Papua New Guinea’s retail sector remains in its nascent stages, with the majority of the population remaining outside of the formal economy and low rates of urbanisation. The recent construction of the $19bn PNG LNG natural gas project provided significant support for retail expansion, although retailers have since grappled with a host of challenges, including subdued macroeconomic growth, weakening demand, limited foreign exchange supply and security concerns.
Despite these challenges, the sector began to rebound in mid-2016, with the resumption of Ok Tedi mining operations boosting the business climate. Retail growth should take off in the medium-term as population growth, rising incomes and urbanisation drive new demand for formal retail space. In the interim, falling food, alcohol and tobacco prices, kina stabilisation and election spending should support a more stable 2017.
Growth Drivers
The most significant growth driver for new retail developments in PNG will be surging population growth, with the population forecast to increase by 64.3% between 2013 and 2040, from 7.4m to 12m. Purchasing power is also predicted to improve, with APEC expecting GDP per capita to triple over the same period, from $2942 to $9651.
As the population grows and more citizens become part of the formal economy, demand for new retail developments is expected to rise. Urbanisation will also support this trend, and the country’s National Urbanisation Policy, running from 2010 to 2030, forecasts the country’s urbanisation rate to rise from 13% in 2000, and an estimated 15% in 2010, to hit 20% in 2030, with an average annual growth rate of 1.6%.
At the same time, retail sales are challenged by a host of recent headwinds, including waning demand following the completion of the PNG LNG project, limited access to the necessary foreign exchange for product imports, currency depreciation, weak macroeconomic growth, and elevated transportation and security costs. The Department of Treasury downgraded expected wholesale retail and trade sector growth for 2016, from 3% to 1.9%, which it attributed to weak sales and a shortage of foreign currencies to source imports.
Value Of Sales
The retail sector struggled in 2016, despite an uptick in the second quarter, according to the Bank of Papua New Guinea (BPNG). The bank conducted a business liaison survey in 2016, which found that the nominal value of sales in the private sector declined by 2% in the third quarter of 2016, following on from a 20.8% increase in the second quarter. Excluding the minerals sector, sales fell by 1% in the third quarter, following on from a 20.3% rise in the preceding quarter, which was led by the agriculture, manufacturing, minerals, and wholesale and retail sectors. In the year to September 2016, sales increased by 10.4%, or 10.1% excluding the minerals sector.
In wholesale and retail, the BPNG found that while business improved in the second quarter, annual sales still contracted. In the wholesale sector, sales contracted by 8% in quarter three, against a 17.1% rise in the second quarter, with higher oil prices, rising demand for consumable goods and chemicals, and rising coffee exports supporting growth. In the 12 months to September 2016, however, wholesale sales fell by 4.9% against the same period a year earlier.
Retail sales also recorded a mixed performance, with a 14.7% fall in the third quarter of 2016, against a second quarter increase of 14.2%. The BPNG reports that the mid-year turnaround was driven by higher sales of heavy machinery, equipment and services as operations at the Ok Tedi Mine resumed, along with rising demand for tyres, and general and consumable goods. Despite the increase, sales nonetheless declined by 38.4% in the 12 months to June 2016.
Major Retailers
The CPL group is one of PNG’s largest retailers, launching operations in 1987, and diversifying its offerings through acquisitions and new retail ventures since the early 2000s. According to the group’s 2015 annual report, CPL had 64 retail outlets in operation across the country, and continues to expand its chain of City-branded pharmacies. Today, City Pharmacy is present in all major urban centres outside of Port Moresby, announcing in May 2016 that it had opened its 32nd pharmacy in the country – its third in Mount Hagen. In 2005 the company acquired the Stop N Shop supermarket chain from Steamships Trading, before moving in 2009 to acquire the Steamships Hardware chain, rebranding it as Hardware Haus.
Three new retail brands were launched under the CPL umbrella between 2011 and 2013, including Boncafé, Eagle Boys Pizza and Paradise Cinema. CPL also developed the most recent formal retail project to hit Port Moresby, the Waigani Central shopping complex, which opened in 2014. In the same year the company entered fashion retailing for the first time, opening a Jack’s of PNG store in Waigani Central in April, and a second location in Vision City in December 2015.
