Increasing wages in Myanmar mean rising discretionary spending

With a thriving economy and a youthful, burgeoning middle class, Myanmar is poised for rapid growth in retail spending. In the four years since the nation’s emergence from a lengthy period of economic isolation in 2012, disposable incomes have increased rapidly, and a handful of local retailers have stepped up their operations to meet rising demand for fast-moving consumer goods (FMCGs), automobiles and other retail products. According to the Myanmar Retailers Association (MMRA), from 2012 to the end of 2014 the retail sector expanded by 7-15% per year, in line with overall GDP growth in excess of 7% over the same period. “Our only constraint at the moment is production capacity,” said Christoph Steinwehe, CEO of domestic drinks manufacturer Lo Hein Company (LHC). “On the demand side we see huge potential.”

Hurdles

Nonetheless, the local retail sector faces challenges. For example, the FMCG segment, which has been touted as a key growth area in recent years, is dominated by small-scale retailers, which operate primarily out of informal kiosks, groceries, convenience stores or traditional “wet market” stalls. These sites accounted for 90% of FMCG sales in recent years, according to MMRA estimates. The remaining 10% was generated by Western-style supermarkets, which are a relatively new development in Myanmar. Boosting this figure will require new, high-quality retail space, a large amount of financing, and investment in workforce development and training. “Building our employee base is a key challenge,” said Ronald Lee, a project director at City Mart Holding (CMHL), a local retail conglomerate. “We need more investment in education and teacher training in Myanmar.” Other hurdles facing retailers include the depreciation of the kyat, weakening consumer sentiment over 2015 and rising rents, particularly in Yangon.

Expansion

Despite these and other hurdles, most local retailers expect to see considerable expansion for the foreseeable future. According to the World Bank and the UN, per capita income in Myanmar rose from just under $800 per annum in 2010 to nearly $1200 by the end of 2014, an increase of 50%. Rising purchasing power has seen the spending habits of some more affluent consumers shift towards international retailers and brands. Assuming that current restrictions on foreign investment in the sector are liberalised in the coming years – as they are widely expected to be – domestic retailers will likely see increased competition from international players, which has the potential to benefit consumers.

In Numbers

While the retail market has posted substantial expansion in the past half decade, it began from a low base, and has yet to catch up to its regional peers. With GDP per capita of around $1300 in 2014, according to CMHL, purchasing power among locals was well below that in neighbouring Vietnam, with GDP per capita of $2000 in 2014, and Thailand, at $5900. Given these disparities and Myanmar’s positive indicators, most domestic retailers expect to see a high rate of growth across numerous business lines for the foreseeable future.

According to CMHL data, in 2010, just after the country’s current economic liberalisation drive began, 71% of consumer spending, measured as a percentage of real GDP, went toward necessities like food; while 13% went on semi-necessities, such as household products, health care and utilities; and 14% went toward discretionary spending, which includes personal items, recreation, education, cultural activities, transportation and communication.

However, by 2014 around 33% of monthly household expenditure went toward food and groceries, around 35% went toward semi-necessities and the remaining 32% was spent discretionally, according to survey data from Nielsen, a US-based market research firm. Given that these two sets of data (2010 and 2014) came from different sources and were calculated in different ways, comparing them directly is problematic. Nonetheless, the striking shift in consumer spending habits over a relatively short period of time suggests a positive trend.

Rapid growth in the telecoms and IT sectors also points toward rising consumer expenditure. As of mid-2015 household mobile penetration was at 44%, according to Nielsen, and this jumped 19 percentage points in 2014 alone. Some 81% of mobile phone users communicate with SMS, 24% are active on social media and chat applications, and 20% browse the internet on their phones. Rising uptake in telecoms usage is widely considered to be a major advertising opportunity for local retailers.

Key Players

CMHL, which launched its first supermarket in 1996, is Myanmar’s largest retail chain. The privately owned firm operates various brands, including City Mart Supermarkets, Ocean Super-center (large-format hypermarkets), Seasons Bakery and Café, Popular Bookstores, City Care pharmacies and City Express convenience shops. Additionally, City Mart operates six shopping centres, each with more than 100,000 sq feet of leasable retail space, plus 10 smaller neighbourhood centres, which vary in size from 16,000 to 30,000 sq feet. Since 2014 CMHL has been expanding into smaller urban areas that remain underserved by modern retail outlets. In October 2015 the firm announced that it had secured a $25m investment from the International Finance Corporation, which will finance the bulk of the retailer’s $46m expansion plans.

In addition to new hypermarkets in regional centres like Bago, Mawlamyine and Monywar, CMHL plans to construct a handful of new hypermarkets and supermarkets in Yangon to meet continually growing demand. According to CMHL, as of 2014 the company’s brands accounted for more than 50% of modern retail space as measured by selling floor area and for more than 66% of branded FMCG goods, although these numbers may have changed.

Other major domestic retail players include LHC, UMG Myanmar, the Ga Mone Pwint Group (GMPG) and Seing Gay Har. LHC, the largest bottled water manufacturer in Myanmar, also produces carbonated soft drinks and energy drinks. UMG, a local conglomerate, which established its Win Food brand in 2013, oversees the Wasuka wafer brand in Myanmar, in addition to manufacturing tapioca-based snacks. GMPG, meanwhile, was launched in 1991 and currently operates four department stores in the country, aimed at middle-income consumers.

Diversified Businesses

Most of Myanmar’s leading retailers were either launched under a conglomerate or have worked to diversify their business lines recently. In addition to its retail operations, for example, CMHL operates a major internal logistics business to ensure it can maintain a steady supply of products. “Logistics are two to three times more expensive in Myanmar than in neighbouring countries, due largely to the poor quality of the roads and other transport infrastructure,” Lee told OBG. “Consequently, all major retailers run their own logistics operations here.” The Lo Hein Distribution Company, an independent subsidiary of LHC, provides logistics and distribution services to its parent company, but also as a business to third-party clients.

UMG, meanwhile, was established in 1998 as a construction equipment distribution company. In addition to its food business, today the firm is active in mining, financial services, property development, telecoms, information technology and education.

Quality Space

A key hurdle to continued retail expansion is a widespread lack of high-quality retail space. According to Collier’s International, demand for grade-A retail space has been strong in recent years, with vacancies of just 3-5% pushing up rents, particularly in Yangon, which is home to the bulk of Myanmar’s retail establishments.

At the end of the first half of 2015 Yangon had approximately 150,000 sq metres of leasable retail space. Though no new space has come onto the market since early 2014, a handful of malls have been refurbished, and a raft of new projects are under way, a number of which will likely be completed early in 2016 (see Construction & Real Estate chapter).

As the quality of retail property continues to improve in the coming years, and given Myanmar’s large population and rising incomes, international retailers are increasingly likely to enter the market. A key future demand driver for high-quality space in Yangon, in particular, is international food and beverage franchise restaurants, according to Collier’s.

According to the McKinsey Global Institute, rising discretionary expenditure and increased market efficiencies could push consumer spending in Myanmar to more than $100bn per year by 2030, which would represent a near-tripling of the current figure of $35bn. “The middle class has grown rapidly and incomes have risen dramatically,” Lee told OBG. “While it will take time for a full-fledged consumer society to develop here, the process is under way.”

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The Report: Myanmar 2016

Industry & Retail chapter from The Report: Myanmar 2016

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