2016 RETAIL OUTLOOK: Rounding up 2015 and looking ahead to 2016

Rising operating costs, lower sales and an increasingly competitive environment continued to plague retailers in Singapore and Malaysia in the last quarter, eroding the performance at many retail establishments in the two countries.

Meanwhile, retailers in the Philippines are getting into expansion mode while Thai retailers prepare to brace themselves with the onslaught of drought. In India, foreign retailers are encouraged by the more relaxed government regulation.

Malaysia and Singapore retailers hit by declining sales
In Singapore, the slew of corporate results announced recently included third-quarter losses suffered by companies like Isetan, Metro and FJ Benjamin.

Isetan (Singapore) reported its third straight quarter of losses. Its loss after tax of S$6.1 million (US$4.4 million) for the three months ended September this year was more than double the loss of S$2.9 million in the same quarter last year. Its second-quarter 2015 loss stood at S$5.8 million.

The Japanese store’s sales in Singapore for the third quarter fell by 14% from a year ago to S$68.7 million.

It was hurt by lower sales at all of its stores, with the exception of Isetan Jurong East, and the closure of Isetan Orchard at the Wisma Atria shopping centre.

“Moving forward, the slower economic growth may impact sales, and the trading environment is expected to remain very competitive among retailers,” said Isetan in a statement accompanying its results.

Much of the same story was repeated at Metro and FJ Benjamin.

Singapore retail and property developer Metro Holdings’ retail division recorded an operating loss of S$2.1 million for the fiscal second quarter to end-September, compared with S$1.2 million a year ago.

Its net profit for the three months ended September this year fell from S$60.6 million in the same period last year to S$18.6 million.

Metro attributed its higher operating loss to high costs incurred on the new Metro Centrepoint store which commenced operations late last year.

Operating conditions have also been difficult. The company’s chairman, Winston Choo, said the outlook remained challenging, “especially with the competitiveness in the industry discounted trading environment and high operating costs”.

Metro also expects sales to remain affected by the makeover being carried out at its Centrepoint outlet since May this year.

Over at FJ Benjamin, whose lines include Gap, Guess and Bell & Ross watches, there was a net loss of S$5.5 million in the fiscal first quarter ended September — compared with a net profit of S$1 million in the same period a year ago.

Higher discounts given by its timepiece wholesale business and a lack of one-time gains were the main reasons behind the weaker performance.

The firm had booked one-time gains of S$7.2 million from the sale of property and mandatory convertible bonds in the period a year ago.

FJ Benjamin’s group revenues fell by 15% to S$63.7 million in the three months to end-September, although operating losses were halved to S$3.2 million from S$6.5 million a year ago.

CEO Nash Benjamin expects consumer sentiment to remain muted in the mid-term. In response, the company will continue to proactively manage its brand portfolio and right-size its operations.

Meanwhile, Singapore bakery and food court operator BreadTalk also announced a weak set of results. Its net profit for the third quarter ended September this year plunged by 60% to S$1.6 million from S$3.9 million in the same period last year.

Net profit for the first nine months to end-September declined by 23% to S$6.5 million.

Revenues rose by 4.7% to S$162 million.

In addition to a poorer performance at its bakeries, the group was also hit by higher costs in China and Singapore. Earnings also fell due to higher depreciation expenses associated with newly-opened outlets that were still under gestation.

BreadTalk emphasised, however, that its bakery division was in the process of implementing new strategies to improve profitability. This included addressing underperformance in areas like Hong Kong and Malaysia.

BreadTalk operates bakeries as well as food outlets such as Toast Box and Ramen Play, and the group also has rights to franchises such as Din Tai Fung in Singapore and Carl’s Jr in China.

In Malaysia, Parkson Retail Asia director Datuk Magic Lee said at a media briefing that the group’s sales could fall by as much as 15%. Results were hit by not only the implementation of GST in Malaysia but also by the ringgit’s heavy devaluation.

The department store operator has invested RM100 million (US$237 million) to rebrand and reposition itself. It intends to enter new categories — such as gourmet food, supermarkets and beauty — and import new fast-fashion brands. Variations of this reform will be introduced into its operations in other countries such as Vietnam, Indonesia, China, Myanmar and Cambodia.

It plans to launch three affordable fast-fashion brands from Korea soon. The brands are Spao, Mixxo and Who.A.U. Parkson aims to build a portfolio of about 100 brands (expanding from its existing 35 brands) in its apparel offer while continuing to open new stores throughout the region. Also in its plans are four stores in Malaysia, three to five outlets in Indonesia, two in Myanmar and one in Cambodia by 2016.