Challenging Environment
CPL Group has struggled with subdued macroeconomic growth, sinking demand and a foreign exchange shortage since the completion of the PNG LNG project in April 2014. CPL revenues fell by 9% during the first half of 2016, with net losses before tax totalling PGK16,000 ($5100), against net profits of PGK3m ($951,000) in 2015. This was partially attributable to a PGK1.3m ($412,000) decline in its wholesale business, as sales to the government dropped during the six months to June.
Security expenses also rose, including a PGK500,000 ($159,000) one-off expense for new Stop N Shop stores in Koki and Harbour City, while the company was also hit with PGK2m ($634,000) in lost business after it was forced to close its stores in June in the wake of nationwide student unrest. Delayed government payments and cash flow constraints have also been an issue. Nonetheless, the group expected results to improve in the second half of 2016 and into 2017, following the opening of its Harbour City and Koki Stop N Shop stores.
Present in PNG since 1919, Steamships Trading Company was one of the country’s largest retailers until 2005, and today operates a commercial arm, Laga Industries, which manufactures and distributes consumer goods, providing employment for more than 500 people at its Lae processing plant, distribution centre in Port Moresby and nationwide sales offices.
Laga focuses almost exclusively on food and beverages (F&B), and fast-moving consumer goods, with a product line including the Highlands Meadow cooking oil range, Star of India curry powder, 111 baking powder, Goroka coffee and Kulau coconut milk. Its mainstay F&B business line is Gala ice cream, which is sold at more than 200 locations across the country, with sales estimated at 20,000 units annually. Steamships also holds a 50% interest in Colgate Palmolive PNG, which distributes oral, personal, home and fabric care products.
After struggling with slowing consumer demand in 2015, Steamships’ annual report noted that Laga Industries recorded a modest turnaround in 2016, with sales growth in key ice cream and cooking oil segments. The growth occurred despite ongoing kina depreciation and a gradual improvement in commodities prices, both of which drove import costs up. At the same time, the company noted that these factors pushed several of its competitors in the cooking oil segment out of the market, supporting a recovery in the second half of 2016.
Shopping Malls
Outside of the Waigani Central, development, Port Moresby’s formal shopping centres are Vision City, which opened in 2010, and Waterfront Place, which was established in August 2012.
Planned and developed by Dynasty Development, the PGK1bn ($317m) Vision City shopping mall project offers 45,000 sq metres of retail space within a three-storey building. The mall houses a hypermarket, F&B outlets and retail facilities, with the Vision City development project spanning 9.2 ha and featuring a luxury business hotel and convention centre, an executive apartment building, and a commercial office tower.
The $48m Waterfront Place, developed by Garamut Enterprises, is located just outside of Port Moresby’s central business district, and offers a range of international food at the Foodworld supermarket. Retail offerings include children’s clothing, sportswear, mobile phones and handsets, a department store, and an office and computer supply store, while the centre also has an optometrist, bank, hair salon, post office and pharmacy.
Outlook
Although the sector has struggled amid economic uncertainty and subdued GDP growth, there are signs the retail environment will improve in 2017. The BPNG reported that while the country’s annual retail price index (RPI) rose by 4.3% in March 2017, it decreased by 2.1% in the 12 months to February 2017. The results were largely driven by price declines in the alcohol, tobacco and betel nut category, as well as food expenditure, which contracted in early 2017.
Quarterly headline RPI fell by 0.4% in March 2017, compared to a 1.9% increase in the final quarter of 2016, as food and non-durable goods prices fell by 3.8% and 8.4%, respectively. Although the kina’s depreciation – estimated at around 35% against the US dollar since 2012 – will continue to affect import-dependent retailers, inflation and currency movements are forecast to stabilise. At the same time, election-season spending is expected to boost consumer purchasing power, lending a more optimistic outlook to retail growth in 2017.
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