Stocking up: Food and beverage, health and beauty, and online platforms are key segments shaping the retail sector

Following a few uncharacteristically slow years for the Thai retail industry, vendors are looking to build on the momentum created in 2016 and continue to expand nationwide sales into the next decade. Boasting the second-largest economy in the ASEAN region and attracting millions of tourists each year, Thailand has developed into a shopping destination not just for the domestic population – which has shown a seemingly insatiable affinity for large shopping malls – but for customers visiting the country from around the globe.

SECTOR STANDING: As of early 2017 the retail sector has been buoyed by ongoing economic growth; an increased tourism inflow; the recovery of the agriculture sector after a prolonged drought; an influx of cash into the national budget; and the further development of economic corridors and special economic zones around the country. The stable, single-digit growth in retail sales that has characterised the past few years signals a period of relatively controlled expansion of the retail sector compared to the more lucrative but volatile years that saw growth rates touch double digits.

Retail sales rebounded from the 2009 slump induced by the Asian financial crisis to post stable growth rates averaging just under 5% from 2010 to 2016, according to data provided by the Thai Retailers Association (TRA). Led by non-durable goods, retail consumption topped BT3.5trn ($98.6bn) in 2016, up 2.4% from 2015 and a large increase over the BT2.4trn ($67.6bn) purchased in 2009. Food purchases account for roughly two-thirds of all consumption in the country, with higher-priced non-food items accounting for the remainder.

Non-durable goods – including food – have recently been operating as the primary growth engine for the sector as a whole, posting annual growth rates of 3.2% and 3.7% in 2015 and 2016, respectively. This outpaces the expansion in the semi-durable and durable goods segments which posted respective gains of 3.2% and 1.65% in 2016. This recent trend breaks from longer-term growth patterns exhibited earlier in the decade when robust economic expansion fuelled rapid double-digit gains in the retail sector and led to prolific spending on durable goods among the expanding upper and middle classes.

These trends were likewise reflected in the Bank of Thailand’s retail sales index, which increased to 213.0 in 2016, up 5.9% from 2015 but still 7.8% below 2013 levels. The 12-month moving average of the retail sales index has continued to show positive growth, albeit at a slower rate than in previous years, supported by increases in farming income; government stimulus in the form of tax relief and cash disbursements to low-income households; and healthy tourist arrivals. Year-end sales were also assisted by a BT15,000 ($423) tax allowance issued by the government in December 2016 for items purchased that month, although the stimulus measure will not have any long-term effect and likely drew demand away from early 2017 purchases.

Countering these positive indicators, the issue of relatively high levels of domestic debt still casts a long shadow over the sector, with household debt exceeding 80% of GDP and impeding consumer spending. Consumer confidence was also shaken in October 2016 with the passing of His Majesty King Bhumibol Adulyadej, resulting in a drop in the consumer confidence index (CCI) to 73.1 and then 72.3 in November before beginning a period of recovery in December at 73.7.

MARKET STRUCTURE: Although decades of shifting preferences and modernisation of the retail sector have impacted the current market composition, the landscape is still dominated by small and medium-sized enterprises (SMEs). More than half of all retail purchases in the country are still made in SMEs and momand-pop shops, of which the TRA estimates there are 300,000 -500,000 outlets. Although conventional small, often family-owned, shops are common throughout large rural areas of the country, these shops and traditional wet markets are being squeezed out by modern retail chains in urban areas. The provinces’ larger leading businesses account for 12-15% of the national market, spread among 500-700 companies. At the top sit roughly 40 modern chain stores, which together command roughly 32% of the total retail market.

Some of the largest vendors operating in Thailand are retail conglomerate Central Group; The Mall Group; supermarket chain Big C; CP All, which runs an ubiquitous chain of 7-Eleven stores; and homewares stores Global House and HomePro. Other prominent vendors are Aeon, Tesco and Isetan Mitsukoshi Holdings, along with branded stores such as Adidas, Nike and Sephora.

BIG CITY BRIGHT LIGHTS: The undisputed bulk of retail sales originate in the capital city of Bangkok, with vendors cashing in on the most populated city in the country as well as the increasing number of tourist arrivals flowing into the city. At the end of 2016 Bangkok boasted total retail space of 7.33m sq metres. Despite the addition of a few major retail developments, the total supply added in 2016 tallied 227,921 sq metres – less than the new stock added in both 2015 and 2014 at 503,248 sq metres and 382,117 sq metres, respectively. The majority of Bangkok’s retail space is distributed among the suburbs, which accounted for nearly half of all supply at 3.7m sq metres. Another 2.1m sq metres was located in midtown, followed by the highest-valued property situated in the downtown area, which housed 1.5m sq metres of prime retail space.

This slowdown in delivery of new stock has been reflected across all subsectors of the retail industry, even slowing the rapid growth of shopping mall construction in Bangkok. After adding just one major mall in 2016 (see analysis), construction may pick up in 2017. However, while others are expected, only one large mall had been added by mid-year – the 87,500 sq-metre Icon Siam – as many developers look to wait out sluggish growth in the sector and the domestic economy as a whole. Rather than opening new venues and further saturating the market, many developers have opted instead to refurbish and modernise existing stock in a bid to boost occupancy rates and profitability.

