Thailand: Strengthening retail

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The decision by yet another major player in Thailand’s retail industry to go ahead with an initial public offering (IPO) has fuelled speculation that the sector could be bouncing back from a challenging year, although smaller, independent stores are still struggling to overcome a slump in sales.

The Thai arm of Tesco launched the property fund in February to finance future expansion, following in the footsteps of other large operators who are now public companies, including Big C, 7-Eleven and Central Group.

The Tesco Lotus Retail Growth Freehold and Leasehold Property Fund, which is similar to a real estate investment trust, includes 17 shopping malls anchored by a Tesco Lotus hypermarket in Bangkok.

The IPO will offer shares priced between BT9.65 ($0.32) and BT10.40 ($0.34) and is expected to raise around $585m, which would give an estimated yield of 6.5% to 7% per year.

A combination of economic pressures, a rise in the cost of living and fall-out from recent widespread flooding made 2011 a difficult year for the retail industry, particularly for smaller independent stores which were hit hardest by falling sales.

A number of independent retailers were forced to close doors, losing out to the larger companies that found it easier to maintain competitive prices and profit margins in challenging economic conditions.

Smaller retailers also bore the brunt of delivery disuptions caused by the impact that the floods had on supply chain operations and the logistics industry. Unable to negotiate with producers on the same level as large chains, some smaller stores are still struggling to regain a reliable flow of supplies today.

Measures have been aimed at protecting smaller independent retailers in the form of a 2005 draft law which would restrict the number of retail stores larger than 10,000 sq metres permitted to operate.

The Retail and Wholesale Business Act is expected to eventually become law although it has been hit by delays. However, critics have voiced concern that the proposed legislation could slow down chain expansion and accelerate consolidation as the major players turn instead to acquisition for growth.

Observers point to Big C’s purchase of the Carrefour chain in 2010, which prompted a struggle between the giant retailer and Tesco Lotus for domination of Thailand’s retail sector.

With 6.3% of total retailing value, Tesco Lotus was the country’s second-largest retailer in 2011 after mini-market operator 7-Eleven, which had a market share of 8.5%. Big C ranked third with a 4.5% share.

The proposed law is also expected to drive retailers towards further expansion in the increasingly popular small to medium-size retail outlet segment.

Trends indicate that the major players are already considering the potential of smaller outlets and going head to head in this subsector. The fourth-ranked retailer, Central Retail Corporation, plans to spend BT1bn ($32.5m) this year on the creation of 200 additional Tops Daily mini-supermarket outlets measuring 200 sq metres, marking a significant increase on the 70 it opened in 2011.

7-Eleven, which has 6000 stores and a track record for opening between 400 and 500 new outlets each year, leads the way against Tesco Lotus Express which currently operates less than 600 shops of 150 to 360 sq metres.

Big C Supercenter PCL’s Big C Markets, which span 2000 sq metres, are already sufficiently large to qualify as shopping malls, while its chain of convenience stores, Mini Big C, are all between 80 and 100 sq metres.

Thailand is also gearing up for the opening of the large-scale Mega Bangna retail project which is scheduled to begin operating in May. The BT10bn ($325m) joint venture between Siam Future Development, SPS Global Trade and IKEA will feature the first IKEA store in Thailand alongside other anchor tenants such as a Robinson department store, the home improvement retailer HomePro, a SubZero skating centre, a Cineplex and a Big C. Located in urban Bangkok, the complex will also include restaurants, clothing and home décor retailers, together with a car park with 8000 spaces.

Indications are that Thailand’s mega-stores are shifting strategies to accommodate the country’s changing laws and business environment, as they find new ways to strengthen their foothold in the country’s retail market. Independent retailers, however, look likely to face an uphill challenge to remain afloat, unless the draft business law is enacted before more consolidation takes place.

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