Room for growth in Thailand's luxury good segment

Thailand’s continued economic success, relatively young and increasingly affluent population, well developed urban infrastructure and its status as a popular tourist destination have all coalesced to make the country a premier market for luxury goods on par with other regional commercial centres such as Hong Kong or Singapore. Yet Thailand, and specifically Bangkok, also maintains a unique advantage in the high-end goods sector as Thai retailers can offer goods from the same premium brands offered elsewhere at a more competitive price due to lower overheads compared to other regional capitals. As a result, Thailand has developed into one of Southeast Asia’s largest luxury goods markets, ahead of Malaysia, Indonesia and the Philippines, with total luxury goods expenditure reaching $2.5bn in 2014.

A Sizeable Target Market

Similar to many developing markets across Asia, Thailand boasts a relatively youthful affluent middle and upper class, providing a large target market for luxury goods. As of 2014 the 30-34 age bracket comprised the largest share of the Thai population earning an annual gross income of $150,000 or more, accounting for 20.5% of the prized income group, with the 35-39 age demographic accounting for a another 18.6%, according to Switzerland-based Digital Luxury Group.

These high income levels combined with low housing costs allowed Thai consumers to benefit from some of the highest levels of discretionary spending in 2014 as a proportion of total consumer expenditure of all major markets in the region, a key factor in determining luxury spending.

This demographic sweet spot is the amalgamation of a population bulge stemming from the baby boom of the 1970s (in 2014, thirty-somethings made up 15.4% of the total population) coupled with the rising affluence of the country as a whole and the emergence of a burgeoning middle class. This window of opportunity will remain open for years to come, as the same age groups are projected to lead the top annual gross income bracket through 2030, albeit as a slightly smaller proportion, as population ageing gives older demographics a greater presence in this group and dilutes the shares of the younger age brackets. In 2030 the 30-34 age group is still projected to make up 18% of the population earning $150,000 or more in gross annual income with a further 17.3% present in the 35-39 age band.

The net result of these socio-economic trends has significantly boosted discretionary spending patterns in Thailand over the past decade, providing ample prospects for retailers working in high-end consumer goods. These opportunities extend outside of traditional goods and into services as well, with affluent Thais increasingly seeking out luxurious dining and entertainment experiences. These include high-end accommodation, international gourmet restaurants, luxurious cruises, and luxury cinemas and spas all catering to the domestic market as well as high-end tourism and business travellers. In-store VIP customer services are also popular for high-net-worth individuals, which provide exclusive customer service served by well-trained and professional salespersons.

As the quantity of money spent on luxury goods increases, demand is also becoming ever more fragmented, providing opportunities for new competitors to muscle in on the market. New brands continued to penetrate the Thai market in 2015, including Dior Homme, Jimmy Choo, Tiffany & Co, Roger Vivier, MCM, Roos and Alexander Wang in addition to the opening of new flagship stores and the larger boutiques for premium brands such as La Mer, Charriol and Paul Smith.

Prime Real Estate

In addition to favourable domestic demographics, Thai luxury good sales are also driven by a significant number of affluent tourists, particularly those from mainland China who have developed reputations as big spenders when travelling abroad. Attracted by relatively lower prices compared to other major regional commercial hubs along, many foreign visitors tend to frequent Bangkok’s numerous shopping districts, often in conjunction with destination vacation trips utilising the country’s well-established tourism industry. With half of the world’s 10 most expensive global retail markets located in the Asia-Pacific (Hong, Kong, Tokyo, Melbourne, Sydney and Beijing), Thailand is a well-stocked yet less expensive alternative.

Attractive Market

 “Thailand remains an attractive country for global luxury brands as the cost of investment here is about half that of some neighbouring destinations,” Kriengsak Tantiphipop, CEO of high-end shopping complex The Emporium, told local press in May 2015. “During the last two years, more than 100 new global brands have entered Thailand. That has approximately doubled the number of stores [in this category] compared with 2012,” said Kriengsak, who noted that the top brands were largely from Italy, the UK, Australia, Japan, Hong Kong, Singapore and Sweden.

Operational costs for retailers in the region have surged in recent years due to the increased competition in the expanding retail segment, driving up wage and rent growth rates in the Asia-Pacific region far faster than the global average.

According to figures from the International Labour Organisation, real wages in Asia increased by 60% from 2005 to 2013, more than three times as fast as the global average which expanded by less than 20% over the same time period.

In addition to the direct financial costs associated with this growth, this trend also poses challenges in recruitment and retention in the luxury retail sector as competition for skilled frontline salespersons intensifies. At the same time, retail rent in prime locations has spiked dramatically with around two-thirds of major cities within the region recording double-digit growth in rents in 2014 compared with 2009. Since 2002, property consultant CBRE’s Asia-Pacific Prime Rental Retail Index has increased by more than 75 basis points, breaking the 175 level at the end of 2014 before flattening out in 2015.

With most of the early expansion of luxury goods within the region focused on markets in China and Singapore, these locations are also nearing or passing the point of saturation. As of the end of 2014, more than 90% of international luxury retailers monitored by CBRE had at least one stand-alone store in the region, with China (87%) and Hong Kong (81%), Japan (79%) and Singapore (75%) ranking as the most penetrated markets. As these markets mature past the saturation point, luxury brands are more likely to move into other markets in order to avoid a slowdown in sales. Thailand still has room to grow in this respect with a luxury goods penetration rate of 63%, tied with Malaysia and higher than Indonesia (60%), India (54%), the Philippines (46%) and Vietnam (44%).

Rising Tide

Asia’s unprecedented economic growth spurt, led by China, may be slowing in momentum but this has yet to have a significant impact on the spending luxury spending habits of the well-to-do. In 2014 the Asia-Pacific region still accounted for one-third of the €224bn worth of personal luxury goods sold worldwide, according to CBRE data. This is the culmination of a decade-long growth trend which has seen luxury sales nearly triple in value since 2006. The region now includes some of most prolific spenders on high-end items behind the US, including the mainland Chinese market which expanded from €4.5bn in 2007 to €15.3bn in 2014 along with Japan, which remains the world’s second-largest luxury market with total sales of €17.9bn on the year. Other major luxury retail markets in Asia-Pacific include South Korea, Hong Kong, Taiwan, Singapore and Australia, all of which send a substantial number of tourists to Thailand each year.

The rise of China as a global economic powerhouse, along with strong, sustained growth from emerging economies in the region, has created an increasingly large pool of affluent consumers eager to spend their newfound disposable income wealth as Western economies have struggled over the past decade. In 2014, Asia-Pacific surpassed North America as the region with the most high-net-worth individuals (classified as those who have over $1m of investable wealth), at 4.69m, thus creating millions of potential consumers for luxury retailers in the region. Tapping into this new money, many of the premier luxury brands now source a high proportion of their revenues from the region. Prada, for instance, derived more than half its overall sales revenue from the Asia-Pacific in 2014.

Other notable brands including Richemont, Hermès and Kering all tallied between 40% and 50% of the sales from within the region in 2014 as well, with luxury retailers Tiffany & Co and LVMH posting more than one-third of overall sales from the Asia-Pacific.

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The Report: Thailand 2016

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