A resilient market: Despite some challenges in 2011, major international and local brands continued to expand and upgrade

Whilst its vibrant traditional markets remain a draw for tourists, Thailand’s large and growing modern retail sector, which accounts for approximately 40% of all sales, has attracted a number of domestic and international investors. Consumer demand has been particularly resilient even in the face of the most extreme events, with household expenditure largely unaffected despite some shifts in preferences.

BY THE NUMBERS: The Thai Retailers’ Association (TRA) estimates the retail sector expanded by 7% year-on-year (y-o-y) during 2011, reaching approximately BT1.4trn ($44.66bn), or around 16% of GDP. This makes Thailand the second-largest retail market in Southeast Asia, just trailing Indonesia. Consumer spending tends to increase in the run-up to elections, and the months leading up to July 2011 proved no exception. As unprecedented floods hit the capital in the final quarter of 2011, consumer spending on non-essentials slumped significantly, but confidence quickly returned in December, a sign of buoyant demand supported by a series of government policies to come in 2012.

Consumer spending has proved particularly resilient to disturbances in recent years, as the government has supported the price of key agricultural commodities and offered regular stimulus programmes that have boosted domestic demand. Rising disposable income is also helping to drive demand, while eager competition in all major segments of the retail market – hypermarkets, malls, convenience stores and increasingly home improvement centres – means that product offerings continue to expand.

Modern retailing can at times face a tough ride in the kingdom. Indeed, popular criticisms of modern hypermarkets may have prompted the Charoen Pokphand (CP) Group to sell its stake in Tesco Lotus in 2003, although some believe it might have done so to improve its cash flow. Meanwhile, zoning regulations can restrict larger outlets. However, the modern sector continues to expand and is dominated by hypermarket sales: 40% of formal sales were through hypermarkets, 16% through cash and carry, 13% from supermarkets and 31% from convenience stores, according to the TRA.

BATTLE OF THE HYPERMARKETS: The hypermarket segment has become increasingly consolidated and competitive in recent years. The TRA estimates that 90% of Thai shoppers living in urban areas pay a visit to a hypermarket every week, with two retailers accounting for 71.4% of the market.

The largest chain is Tesco Lotus, which commands over 40% of the market. The UK’s Tesco Group originally established the joint venture with CP Group, which subsequently sold its stake back to Tesco. The world’s third-largest retailer (by revenues) owns about 900 stores in Thailand in five formats: the larger Plus Mall, Extra and Hypermarket types, as well as the smaller, more central Talad and Express units. With over 38,000 staff and some 35m clients a month, Tesco Lotus plans to add 300 more stores in 2012.

Big C, founded in 1993 by local conglomerate Central Group, has grown to be the country’s second-largest hypermarket, accounting for 31% of the market. France’s Groupe Casino is the majority shareholder, having acquired its ownership stake in 1999. Besides its Big C Market and Big C Extra hypermarkets, the retailer has opened outlets in the larger Big C Jumbo format – its first foray into the cash-and-carry segment – to cater to wholesalers and shopkeepers.

BIG SALE: One of the biggest stories of the last few years has been the decision of France’s Carrefour to sell its Thai operations to Big C in November 2010. The French retailing giant had originally intended to sell its Malaysia and Singapore operations as well, but the more than BT35.4bn ($1.13bn) it received for the 42 stores from Big C allowed it to put on hold its exit from South-east Asia. Both Tesco Lotus and Big C have scrambled for Carrefour’s clients, with the former rapidly stocking all the products consumers used to be able to find at Carrefour outlets.

The rapid expansion of foreign hypermarkets across Thailand has resulted in a highly competitive terrain. Larger chains have expanded their loyalty programmes, with Tesco Lotus launching a Tesco Visa card in conjunction with the Bank of Ayudhya that targets its over 8m existing Clubcard loyalty members. Market consolidation has prompted the market leader to upgrade some of its stores and diversify its offerings. Competition between Tesco Lotus and Big C has at times taken on a very direct nature, and both retailers have opened a number of outlets in close proximity to one another in several central locations.

INNOVATION: The rivalry has also driven innovation. For example, Tesco launched the Extra format in July 2011, a first in Asia with 30,000 products on offer and 120 shops and stalls, through an upgrade costing some BT300m ($9.57m) of one of its hypermarkets on Bangkok’s Rama Four road, perhaps in response to the remodelling and rebranding of the existing Carrefour shop across the street. The British retailer opened a second Extra outlet later in 2011, in Khon Kaen province, with a capital investment of roughly BT500m ($15.95m).

