New retail projects in the pipeline in Sri Lanka

 

The retail sector in Sri Lanka is set for rapid development. Shopping is becoming increasingly convenient as modern outlets become more numerous, new malls are being built and an increasing number of global brands are arriving in the country. Meanwhile, the growing tourism industry is bringing not only money but also the culture of shopping. Most of all, local consumers are becoming more sophisticated and demanding better products as the middle class grows.

“There is now an aspiration for the high-end brands,” Rizvan Sahabdeen, managing director of Colombo-based jewellery retailer Sifani, told OBG. “We are very confident of growth in Sri Lanka.”

Consumer Spending 

Sri Lanka is at a point that suggests an upswing in consumer demand. Rising incomes have reached the level where nations generally become more focused on discretionary consumption. GDP per capita in current dollar terms was $3909 in 2016, more than double its level a decade earlier. Sri Lanka is now at the very upper edge of the World Bank’s lower-middle income classification ($1006 to $3955). Given these numbers and the improving conditions in the country, it is seen as a place of great potential. Sri Lanka ranked 12th in AT Kearney’s 2017 Global Retail Development Index, its position remaining unchanged from the previous year’s report.

Since the end of the civil war in 2009 personal household consumption grew at an average of 11.6% a year through 2016. Importantly, as overall spending has risen, the percentage of income committed to necessities has dropped. Sri Lanka has long been a consumer-driven nation. Household final consumption as a percentage of GDP has historically been between 70% and 80%, and still remains in the 65-70% range.

For years, demand in Sri Lanka has centred on the most basic of products, and the shopping experience has been relatively simple and straightforward. However, tastes and preferences are changing as the country strives for higher middle-income status. While Sri Lanka’s GDP per capita is more than double that of India’s, the latter sells almost twice the ratio of premium fast-moving consumer good (FMCG) products, according to global research firm Nielsen. This gap could narrow quickly as Sri Lankans develop an appetite for a range of affordable premium goods.

Retail sales will grow by 6% a year through to 2019, according to AT Kearney, with demand particularly firm for durables, furnishings, and telecoms items and services. Listed firms benefitting from changing consumer habits include Cargills, Singer, Ceylon Tobacco Company, Ceylon Cold Stores, Nestlé, Keels Food Products, Lion Brewery, Distilleries Company and Hemas, according to a 2016 study from stock brokerage Asia Securities.

Mall Story 

Colombo had eight malls as of the end of 2017, with various estimates of total floor space between 660,000 sq feet and 800,000 sq feet. In 2013 it was estimated that demand outstripped supply by three to one, and that ratio reached four to one over the following three years. In 2017 national retail sales totalled $30bn, according to AT Kearney.

Four major mall projects are in the pipeline and set for completion through about 2020. The new malls will more than double the net retail floor area available in the capital. As a result, Colombo is poised to go from a place with a lack of modern shopping space to one with a collection of impressive retail venues.

Tourists, especially those from China, tend to prefer world-class retail spaces. As a result, Sri Lanka is in need of so-called destination outlets and key retail landmarks to draw tourists. Without modern, convenient and well-designed malls, an opportunity is being missed as overseas visitor numbers rise, with arrivals quadrupling in a decade. The dearth of quality malls is holding the market back in other ways. Major retail brands are interested in entering the Sri Lankan market, but many seek minimum footprints of 20,000 sq feet. For a number of years the best the market has been able to offer is spaces of 5000 sq feet, often on higher floors.

Colombo’s main shopping malls – Liberty Plaza (Sri Lanka’s first mall built in 1982), Unity Plaza, Majestic City, Crescat Boulevard, K Zone (in Moratuwa and Ja-Ela), the Dutch Hospital Shopping Precinct and Arcade Independence Square – range in size from around 30,000 sq feet to some 110,000 sq feet.

Department stores are also major players in the market. Odel started as an outlet market in 1989 and opened its flagship store, a refurbished colonial building with 33,000 sq feet of space, in 2000 at Alexandra Place. The company now has a total of 20 stores throughout the country, including one at Bandaranaike International Airport. The House of Fashions, at 250,000 sq feet, is the largest department store in Sri Lanka.

