Major retailers in Thailand focus on improving retail experience in response to subdued growth

After a prolonged period of sluggishness, the retail sector in Thailand shown signs of healthier growth. General stability is having a positive impact on the sector, while years of targeted investment have also supported growth. However, some uncertainty remains, as consumer debt is still elevated and an uneven distribution of purchasing power growth exists. Meanwhile, traditional retailers are being challenged by e-commerce, which offers significant potential following the improving warehouse and logistics capacities in the Eastern Economic Corridor. In addition, a large amount of retail floor space is set to be added to the market in the next few years, although some larger malls in the pipeline could struggle to achieve full occupancy.

Shopped Out

Thailand is well known for its distinctive low-end offerings, such as night markets, street vendors and budget malls. In recent decades it has begun developing a competitive high-end retail market as well, with Bangkok possessing a number of luxury malls, including Siam Paragon, Terminal 21 and Siam Discovery.

Despite its global reputation, the sector has struggled in recent years. Political instability has fuelled uncertainty among consumers, with the burning of Central World Mall by political protesters in 2010 a potent symbol. According to the University of the Thai Chamber of Commerce, the consumer confidence index peaked in 2004 at 112.4 and has spent most of the time thereafter around or below 80, with figures below 100 indicating deteriorating confidence. Even though it was evident that many luxury malls were unable to attract sufficient footfall, developers continued to build new malls, with a number of local media outlets reporting on the notable disparity between supply and demand.

However, the market has been quietly recovering, and optimism is slowly beginning to return, with the sector posting positive results in recent months: retail sales growth was up 9.7% year-on-year in January 2018, the highest rate since early 2013. The Bank of Thailand recorded a similar recovery in the retail sales index: it fell from 226.11 in 2013 to 212.92 in 2015, but rose to 228.52 in 2017. The new year started strongly, with the index reaching 235.69 in January 2018 and an all-time high of 259.38 in March 2018.

A New Era

The Thai Retailers Association (TRA) is optimistic that investment in infrastructure and political stability – with long-awaited general elections expected to take place in 2019 – will underpin growth. The sector posted stable expansion of 3.2% in 2017 and 3.3% in the first half of 2018, with the TRA forecasting growth of 3.3-3.5% for 2018. Jariya Chirathivat, president of the TRA, told local press in December 2017 that the market has bottomed out, and the recovery of spending power should sustain the sector through 2019.

The trend in retail is in line with the broader economic recovery. In the first quarter of 2018 the country’s GDP expanded by 4.8% year-on-year, which was the highest rate in five years. The IMF has forecast GDP to grow by 3.9% over the full year of 2018. Thai consumer confidence is also on the rise, due to planned increases in the minimum wage and the strong stock market. The consumer confidence index reached 80.1 in April 2018, the highest level since late 2014.

The current strength of the market is also reflected in the financial results of private players. Retail property development company, Central Pattana, which operates 32 malls nationwide, reported that net profits were up by 47% in 2017, partly as a result of rising tourist arrivals. According to Central Group, one of Thailand’s largest retail and real estate developers, Chinese tourists account for as much as 20% of their retail sales.

Thailand’s malls also seem to have come some way in turning around the downward trend of consumer footfall, avoiding the “downfall of the mall” phenomenon that has hit many retailers in the West.

Government stimulus measures have helped to boost retail activity, too. In October 2017 around 11m state welfare cards were introduced. These are loaded with monthly allowances that low-income earners can use to buy food and basic items at select stores. According to local media reports, citizens spent over BT11.9bn ($344.5m) in the programme’s first four months. In addition, the Shop Chuay Chart scheme allowed Thais to deduct up to BT15,000 ($434) from their taxes for goods purchased during a 23-day window in late 2017. The Ministry of Commerce also coordinated with distributors, retailers and wholesalers as part of the Ruam Jai Perm Suk Shop Sanuk Lod Rub Pi Mai campaign to offer consumers 20-80% discounts on a range of goods for 22 days, which significantly stimulated consumption during the end of year holiday period in 2017.

Convenience

The fast-evolving convenience store segment is a major force in retail. In addition to multiplying in numbers, these outlets have also influenced the spending habits of Thai consumers, with many people now shopping more often and buying a few items each time. Industry stakeholders expect that the market share of convenience stores will continue to expand.

The number of 7-Elevens in Thailand hit 10,007 in mid-2017, some 18 years after the first store opened in 1989. Its parent company CP ALL, which is licensed to use the 7-Eleven trademark in Thailand, aims to have 13,000 stores nationwide by 2020. CP ALL reported a net profit increase of 19% in 2017. Other major competitors in the space include Tesco Lotus Express, Mini Big C and FamilyMart, which is controlled by local Central Group. Japanese company Lawson, which has opened convenience stores in Thailand under the branding Lawson 108, opened its 100th store in February 2018, and announced a target of 208 stores by 2020. MaxValu, which is part of the Aeon Group, is another Japanese retailer in the market. It is estimated that Thailand currently has over 13,000 convenience stores in total.

Areas of Concern

Despite these positive indicators, some concerns remain. For example, low demand persists at some levels of the market as household debt remains high, and although the general elections are scheduled to take place in May 2019, there is still some uncertainty about Thailand’s democratic future.

Sales in the fast-moving consumable goods (FMCG) segment in particular have been weak. The segment has had low growth in recent years, expanding by 2.6% in 2014, 2.2% in 2015 and 1.7% in 2016, before contracting by 0.4% in 2017. Kantar WorldPanel Thailand, a local market research company, forecast FMCG to shrink by a further 1% over 2018 and 2019. Food outlets designed to appeal to the middle- and lower-income categories are also doing poorly due to weak demand.