The CP Group, the largest agro-industrial conglomerate in Thailand, has also expanded vertically into the wholesale and convenience markets. At the wholesale level, Siam Makro, which was founded by CP in partnership with Dutch-based Makro Group and floated on the local stock exchange in 1994, has developed an extensive network throughout the country. The company leads the market in the wholesale cash-and-carry business of food and dry goods, serving mostly small retailers, hotels and restaurants. Siam Makro operates a network of 48 outlets and has made a particular push in the provinces, with 39 of its units located upcountry. The strategy is bearing fruit, as Makro strives to achieve BT100bn ($3.19bn) in sales in 2012 on the back of increased incomes in the provinces.

An estimated 49% of the average $150 that is spent by a Thai consumer each week is allocated to fresh foods, according to the TRA. As agro-processing groups have increasingly moved up the value chain towards more ready-to-eat products to suit the needs of a global working population that has less time to spare, so has the Thai market proved an eager testing ground for packaged meals sold through convenience stores. The CP Group in particular has been successful at vertical integration, with operations spanning production to retail. According to the US Foreign Agricultural Service, margins for in-house brands are typically double that of branded products, which encourages retailers to expand their operations vertically.

AIMING FOR CONVENIENCE: Store types have become increasingly diverse over the years, driven by the need for proximity to an expanding urban clientele. Impetus towards smaller formats has also come from the Zoning Law and Building Control Act, which defines clear zones for larger hypermarkets.

While the Ministry of Commerce has sought in recent years to pass the first Retail and Wholesale Act in an effort to protect the interests of small retailers, the law has repeatedly been delayed despite popular pressure to approve it. Should the act be passed, it would give government oversight of retailers’ expansion plans and require retailers to apply for special licences if their sales exceed a certain threshold.

Tesco has aggressively expanded its network of smaller Express stores at fuel stations and city-centre locations, with more than 550 across the country. Big C has lagged behind, with only a few dozen of its Mini Big C shops. Yet both global hypermarket chains have struggled against the dominance of the CP Group in the convenience segment.

CORNERING THE MARKET: Indeed, the CP Group has cornered the market in convenience stores, with around 6100 7-Eleven stores operated by its subsidiary CP All, of which it owns 49%, with the balance of shares publicly traded. This network is a full six times larger than that of its closest competitor. With net profits rising to $222m in 2011, an increase of 48% y-o-y, and a market value of roughly $7.7bn, the franchise aims to add a further 500 stores a year until 2015. It has halted expansions in international markets like China in 2011, where the CP Group has significant operations, as well as in potential new markets throughout South-east Asia in order to focus on Thailand. To support its ambitious goals, CP All runs two business schools in Bangkok to recruit and train staff for an industry that suffers from a notoriously high employee turnover rate.

One of the leading conglomerates in the country, the diversified Saha Group, has taken second place in this segment of the market, with its network of more than 1000 108Shop stores. Following closely behind in third place, CP’s second convenience store chain, CP FreshMart, has a similar number of outlets, which primarily sell ready-to-eat frozen meals that are produced by a CP Foods subsidiary.

Japan’s trading conglomerate Itochu set up a local franchise, Siam FamilyMart, in 1993. The Japanese retailer operates over 660 stores in urban locations nationwide and has cooperated since 2006 with massmarket property developer LPN Development Group to open convenience stores in its condo complexes.

The Central Group is also active in the supermarket segment through its subsidiary, Central Food Retail, which runs 190 branches under two brand names, Central Food Hall and Tops. Smaller convenience store chains such as Foodland (the kingdom’s oldest chain, with 11 outlets), UFM Fuji (two units) and Villa Market (18 outlets) continue to serve niche markets of mostly expatriates. But the big story of 2011 was the launch of the MaxValue chain by Japanese retailer AEON. It has invested an initial BT300m ($9.57m) in 20 mini-supermarkets and plans to add a further 20 units in 2012 and another 60 by 2014 in central urban areas.

National oil company PTT is also a player in the convenience store sector, through its 147 Jiffy fuel station outlets, which it acquired as part of its purchase of ConocoPhillips’ retail operations in Thailand. Although it has partnered with 7-Eleven for most of its network, PTT does appear to have ambitions in the retail sector, which is illustrated by its unsuccessful bid for Carrefour’s Thai operation in 2010.

NEW LEGISLATION: One possible piece of legislation that could have an impact on the sector is the Retail and Wholesale Business Act, first mooted in 2005. The act, which could curtail the hypermarket trend, has a tendency to resurface periodically in response to concerns from small retailers that they are being crowded out by the bigger players. The legislation has been through many drafts, but the latest emerged in May 2012, drawing immediate criticism from private sector entities such as the TRA.

