Cover Story: Higher traffic in malls but sales decline

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RETAILERS, which are bracing themselves for a tough year in 2015 once the Goods and Services Tax (GST) kicks in on April 1, were surprised to find out that retail sales had dipped earlier than anticipated, particularly in the third quarter of this year.

They also observe that consumers have not just been skimping on discretionary spending but on essential grocery items, including fresh food, signalling that things may be worse than anticipated, and that it could get yet worse.

In a previous report released by Retail Group Malaysia (RGM), retailers had projected an overall growth of 8% for July to September this year.

Those in the fashion and fashion accessories line had anticipated a 20.6% rise, department store-cum-supermarkets had projected an 8.8% increase, and department stores, 7.4%. Meanwhile, supermarkets and hypermarkets, and other speciality stores projected that they would grow 3.4% and 4.5% respectively.

However, the actual data may disappoint. Feedback gathered by The Edge from several retailers on their performance in the third quarter reveals that, with the exception of food and beverage outlets, all other retail segments have experienced a decline. For some, sales have slumped 30% compared with the same period last year.

RGM, which compiled its data using feedback from members of the Malaysia Retailers Association (MRA), is due to release the actual retail sales data for the third quarter by mid-December.

According to Mydin Mohamed Holdings Bhd managing director Datuk Wira Ameer Ali Mydin, like-for-like sales at his stores contracted in the six months ended Sept 30, 2014.

“For the first time in 25 years, overall same store sales are down,” Ameer tells The Edge, when asked if consumers are shopping less. The Mydin group operates several business formats, including hypermarkets, mini-markets and convenience stores.

“Our same store growth is down 5%. Everything is down. Even [sales] of basic [items] are down 3%,” Ameer says. Basic items refer to groceries that typically include essentials such as milk, Milo, sugar and flour. Mydin’s target market is the middle to lower-income group.

At fashion and accessories retailer Bonia Corp Bhd, managing director Datuk Albert Chiang says for the quarter ended Sept 30, sales at the group’s standalone stores contracted 5% while sales at its consignment counters (counters within department stores) grew only 1% compared with the same period last year.

A managing director of a listed retail company that deals in clothing, restaurants and accessories, who declined to be named, says business was down 2% in the first 10 months of the year compared with the previous corresponding period.

According to him, the worst months this year were April, May, June and October. “Spending during this Hari Raya season was not as good as last year,” he says of what is normally a strong sales period for retailers.

While it may appear that the parking lots at shopping malls continue to be full, this is not an indication that people are shopping.

Mall operator Tan Sri Teo Chiang Kok, whose family owns a controlling stake in the 1 Utama Shopping Centre, says retail tenants that have been hit hardest are those dealing in fashionable and non-essential items.

“There has been a 10% to 20% decline in sales in these categories over the past six months compared with the previous corresponding period,” he says. However, he notes that sales at food and beverage (F&B) outlets “are still holding, and so are multi-brand stores”.

“The large format and fast-fashion stores are growing too,” he says, referring to brands like Uniqlo and H&M.

Teo is a director of Bandar Utama City Corp Sdn Bhd, which owns and operates 1 Utama Shopping Centre. The mall has 2.1 million sq ft of net rentable area, and houses 700 stores, 130 of which are F&B outlets.

An interesting observation he shares is that the increase in patronage at the mall is not reflected in the sales volume.

“Car park entry increased 3% to 4% in the third quarter of 2014, compared with 3Q2013. Spending time at the mall is the cheapest form of family entertainment, as there is something interesting for each member of the family to indulge in and meet for a meal,” he says.

Other mall operators are witnessing a similar trend. “The (retail) market has softened this year. With the exception of food and beverage, [the decline] is pretty much across the board,” says H C Chan, CEO of Shopping Malls & Theme Parks at Sunway Bhd.

The Sunway group is set to be one of the country’s largest mall operators in the next few years, with about five million sq ft of net lettable area when all its malls are completed. Its current portfolio comprises Sunway Pyramid, The Mall at Jalan Putra, Giza in Kota Damansara and Carnival in Seberang Prai. It plans to build four more malls, and expand Sunway Pyramid.

What is causing the decline in retail sales?

Teo attributes the decline to a higher cost of living. “People are feeling poorer because the cost of living is rising. Hence, their budget for discretionary spending is reduced. Consumers are tightening their belts,” he says.

Data from the Malaysian Institute of Economic Research shows that the Consumer Sentiment Index (CSI) in the first quarter of the year was below the 100-point threshold at 96.8. The CSI is a barometer of consumer expectation for the next two quarters.