The retail occupancy rate in Bangkok at the end of 2016 stood at 93.8%, up from 92.6% at the same time in 2015. High-end, efficiently run malls in prime locations, operated by premier developers such as Central Group, The Mall Group and Siam Future Development, led the way, running occupancy rates over 95%, while less well run and older locations posted lower occupancy rates.

MOVING UPCOUNTRY: As the financial and political centre of Thailand, Bangkok receives the lion’s share of attention from the retail sector, as evidenced by the steady stream of enormous shopping malls cropping up on seemingly every block of the capital city.

While the capital does boast the largest variety of outlets and, understandably, the highest concentration of wealth, the other 40m consumers outside Bangkok are becoming an increasingly coveted demographic for retailers in the country. “Retailers are now expanding the number of stores in the upcountry – Bangkok accounts for 28% of retail outlets and the rest is upcountry,” Chatrchai Tuongratanaphan, executive director of the Thai Retailers Association, told OBG. “Over the past three or four years there has been an influx of money and low interest rates, so even upcountry people can afford things such as satellite TV.”

This growth outside the primary market is being spearheaded by many of the more successful developers that already have a strong presence in Bangkok and are now looking to push their influence further afield. Thailand’s largest retailer, Central Group, has plans to open at least three shopping complexes in the near future in Samut Sakhon’s Maha Chai district, Nakhon Ratchasima and Phuket, according Surachet Kongcheep, associate director of Colliers International Thailand. Robinson Department Store, owned by Central Group, also has plans to develop three new branches outside of Bangkok in 2017, two of which are lifestyle shopping complexes in Phetchaburi and Kamphaeng Phet provinces.

FOOD & BEVERAGE: Accounting for the majority of domestic retail sales, as well as posting the highest growth rates of any retail segment, Thailand’s food and beverage industry represents one of the most attractive retail opportunities in the country, but also in the Asia Pacific region. In 2015 Thai consumer expenditures on food and beverage totalled $59bn, equalling approximately 26% of all household expenditure where per capita disposable income was $3166.

In addition to being the largest retail subsector, food and beverage-oriented businesses have also been among the fastest growing in the industry. Convenience stores led the way with 10.4% average annual growth in 2010-16, supermarkets posted an impressive 8.3% average growth rate, and 5.3% growth was tallied for the hypermarket and supermarket categories. Growing at a projected compound annual growth rate of 7%, the grocery market is expected to top $145bn by 2020, up from the $73bn of total food sales made by organised retail chain stores in 2015. As a whole, modern retail sales account for approximately 70% of total sales after wrestling away business from traditional venues such as wet markets and small-scale grocery stores. Major players such as Big C, Tesco Lotus, Central Food Retail Group, AEON (MaxValu), The Mall Group, Villa Market and Foodland are currently locked in a competitive struggle for more affluent urban consumers, while also expanding into secondary markets to increase their presence. “The Thai food retail segment has permanently been characterised by high levels of competition within all formats and a high level of merger and acquisition activity,” Pascal Billaud, CEO of Central Food Retail Group, told OBG. “With the market entry of large e-commerce players such as Alibaba, this trend will definitely continue and will disturb existing players.”

SKIN DEEP: One area which retailers are singling out for increased competitiveness in 2017 and beyond is the high-end health, beauty and cosmetics segment. Keen to attract consumers in the high-margin demographic of financially well-off middle-aged and older women – who account for a substantial portion of purchases in this segment – both domestic and international brands have recently become more aggressive in their race for market share. “The health, beauty and fashion cosmetics market in particular is heating up, with the leading Japanese cosmetics brand Matsumoto Kiyoshi entering the market,” Chatrchai Tuongratanaphan, executive director of the TRA, told OBG, noting that as consumers earn more, they generally spend more on health and beauty products.

As a result, competition is expected to intensify among store chains operating in Thailand, such Boots, Watsons, Tsuruha – another new arrival from Japan – and Pure for the personal and beauty care market, estimated to be worth approximately $5.8bn in 2015. The domestic market accounts for $3.5bn of this, with the remaining $2.3bn exported. This places Thailand’s cosmetics market as the 16th-largest in the world and the third-largest in Asia behind only Japan and South Korea. The industry is projected to reach $6.39bn in 2017 by the US Department of Commerce.

In addition to robust demand for domestic brands, Thailand is also an attractive destination for foreign companies looking to access Asian markets, and the country has established itself as the number one original equipment manufacturer in ASEAN. Although the majority of raw ingredients are imported, Thai cosmetics manufacturers are seen as proficient operational partners, and 80% of the country’s 762 cosmetics manufacturing plants are foreign-Thai joint ventures.

Despite a strong performance from the luxury segment in Thailand, the segment does contend with higher taxes compared to those levied on other subsectors. As such, luxury goods – which include cosmetics and beauty aids, along with other fashion goods – are subject to duties ranging 25-40%, which raise sticker prices in department stores where they are sold.