While consumer sentiment is expected to remain weak in Malaysia, Lee hopes the rebranding campaign will fuel at least a 50% increase in sales year-on-year (YoY).

Meanwhile, for its China stores, Lee expects sales to remain negative due to competition from online retailers. Lee also notes the challenge of offline retail platforms facing higher taxes for branded products compared to online retail.

Parkson had closed one store in Zhengzhou, China, on September 30 after only a year of operation. However, it plans to open a new concept shop in December 2015 through a joint-venture partnership. The group operates 60 stores across 34 cities in China as of 30 June 2015.

The Philippines, a growing retail hotspot
In the Philippines, buoyed by the country’s Q3 results, the Philippine Retailers Association (PRA) remains positive that a 6.5% GDP growth by end-2015 as projected by the government is attainable. The country’s GDP growth was the third fastest among Asian countries, next to China’s 6.9% and Vietnam’s 6.8%.

“The Philippine market is seen as one of the thriving markets in the region, especially as we have a consumer-driven economy with a growing young population, who are mostly in the labour force.

“These young professionals, called the Millennial generation, are mostly the ones who have high disposable incomes and the top spenders. They are the ones who dictate the current consumer trends and pattern.

“Hence, most of the challenges and opportunities in the retail scene are rooted and directed at them,” says Roberto S Claudio, PRA’s vice-chairman for International Relations and Toby’s Sports’ chairman.

According to Claudio, the rise of the digital age and the mobile generation has seen a surge in online stores in the Philippines. The challenge though, would be the slow and unstable Internet connection in the country.

The challenges of bureaucracy and corruption do not deter foreign companies from entering the market. Slated as the 12th largest population in the world with more than 100 million consumer and a consumption-driven economy, this makes business lucrative for foreign companies. The country has risen to become the highest growing country in retail growth, compared to Thailand, Malaysia, Indonesia and Vietnam.

Driven by a strong consumer generation, the country has attracted many British retail brands. According to UKTI, there are more than 200 British companies operating there. Some of the long-time British retail brands operating in the Philippines include Clarks, The Body Shop, Marks and Spencer and Topshop. In recent years, Costa, TM Lewin, Waitrose and Tesco have also entered the Philippine market.

Swedish retailer H&M entered the market last year, and is opening 13 more stores by the end of this year. Zara (owned by Spain’s Inditex), Uniqlo (owned by Japan’s Fast Retailing), as well as convenience store chains such as Japan’s Lawson and Family Mart and Indonesia’s Alfamart, have presence in the country too.

A Nielsen report cites the number of supermarkets in the Philippines to have grown by 53% to 644 from 2012 to mid-2015. Additionally, convenience stores in the country are anticipated to increase by 60% to 2,280. This number is expected to double by 2018.

SM’s new City Seaside mall in Cebu City is the second largest mall in the country with 470,468sqm of floor space. SM’s Philippine mall portfolio consists of 53 malls, and is anticipated to increase to 75 by 2018.

Also opening a new mall, its third in Cebu City, is Robinsons Land, the retail and property arm of JG Summit. Robinsons Land has 40 malls in the country and looks to open 10 more malls by 2017.

Other players are DoubleDragon Properties, Ayala and Puregold Price Club. DoubleDragon Properties is set up and co-owned by Jollibee Foods owner Tony Tan Caktiong. The company has launched the first of planned 100 CityMall outlets in March this year, to be completed by 2020.

Meanwhile, Ayala and retailer Puregold Price Club, in a joint venture, launched their first Merkado supermarket in July this year, with plans for more in the country.

“The Philippine market is seen as one of the thriving markets in the region, especially as we have a consumer-driven economy with a growing young population, who are mostly in the labour force.” — Roberto S Claudio, Vice-Chairman for International Relations, The Philippine Retailers Association

As for Metro Retail, it has recently launched its IPO to finance its ambitious next phase of expansion. In a tough economic climate, it has issued its share at a lower price offering. Metro plans to open seven new stores in 2016 and have identified 30 sites for its expansion in the next three years.

It has set its sights for 80% of its expansion to be in the Visayas region. Majority of its stores will be hypermarkets. Others will be department stores and supermarkets. It is also looking to acquire retail stores to operate under the Metro brand.

Metro Retail, founded by the Gaisano family, opened its first store in Cebu City in 1982 and currently owns 46 hypermarkets, supermarkets and department stores. It plans to open 10 outlets every year.

Thailand retailers impacted by drought
With the agriculture industry employing 32% of the Thai labour force, the drought’s side effects are impacting other industries in Thailand, including retail.