Doubling of Space 

Real estate consultancy JLL estimates that 10% of the mall space in the capital is used for the sale of footwear, 15% for jewellery, 16% for computers, 25% for clothing, 18% for mobile phones, and 16% for food and beverages. According to JLL, emerging retail centres include Havelock Square in Colombo 1 and Sir James Peiris Mawatha, Galle Face and Slave Island in Colombo 2. Significant opportunity is seen in the suburban areas as most current plans are targeting the centre of the capital.

The four new malls entering the market over the next five years are large, high-end and innovative. Two of these were scheduled to open at the end of 2017, but neither opening had been confirmed as of the second quarter 2018. Marino Mall will have 150,000 sq feet of retail space, 10 restaurants and a 300-room hotel. A mall at mixed-use development Colombo City Centre is billed as the country’s first hypermall, it will be five storeys high and have 210,000 sq feet of retail space.

The Mall at One Galle Face is expected to open in 2019 as part of a massive mixed-used project that will include a Shangri-La Hotel, apartments and an office tower. The facility will have a total of 490,000 sq feet of retail space. The hotel opened in late 2017. Odel is planning a mega-mall with 300,000 sq feet of space. Completion of the project is expected for early 2019.

Consumers are increasingly favouring modern retail over traditional markets. The price differential between the two sub-sectors is narrowing, with supermarkets and hypermarkets often able to offer goods cheaper than the local markets due to economies of scale, buying power and efficiency. Convenience is also becoming a factor among consumers, who are now more inclined to frequent modern retail outlets.

Growth potential is high as penetration remains relatively low. Supermarkets are now responsible for approximately 15% of retail grocery trade in Sri Lanka, compared to about 30% in places like Thailand, according to Fitch Ratings. North Central, North Western and Uva provinces are especially promising, though in the near term the supermarket chains are not expected to make significant investments beyond Western Province.

According to a 2016 report from local grocery delivery start-up Snapcart, Cargills Food City is the largest supermarket group in the country by far, with an estimated market share of 50% and 300 outlets throughout the country. Cargills also has a number of convenience stores under the brand name of Cargills Express. Laugfs Supermarket has been in existence since 2001 and brought 24-hour shopping to Sri Lanka. It is part of Laugfs Holdings, a multinational conglomerate. Keells Super, a member of the John Keells Group, had 65 outlets as of early 2017. Arpico is managed by Richard Pieris Distributors and has 17 branches throughout the country, and an additional 20 Arpico Daily stores. Star United is a franchise-type supermarket chain where the stores are individually owned but supported by Ceylon Business Limited. Founded in 2013, it has 40 outlets with plans to expand to a 500-unit chain.

International Brands 

While foreign investment is prohibited for retail establishments with capital below $1m, significant international activity is evident elsewhere in the value chain. Franchises are becoming notably more active, while larger retail is attracting attention from a number of global players.

International retail brands in the country include Cold Stone Creamery from the US, Abu Dhabi’s Tablez Food Company and Mitra Adiprakasa from Indonesia. Cargills also runs KFC and TGI Friday’s franchises, since 1997 and 2012, respectively. Domino’s Pizza had 20 stores as of 2016, with the first branch opening in 2011. McDonald’s, meanwhile, was brought to the market in 1998 by the Abans Group. Other investors are also coming to the sector, with UAE’s Lulu announcing plans in mid-2017 to open a mall and a supermarket in Colombo. SPAR, a Dutch food retail chain, announced plans to open its first store in Sri Lanka in early 2018, although in March of the same year this was unconfirmed. The voluntary retail partnership, which aims to go up against the giants by uniting independent outlets, has more than 12,000 stores in 42 countries. The Sri Lankan-owned partnership also focuses on sourcing locally.

A Hugo Boss store was opened in early 2017 at Arcade Independence Square. It is said to be the first luxury brand with its own retail presence in Sri Lanka.

Not many other newcomers are expected, as the sector has high barriers to entry, according to Fitch. The established players have strong property portfolios of leased and owned sites in the best locations, while they also have strong logistics networks and supplier relationships. Replicating the success of such companies would require significant investment.

