Price competition intensifies in Malaysia as innovative retail options expand

With steadily rising per capita income and a modern, increasingly sophisticated and widespread retail sector, Malaysians today have a wider choice than ever when it comes to both consumer products and the channels through which to purchase them.

Hypermarkets, convenience stores and traditional markets and stores are all jostling for position in the country’s cities, towns and villages, while online retail is also developing. However, the economic slowdown and the imposition of a goods and services tax (GST) in 2015 have affected the retail sector, making price competition even fiercer. The year ahead looks to be a period of consolidation, while consumers get used to a new reality. Despite these short-term challenges, the sector continues to offer great potential, as more innovative retail experiences and the roll out of modern retail continue to characterise the market.

Adding Up The Numbers

According to the latest data from the central bank, Bank Negara Malaysia (BNM), the country’s GDP for the fourth quarter of 2015 stood at RM303.85bn ($75.2bn) at current prices, up around 5% from RM289.4bn ($71.6bn) in the same period of 2014.

Over this period, the wholesale, retail, accommodation and restaurants segment grew from RM54.56bn ($13.5bn) to RM59.76bn ($14.8bn), or around 9.5%. For the year as a whole, BNM figures give GDP at purchasers’ value of RM1.157trn ($286.4bn), with the retail trade responsible for RM78.09bn ($19.3bn), or 6.7%. Food and beverage (F&B) contributed RM27.34bn ($6.8bn) to that total.

As GDP has grown, so have per capita incomes, with the most recent data on this, from the Department of Statistics Malaysia, showing mean monthly household consumption expenditure rising from RM2190 ($542) in 2009 to RM3578 ($886) in 2014 – reflecting 9.8% annual growth at nominal value. There is also an element of rural/urban divide in this, with the figure for urban areas growing from RM2465 ($610) to RM3921 ($971), while in rural areas, household consumption expenditure rose from RM1600 ($396) to RM2431 ($602). A further division is by state, with Putrajaya, Kuala Lumpur (KL) and Selangor recording the highest monthly levels, at RM5627 ($1393), RM5559 ($1376) and RM4646 ($1150), respectively.

Spending Money

The biggest portion of monthly household spending continues to be spent on food and non-alcoholic beverages, yet the percentage fell from 20.3% in 2009 to 18.9% in 2014. This is illustrative of a growth in overall income, as basic commodities take less of the budget, leaving more to be spent on less essential items, such as recreation and culture – which rose from 4.6% to 4.9% – and restaurants and hotels – which grew from 10.9% to 12.7%.

Prices have also been relatively stable in recent times. The BNM consumer price index, which started at 100 points in June 2010, stood at 114.5 in January 2016, up 14.5% in 5.5 years. In 2015 inflation was 2.1%, although it had begun to tick up in early 2016 on the back of higher F&B prices. Indeed, the index for food and non-alcoholic beverages stood at 122.3 points in January 2016, while that for alcoholic beverages and tobacco stood at 165, following a tobacco excise duty hike in November 2015.

This robust growth in consumer expenditure also reflects in the strong increase in the retail trade’s contribution to GDP. The 2015 total of RM78.09bn ($19.3bn) was up 10.87% on RM70.43bn ($17.4bn) in 2014. Indeed, double-digit annual growth has been the norm for several years now.

Sentiment

Going forward, consumer sentiment is a key factor, with the Malaysian Institute of Economic Research (MIER) reporting that this has been sliding downwards since the third quarter of 2014. Indeed, in fourth-quarter 2015 MIER’s consumer sentiment index (CSI) hit a record low, at 63.8 points, having been over 100 points during the first half of 2014. Issues affecting sentiment included growing fears of higher prices in the future, worries over jobs and incomes in straitened economic circumstances, and concerns that household finances were coming under pressure. Indeed, with public expenditure a major driver of overall growth in Malaysia, the announcement of a budget “recalibration” in early 2016 sent jitters across the economy and prompted consumers to tighten their belts further, delaying decisions on big-ticket items. A Nielsen survey in the final quarter of 2015 showed that 84% of Malaysian consumers had changed their spending habits over the previous 12 months to save on household expenses, while 64% had cut spending on new clothes and 51% had switched to cheaper grocery brands. Yet household economisation can also mean a boon for certain retail formats, with local convenience stores and hypermarkets benefitting from heightened consumer cost-consciousness.

Consumer Profile

The Malaysian consumer is often characterised as being very brand-aware. There is also a rural-urban divide in terms of the type and range of products likely to attract customers. Retailers who spoke to OBG noted that in cities, consumers have a greater interest in new products and look for wider variety than those in rural areas – a factor that influences the range of stock available from the corner store to the hypermarket.