The draft specifies four major business categories for tighter regulation: hypermarkets and superstores, discount stores, supermarkets and convenience store chains, which combined have more than BT1bn ($31.9m) in total annual revenues.

Under the proposed amendments, hypermarkets and supermarkets would be restricted to as far as 10 km outside of municipal centres and would have to limit their operating hours to as little as 12 hours per day. Moreover, the bill could potentially restrict the expansion of chains such as Big C to the benefit of smaller chains or family-run enterprises. However, given the law’s exceptionally long gestation period and the likely resistance from the big chains, retailers are not expecting the bill to be passed any time soon.

SHOP ’TIL YOU DROP: The shopping mall segment, like hypermarkets, underwent some major changes in 2011, with increasing competition at home and moves internationally by Thailand-based companies. According to global real estate advisory firm CBRE, total supply of retail space in Bangkok went up to 5.56m sq metres by the third quarter of 2011, a y-o-y increase of 2.5%. Over the same period, total occupancy rose by close to 1%, with the occupancy rate reaching 91.6% on the back of resilient consumer spending.

Two family-owned conglomerates have traditionally led the expansion of the shopping mall segment in Thailand. The Central Group, which is owned by the Chirathivat family, develops malls under its Central Pattana (CPN) subsidiary. It also owns the Central Retail Corporation (CRC), which operates the Central, Zen and Robinson department stores.

The Central Group owns 16 malls (and six more at various stages of development), far outpacing its historic rival, the Mall Group, which is controlled by the Umpujh family, with its 10 malls, plus one in development. While the Mall Group has remained focused on large-scale developments in the capital (with only one mall outside Bangkok, in Nakhon Ratchasima), publicly listed CPN has moved much more aggressively in acquiring a considerable land bank and developing projects in provinces such as Phuket, Chiang Mai and Pattaya. The mall leader earned BT100bn ($3.19bn) in revenue in 2011 and expects to take in BT230m ($7.34bn) in income in 2012, on the back of both organic expansion and the impact of recent acquisitions.

The newest of CPN’s malls, Central Plaza Rama IX in the centre of the planned new business district of Makassar, opened in 2011 just as construction of its Central Embassy began. Central has also been upgrading existing malls, reopening Central Plaza Ladphrao in August 2011 after a BT900m ($28.71m) renovation. CPN was able to fully reopen the region’s second-largest mall, Central World, after a BT2.8bn ($89.32m) renovation in 2011 following an arson attack related to the political unrest in central Bangkok in May 2010.

Meanwhile, the Mall Group owns eight malls under its “The Mall” brand as well as two newer shopping facilities, Emporium and Siam Paragon. The latter is a joint venture with Siam Piwat, a privately held firm that owns neighbouring Siam Centre and Siam Discovery Centre malls in Bangkok’s Ratchaprasong district. While work has already begun on an Emporium 2 project, the Mall Group has diversified into grocery stores, launching an up-market food court in a low-rise mall on Rama Four road in 2010, creating additional competition for neighbouring Tesco Lotus and Big C outlets.

FACE OFF: The Central Group may have taken the lead in terms of geographical spread, but the two mall developers are facing off in Bangkok’s downtown high-end retailing. CPN’s Central Embassy, which represents the group’s return to the luxury segment after more than a decade of absence, stands on the former grounds of the British Embassy along Wireless Road. In a move to improve the group’s synergies up-market, Central Retail acquired Italian department store chain La Rinascente for $291m in May 2011. This deal was the group’s first foray in Europe, and its first significant move outside of Thailand. “Our ultimate goal is to take it global and to be recognised all across Asia, be it in Thailand, China, Japan or Hong Kong,” Tos Chirathivat, CRC’s CEO, told the local press following the acquisition.

COURTING TOURISTS: With some 19m tourist arrivals in 2011, shopping by visitors to the country represents a potential area of growth. An increase in the number of short-haul flights has been an important driver of demand, attracting more regional consumers to Bangkok. Modern retailing in provincial tourism centres like Phuket and Chiang Mai have also benefitted from the rise in regional tourists. High-end retailing in particular depends on foreign demand, with 60% of purchases at malls in central Bangkok made by international visitors, according to the Central Group.

While successive governments have sought to promote shopping in the capital in an effort to lengthen average stays and increase tourist spending, the responsibility for promotion has fallen on the private sector. The Ratchaprasong Square Trade Association, which represents all malls in Bangkok’s upscale central shopping district and is led by the high-end mall Gaysorn, has helped to define a strategy for this central tourism draw. In 2011 the association signed a memorandum of understanding with Bangkok’s administration to extend the shared skywalk infrastructure by 2013 in a public-private partnership.