While the number of retail newcomers is not expected to significantly increase entertainment opportunities are also seen as having the potential to entice investors to Sri Lanka.

“Colombo’s entertainment facilities stand out among local business opportunities,” Ashok Pathirage, chairman at Sri Lankan ICT holding company Softlogic, told OBG. “Colombo holds significant potential for foreign and local investors to further develop this exciting area of the economy,” he added.

Development Efforts 

Attempts to develop retail’s contribution to the economy are ongoing. The Sri Lanka Retailers’ Association, which is affiliated with the Ceylon Chamber of Commerce, held a retail learning workshop in June 2017. The meeting was reported to be one of the first such events in the country. A total of 40 retail employees participated in the event with themes ranging from effective management to communications, operations, customer care and technology. The forum also covered the role of the changing consumer and the use of digital technologies. Other priorities in the sector include supply-chain management. Retailers have been encouraged to engage in better forecasting in order to avoid panic buying at the last minute.

Technology is beginning to play a significant role in the sector. In addition to the growth of online retailers, such as Takas.lk and Kapruka.com, traditional retailers, such as Odel, are using the internet to reach customers. According to mid-2017 estimates by Takas.ln and local financial advisor York Street Partners, online shopping is estimated to be worth about $40m. E-commerce is initially expected to complement the traditional channels rather than cannibalise them. Technology is being used to assist smaller establishments to compete more effectively with rivals on and offline. For example, 99RetailStreet is a cloud-based platform that enables shops to gain access to the market and effectively challenge larger retail outlets.

The potential in the retail sector is also spurring activity in mergers and acquisitions. In September 2017 the majority of shares of Singer Sri Lanka, a major seller of white goods, other appliances and electronics, were acquired by Hayleys, a local diversified conglomerate. While Singer has been doing well in terms of total revenues, its margins have been under significant pressure. The cost of the acquisition was LKR10.9bn ($71.2m), making it the largest ever in the country’s history, according to local press reports.

Despite the strong numbers, the retail sector is facing challenges. Inflation is weighing on consumers and resulting in lower expenditures, with national consumer price inflation in October 2017 reaching 8.8% from a year earlier. Rising food prices and education fees are the main burdens. As they are squeezed, consumers are starting to cut back on basic FMCG items.

Consumer confidence has been sluggish in recent years. After demonstrating strong performance in 2015, with the Nielsen survey hitting an all-time high of 87 that year, it fell the following year as the currency weakened, dipping below 50. It is now recovering, but is far from previous highs. In the first half of 2017 the Mastercard Index confirmed the Nielsen results: consumer confidence in that survey was 38.2, slightly low but stable. The sense locally is that the country needs 7% growth for consumers to feel more confident.

Fitch notes that new regulations, on price controls and taxes, which have fluctuated significantly in recent years, hang over the sector and could slow growth. New taxes have the potential to reduce consumer spending, but higher incomes may balance the effect of the taxes and result in increased sales of luxury items.

Sri Lanka is set to lift price controls, though it wants to ensure that consumers are not taken advantage of in the process. It is hoped that as prices rise, local production will increase and quality will improve. So far, the market has not been responding effectively to new demand. Despite the shift of the consumer sector, local manufacturers are not keeping pace.

Generally speaking, they are not making products that cater to higher incomes and are thus failing to capture opportunities in this segment. Though new malls are being built, natural limits exist on retail development. Construction costs are prohibitive in Sri Lanka as most building materials need to be imported and tariffs are relatively high. It is not clear whether the proliferation of new malls will continue, especially developments beyond the country’s capital.

Outlook 

Many forces are at work in the retail sector, some positive, some negative. The relevant infrastructure is developing and consumer demand is strengthening, although broader economic factors are restricting progress. Consumer confidence is being held back as Sri Lanka works its way though the requirements of the 2016 IMF bailout and institutes necessary reforms. However, the long-term trend is strong and any near-term weakness is likely to pass as economic growth stabilises and new malls and supermarkets come on-line.

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The Report: Sri Lanka 2018

Industry & Retail chapter from The Report: Sri Lanka 2018

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