PNG's retail sector finds opportunities for future gains

 

The retail sector in Papua New Guinea is showing signs of resilience despite challenges in the wider economy. Slow GDP growth, tight household budgets and a lack of foreign currency have created a difficult environment for trade stores, shops, supermarkets and malls: sales at some of the country’s bellwether retailers have fallen as much as 50% from peak levels in 2012. At the same time, government-led efforts to encourage local production and consumption in the form of campaigns and tariffs continue to move the economy forward. Some firms are expanding their footprints, adding to their dealer and service networks, while new stores are entering the market, and delayed projects are getting back on track.

One challenge the sector is facing, however, is the growing number of foreign businesses, which operate without proper licences and often with a low level of tax compliance. Though difficulties remain, many retailers see this as a time to consolidate, build upon their foundations and develop more offerings. “We have appointed an authorised parts reseller in Manus and are continuing to look for opportunities,” Neil Stewart, general manager operations at Ela Motors, told OBG. “For instance, we are planning to invest PGK20m ($6.2m) in the development of a standalone Toyota-only facility, with construction to begin in 2019.”

Deep Roots

The retail sector in PNG has evolved substantially over the past six decades, as it adapted to serve the changing needs of diverse communities spread across great distances. Brian Bell Group, which started as a gun shop on Ela Beach in 1958, is now a major purveyor of white goods, with 12 outlets throughout the country. Papindo Trading Company, which is 100% locally owned, has 42 stores throughout PNG. The chain operates under a variety of names, including the Hagen Shop, Shopper’s Choice and Alotau Supermarket & Department Store. City Pharmacy Limited (CPL), which is listed on the Port Moresby Stock Exchange, has six brands in total, including 29 City Pharmacy outlets, eight Stop & Shop branches, 11 Hardware Haus stores and seven BonCafes. Able Home & Office has eight stores nationwide offering everything from coffee machines to computers. Courts, a WR Carpenter company selling furniture and electrical goods, has six branches around the country. TST has eight supermarkets, most in Port Moresby, while local conglomerate RH Group has three hypermarkets in Port Moresby and one in Lae. In 2010 it completed Vision City, the largest mall in the South Pacific. The PGK1bn ($312.2m) complex has 50 stores, a hypermarket and a cinema.

Mixed Performance

In the first three quarters of 2017 retail sales rose by 11.9%, compared to a 35.5% decline in the corresponding period in 2016, according to the central bank. As a whole, the sector grew 2% in 2017 and was expected to grow by 4.2% in 2018 and by around 4% per annum through to 2022, slightly outpacing GDP growth, according to projections in the 2018 budget. Inflation was relatively subdued, with estimates putting the rate at 5.9% in 2017; it is projected to rise to 6.9% in 2018, before falling below 6% again. The price of goods rose in part due to the increase in the import tariff and fuel tax. The government increased the excise tax for diesel from PGK0.10 ($0.03) to PGK0.23 ($0.07) per litre at the beginning of 2018, which impacted the prices of most items sold in the country to some degree.

Challenging Times 

Despite some positive indicators overall, weaknesses still persist after two years of sluggish growth and foreign exchange shortages. CPL, the only publicly traded retailer in the country, recorded a rise in sales revenues, from PGK556m ($173.6m) in 2016 to PGK580m ($181.1m) in 2017. However, a warehouse fire in June 2017 resulted in an operating loss before tax of PGK28m ($8.7m).

In May 2018 the company closed its Paradise Cinema Waigani and transferred ownership a month later to Vision City Investment, an RH Group company. CPL said the move was part of its strategy to focus on its core businesses of health, food, shelter and lifestyle.

In July 2016 diversified agri-business Agmark closed its hardware division after a weak performance in 2015 fuelled by the country’s economic situation. However, the firm’s main focus of cocoa exportation remains active. Ela Motors, owned by Toyota subsidiary Toyota Tsusho South Pacific Holdings, controlled more than half of the country’s vehicle market in 2016, but has seen sales fall from 6450 units in 2012 to 2638 units in 2017, with 2018 sales forecasts at 2554 vehicles.

Expansions

Though firms have struggled with reduced numbers and setbacks in recent years, some are also finding opportunities for growth. In April 2018 Ian Clough, chairman of Brian Bell Group, told local media that the company was making investments in warehousing and distribution, adding that the retailer was also expanding its property development. In February 2018 CPL also saw positive developments, raising PGK50m ($15.6m) from existing shareholders and a new investor. It also entered into sale and lease arrangements on three of its buildings, which was expected to raise another PGK20m ($6.2m) for reinvestment.

Plans are also being formulated to expand Vision City, the region’s largest mall. While phase 2 involved the addition of almost 8500 sq metres of gross leasable area to the mall, on top of the original 36,500 sq metres, considerations for phase 3 include high-end clothing, residential apartments and premium commercial space. The mall estimates that 9000 people pass through it each day, with the daily peak as high as 18,000. RH Group is also planning to invest in Paradise Cinema, saying it will upgrade the asset so that it is on a par with other leading cinemas in the region, while the Big Rooster fast food chain opened its 20th store in the country in Vision City in late 2017.