Thailand’s duty-free monopoly, King Power International, has also proven adept at capturing a large part of the tourism retail market both through its 9000-sq-metre store at Suvarnabhumi Airport, as well as at its 41,500-sq-metre mall in the Phaya Thai district in central Bangkok near to the airport link rail station. Regional tourists have captured the retailer’s focus moving forward. “Tourism from China has really taken off in the last three years, with the average spending per invoice increasing almost four-fold,” Chulchit Bunyaketu, the deputy chairman of King Power, told OBG. Indeed, in September 2011 it opened a 5000-sq-metre duty-free centre in Pattaya aimed primarily at Russian and Chinese tourists, at a cost of BT500m ($15.95m).

COMMUNITY COMPETITION: The two big players in the mall segment have been facing increasing competition from a relative newcomer in this space, Siam Future, which is set to open South-east Asia’s first low-rise regional super-mall, Mega Bangna, spreading over 2m sq metres of space. The development includes the country’s first Ikea store with 40,000 sq metres of store space, which opened in November 2011 to up to 40,000 visitors a day. The large-scale project has been welcomed by the market: by the close of 2011, Siam Future had already leased 92% of space in the BT10bn ($319m) complex, which opened in May 2012. The development, which in total has more than 185,000 sq metres of gross leasable space, hosts five anchors (Ikea, Robinson Department Store, HomePro, Major Cineplex and Big C Extra), in addition to 450 shops.

Siam Future had already established itself as a leading developer of community malls, which are closer to residential areas. While smaller mall developers have competed in this segment for a long time, community malls have in recent years gathered enough momentum to compete with the major offerings from the Central and Mall Groups, and there are now over 100 community malls in greater Bangkok.

These shopping facilities are more customised and focused on specific formats: lifestyle, entertainment, neighbourhood, convenience and automotive service centres. Food and beverage retailers have been active and aggressive in competing for space at new community malls as well, which has driven part of the expansions. Siam Future currently owns 224,120 sq metres of leasable space and intends to continue expanding in metropolitan Bangkok, with the goal of more than doubling its space to 500,000 sq metres by 2013. The company expects the number of community malls to reach up to 250 in the metropolitan area in the coming years, as demand grows and more developers come onto the market.

LIFESTYLE MALLS: Entertainment has proven an especially profitable angle for retail developments. One company in particular has benefitted from the strong growth: the largest cinema-operator, Major Cineplex Group, which also holds a 25% stake in Siam Future. It runs screens in a variety of formats, including standalone cinemas, in shopping malls or attached to hypermarkets. The company already controls around 80% of the cinema market with more than 360 screens. Having opened between 30 and 40 new screens a year until recently, it is investing BT1bn ($31.9m) on 50 new screens in 2012. The cinema market is certainly growing apace, with the average Thai attending 1.5 movies a year, according to Major, and with a strong local component – approximately 45% of movies that are screened in the country are Thai productions. Urban centres such as Bangkok and Chiang Mai are particularly important, with residents there viewing an average of 2.2 and 2.5 movies per year, respectively.

Leveraging off of a convergence of entertainment in so-called lifestyle malls, Major is developing such community malls across the kingdom. “The cinema market as a whole is merging with other entertainment activities such as bowling, karaoke and ice skating for instance,” Vicha Poolvaraluck, the chairman of Major Cineplex, told OBG. “This means that operators with a presence in a number of these segments are likely to benefit.” The Poolvaraluck family-owned business also holds the local franchise for McDonalds and runs a chain of fitness centres and over 360 bowling alleys, which provide popular anchors to developments.

The Central Group’s CPN Retail Growth Leasehold Property Fund, (CPNRF) is the biggest of these, with a market capitalisation of just over TH24bn ($765.6m). CPNRF, which was launched in 2005, consists largely of retail and office assets from the downtown Bangkok Central World megamall.

Tesco Lotus made waves in March 2012 when its property fund listing became the largest Thai initial public offering in six years. The BT18.4bn ($586.96m) offering was oversubscribed four times, and the stock has outperformed the flaccid Thai stock exchange in the months since its launch. Interest has been particularly strong from institutional investors looking for solid returns in an uncertain global market. The fund consists of 17 shopping malls across Thailand, anchored by a hypermarket in Bangkok. Tesco has said it will use the funds raised for expansion projects.

OUTLOOK: The policies of the Pheu Thai administration have boosted provincial incomes directly and indirectly through raises in the minimum wage as well as subsidies for agricultural products. The increase in household incomes upcountry has captured the attention of key mass-market retailers, which are expanding rapidly in the provinces to optimise their share of higher government spending and rising salaries in 2012.