Growth of incomes and Myanmar's young population drive demand for nonessential goods

 

Myanmar’s retail segment has boomed in the years since the economy was liberalised, with foreign goods hitting the market and local sellers making their offer more sophisticated. Legacy retail conglomerates are investing in Western-style upgrades to supermarkets and malls, and foreign investors are entering into joint ventures to bring technical know-how. Foreign loans and investment in the retail sector are also bearing fruit, with international-standard outlets expanding outside the traditional commercial centres of Yangon and Mandalay into smaller towns and villages. Retail growth has been fuelled by consistent gains in the country’s GDP, and a string of legal reforms aimed at deregulation and at encouraging the entrance of foreign players in a previously closed-off area in the economy (see analysis). Together with encouraging demographic indicators, Myanmar’s retail sector is expected to maintain momentum in the coming years.

Before liberalisation, Myanmar’s economy largely restricted foreign imports and investment, severely impacting economic growth and consumer habits and limiting the retail sector to small-scale shops. Since political and economic reforms were announced, Myanmar loosened controls on imports and opened up to foreign investment.

Critical regulatory reforms affecting the retail sector were implemented in 2018, resulting in increased consumer demand, foreign companies eyeing entry to the Myanmar market, and local retailers upgrading their marketing, technology systems and logistics. While challenges remain, Myanmar’s retail sector is shaping up to be one of South-east Asia’s great untapped frontier markets.

Size & Performance

Myanmar retail has been growing significantly, expanding by an annual average of 28% between 2015 and 2018. Growth has encompassed not only local products, produce and foodstuffs, but also luxury offerings such as Hugo Boss and Gucci – brands that were unknown in the market less than a decade ago. Whereas consumption was previously focused on necessity, today it has shifted to include amenities and lifestyle goods as disposable incomes increase.

The shift in demand led foreign retail businesses to open up shop within the country. According to a study from March 2018 by behavioural research and consulting firm Envirosell Thailand, demand has increased for products such as dish detergent, fabric softener, hair conditioner and shower gel, which are considered consumable goods and not strictly necessary. The firm also noted growth in coffee shops including Gloria Jean’s Coffees and the Coffee Bean & Tea Leaf as consumers turned away from traditional offerings.

Structure & Oversight

Myanmar’s retail sector ratio is 90:10, with 90% accounting for traditional trade such as local markets. Changing demographics and a growing middle class are changing this slowly, as consumers are opting instead to do their grocery shopping and pick up non-perishables and necessities at supermarkets and convenience stores. Grocery, convenience, fabric, pharmacy and fashion are the top-five outlet categories and account for 45% of retail outlets, according to City Mart Holding.

While Myanmar’s economy was closed to international brands prior to liberalisation in 2011, free market policies have ushered in the entrance of Coca-Cola, Unilever, Carlsberg and Heineken, among others. Coca-Cola re-entered the market in 2013 after a six-decade hiatus; before re-entry, Myanmar was one of only three countries, along with Cuba and North Korea, where the brand was not legally sold. Today it can be found in most small, family-owned shops, as well as supermarkets and malls around the country. Unilever entered the market shortly after Coca-Cola in 2013, and international beer brands Carlsberg and Heineken arrived in 2015. In the years since, alcoholic beverage makers in the country have enjoyed rising consumption fuelled by rapid urbanisation, a young population and a growing middle class (see Industry overview).

The free-market policies implemented by the government to reinvigorate the retail sector include the 2017 Myanmar Companies Law, which allows foreign investment stakes of up to 35% in local companies, and Directive No. 25 of 2018, which authorised 100% foreign ownership in retail companies, as well as joint ventures between international and local investors to engage in the retail and wholesale businesses. The new rules allow 100% foreign-owned ventures if they invest $3m and $5m to launch a retail or wholesale business, respectively. Joint ventures with foreign partners where the local party has at least a 20% stake should make initial investments for retail and wholesale of $700,000 and $2m, respectively. Previous foreign investment rules restricted foreign investment to joint ventures that required approval from the Myanmar Investment Commission (MIC).

