Sri Lanka's rapidly growing retail sector attracts new entrants


An up-and-coming middle class with disposable income and a preference for spending over saving, in addition to a strong economy with mounting tourism receipts and few restrictions on foreign investment, make Sri Lanka a favourable destination for retail investors of all stripes. Nevertheless, the sector does face some near-term barriers to growth. These include limited quality retail space in the capital and unstable consumer confidence. In the medium term there is a need to build up the necessary infrastructure – physical, technological and regulatory – that will eventually enable the next wave of retail and e-commerce to truly take off in the country. However, as the retail sector matures, and if the country’s economy surges as predicted, it will likely stand to benefit greatly from its location.

According to a recent study by real estate consultancy Jones Lang LaSalle (JLL), Asia Pacific’s cities are the most appealing destinations for luxury retailers to establish a presence, with the region home to seven of the top-10 cities with the highest presence of luxury retailers, and for savvy investors, now is the time to start building the next Singapore or Hong Kong.

Strong Growth

If trends continue on their current trajectory, increasing numbers of Sri Lankans will continue to have more disposable income to spend on retail goods. After expanding 4.8% in 2015, Sri Lanka’s economy grew by 4.4% in 2016, central bank data shows.

At 56%, the services sector contributed the highest proportion of GDP growth at a rate of 4.7% during the third quarter of 2016 compared to the same quarter of 2015. The wholesale and retail trade subsec-tor reported a growth rate of 4.6% compared to the same quarter in 2015. From 2010-15 Sri Lanka’s GDP per capita in current US dollars rose by over half to $3794, according to World Bank data, and its per capita income tripled between 2003 and 2014 to reach $3440. The monthly mean household income was LKR45,878 ($312.80) in 2012-13 – the most recent consumer and household spending survey available – while estimated average monthly household expenditure was LKR41,444 ($282.60), up 32% from the 2009-10 survey.

Consumer Sentiment

Sri Lanka’s Inland Revenue Department announced that changes to the value-added tax (VAT) would be implemented from November 1, 2016 as per the VAT (Amendment) Bill passed by Parliament in October 2016. In a statement the commissioner general said VAT would increase from 11% to 15%, with an annual VAT threshold on the wholesale and retail market of LKR50m ($341,000). VAT in Sri Lanka is applicable on milk powder, cigarettes, liquor, perfumes, jewellery, electrical appliances and telecommunication services.

Despite the introduction of new taxes in the 2017 budget that could depress consumer spending, rising incomes generally indicate a shift to higher consumer spending. Indeed, according to a November 2016 study by stock brokerage Asia Securities, the country’s growing incomes – and the subsequent increases in disposable incomes and changing lifestyles – are the key to lifting its retail sector growth.

Consumption patterns in Sri Lanka resemble those of Western nations more closely than those of emerging South and South-east Asian nations – where the latter tend to save, Sri Lankans tend to spend, often on lifestyle products and luxury goods, according to JLL. This trend is signalled by Sri Lanka’s gross domestic savings being one of the lowest among South and South-east Asian countries. The country’s gross domestic savings stood at 22.6% of GDP in 2015, according to figures from the World Bank, compared to 30.4% in India, 32.7% in Malaysia and 34.8% in Indonesia.

However, change may be on the cards, at least in the short term. MasterCard’s Index of Consumer Confidence data found that overall consumer confidence in the Asia Pacific markets was stable, increasing by just 0.05 points to 59.72 in the first half of 2016 from 59.67 points a year earlier. However, Sri Lanka (38) decreased by 4.2 points, thus sinking into “pessimistic territory”.

According to the latest index, released in mid-January 2017, Sri Lankans view of market conditions improved, with the index showing a 2.1-point rise in sentiment levels from the previous year, while the score for the country reached 40.1, moving it from having a pessimistic outlook to a neutral one.

In November 2016 the central bank kept benchmark interest rates unchanged for a fourth straight month, saying its policy settings remained appropriate as high credit growth was showing signs of moderating. The bank maintained the standing deposit facility rate and the standing lending facility rate at 7% and 8.5%, respectively. It has tightened monetary policy three times since December 2015.

