet subsidies, the economy collapsed and retail sales went down with it. According to World Bank data, household final consumption dropped 75% between 1989 and 1993 as GDP per capita fell for four years straight. But as the economy recovered, so did domestic consumption, almost doubling between 2007 and 2011.

The trend appears to be continuing. The World Bank reports that in the first quarter of 2012, wholesale and retail trade rose 51% year-on-year. The Mongolian Growth Group reported in August 2012 that rents at its higher-end properties were up 50% in one year. The company, which is listed in Canada, owned 6114 sq metres of retail space as of September 30, 2012.

Consumption certainly has room to grow. Historically, household final consumption as a percentage of GDP has been relatively high, hitting 76% in 1991 and 2002. In 2011, however, it dropped to less than 50%. As the GDP has expanded, the consumer has not kept up. If that gap narrows while the economy continues to grow, consumption could boom. According to data from CEIC, average monthly wages jumped more than 20% between December 2011 and June 2012.

TOP MARKET: In its 2012 Global Retail Development Index, AT Kearney ranked Mongolia number nine, ahead of Malaysia and Indonesia. At the top of the list were Brazil and China, ranked first and second, respectively. In its commentary, the consultancy said that while Mongolia has a low population, its economy is growing fast and its wealth concentrated.

According to Gan-Erdene, it is not only the numbers that are important, but also the way people shop. They are in the market for the best products and are very sensitive to quality, durability and, in the case of food, purity and safety. Mongolian supermarkets are stocked with goods sourced globally. Korean products are especially popular, and European and America goods also attract the shoppers. Although China is geographically next door, many people would rather spend a bit more for products made further afield.

As with most sectors of the economy, retailing is looking for its own model. The State Department store remains the focus of the city, but the consumers are changing and retailers are adapting. Korean and the US retailing models seem to be of greatest interest now, even the big-box store concept that originated in the US. Gan-Erdene notes that Mongolia is not strictly East Asian, more Central Asian, and as such its consumer behaviour may not be quite the same as that found in places like China, Japan, Korea and South-east Asia.

CASH & CARRY: Nomin is active across the retail spectrum and is adapting. It is setting up cash-and-carry markets, for example. With the retailing boom in the country, the company thinks that offering semi-wholesale establishments, where consumers can make bulk purchases and smaller shops can buy their stock, is a good way to position some of its hypermarkets. “Retail is shifting towards modern trade,” Lester Tan, the managing director of MCS Asia Pacific Brewery, told OBG. “Customers prefer bigger supermarkets where they have a wider selection of goods. The Mongolian consumer has become a lot more brand sensitive.”

While the country has a number of major players, it is far from consolidated, especially in the convenience store segment. Nomin Holding is one of the major brands, with subsidiaries involved in manufacturing, electronics, foods and general retail. Minii Delguur claims to be the largest supermarket chain in the country. Other names include Orgil Supermarket, Sky Department Store and the Naran Group, with a department store, seven supermarkets and an auto retailer.

OUTLOOK: Mongolia has a long way to go in serving the mid to mid-high market. While the high-end retail establishments are run at international levels, the rest of the market adheres to local standards. Many retail outlets are poorly laid out and inefficiently run. Service can be good, but in some instances it seems that Soviet-era attitudes toward the customer persist. Meanwhile, shoppers are in fact getting more demanding and discerning about the surroundings in which they shop.