According to RGM managing director Tan Hai Hsin, retail sales in the months of September and October were affected by several factors, including consumers adopting a wait-and-see approach before the 2015 budget in October, on issues such as GST and incentives.

RGM’s figure includes all retail sales except big-ticket items such as cars and houses.

“On Oct 2, petrol prices increased unexpectedly. This led to consumers being concerned about their future prospects and rising cost of living,” says Tan, who has been observing and tabulating retail data since 1995.

“There are still doubts about GST. Consumers are not sure if they should buy now or later,” he explains, adding that sales were also affected by parents venturing out less often due to the year-end school examination.

Bonia’s Chiang too opines that consumers are cautious about their spending, particularly after the announcement of fuel subsidy rationalisation in Budget 2015 — even though there has been a drop in world oil prices — and the impending implementation of GST next year.

He expects that the once GST is implemented, prices will rise and this will further dampen consumer sentiment.

An indication that the cost of living has risen is the Consumer Price Index (CPI). In the first nine months, the CPI increased 3.3% to 110.1, from 106.6 in the first nine months of 2013. The CPI in July and August rose 3.2% and 3.3% respectively, while in September, it rose 2.6% to 110.7 compared with 107.9 a year ago.

Just in September, the food and non-alcoholic beverage index rose 3.2%, restaurant and hotels 4.8%, housing, water, electricity, gas and fuel 3.4% and health 3.4 %, indicating an increase in the prices of the indices’ various components.

Retail trends

After a rough July, August, September and October this year, retailers are hoping to see some recovery as the year-end sales, school holidays and festive shopping season begin. A slight dip is again anticipated in January 2015, before a sales spike in February for Chinese New Year shopping, and in March, before GST commences.

However, once GST kicks off, retailers expect that it could take up to six months before consumers get used to the tax and start shopping again.

Chan says while a spike in sales volume is expected, particularly in February and March, it would nevertheless be difficult to gauge the degree of push in sales pre-GST.

Tan points out that since the issues of rising cost of living, removal of fuel subsidy and oversupply of retail space have been ongoing since 2012, they will not cause a sudden drop in retail sales as they are within consumers’ and retailers’ expectations. However, the implementation of GST will have this effect, as it is a totally new policy and tax system. “Until now, consumers and retailers have little knowledge of this and how it will affect them from April 2015 onwards.”

RGM has forecast retail sales to grow 6% in 2015 and touch RM103 billion, from an estimated RM97.2 billion in 2014 but, Tan adds, “inflation is expected to rise about 4%. Therefore, the real growth may be around 2% to 3%”.

On whether retailers will see an impact from GST on their margins, Tan says this remains uncertain until nearer to April 2015, as they are unable to ascertain how much of the tax they will be able to absorb and by how much they can increase prices.

Meanwhile, the Malaysian Shopping Malls Association president Tan Sri Eddy Chen appears more optimistic. “The overall 2014 performance should not be worse than in 2013.” He expects the post-GST sales dip to level out after the second quarter. “However, much may depend on consumers’ perception of local and economic uncertainties,” he says.

In order to cushion the decline in sales, retailers are expected to boost sales and promotions. Chiang, for example, says Bonia will carry out more in-house promotions or fairs during the year-end festive season, as well as pre-GST sales events, should the government allow it.

Mall operators are also expected to do their bit to lure shoppers and encourage them to spend. “Malls will have to be even more innovative in their marketing campaigns and provide more specialised services to attract shoppers,” Chen says.

Just a blip — sentiment remains positive for the next decade

Joyce Yap, president of BBKLCC Tourism Association Kuala Lumpur, says while the decline may be as high as 30% for some retailers, for those within the BBKLCC, the decline is only 3% to 5%. She attributes this to the slowdown in business as a result of a reduction in tourist spending, inflation and sales in the third quarter.

She goes on to say the disasters of Malaysia Airlines MH370 and MH17 have had a bigger impact on shops in BBKLCC compared with malls in suburban areas, which are probably more sensitive to inflation. Contribution from tourist shopping is down 5%.

Even so, Yap views the current decline as just a blip.

“During a recent ICSC (International Council of Shopping Centers) meeting in Singapore, the message was that sentiment on Southeast Asia for the next 10 years is positive. Malaysia, in particular, is interesting to observe due to its strategic location, increase in the number of middle-income earners, and its lower cost of business. The engine of growth is still Asia and the Malaysian market is still good.”

This article first appeared in The Edge Malaysia Weekly, on December 1 - 7, 2014.