Consumer Demand

Driving the maturation of the retail sector is a combination of demographic factors and economic expansion. On the economic side, powered by the rapid growth witnessed in labour-intensive sectors, GDP per capita is expected to grow by more than 55%, from $1480 in 2018 to $2300 in 2022, making room for more disposable income to spend on non-essential goods. Rising incomes will support greater discretionary spending, including on goods such as cosmetics and make-up, as well as luxury foodstuffs.

In terms of demographics, the numbers paint an attractive picture for prospective retailers. The country has a youth bulge, with 55% of the population aged under 30. This contrasts with neighbouring Thailand and Malaysia, where low birth rates mean potentially declining retail sales going forwards. For Myanmar, favourable demographics suggest a massive pool of untapped buyers and a shift from spending on necessities to consumption of non-essential items. Whereas a decade ago Myanmar consumers spent their basic earnings on food and basic clothing, today’s young people are buying brand-name clothing and organic foods as they shift their consumption habits. “In the short to medium term I expect to see more global brands entering the market particularly those appealing to the younger well-travelled Myanmar consumer” Mark Bedingham, President and CEO of Singapore Myanmar Investco, told OBG.

For retailers, this represents a fundamental shift in spending habits, adding further attractiveness to the market. Increased competition, however, is putting pressure on consumer prices, which concerns some industry stakeholders, particularly with headline inflation slated to rise as high as 8.8% in 2018, according to the World Bank. “As such, some companies are talking with each other to align strategies and ensure that the quality of products does not decrease too much and that market prices do not fall too low,” Thuyein Myint Shwe, founder and managing director at Zawgyi Premier, a local import and export company, told OBG.

E-Commerce

E-commerce is also poised to see more robust growth as retailers develop Myanmar’s first electronic platforms. The swiftly developing ICT sector undoubtedly has contributed to this, as the country’s mobile penetration rate exploded from 10% in 2013 to 86.2% in mid-2016 to 105% in 2018, with a unique mobile penetration rate of 50%, leaving room for future expansion. Connections have also become more affordable; the price of SIM cards fell from over $2000 before liberalisation in 2011 to under $2 in 2018. The growth in mobile penetration, combined with favourable demographics and growing disposable income, paint an encouraging outlook for e-commerce in Myanmar.

“Myanmar should build on the strengths identified by our recent study: a competitive telecommunications sector, a growing tech-savvy youth population, innovative logistics solutions for the door-to-door delivery of e-commerce parcels and a fledgling tech start-up scene,” Shamika Sirimanne, director of the division on technology and logistics at the UN Conference on Trade and Development, told local media, referring to a November 2018 assessment on Myanmar’s digital readiness.

In anticipation of expanding e-commerce, Myanmar’s private sector and government are working together to implement regulations to both foster growth in the subsector and protect consumers. In June 2018 the Myanmar Retailers Association requested the adoption of an e-commerce law which, as of late 2018, was still being drafted by the Ministry of Commerce. The intention was to align it with the ASEAN e-commerce agreement signed on November 12, 2018 in Singapore.

While there is significant potential in Myanmar’s e-commerce segment, challenges remain. Outside of the major urban centres, logistics including underdeveloped roads and transport networks — especially during rainy seasons — pose a hindrance to delivery. Planned upgrades in infrastructure over the coming years should go some way towards reducing delivery times and costs. Human resources also pose a challenge as e-commerce often requires specialised IT skills. The authorities have earmarked more funding for education, however, and greater emphasis on technical training should allow e-commerce companies to recruit more workers locally.

Supermarkets

The growth of Myanmar’s retail sector has included new developments in both small local shops and higher-end supermarket chains. Local companies such as City Mart have launched national expansion drives aimed at offering Western-style supermarkets and hypermarkets throughout the country. The company has benefitted from a $25m loan given by the World Bank’s International Finance Corporation to expand operations across Myanmar. City Mart has also been diversifying its offerings to include produce free of pesticides. Additionally, in August 2013 City Mart entered into an agreement with the Japanese trading house Sojitz and in July 2018 announced the acquisition of a hydroponic farm to source high-quality produce made without additives, which it hopes to expand.

