KUCHING: It has been a tough year for retailers, with disappointing growth compounded by the rising costs of living post-Goods and Services Tax (GST) in addition to the weak ringgit, the combination of which resulted in weak consumer sentiment.
Observers believe this trend will continue in 2016 as the country will experience slow growth in gross domestic product (GDP) and private expenditure, along with a high level of household debts.
Analyst Norsyafina Mohamad Zubir from the research group JF Apex Securities Bhd (JF Apex) noted that Malaysia’s retail industry continues to face subdued growth owing to weaker consumer sentiment as Malaysians cut spending to cope with rising prices.
“Consumers are cutting out any unnecessary purchases and (will) be more prudent in their spending,” she said.
The research arm of TA Securities Holdings Bhd (TA Research) meanwhile highlighted that on a macro level, consumer sentiment will likely remain weak in 2016.
TA Research noted that the third quarter of current year 2015 (3Q15) Malaysian Institute of Economic Research’s (MIER) consumer sentiment index which, tumbled by 1.5 points to a fresh level of 70.2, is at 1997/1998 Crisis low.
“In our view, weak consumer sentiment is due to lower discretionary income owing to rising overall costs of living post implementation of GST in April 2015 and weak ringgit.
“This is further aggravated by the knock-on effect of the lower commodity prices, which has an indirect impact on the household income of the related labour force,” the research arm said.
Cheah King Yoong of AllianceDBS Research Sdn Bhd (AllianceDBS Research) revealed channel checks showing that consumer spending and visits to shopping malls still have not recovered to the pre-GST levels.
“Our observations are also being supported by recent statistics released by MIER Malaysia where 4Q15 consumer sentiments index fell to a record low of 63.8 (3Q15: 70.2), attributed to growing concerns of higher inflation, expectations of a challenging labour market and present household finances to deteriorate,” he said.
For retailers, JF Apex noted that according to Malaysian Employers’ Federation (MEF), they experienced a major drop in sales with some registering a more than 40 per cent decline over festive periods in the second half of 2015 (2H15).
The research firm further noted that the combined impact from the implementation of GST in April 2015 and the ringgit’s depreciation against the US dollar attributed to the bigger decline for retail sales in 2015.
“According to Malaysia Retailers Association (MRA), retail sales grew 4.6 per cent in 1Q15 and further plunged by 11.9 per cent in 2Q15, the worst quarterly retail growth rate since the 1997/98 Asian financial crisis.
“The negative impact from GST implementation on the country’s retail industry was worse than expected in 2Q15 as consumers held back on their spending and adopted wait-and-see stance while waiting for more promotions by the retailers,” it said.
JF Apex went on to note that businesses of many retailers dropped from 20 to 50 per cent as the introduction of GST last year affected all retail sub-sectors (from retailers selling grocery, fashion and fashion accessories, toys, gifts, handphones, furniture as well as electrical and electronics).
“Retailers came out with promotions by offering heavy price discounts and continued to sacrifice their bottom lines in order to get more shoppers,” the research arm said.
It added that the data showed Malaysia’s retail sales growth remained slow during 3Q15, up 1.6 per cent year on year (y-o-y) as compared to an increase of two per cent y-o-y of the same period in 2014.
Sarawak brings in new retailers
Despite such pessimistic views on consumer sentiments and the retail sector, Sarawak seems to have experienced the opposite as a rush of new retailers entered the local market in the last quarter of 2015. This was, however, partly due to the opening of the state’s largest mall – Vivacity Megamall – in December.
CH Williams Talhar & Wong (WTWY) observed in its WTW Property Report 2016 that except for Vivacity Megmall (Vivacity) which was completed in December 2015, there were no other malls completed for Kuching in 2015.
While only Vivacity Megamall was completed last year, it should be noted that this singular megamall alone has increased the retail space in Kuching by another 820,000 square feet (sq ft).
It will house more than 300 international, regional and local brands ranging from fashion, gadgets, sports gears, food and beverage (F&B) and entertainment segment across five floors of retail space.
In one to two years’ time, Kuching will see more malls sprouting up in the city as WTWY noted that there are a number of malls currently under construction and due to be completed by 2016/2017.
These include the six-storey Emporium at Jalan Tun Jugah, the Matang Mall (a four-storey mall at Matang), Moyan Square Shopping Mall, a 3+1 storey mall at Jalan Batu Kawa-Matang and Aeon Shopping Mall located along Jalan Keretapi.