Still, despite the possibility of a looming credit crunch, there is much room for demand, even for some of the most basic consumer goods. In 2012-13 only 46% of Sri Lankan households had a refrigerator, 17% had a washing machine and 18.5% had a personal computer, according to central bank data.

Consulting firm AT Kearney has described Sri Lanka as a “strengthening economy with retail growth”. With its population of 21m and total retail sales of $31bn, Sri Lanka ranked 12th in AT Kearny’s 2016 Global Retail Development Index (GRDI), directly behind Vietnam’s 11th place. Not surprisingly, China and India took the first and second spots, respectively. With retail sales’ 6.6% compound annual growth rate from 2013 to 2015, and modern retail growing by 4.5% in 2015, Sri Lanka’s retail sales per capita were forecast to grow by 6% annually in 2017-18, according to the index.

The GRDI measures and ranks the world’s top-30 developing countries for retail investment, based on relevant macroeconomic and retail-specific variables such as market size, country risk, market saturation and time pressure. Crucially for potential investors, Sri Lanka’s scores revealed the country has relatively low market saturation. In addition, the index described the time pressure to enter its retail sector as medium high. Together, these two factors describe a market that has potentially high demand and investment opportunity in the extreme short term.

Trading Partners

Sri Lanka has recently made strategic moves to become more engaged with ASEAN, a group of which it is not a member. Its retail sector as well as the wider economy in general is eager to explore the opportunities for economic engagement with the $2.6trn ASEAN Economic Community (AEC) market, which comprises more than 622m people.

Becoming closer to the AEC and other non-European markets has recently taken on a more urgent tone for the country’s retailers, especially those that export their goods. The consequences of the UK’s exit from the EU will have direct effects on Sri Lanka’s retail sector. The EU is Sri Lanka’s foremost export destination, with almost 29% of all exports headed there.

Of total EU exports, 34% go to the UK and 10% of all its exports go to the UK. Furthermore, garments – one of the country’s most important exports – make up 80% of all export products from Sri Lanka to the UK, and the country accounts for 43% of Sri Lanka’s total garment exports to the EU.

If Sri Lanka is successful in regaining the generalised system of preferences plus trading facility, it will have preferential access to the UK only while it remains part of the EU. When the UK leaves the EU, the two countries will have to agree a new bilateral agreement on trade. This is of course not impossible, but the uncertainty that is prevalent in the short and medium term does not make for a stable platform from which to make investment decisions for either side of the trading space and does not make for an advantageous position from which the retail sector’s stakeholders must operate.

Supermarkets Surge

The supermarket segment is expected to see record growth in the short term, driven by the country’s rising per capita income and workforce numbers, as well as changing patterns of consumption. More than 500 supermarkets, hypermarkets and convenience stores operated in the country as of 2015. Building on this momentum, the country’s retail supermarkets and stores recently formed an association to enable industry professionals, entrepreneurs and contributors to join together in an idea-sharing platform for the retail industry. The Sri Lanka Retailers’ Association was incorporated as a company in July 2016. Its founding membership includes leading retail business establishments such as Cargills Foods Company, Keells Super, Abans, Cool Planet, DSI, Hameedia, Healthguard Pharmacy, Laugfs Supermarkets, No Limit, Swarnamahal Jewellers and Singer Sri Lanka. At the association’s inaugural meeting in October 2016, proposals included promoting Sri Lanka as a retail hub and the staging of a Colombo shopping festival.

Cargills is the country’s largest modern food retailer as measured by sales and number of stores. The Cargills chain holds approximately half of the market in terms of turnover, operating 177 supermarkets and more than 220 retail outlets. Since 1983 the Cargills retail operation has extended its presence as Cargills Food City supermarkets and Cargills Food City Express convenience stores. In 2016 Cargills Food City was rated the 10th most valuable brand in Sri Lanka, according to the Brand Finance Index ratings, earning it an AA+ rating. In hot pursuit, state-owned Sathosa operates 250 convenience stores, Keells has more than 50 hypermarkets and Arpico has 13 hypermarkets.

