This article first appeared in The Edge Malaysia Weekly on July 17, 2017 - July 23, 2017

THE string of popular businesses that have closed over the last three months, especially in the retail and food and beverage sectors, seem to be in contradiction with the strong set of economic data that has brought some cheer to the country.

Gross domestic product figures surprised on the upside in the first quarter of 2017, with growth at a robust 5.6% year on year. With continuously improving data from the manufacturing industry and exports since January this year, economists are convinced that growth can be sustained above 5%, at least for the first half of 2017.

Yet, sentiment on the ground, among consumers and businesses, paints a starkly different picture.

Retail sales were down in 1Q2017, contracting 1.2% year on year and coming in below market expectations.

“Although GDP growth was good in the first quarter of 2017, it was not reflected in retail sales during the same period. MIER (the Malaysian Institute of Economic Research) did not produce good indications during the period as well,” says Retail Group Malaysia managing director Tan Hai Hsin in an email to The Edge.

“We believe only certain public and private sectors contributed to this growth, including government expenditure, infrastructure, construction, information technology and export. As the growth was not broad-based, it did not benefit the rakyat.”

The Consumer Sentiments Index tracked by MIER has not breached the 100-point optimism threshold since 3Q2014. Nevertheless, it improved to 76.6 points in 1Q2017 from 69.8 in 4Q2016.

Where businesses are concerned, perhaps still fresh in the mind of Malaysian consumers is the closing down of South Korean bakery Tous Le Jours and cosmetics brand Nature Republic. Both closures happened abruptly. There was also the less-than-a-day closure notice by True Fitness in Malaysia, which caused public outrage.

Shortly after, consumers were again caught off their guard when South Korean barbecue restaurant Bulgogi Brothers and Michelin star Hong Kong restaurant Tim Ho Wan put up the shutters.

Interestingly, MIER’s Business Conditions Index climbed to 112.7 points in 1Q2017 from 81.2 in 4Q2016.

“All these years, even after the Goods and Services Tax was imposed in 2015, we didn’t feel that much of a difference in our business. But after this year’s Chinese New Year festival, we began to see a marked decline in consumer sentiment,” Oriental Group of Restaurants chairman Datuk Phillip Siew tells The Edge.

He adds, however, that while many F&B outlets have seen a drop in both headcount and average spending by customers, Oriental Group has been spared the double whammy. “The headcount in our restaurants is the same but the average spending of customers has declined somewhat. It’s kind of a slowdown for us and to counter that, we have to do more [to keep sales up].” Siew believes average spending is under pressure mostly in casual dining.

Economists opine that the Malaysian economy has definitely strengthened as the global economy is seeing synchronised growth. A reason why the more robust economy has not been felt by the layman is the lag in spillover, says Sunway Business School professor of economics Dr Yeah Kim Leng. “The rise in investments in terms of capital expenditure, wages and hiring has been happening in the last couple of months. It (sentiment) will take some time to catch up [with the economic indicators],” he says.

There is also the uneven growth of the various sectors of the economy. CIMB Research head of economics Michelle Chia says the notable acceleration in real GDP growth in 1Q2017 was due to the agricultural sector, particularly oil palm and rubber, which contributed heavily to the 1.1 percentage point uplift in headline GDP growth in 1Q2017.

“As palm oil and rubber production is largely based away from urban areas, the ‘trickle-down’ may have been more strongly felt by the rural population,” she reasons.

According to United Overseas Bank (M) Bhd economist Julia Goh, sentiment on the ground is mired in the rising cost of living while for companies, it is the higher cost of doing business and intensifying competition. “Consumers are more discerning now, even more so with costs having gone up. But I see no reason why products and services that are affordable and offer good value should not do well.”

A localised problem?

Restaurateur Siew admits that competition is tough in the F&B industry, causing the weaker businesses to fold. “But we (Oriental Group) are still planning to open two more restaurants in new malls in the Klang Valley this year ... there are so many new malls these days.”

Prof Yeah opines that the proliferation of malls in recent times has created an “oversupply situation”. “Competition is intense among them. I don’t think it’s necessarily a decline in overall demand as consumer sentiment has improved recently. But there are just too many players competing for the same demand.”

CIMB’s Chia attributes the woes of service-oriented industries like F&B and retail to higher commodity prices, which in turn increased raw material costs. The weaker ringgit in recent years, not to mention rising foreign labour costs and rents in Greater Kuala Lumpur, worsened the situation.

Siew agrees that labour is really hard to come by these days in the services industry. “Foreign workers aside, it’s so difficult to find local workers these days. The good ones have all left for other places like Singapore or Australia.”

According to Chia, the pattern of consumption may be changing because of the growing affluence of Malaysians. “Spending on services and experience-oriented consumption as well as new channels of retail consumption, such as e-commerce, are challenging traditional F&B and bricks-and-mortar retail outlets,” she says.

Malaysia Retail Chain associate president Datuk Garry Chua believes the recent closures could have been because the business models did not work in the local environment. “I think it is very important for foreign brands that come into Malaysia to look at their costing. The weaker ringgit means the prices of anything that is imported are going to be inflated. So, if you are not competitive, your products will be high-cost and you cannot mark up your margin too much because you will lose your competitiveness.

“The concept has to be right, the quality ... I was told some of the products brought in are not consistent with the overseas parent’s concept, not to mention names, but if they are not consistent in quality, they will have a lot of issues.”

Retail Group Malaysia’s Tan emphasises that closures, whether of local or foreign retail businesses, happen all the time. “The media just happened to highlight the recent ones. When they close down, other retailers take over the shops.”

There is some comfort in the fact that the recent business closures are not an “accurate reflection of the present economic situation”, as the economists put it. But a more pressing question is, when will the general public start to feel the spillover effect of the robust growth figures?

“If growth is sustained above 5% and unemployment continues to trend downwards ... wages also have to rise strongly because they are a key driver of consumption,” is Prof Yeah’s answer.

Others believe the spillover effect will only be felt by the broader economy in the later part of the year. In the meantime, it is likely that the man in the street will continue to question the contradiction between the latest economic data and his real situation.

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