Meanwhile, the TRA notes that the home renovations and DIY segment has been lagging, largely due to weak property sales in the real estate sector, while department store sales have also been weak. However, there has been notable growth in supermarkets and stores selling health, beauty and personal care products. The TRA also highlights that purchasing power growth is uneven and concentrated in Bangkok and other major cities, calling for government allocations and government policy to stimulate activity in secondary cities.

According to real estate consultancy CBRE, vacancy rates have been increasing in the Bangkok retail space. The overall vacancy rate in the first quarter of 2018 was 6.4%, with the figure in the downtown area at 9.4% and at 9.5% in midtown. Central Pattana had occupancy of 93% at its properties in 2017, which was down 2 percentage points from 2016, though the group attributed this to the major renovations under way at their malls.

New Ventures

The retail sector is currently characterised by partnerships and reinvestments as major players seek to bolster their positions. In June 2018 the Siam Piwat Group has entered a 50:50 joint venture with US-based Simon Premium Outlets – which is the largest publicly traded retail real estate company in the world and owns 230 properties – to open three luxury retail outlets in Bangkok by 2020. A site for the first property has already been chosen, but it has not yet been disclosed by the company. Simon Premium Outlets already has a presence elsewhere in the region, with properties in Japan, South Korea and Malaysia.

Central Pattana, meanwhile, is spending BT100bn ($2.9bn) to revitalise its existing properties and open new locations over a five-year period. Their plan seeks to transform their outlets so they can better compete in the digital age. Central World is scheduled to be renovated from late 2018, while Central Phuket is set to open in September 2018 and CentralPlaza Ayutthaya is slated to open in December 2019.

The company is also building the country’s largest outlet mall, Central Village, which will span 160,000 sq metres and accommodate 235 shops. The BT5bn ($144.7m) shopping centre – which will be located about 10 minutes from Suvarnabhumi International Airport, catering to tourists and local middle-income customers – is expected to open in late 2019.

Other large-scale malls are also in the works: Gateway Bangsue, an 11-storey community mall in Bangkok, is set to open in late 2018; EmSphere in the capital is scheduled to open in 2020; One Bangkok will open in 2021 on Wireless Road at the site of the old Suan Lum Night Bazaar; and Bangkok Mall, to be built by the Mall Group, stands to be the largest mall in South-east Asia once complete. The BT20bn ($578.9m) Bangkok Mall is set on a 100-rai (16-ha) site at the Bangna Intersection and is scheduled for completion in 2023. In February 2018 the Hongkong Land Group bought the site of the British Embassy, a 25-rai (4-ha) plot of land on Wireless Road, for £420m in a joint deal with Central Group. The transaction was the biggest land deal ever made in Thailand. Further afield, mall developments are envisioned to have a positive multiplier effect in less developed urban centres. Projects of this type include CentralPlaza Korat, Terminal 21 Korat and the expansion of The Mall Korat.

4.0 Initiative

The ultimate goal of the Thai Shopping Centres Association’s Shopping Centre 4.0 initiative is to strengthen Thailand’s position as a retail destination within ASEAN by more effectively serving the modern lifestyles of customers in the digital era.

The three-pronged strategy seeks to promote shopping centre designs that offer digital services; utilise data and omni-channel approaches in order to more effectively engage customers and provide personalised services; and build partnerships between competitors. Under the strategy, mall owners are investing an estimated BT57bn ($1.6bn) to increase their collective floor area to roughly 9.1m sq metres by 2019.

Consumer preferences are already starting to move away from traditional over-the-counter retailing towards e-commerce. It is estimated that approximately 10% of Thai households utilised online shopping channels in 2017, up from 7.3% in 2016, with the popularity of e-commerce set to increase further as internet penetration rates and online services improve. Although online sales currently make up only a small fraction of overall sales in retail, the TRA has estimated that short-term growth will be in the 15-20% range annually, compared to the 1.2-4.4% average for the country’s aggregate retail consumption in recent years.

As a result, the country’s major retailers are exploring e-commerce avenues. The Mall Group, for example, is looking for a strategic partner to help it develop its online shops in order to maintain competitiveness against international giants such as Amazon and Alibaba. The group signed a deal with Siam Commercial Bank in late 2017 to introduce a system that will allow shoppers to make purchases with QR codes. Meanwhile, Central Group is forming a 50:50 joint venture with JD.com, a Chinese e-commerce firm, with total investment of around $500m. Under the agreement, JD.com will provide technology and logistics support. “With JD.com and Central Group’s partnership fully in place, the retail business is changing quicker than before. Developing the supply chain remains the key to success, and some operators are already taking significant steps to ensure that retail expansion is boundaryless,” Pascal Billaud, CEO of Central Food Retail Group, told OBG.

Alibaba plans to invest BT10bn ($289.5m) in developing a digital hub in the EEC that will serve as a launchpad for Thai agricultural products in the Chinese and global markets. The Chinese tech giant was already present in the Thai market through its majority ownership stake in Lazada, the nation’s most popular e-commerce site.

With logistics named as one of the targeted New S-Curve industries intended to catapult the country into the next phase of development under the Thailand 4.0 strategy, it is reasonable to expect that increased warehousing and logistics capacity, particularly in the EEC, will contribute to the development of the e-commerce segment in the years to come.

Outlook

Although sectoral growth has been forecast to remain somewhat subdued in 2018, there are still positive signs for the short to medium term. With the economy recovering, sales should continue to strengthen. The challenge now is to build on these gains. If retail groups simply add more floor space without giving due consideration to the disruptive potential of digital technology and e-commerce, they may suffer in the long run. While traditional retail remains popular for now, vendors must nevertheless adapt to changing consumer habits in order to maintain relevance and growth, a process that should be aided by the government’s ongoing efforts to establish a digital economy.