Ceylon Cold Stores is currently the country’s second-largest food retailer and its largest ice-cream vendor. The company competes strongly with Coca-Cola in the beverages business, according to Asia Securities, which noted in a recent report that Ceylon Cold Stores is investing in new plants to drive the growth of its “impulse” product range.

In consumer durables, multinational firm Singer lays claims to the mantle of largest firm in terms of sales and store numbers. Its island-wide network includes many locally manufactured products, such as washing machines and refrigerators, for which its Regnis unit is the market leader. In consumer electronics, meanwhile, Abans, Singer and Softlogic are the three market leaders. Other notable players in the modern retail trade sector include Laugfs Sunup Supermarkets, Star United, Ceylon Tobacco Company, Nestlé, Keells Food Products, Lion Brewery, Distilleries Company and Hemas.

Foreign Players

Although domestic firms remain the frontrunners in the country’s retail sector, a few international retailers have announced plans to enter the market. One of these, the US-based ice cream shop Cold Stone Creamery, is planning to open five new stores in Sri Lanka by 2021 in collaboration with Lulu Group International’s Tablez Food Company.

Despite its growing GDP, Sri Lanka has been mostly overlooked by international retailers until recently. This is probably attributable to its comparatively small population and the relatively recent end of a long-running civil conflict. However, that may be changing too, as retail conglomerates including Unilever, Nestlé, British American Tobacco, McDonald’s, Dunkin’ Brands, Domino’s, Yum! and Coca-Cola have entered or expanded their presence in Sri Lanka’s retail space. Other retailers that have publicly announced plans to enter the Sri Lankan retail space include Indonesia’s Mitra Adiperkasha (MAP), which operates 1900 stores and retails more than 150 brands in Indonesia, and Indian jewellery firms Joyalukkas and Kalyan.

Although the country is a hub for global textile manufacturing, it primarily serves export rather than domestic markets. Mango, Benetton, Fashion Bug and the Landmark Group are the main international firms active in the retail apparel segment, with the outlets mainly operated as franchises.

Retail Spotlights

Catering to the upmarket populace are Colombo’s branded shopping destinations, located mainly along Galle Road and Duplication Road. The capital’s traditional wholesale and retail sub-markets of Pettah trade in both domestic and export-oriented business segments such as textiles, tea, jewellery and spices. Many established upmarket retail outlets are located in the southern areas of Colombo.

Colombo’s main shopping malls – Majestic City, the Dutch Hospital, Liberty Plaza, Unity Plaza, Crescat Boulevard, Realty Plaza and K Zone (in Moratuwa and Ja-Ela) – range in size from 30,000 sq feet to 250,000 sq feet. They are at or near capacity, with an average vacancy rate of 5%, according to JLL. More space is on the way, however, with at least 10 new malls reportedly in development and expected to add more than 1.5m sq feet of retail space to Colombo’s existing mall stock.

Quality retail space is thus extremely limited in Colombo, where rents for retail space increased by around 30% in the second half of 2015. A large amount of development of multipurpose space is in the pipeline, however, especially in Colombo, which can look forward to at least two iconic developments that will incorporate retail space in the near future. One, the Altair project, will offer 40,000 sq feet of much-needed upmarket retail space in the capital when complete – currently set for some time in 2017.

Scheduled to open in 2019, the John Keels Group’s Cinnamon Life complex, will include high-end retail mall space and office space, as well as convention, ballroom and banqueting space, a luxury hotel and residencies. The Keels Group already operates the Crescat Boulevard shopping centre in downtown Colombo and the K Zone shopping malls in Moratuwa, south of Colombo, and Ja-Ela, north of the city. In addition, the ongoing Colombo International Financial City project will include designated shopping areas – the Slave Island and Galle Face shopping districts – as well as hotels.

Lastly, the Wijaya Group manufactures its own brands of garments in factories located in Maharagama and retails them in CIB Shopping Centres across the country.