“When completed, these will add more than half a million sq ft or so of retail space to the current Kuching market.
“The large influx of new retail space into the market in the last few years has showed signs of saturation, which is reflected by falling transactions and occupancy rates for shopping malls,” it said.
A year-end rush of new entrants
Nando’s: Adherance to quality
Among the anticipated new entrants into Sarawak was Nando’s Malaysia, a leading fast casual restaurant brand which has recently been expanding its presence across the country at a much faster rate in the past few years.
In a recent meeting with BizHive Weekly and The Borneo Post Seeds, Nando’s Malaysia marketing director, Chai Hui Fung explained why they have entered the Sarawak market.
Chai said that the process of looking for a site and opening up in Kuching took Nando’s Malaysia a slightly longer time because even in KL and overall West Malaysia, the group is also not fully expanded yet because there are still a lot of opportunities.
To date, Nando’s Malaysia has 73 outlets, with the number of new stores having doubled in the past five years, indicative of their more aggressive expansion plans during that period.
“We have opened up in Seremban, Kuantan and Terengganu, so these are all new states that we just started to go into. That’s why opening up here, we have to go by stages,” she said, adding that coming into Sarawak has been the most difficult one so far.
Having first opened up in Kota Kinabalu two years ago, Chai revealed that they tried to learn about the operations and market there first, something which was going to benefit the group when they finally ventured into Sarawak.
She shared with us that for example, it was really very different in terms of supply because of a lot of things that Nando’s Malaysia might not have thought of when the group actually needed to open just one or two outlets in a state that is two hours (flight) distance from Peninsular Malaysia.
They initially thought obtaining supplies such as the same vegetables and rice as what they would get in Peninsular Malaysia would be quite straightforward here, but instead found that not to be the case.
“That’s why we have to do more testing, adjustments to ensure that we deliver the same quality,” she said.
Chai further noted that all restaurants throughout the country are wholly-owned by Nando’s Malaysia which also factors into why it took slightly longer for the group to open up an outlet in Sarawak.
“Also, in terms of restaurant designs, we are very particular,” she said. Nando’s Malaysia prefers a more spacious design for its restaurants, choosing to have ‘bunk seats’ and big tables to hold bigger groups of customers.
Chai explained that these big tables are in line with Nando’s Malaysia’s aim to have its restaurants be a place where people can come together for gatherings.
Aside from their unique restaurant design, Chai highlighted that they also need to make sure that they have the local supplies and the people here who can support the operations of the outlet.
“Otherwise, what we really don’t want to hear is customers saying that the chickens we serve here is not as nice as the ones served in KL. It is very common that people in Sarawak and Kota Kinabalu will compare because people here are very well exposed.
“For those who know the brand, they actually travel to KL, West Malaysia, they would have tried it and they would compare so we have to make sure consistency is there.
“That’s why we don’t want to give customers the feeling we are offering a substandard offering here. It has to be the same as what you get anywhere in the country,” Chai stressed.
More outlets on the way
According to Nando’s Malaysia chief executive officer (CEO), Stephen Chew, in an email interview, they believe that there is strong potential to continue to grow and expand in East Malaysia and will continue to look at opening into more areas when the time is right.
In terms of further expanding in Sarawak, Nando’s Malaysia does have plans to open another restaurant in Kuching.
“We believe Kuching has got huge potential for retail. It is still a relatively untapped market with lots of room to grow and we are excited about growing with Kuching,” he said.
Chai shared that in fact, from an economies of scale (EOS) point of view, Nando’s Malaysia does want to have two or three more outlets in the same state so that it is actually easier in terms of management.
“We are looking at the second one in Kuching within this year. The plan for this year is definitely on East Malaysia, to really build the brand in East Malaysia,” she said, adding that they felt they really need a dedicated support team for this part of the region.
She noted that the expansion of Nando’s to other major cities in Sarawak are under consideration.
Currently, the concern is more towards whether there is enough population to suffice opening up more outlets and more importantly, the right location, whether there are malls that fit the group’s criteria.
“We don’t want an outlet where the space is too small,” she reiterated, adding that there must also be traffic flow at the locations.
Product-wise, Nando’s Malaysia is confident that this is not an issue. Chai believed that people will definitely like what Nando’s Malaysia has to offer given the chance to try it.
Chew revealed that to date the reception towards Nando’s in Sarawak has been very positive and that it has managed to garner a strong following since it opened here last year.