The company is also investing heavily in IT system upgrades to bring operations up to international standards and encourage consumer spending. “The consumer goods sector becomes an extremely important and integral part of Myanmar’s economy and is expected to grow significantly,” Arnel Redondo Reyes, head of IT for City Mart, told local press, noting the consumer goods market constitutes about 15% of GDP, or $7.5bn, and consumer spending is expected to triple from $35bn to $100bn by 2030. “As our customer base expands, our infrastructure needs an upgrade to support the scale and breadth of our operations.” In July 2018 the company announced plans to invest around $10m to digitise operations, a move that is expected to improve profit margins and reduce waste.

Retail Chains

Big-ticket international retailers are also eyeing the Myanmar market. In August 2018 US doughnut brand Krispy Kreme announced it was opening 10 outlets in Myanmar, joining international brands such as KFC, Pizza Hut, Gloria Jean’s Coffees and Burger King. Popular Japanese discount chain Daiso entered the market in 2012 and now has stores in almost every modern shopping mall in Yangon. Another Japanese firm, Aeon Orange, entered into the Myanmar market in the form of a joint venture with local partner Creation Myanmar Group of Companies in August 2016, acquiring 14 supermarkets operated by Hypermart Asia and opening its first store in Yangon that year.

Floor Space

The growth in retail space has kept up with sector growth, increasing from 150,000 sq metres in 2013 to 250,000 sq metres in 2018. Much of this growth reflects changing consumption habits and preferences as international-style malls gain popularity. “Myanmar’s behavioural consumption, which now integrates new lifestyles and purchases based more on personal emotions, leads to various business opportunities,” Sirinporn Jiwanun, CEO of Envirosell Thailand, told local press.

Even as retail space in major urban centres expands, Myanmar’s property players are struggling to meet demand. According to a report published by real estate consultancy Colliers International in March 2018, 95% of the country’s retail space is occupied, and the sector is expecting annual growth in retail space to exceed 7% over the coming years, underscoring the need for continued expansion in retail space to meet demand. The high level of occupancy reflected a positive outlook among retailers, which should sustain growth this year and beyond, according to Colliers. The firm said it expected demand would be maintained despite the release of new space onto the market.

FDI

Some foreign companies are investing in Myanmar’s local consumer goods market under a joint-venture model, such as Japan’s Mitsubishi, which entered into a joint venture with Premier Coffee, a domestic producer of three-in-one instant coffee. The venture resulted in significant upgrades in Premier’s facilities in Myanmar to adopt international quality standards. The Premier venture also helped parent company Capital Diamond Star Group achieve economies of scale. Thailand’s ThaiBev, meanwhile, also bought a 50% share in Myanmar Distillery Company, a local producer of whisky, and received approval from the MIC to produce and distribute beer. The move is one of the latest in a trend of foreign companies manufacturing retail goods in Myanmar instead of importing them from neighbouring ASEAN countries (see Industry overview). This represents an opportunity to localise consumer foods production and develop supply lines.

Challenges

While there is notable potential in Myanmar’s retail sector, challenges remain. The kyat depreciated significantly against key currencies in 2018, leading to fears that local retailers had overborrowed in US dollars. If local retailers are too exposed in terms of foreign currency credit, some may struggle to repay as the loans become due. A weaker currency also makes imports more expensive for local consumers, a notable issue in a largely import-dependent retail sector. In addition, rising import can increase inflation and impact the spending power of the burgeoning consumer class.

“Although the average household income of Myanmar families has increased in recent years, their purchasing power is being heavily affected by the rise of the dollar,” U Soe Myint, CEO of diversified conglomerate Family Mandalar, told OBG. “Some hope that local production lines can help to mitigate the problem, but local manufacturing is costly, making it difficult to compete.”

Human resources also remains a challenge in a country where high-end retail only recently developed, as is logistics infrastructure, which can make transfers from ports to urban centres expensive and slow. There are concerns about Myanmar’s emphasis on big-ticket retailers, which could come at the expense of the smaller owner-operated retailers that have long dominated the sector. In neighbouring Thailand, many local retailers were unable to compete with international-style convenience stores, such at 7-Eleven and luxury shopping malls, pushing many out of business.

Outlook

Myanmar’s retail sector is nonetheless growing, driven by rising disposable income, changing consumer tastes and developing infrastructure. While challenges such as human resources, competitiveness and depreciation remain, continuing demand from an increasingly affluent population, combined with steady improvements in transport and logistics infrastructure, should bode well for the sector’s prospects over the medium to long term.

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The Report: Myanmar 2019

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