According to Retail Group Malaysia, the retail industry is expected to grow 3.9% this year. Photo by The Edge
THE retail industry is going through turbulent times, thanks to the implementation of the Goods and Services Tax, the sluggish economy and the depreciation of the ringgit. But, is there light at the end of the tunnel?
Most retail consultants and property experts tell City & Country that the situation will get worse before it gets better, with some hoping for a turnaround by year end.
“This year, we will see some price adjustments because the weaker ringgit has made some products dearer,” says Allan Soo, managing director of Savills Malaysia.
According to Tan Hai Hsin, managing director of Retail Group Malaysia, the retail consulting firm had initially forecast that the retail industry would grow 5% this year, but in its March report, it was revised to 3.9%. “The retail market will
remain very weak in the next few months. We have witnessed a higher rate of shop closures across the country in the past one year. The occupancy rates of newly opened shopping centres were also poor in the last six months. Many new commercial centres are experiencing poor take-up rates as well,” he says.
Lou Minn Yian, head of commercial real estate at LaurelCap Sdn Bhd, forecasts “an estimated overall sales growth of 1% to 2%”.
“As most branded products are imported in US dollars, a weaker ringgit means higher prices, thus reducing consumers’ purchasing power,” she says.
However, according to Kavita Rekhraj, Deloitte’s consumer and industrial products leader for Malaysia, a “rebound in headline economic growth in the latter half of the year” is expected and “rising consumer incomes are expected to underpin the expansion in retail sales”. Growth is expected to be between 3% and 5%.
“The largest contribution to growth will continue to come from online shopping,” she says.
Datuk Garry Chua, president of the Malaysian Retail Chain Association (MRCA) believes that the retail industry will get a boost from Chinese tourists this year. “I expect stronger growth this year. We’re expecting another one million Chinese tourists, based on Tourism Ministry estimates, for a total of three million this year. It could be more, depending on the strength of the ringgit and how we promote our country. Being a value-for-money shopping destination and having beautiful tourist spots, we expect better results this year.”
Chua, who is also the founder and group managing director of Rotol Group, adds that most Chinese tourists spend RM3,500 to RM4,000 per trip, which is a substantial amount.
On what MRCA members are doing to weather the tough times, he says some are rationalising their business while others are collaborating with other brands.
Malaysia Shopping Malls Association (PPK Malaysia) president Tan Sri Eddy Chen says while sales of fashion goods have slowed, the food and beverage sector is still doing well.
“Many malls thrive on the F&B business — food and beverages are something people will continue to pay for. Furthermore, food and beverages at malls are cheaper than at boutique restaurants. Also, there is a wider variety ... 40 to 50 types of food at a food court,” he says.
Chen, who is also the managing director of property development company MKH Bhd, reveals that the bigger malls in good locations with critical mass in the Klang Valley are doing well, as are some suburban malls.
Strategic decisions needed
As a result of the slowdown, retailers and landlords have to come up with strategic plans to ensure they stay afloat.
Savills’ Soo says, “Retailers will have to make some price adjustments in view of the depreciation of the ringgit. Then, they have to consider the supply [of space] coming onto the market as more malls are completed, which could lead to sales dilution in competitive areas. After that, you have to look at inflation, which reduces consumers’ disposable income. So, you have to start looking at, if you are able to, offering discounts.”
According to research by Savills, the supply of mall space in the Klang Valley as at end-2016 was 60.2 million sq ft.
This year, 2.95 million sq ft is expected to come onstream. Among the malls that opened recently are MyTOWN (1.1 million sq ft) and KL Gateway Mall (400,000 sq ft). Those scheduled to open later this year include M Square (380,000 sq ft), Melawati Mall (620,000 sq ft), Four Seasons Place (200,000 sq ft) and Evo Mall in Bangi (251,000 sq ft).
Soo’s advice to landlords is simple: attract more traffic. “The landlords have to work hard to attract customers with more promotions ... actively searching for and engaging with shoppers, perhaps via social media,” he says.
LaurelCap’s Lou says retailers need to use accurate research data to better position their business. “Proper market research and feasibility studies are vital to find a demand-supply equilibrium. Retailers should pay more attention to affordable goods rather than mid to high-end products this year.”
She adds that landlords need to work hard to retain tenants. Rents may need to be lowered initially but can be adjusted accordingly over time. A good tenant mix and an efficient management are vital to attract shoppers.
“Landlords should ensure washrooms, car parks and so on are in good condition for the comfort of shoppers. Some older malls are losing their market share to newer or refurbished ones,” says Lou.
Retail Group Malaysia’s Tan says landlords should “ensure their tenants have sufficient sales to ride the current economic situation”.