“Moving forward, the main objective for us is to continue to build awareness and trial for Nando’s in Sarawak,” he said.
Chai noted that the focus for them now is on how to maintain this momentum in the long run, along with ensuring that their people on the ground are up to mark and the products are consistent. For that reason, it is crucial for Nando’s Malaysia to build its brand here.
“The idea is how are we going to introduce Nando’s to new customers. Because a lot of people from Sarawak already know about Nando’s.
“Now the idea is how do we get the rest of the customers who have never heard of Nando’s in Sarawak to also come to Nando’s to try.
“That is going to be the focus. We can’t always rely on the same group of customers, we have to get new people to try as well,” she said.
Outlook on Kuching
Chew noted that with consumer sentiment softening it is expected to be a challenging year for the entire retail sector in Malaysia and this will very likely be the same case in Kuching and Sarawak in general as well.
“However, we are still new in this market so hope that with our marketing efforts, our restaurant will continue to see strong demand over these tough times,” he said.
While acknowledging that consumer sentiment is weak, Nando’s Malaysia is not cutting expenses but will instead be more cautious in terms of expanding its business. The group will likely be opening less restaurants, as compared to previous years
Instead, Nando’s Malaysia will still want to maintain its quality and focus on giving its customers the best. In addition, the group will continue ensuring that its employees are developed well as Chai explained that in the restaurant business, “you can’t shrink manpower”.
“Probably what we need to find is if there is a better way to be cost-efficient,” she added.
Pandora: Affordable jewelry unaffected by slowdown
The second Pandora outlet, an affordable luxury brand under the purview of Habib Jewels Sdn Bhd (Habib Jewels), was also launched in Vivacity in December.
According to Pandora Malaysia managing director, Datin Sri Zarida Noordin, Sarawakians have always been supportive and responsive towards their brand, Pandora.
“Our jewellery is affordable and comes with luxury touches to it. Our craftsmanship and intricate designs have been getting remarkable responses from everyone here,” she enthused.
Zarida personally thought the jewellery market here has evolved massively over the past years and that the Pandora brand presence in Kuching is amazing.
“Pandora merges contemporary design with high quality materials and excellent craftsmanship based on a combination of modern and traditional techniques.
“Sarawak is the biggest state in Malaysia and are very appreciative of arts and culture,” she added.
On Pandora’s reception in Sarawak so far, Zarida observed that the response from the state is wonderful and believes that it is a promising market.
“We have garnered new customers and younger generation customers, as well. Our customers here are trendier and fashion conscious,” she said.
Zarida added that the word of mouth is also a powerful tool here whereby for example, a group of friends will be having a few similar charms to represent their friendship. In addition, it is also the most ideal gifting approach to family and friends.
Zarida shared with BizHive Weekly that the Pandora fundamental concept comprises of bracelets, charms, rings, necklace and earrings. “Women can choose from a multitude of exquisite materials, colours, setting, details and finishes from our collections,” she said.
To date, Zarida has found the feedback on sales of Pandora to have been tremendously good and as such, appreciates the support and love from the customers here.
“Our two boutiques located at tHe Spring and newly opened Vivacity Megamall will cater to our Sarawak customers especially during seasonal period such as Valentine’s Day, Mother’s Day and Christmas as Pandora will have new collections that accommodates to it,” she said, adding that Pandora’s latest collection caters to Valentine’s Day and Chinese New Year 2016 occasion and it is the perfect gift for loved ones.
Under Armour: Growing demand in line with trends
Triple Pte Ltd (Triple), the exclusive distributor for Under Armour in Southeast Asia, believes that the sports industry will be resilient in these tough times.
Renowned for its high performance footwear and apparel, US-based Under Armour ventured into East Malaysia two months ago with its first Shop in Shop concept in LEA Sports Centre in Sarawak Plaza, Kuching.
Under Armour distributes its products in Malaysia through an exclusive partnership with Triple.
Michael Binger, CEO of Triple, observed that the retail sector in Kuching and Sarawak is not yet as mature and competitive as in Kuala Lumpur.
“There are however a number of interesting mall projects coming up that will change the retail landscape and ultimately shopping experience of local consumers.
“The key is that Sarawak consumers are exposed to retail trends not only in Kuala Lumpur but Asia wide, and increasingly desire similar experiences at home,” he said.
