Cover Story: Local retailers losing out to global brands

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THE declining profits of many listed retail players over the first nine months of the year are indicative of a major shift in consumer spending habits. Global brands such as H&M and Uniqlo, whose presence is firmly established after just over two years in Malaysia, have provided stiff competition for local apparel makers.

The additional marketing and rebranding expenditure by local retailers, such as Padini Holdings Bhd and Bonia Corp Bhd, has dented their profit margins, which could lead to a slowdown in their expansion plans and a revision to their future earnings expectations.

While prominent malls such as Sunway Pyramid and Suria KLCC continue to experience higher visitor traffic, some say most of the spending is at food and beverage (F&B) outlets than at local apparel stores.

A retail sector analyst with a bank-backed research house says the industry could be heading towards a down cycle. “There is a risk that we could see a slowdown due to the prevailing high cost of living as well as price inflation. Consumers will likely be more price-sensitive while remaining brand-conscious, which partly explains their preference for international brands.”

The upcoming Goods and Services Tax (GST) as well as the removal of fuel subsidy by the government are widely expected to have an impact on the prices of goods. As income growth has not risen at the same rate, the shortfall in disposable income will force consumers to become even more selective in their purchases.

An analysis of the revenue and net profit trends of several public-listed retailers up to Sept 30 shows a flattish performance over the previous four quarters (see Chart 1). During this one-year period, revenue seems to have stagnated on a quarterly basis, most likely due to intense competition and a lack of spending growth among consumers.

A greater concern would be the general decline in pre-tax profit for all six companies whose income peaked in the final quarter of last year (see Chart 2). Should the companies incur higher operating expenses while sales remain flattish, it is likely that they will experience further decline in income as well as an erosion of profit margins over the next few quarters.  

In its quarterly filing with Bursa Malaysia, Padini outlined the challenges ahead for it. “While the viability of the sector remains intact, pressures on margins brought about by an increasingly price-sensitive population of consumers, and by rising operation costs, will continue to bear on the profitability of the group’s business.”

More ominously, the latest quarterly results of Padini, Bonia, AEON Co Bhd, Parkson Holdings Bhd and OldTown Holdings Bhd have largely come in below analysts’ expectations. Kenanga Research analyst Soong Wei Siang, who has an “underperform” call on AEON, remains bearish about the sector over the medium term. “Retail will remain challenging in view of the soft consumer sentiment, which induced AEON to incur higher marketing expenses to stimulate the market. We remain negative on the group’s outlook as we do not expect consumer spending to recover amid a higher cost of living environment.”

On the other hand, global brands have outperformed local brands by a wide margin in terms of revenue growth. For example, H & M Retail Sdn Bhd reported revenue of RM181.71 million for its financial year ended Nov 30, 2013 (FY2013), or a nearly fivefold increase from RM38.52 million in FY2012. Likewise, Uniqlo (M) Sdn Bhd reported RM204.21 million in revenue for FY2013 compared with RM118.31 million in the previous year.

It is worth noting that H & M’s sales figures for FY2013 were derived from just seven stores. At present, Uniqlo operates 24 stores while Sharaf Fashion Retail Sdn Bhd, which carries the Forever 21 brand locally, reported a turnover of RM62.52 million for FY2013 from five stores.

Uniqlo has been profitable each year since making its debut in Malaysia. It reported a net profit of RM11.14 million in FY2012 and RM25.24 million in FY2013.

Sharaf Fashion Retail also reported a net profit of RM5.17 million for FY2012 and RM3.88 million for FY2013. While the figures remain relatively small compared with maturing brands such as Padini and Bonia, the tremendous revenue growth of the global brands could explain the local retailers’ flattish sales performance.

Be that as it may, food and beverage operators are faring better. For example, Berjaya Food Bhd reported a growth in earnings throughout the past year, mainly due to the contribution of its 50%-owned subsidiary Berjaya Starbucks Coffee Co Sdn Bhd (BSCC).

BSCC was fully acquired by Berjaya Food in April on the strength of its highly popular Starbucks brand. Its results for the financial year ended April 30, 2014 (FY2014), show RM301.36 million in revenue and RM34.98 million in net profit. By comparison, in FY2013, BSCC reported revenue and net profit of RM234.19 million and RM23.59 million respectively.

For OldTown Holdings Bhd, net income has remained fairly consistent despite pressures from increasing raw material prices and intense competition from speciality stores in the café segment. In its quarterly earnings filing, the group said it will continue to invest in new outlets and greater promotional and marketing activities.

As retailers are expected to incur additional expenses to strengthen their brands and grow their revenue in the coming years, their margins will face even more pressure going forward.

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