Outside of Colombo, plenty of room for retail development remains, according to the GRDI report. As the amount of retail space has increased, sectoral growth has incorporated domestic multi-brand chains. There is only one modern retail mall, Kandy City Centre, outside of Colombo. However, local players are in the process of developing multipurpose shopping complexes such as the Gampaha district’s Ward City, with 196 shops and more than 12,000 sq feet of office space. Another mixed-use development, Unity-Niattambuwa, located on the main Nittambuwa-Katunayake roads, will have 96 shops, and the Sanasa Purahala housing and shopping complex in Naiwala will have 117 shops and 68 condominium apartments on 15 acres of land.


Sri Lanka is an increasingly hyper-connected nation. Increased smartphone penetration and adoption of 3G and 4G services have driven up demand for broadband data services, and e-commerce applications are increasingly available due to these technological advances (see ICT chapter). But the e-commerce segment has yet to take off in the country, in part due to banking regulations and monetary policies that work to discourage would-be e-commerce entrepreneurs from creating new businesses using technology. There are notable exceptions to this rule, and one is home-grown e-tailer, The company debuted in 2012, and with a strong customer base it has grown to become Sri Lanka’s largest e-tailer, selling more than $200,000 worth of products each month. In the next 5-10 years, it aims to expand into Pakistan and south India and become a regional player in the e-commerce space.

Online payments have been an obstacle to the e-commerce segment, but recently Harin Fernando, minister of telecommunications and digital infrastructure, announced that PayPal has listed Sri Lanka for 2017. However, it is so far unclear whether Sri Lanka will gain inward access to PayPal. This means that while Sri Lankan users are able to pay sellers in other countries for their purchases via PayPal, Sri Lankans are restricted from receiving payments. E-commerce entrepreneurs and tech start-ups have long lobbied the government and central bank to enable the full suite of PayPal’s functionality, saying that the payment system will open up global markets to their businesses and provide a necessary boost for the country’s exports.

Another payment gateway provider, Ireland’s Stripe, is set to enter Sri Lanka. Stripe should perform the service that PayPal cannot, which is to allow individuals and businesses to accept payments over the internet. “Start-ups and small businesses can sell their products and receive payments to their local bank account through Stripe soon,” Fernando said in March 2016.

Increases in the numbers of credit cards and systems such as cash on delivery for goods purchased online are indicative of the existence of pent-up demand for Sri Lankans to use the internet to purchase goods online. And with retail space scarce in Colombo, more and more retailers are going to be looking for a way to sell online.

Tourism To The Fore

Sri Lanka’s tourism industry has been one of the country’s fastest-growing sectors since the end of the civil war and represents a rich source of earnings for the retail sector (see Tourism chapter). Tourism is the country’s third-largest foreign exchange earner, with close to 1.8m tourist arrivals recorded in 2015, a four-fold increase over arrivals in 2009. According to the Sri Lanka Tourism Development Authority (SLTDA), that figure rose to 2.1m for 2016, a 14% increase over arrivals in 2015. Tourists contributed $2.98bn in earnings in 2015, an eight-fold increase from 2009. Much of these earnings are derived from spending in the hotel, restaurant and retail segments. Tourism numbers for 2016 fell short of the SLTDA’s 2.4m visitors target, but the tourism authority is targeting arrivals of 4m visitors and revenue of £10bn from tourism by 2020.


In Sri Lanka multipurpose developments that incorporate retail services are being built at a fast rate. The retail stakeholders have made great strides in laying the foundations for Colombo and the island at large to become a retail hub, and the financial city project will feed into this goal seamlessly. As the capital grows and retail offerings mature and proliferate, tourists will arrive looking for the next new shopping experience. For the domestic retail market, local players are planning for rapid expansion, and foreign multinationals are also starting to pay attention to the country. If the government and banking systems can work together to enable online payment systems, there would appear to be no limit to what the retail sector can achieve.


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The Report: Sri Lanka 2017

Industry & Retail chapter from The Report: Sri Lanka 2017

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