On reports of the retail sector been hit as Malaysians cut spending to cope with the rising cost of living, Binger viewed that in the short term, some consumer segments will be affected by the rising cost of living.
“However we believe that the long term perspective for Sarawak is positive. In addition, the sports industry has traditionally been more resilient in economically tough times,” he said.
Binger affirmed that people who are serious about sports will continue to invest into sports apparel and footwear.
In terms of Under Armour’s reception here in Sarawak so far, Binger found that the brand has been well accepted with the serious athletes.
“Also, our gym partners see the interest in the brand. We will continue to work on expanding the pool of Under Armour consumers beyond training into categories like running, basketball and football,” he said.
Binger added that they will continue to expand in East Malaysia with key representation not only in Kuching, but also in Miri and Kota Kinabalu.
Slowdown to continue in 2016
JF Apex opined that going forward, Malaysia’s retail industry would not recover meaningfully from the negative impact of the GST on consumer spending in 2016 while the unexpected drop in ringgit value could worsen the prevailing tepid sentiment.
Norsyafina foresees another tepid consumer sentiment in 2016 as consumers held back on their spending under prevailing rising cost of living and job retrenchment.
“I also think that same situation will occur in Sarawak as well,” she said.
JF Apex noted that the political developments in Malaysia also affect the retail sales indirectly as consumers are reluctant to spend with concerns on the spill over effect to economic front.
The research arm further opined that the recovery of consumer discretionary spending could take a little longer due to more cautious spending by consumers.
“Rising costs of living amid higher transportation costs arising from recent and upcoming hikes in Klang Valley’s highway toll rates and railway fares, as well as concerns over the job market conditions amid news regarding workers’ retrenchments in sectors like oil and gas, manufacturing, aviation, banking, and media also exacerbate the domestic consumption,” it said.
In order to mitigate the impact, JF Apex foresees retailers to continue incurring more promotional expenses to stimulate demand, hence impacting their margin.
“I foresee that retailers will come out with promotions by offering heavy price discounts and continue to sacrifice their bottom lines in order to get more shoppers while the recovery of consumer discretionary spending could take a little longer due to more cautious spending by consumers.
“However, I opine that our retail sector will slightly recover in 2H16 as consumers will finally adapt to the GST and rising cost of living,” Norsyafina said.
Meanwhile, TA Research noted that Retail Group Malaysia (RGM) has cuts its forecast for 2015 retail sales from 3.1 per cent to only two per cent, on the back of higher cost of living.
TA Research further noted that if materialised, it will be the slowest growth since 2009. The research arm added that for the cumulative first nine months of CY15 (9MCY15), Malaysia’s retail industry grew only by a mere one per cent from a year ago.
“Going forward, the slowdown could creep into 1HCY16 as consumers are cautious to tap into their savings to fund consumptions.
“In our view, retailers will have to offer heavy price discounts, together with other promotional strategies to boost sales and therefore, risking further margin compression.
“In addition, we also believe that the ringgit will continue to be traded above RM4.00 per US dollar for the rest 2016, which means imported raw material costs will remain elevated,” TA Research said.
Overall, JF Apex maintained its neutral stance on the retail sector as the research firm foresees another slower consumer sentiment in 2016 as consumers became more prudent in their spending.
The research firm expected the consumer discretionary segment to feel the negative impact more than the consumer staple players as demand on F&B products is more resilient than discretionary items during the hard times.
At present, AllianceDBS Research also has a ‘neutral’ recommendation for the sector.
“We do expect consumer spending to recover in the coming quarters, supported by recent government stimulus such as the three per cent cut in employees’ contribution to Employees Provident Fund (EPF) and hike in minimum wage and ringgit stabilisation,” Cheah said.
Nonetheless, AllianceDBS Research believed that the recovery will be gradual.
“Based on our studies of the impact of GST implementation in other economies, we noticed that the adverse impact on inflation and GDP may take up to four quarters to normalise.
“Given that Malaysia implemented the GST in April 2015, consumer spending may take up to 2Q16 to normalise,” Cheah said.
On a side note, he pointed out that they favour selective companies with strong fundamentals which continue to offer attractive investing propositions.
AllianceDBS Research believed that Padini Holdings Bhd will continue to benefit from store expansion and downtrading.
The research house also liked Oldtown Bhd as the earnings contributions from the group’s F&B business are stabilising while FMCG segment should record double digit earnings growth, supported by overseas market.