A new shopping centre has begun service to consumers in Mount Hagen. The Tininga Hagen Central, developed by Steamships Trading and Tininga at a cost of over PGK10m ($3.1m), was inaugurated at the end of 2017. Tininga is a locally based retailer with three supermarkets and two hardware stores.

Similarly, a new shopping complex by Papindo opened in Lae in early August 2018. The PGK50m ($15.6m) facility features four stories across 7000 sq metres.

Mosin Plaza in Gerehu, a suburb of Port Moresby, is also scheduled to open in September 2018. The location has 20,000 sq metres on three floors, and features a supermarket, department store and around 50 shops. It is owned by Vitis Industries, a local company that deals mainly in food-related products.

New Developments

In 2015 a new supermarket began selling items in the lower-priced segment to meet demand in Konedobu, Port Moresby. The market was developed by the Desh Besh Group, which already had two other markets, a clothing store, a bakery and a fast-food restaurant in its portfolio.

Fiji’s Prouds, which offers higher-end consumer goods from stores in hotels, airports and other prime locations, opened a shop at Jacksons International Airport in 2015. Meanwhile, Jack’s of Fiji, a clothing chain which entered the country in partnership with CPL, has been making significant inroads. In 2015 it opened its first two locations in the country in the Waigani Shopping Centre and Vision City, and in late 2017 the firm brought the Izabel London label to PNG to meet demand for high-end brands. The company hopes to expand in places such as Lae, Mount Hagen, Rabaul and Buka, and has been looking specifically at space in the new Tininga Hagen Central.

However, reaching markets outside of the larger cities and towns may require further adaptation by retailers and developers. “Consumer awareness in PNG is not really growing, with the exception of Port Moresby,” Alfred Yau, group CEO of Papindo, told OBG. “Retail in the rest of the country remains focused on prices and not brands,” he said.

Going Online

Digital retail has also been making gains in the country, such as with fortunaonline.net, which is run by the founder of Vitis Industries and hosts a wide range of products, from groceries to hardware. The retailer offers delivery to most locations in Lae and Port Moresby. Other sites include Marketmeri.com, an online classified advertising site, and uitiki.com, a locally owned fashion site that sources clothes internationally. Courts, meanwhile, has an online portal, although at the moment it only offers a digital catalogue for browsing. In the third quarter of 2018 two new players in e-commerce, MyWantok.com and PNG hometask.com, were scheduled to begin connecting consumers with small businesses. As of August 2018 the former had yet to go live, while the latter was up and running.

The online presence of the country’s small and medium-sized enterprises (SMEs) could also receive a boost in connectivity to overseas markets in the near future, with an undersea fibre-optic cable linking PNG with the Solomon Islands and Australia expected to be completed in 2019. Officials are hopeful that the added access will aid in getting more locally made products in the hands of foreign buyers, in addition to lowering costs for domestic consumers. “Considering the APEC set-up and the logistics network, we tend to look to the ASEAN region, with of course, Australia and New Zealand as our primary markets for exports,” Clarence Hoot, managing director of IPA, told OBG. “We would like to expand from there into new markets,” Hoot added.

Domestic Support

In line with state-led plans to promote SMEs, small trade shops have been a target for restrictions designed to increase local ownership. There is a perception within the country that too many of these establishments are controlled and run by foreign interests, and that small retail should be reserved for Papua New Guineans. In 2015 Prime Minister Peter O’Neill called for all of these shops to revert to local ownership within three years, while in July 2018 Mehrra Kipefa, minister for labour and industrial relations, identified the sector as an area where too many foreigners were working, and called for a crackdown on procedures that allow people to enter the country and obtain employment in the sector.

There have also been complaints that foreign firms circumvent regulations and avoid paying taxes. “The government is missing out on a lot of taxes,” Mahesh Patel, chairman of CPL, told OBG. “The Independent Consumer and Competition Commission (ICCC) and the Treasury have taken some actions against counterfeit and illegal practices, but more should be done.”

In a separate move to moderate foreign influence in the sector, a campaign spearheaded by the ICCC mandated retailers sell products with labels only in the English language, as per the Food and Sanitation Act 2007. In March 2016 efforts to enforce the law were increased with the introduction of a ban on foreign labels, scheduled to last 18 months, which included inspections conducted throughout Port Moresby and in the provinces. Those who defied the ban faced a fine of up to PGK100,000 ($31,200) and two years in prison.

There is also a private sector effort to encourage consumers to purchase locally made products, under the “PNG Made” campaign. In August 2018 Chey Scovell, CEO of the PNG Manufacturer’s Council, stated that the increased costs of domestic consumption were offset by the support offered to the community as well as by job creation. He added that the growth of downstream processing facilities and the rising number of major food and specialised companies were likely to generate more options for Papua New Guineans.

Outlook

Although the level of success achieved in 2012 might not be repeated for some time, more positive growth is on the horizon. Vendors are positioning themselves to capture more of the coming business when the operating environment improves. New extractive projects should boost incomes and the GDP, increasing the buying power of consumers and correcting imbalances in the economy. Efforts to support SMEs through infrastructure improvements, more effective regulatory implementation and better internet connectivity will also help.

Additionally, the potential found outside Port Moresby is coming into greater focus, while the sector is evolving as a result of increased urbanisation, with consumers opting for more formal shopping environments.

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The Report: Papua New Guinea 2018

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