According to Jariya Chirathivat, president of the Thai Retailers Association (TRA), the Thai retail economy in the third quarter of 2015 expanded by 2.8%, a drop from 3% in 2014 YoY. In the first half of 2015, the Thai economy grew by 3%. It is expected to round up at 2.9% in the year-end, a drop from 3.2% in 2014 YoY.

“It is forecasted that the retail sector will increase by 3.2% in 2016 and will double to 6% in 2017 due to the high investment in infrastructure by the government and private sector.” — Jariya Chirathivat, President, Thai Retailers Association

Chirathivat says: “By 2016, retail growth is expected to be contributed by, firstly, government expenditure and investment which will continue to expand from the third quarter of 2015; secondly, the remarkable growth of the tourism sector; and thirdly, low crude oil price and inflation which increases purchasing power.

“Nonetheless, the retail growth in the year of 2016 will face major constraints from low agricultural prices in the global market, and the impact from drought.”

Major supermarkets in Thailand are experiencing losses. Big C Supercenter, Thailand’s second biggest hypermart chain following Tesco PLC, experienced the largest drop with a 5.2% decrease in Q3 YoY same-store sales growth (SSSG).

However, one company is standing steadfast. CP All, owned by billionaire Dhanin Chearavanont, has managed to maintain its sales numbers. CP All is the operator of Thailand’s 7-Eleven stores. Its strategy to forge ahead with the expansion despite the country’s economic climate is paying off, helping to balance out and make up for its existing stores’ slower business. CP All’s same-store sales rose by 1.6% in Q3. It plans to open at least 600 stores every year and aim to have a total of 10,000 stores by 2018.

“It is forecast that the retail sector will increase by 3.2% in 2016 and will double to 6% in 2017 due to the high investment in infrastructure by the government and private sector. The segment that will enjoy growth are upscale supermarkets due to the growth in tourism and the increase in upper middle-income consumers who hold strong purchasing power.

“Although the growth of the retail sector will not grow by double digit as it used to, the expansion of stores is still ongoing. TRA expects the number of stores will increase by around 15% in 2015 from 2014 YoY,” says Chirathivat.

India relaxes regulations for foreign retailers
On November 10, the Indian government announced a series of aggressive measures to attract foreign direct investment. Most importantly, it eased the local sourcing requirement for international retailers looking to expand into India.

The actions show Prime Minister Narendra Modi’s determination to move forward with economic reforms. In particular, the reforms are expected to remove much of the unhappiness retailers have, especially with the contentious sourcing ruling.

India is one of the fastest-growing economies in the world. As of November this year, economic growth was projected to remain robust at around 7.25%, according to the Organisation for Economic Cooperation & Development (OECD).

The country has drawn renewed interest from international investors, and fund inflows have been surging. In the first half of this year, India received US$19.4 billion of foreign direct investment, an increase of 30% from the same period last year.

Hopefully, the new measures will enable India to increase this inflow of investments, especially with regards to the global apparel market.

At present, the country’s share of this market is close to 4%, compared with 35% for China and 6% for Bangladesh.

Companies have also been looking more towards sub-Saharan Africa and new Asian locations such as Cambodia, Vietnam and Myanmar as upcoming hubs of apparel sourcing rather than India.

Part of the problem stems from India’s clause on mandatory sourcing, part of its single-brand retail policy.

The latest move by the authorities is therefore timely in creating a retail resurgence, making India an easier place for retailers to operate.

The ruling stipulates that a company with more than 51% in foreign direct investment and seeking to operate under a single-brand banner must purchase 30% of the value of their merchandise from domestic suppliers.

While they are still required to purchase that minimum amount, retailers now have more time to meet this obligation. They can do so within five years from the date they open their first store in India, instead of previously, when they had to comply with the ruling within five years of getting incorporated in the country.

In addition, single-brand retailers will be given the opportunity to sell their merchandise online.

The change will enable single-brand retailers like Ikea to expand more aggressively and in a less cumbersome manner.

Swedish retailer Ikea had been lobbying for years for the change. Now that the sourcing rule has been relaxed, Ikea expects to open its first Indian branch in 2017. The company has big plans and intends to open over 20 stores in India by 2025 as a mid-term goal.

Swedish H&M, the first fashion label to open a singlebrand retail store in India through the 100% foreign direct investment programme, opening its first store in Delhi in October this year, with the second store opening this month. Its third store will open in Bengaluru next year. The company aims to open 50 stores in the country. As its business in the country expands, it plans to increase its local sourcing along with it. India is H&M’s 60th market.

Meanwhile, Walmart is eyeing Punjab for its 22nd store in India. It plans to open 50 wholesale outlets in India in the next four to five years.