“While the landlords may offer temporary rental incentives to the tenants, the latter must play their part by working hard to get shoppers to buy,” he adds.
Deloitte’s Kavita believes retailers need to look at the headwinds on two fronts. The first is the macroeconomic situation where “heightened global financial stress, exacerbated by a depressed ringgit, will continue to dampen consumer sentiment”.
The other front is the tech-savvy consumer. “The tight economic situation will drive more consumers to go online to find the best price,” Kavita says, adding that retailers need to “strategise and customise their digital offerings to serve their diverse customers”.
While consumers may be looking for good deals online, they also want a good shopping experience. Hence, Kavita advises landlords to constantly upgrade their space to remain competitive and carry out more activities to promote their malls.
“As the Klang Valley in particular is becoming more urbanised, shopping malls need to keep up with maintenance to remain attractive and bring in new retailers and brands to refresh their tenant mix and attract shoppers from all over,” she says.
PPK Malaysia’s Chen believes that mall managements need to change the way they do business, for instance, bringing in businesses that do not usually operate out of malls such as logistics companies, online outfits and educational institutions.
The growing appeal of online shopping is giving bricks-and-mortar stores and malls a headache. However, it does not mean that this could mark the death knell for the conventional retail business as e-commerce penetration is low.
“E-commerce penetration in Malaysia now is below 5%, but is fast increasing, driven primarily by mobile commerce,” says Kavita. “According to Deloitte’s recent report, The new digital divide: The future of digital influence in retail, 56% of in-store sales globally are influenced by a digital interaction. When we include the primary source of growth in retail — online sales — the impact of the digital influence is even greater. So, online shopping can only help drive sales.”
While online shopping may be still slow-going, some brands are already looking at capitalising on this untapped market.
“Online retail is on the rise among the younger generation. They are comparing and researching, and as a result, sales of some brands have gone up,” says Soo. “One of the fast fashion brands (which he is unable to reveal) will be launching its online sales app this year. And this means you can buy clothes using your phone. Once they start doing that, they obviously have to make sure their RFID (radio-frequency identification) technology is capable of handling the additional sales channel properly so that the customer doesn’t face the problem of having to wait long for purchases to arrive.” Soo believes shopping apps will be the norm in the near future.
Lou says PricewaterhouseCoopers’ Total Retail 2016 report reveals that “online shopping is gradually become a new trend among Malaysians, with at least half of consumers making online purchases at least once a month”.
Also, Southeast Asian countries are leading the way in the use of mobile phones to make purchases — 66% of consumers in Malaysia and Singapore, and 73% in Thailand. The world standard is only 54%, she says.
She adds that online shopping will make an impact this year as more purchasers are drawn to good offers.
Chua believes e-commerce is the way forward. “The government is setting up the Digital Free Trade Zone this year with Jack Ma as adviser. So, MRCA is riding this. We have formed a committee to work closely with the government. Some of our members have already gone online, like Bagman, and even major players like Tesco and Padini, and they are seeing positive results.”
According to Chen, e-commerce is moving along rather slowly in Malaysia and will probably pick up steam in the next five years. “What is impeding the growth of e-commerce [in Malaysia] is the payment system. Fintech (financial technology) is not well developed here compared with China, where you can pay via WeChat.”
WeChat is a Chinese social media mobile application developed by Tencent Holdings Ltd.
REITs hold steady
Those who have invested in real estate investment trusts (REITs) with malls in their portfolios may be feeling uneasy. However, they have little to worry about.
“We are not expecting significant growth, but most [REITs with malls] should be stable as many of them under our coverage are facing minimal lease expiry this year,” says Sarah Lim, head of equity research at Kenanga Investment Bank. “Additionally, landmark malls tend to perform better due to their location and tried-and-tested tenant mix.”
“We continue to see sustainable rental income from retail components for established shopping malls for REITs under our coverage,” says Lee Meng Horng, an equity research analyst at Hong Leong Investment Bank Bhd.
“Although rental reversions are coming off the cliff a bit, it is still in positive territory, indicating that major retail operators are making money, albeit at a lower margin.”
According to Malaysian REIT Managers Association chairman Datuk Jeffrey Ng, who is also CEO of Sunway REIT Management Sdn Bhd, REITs are doing well so far.
“Retail-centric REITs are likely to continue to enjoy growth, both organic and inorganic. We believe they will have a busy year ahead with their various asset enhancement and asset management initiatives,” he says.
“We may see more acquisitions as the yield expectation between sellers and buyers is likely to narrow during challenging times. This increases the probability of sealing deals if they are yield accretive to the REITs.”