MODERN CONVENIENCE: The mini-market and convenience store segment has exploded in Thailand over the past decade as the offering of uniform, well-lit, air-conditioned stores with consistent high-quality offerings has attracted consumers and multiplied in urban areas as well as expanded into secondary markets. Between 2012 and 2016 the number of convenience store outlets operating in the country spiked 33% to reach 14,071 locations by the end of 2016.

Although inroads have been made by more than a dozen other chains, the 7-Eleven brand owned by CP All continues to lead the market in Thailand with 9411 stores operating across the county as of December 2016. This impressive showing puts CP All as the third-largest operator of 7-Eleven stores behind only Japan’s Seven & I Holdings and its US-based parent company. The next closest rivals pale in comparison, with Tesco Express claiming 1533 stores and FamilyMart operating another 1355 stores. No other brand has reached 400 stores, although a number of companies were pursuing aggressive expansion strategies which could cut into the market leader’s dominance.

FamilyMart has nearly doubled its presence in the country since 2012, while Tesco Express has upped its number by roughly one-third over the same five-year stretch. Other smaller players are also making a big splash early on, such as Mini Big C, which more than tripled the number of stores from 128 to 386 while the Tawekij and Super Cheap brands have put up 123 and 59 stores, respectively, since beginning operations in 2014.

Even with this prolific expansion, there remain significant growth opportunities in the increasingly competitive sector. One such business model ripe for development is the addition of convenience stores within petrol stations, a mutually beneficial partnership common in many countries around the world that is only beginning to roll out in Thailand. According to the TRA, there are more than 25,000 petrol stations operating across the country, with less than 2000 of these currently hosting a convenience store.

PLUGGED IN: Another one of the rapidly growing retail subsectors in Thailand is e-commerce, which, although relatively recently introduced to a market that possesses a well-established affinity for mixing shopping and entertainment excursions, nevertheless has recorded steady double-digit growth rates. Starting from a low penetration base and accounting for only a fraction of overall retail purchases, the upstart segment is already making waves in the industry and has attracted the attention of some of the largest retailers both in Thailand and abroad.

Leading retailer Central Group acquired the Zalora Thailand online retail outfit in August 2016, successfully buying out a potential rival and substantially bolstering its e-commerce capabilities. The market has also attracted the attention of Jack Ma, the billionaire owner of Alibaba Group, a successful Chinese online marketplace. Ma, the second-richest man in China, told local media that he was interested in further developing e-commerce in Thailand and specifically in forming a joint working group with the Thai government to formulate an action plan for e-commerce development, including an effective e-payment system. Ma has also suggested that his group could help screen Chinese visitors to Thailand to ensure the arrival of tourists with more purchasing power, as most outbound Chinese tourists use Alibaba’s online payment system Alipay and the group already has their purchasing history and data.

In addition to dedicated online stores, many established brick-and-mortar stores are embracing omni-channels as a means to boost synergies between offline and online venues, and stave off a siphoning of traditional sales by rival e-commerce companies from other channels. For example, Thai consumers are able to order products online through 24catalog. com, a subsidiary of CP All, and pick up their products at 7-Eleven branches at no extra charge.

Other major retailers, such as Central Food Retail Group, offer over 10,000 products online to customers via a click-and-collect option that operates similar to CP All’s system, and is rapidly gaining popularity among consumers. “We aim to enhance customer engagement through an omnichannel strategy,” Phattaraporn Phenpraphat, executive vice-president of marketing and public relations for Central Food Retail Group, told OBG. “By improving customer experience between online and offline channels, and leveraging our store network, we will achieve more than 5% sales growth by 2020.”

OUTLOOK: Strong economic fundamentals and a young, expanding and increasingly affluent population should provide a strong base for future retail growth not only in urban areas, but also across other regions of the country that remain relatively untapped. Increased government financing of major infrastructure projects should boost spending across all demographics, while the continued growth in the number of malls in urban areas should absorb some of this demand. Increased government outlay is expected to stimulate private sector investment, as companies compete to fill government needs for products and services, as well as capitalising on new opportunities created by completed transportation and energy projects.

Partially as a result of this stimulus, Chatrchai expects the retail sector to grow by 4-5% in 2018 and achieve 6% annual growth by 2020. Although at least 10 new major retail projects are slated to open in Bangkok alone in 2017, the aggregate addition of sector-wide retail space is expected to be slower than in previous years with many developers focusing on renovating existing malls and selectively expanding upcountry.

Non-durable and grocery goods will continue to account for the bulk of sales in the country, as well as serving as the primary growth driver overall. Major retail brands, such as Central Group, The Mall Group and Watsons, are expected to continue to expand both in Thailand as well as within other ASEAN countries, while major discount stores, such as Tesco Lotus and Big C, upgrade their image to target more up-market, affluent consumers. Further specialisation and targeting is also expected on the other end of the spectrum, with an increase in no-frills, discount stores offering small assortments of foodstuffs and household goods in minimally decorated spaces. Online sales will continue to make up only a small fraction of retail sales, although short-term growth is projected to be in the 15-20% range annually, compared to the 3-5% averaged in recent years for aggregate retail consumption.

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