As a multi-cultural society, Malaysia experiences a series of major boom periods in sales during the year. Chinese New Year is a particularly busy period, as are the Muslim Hari Raya and Hindu Diwali festivals. Another seasonal boom comes with the receipt of bonus salary payments and distribution of Bantuan Rakyat 1Malaysia – government aid to lower-income families and individuals. At the same time, consumers are often highly responsive to discount promotions, being willing to travel to collect bargains. Thus, hypermarkets located on the edge of town have been able to continue to attract customers, leveraging their greater economies of scale to give discounts and encourage loyalty card take-up.

According to a DBS Group Research report from 2015, hypermarkets accounted for 22% of the entire grocery retail market, with supermarkets at 14% and convenience stores at 5%. The remaining 59% belonged to traditional grocery retailers, although their market share has seen a progressive decline over the years. For example, in 2009 traditional retailers had 66% share, with hypermarkets at 21%, supermarkets at 10% and convenience stores at 3%.

Supermarkets

GCH Retail and Tesco are the hypermarket segment leaders in the country, with the former operating over 147 hypermarkets, supermarkets and superstores under the Giant name, and the latter operating 50 hypermarkets, serviced from two distribution centres in Selangor. In 2015 Japan’s Aeon was reportedly interested in buying Tesco Malaysia, with the company given a $1.4bn valuation at that time. Aeon had earlier purchased Carrefour’s Malaysian operations in 2012 for €250m, bringing the Japanese giant’s total to 28 hypermarkets in Malaysia. Bringing the two together would challenge Giant’s claim to be the market leader, with the local retailer now running 85 branches.

GCH Retail Malaysia is owned by global player Dairy Farm (DF) – itself part of the Jardine Matheson Group – and also operates Cold Storage, Jason’s Food Hall and Mercato high-end supermarkets, in addition to Giant hypermarkets and supermarkets. DF also operates the country’s Guardian health and beauty stores and Giant Malls. Aeon Malaysia, meanwhile, includes not only Aeon Stores, but Aeon Wellness, Aeon MaxValue, Aeon Malls and Shopping Centres, and outlets of Mister Donut and Daiso Japan. In 2016 GCH announced plans to open six more hypermarkets while renovating its 28 existing stores.

Chains

Another operator, MYDIN has a range of store formats and some 90 outlets in total nationwide. The 50 minimarkets are branded as MyMydin, the 10 convenience stores MyMart, while 20 hypermarkets feature in MYDIN Malls. Mydin also runs three bazaars and 16 emporiums, along with six franchise outlets, known as Mydin Mart. Mydin opened the high-end SAM Groceria outlet in 2013, a move away from its general profile as a low-price store.

Econsave Cash & Carry is a further key player in the supermarkets segment, targeting highly cost-conscious consumers. Headquartered in Selangor, the company expanded into Eastern Malaysia in 2015, adding its 55th store in Miri’s Myy Mall. Another supermarket chain is Jaya Grocer, owned by Trendcell, which has 16 outlets nationwide. For the 2015 financial year, the chain posted earnings before interest, tax, depreciation and amortisation of RM18m ($4.5m), while the company was also valued at around RM175m ($43.3m) in March 2016 as a string of potential buyers was reportedly in the market. These included TPG Growth, Creador and a Singapore-based Japanese fund. Jaya was originally founded by the Teng family, which also established Giant, eventually selling the latter off to DF.

Creador is another investor in the convenience store segment, with a stake in 7-Eleven, the convenience store giant. This is the market leader in this segment, and has been rolling out aggressive expansion plans. According to DBS, 7-Eleven had a 76% market share in convenience stores in 2014. The firm has amassed a portfolio of 1600 outlets while continuing with a target of adding 200 more a year. In March 2016 the retailer announced annual revenue growth of 6%, to just over RM2bn ($495.1m), although net profits fell by 12% due to the added expense of the expansion programme.

Convenience Competition

A key rival for 7-Eleven is KK Super Mart, established in 2001, which had a market share of approximately 10% in 2014, according to DBS. The chain specialises in smaller stores with a higher sales-per-floor-area ratio than many of its peers. Another expanding player is Bison, which runs newsstands and convenience stores and is pursuing a RM35.5m ($8.8m) expansion programme aiming to add 115 new stores to its portfolio by 2017. The company launched its debut listing on the Bursa Malaysia stock exchange in late March 2016, a move calculated to help fund store growth.

Competition between convenience stores is likely to see increased innovation – 7-Eleven, for example, has plans for a “Boxit” system, whereby online purchases can be delivered to local stores – as the concept of the store as a social meeting place offering a range of services sees further development.

In department stores, the largest market player is Parkson, the retail arm of Malaysia’s Lion Group. It has 39 outlets nationwide, while also operating stores in China and Indonesia. Performance in the former was disappointing in 2015 given intense competition and the economic slowdown, resulting in losses. The firm is looking to streamline its international business.

In Malaysia, however, early 2016 saw the opening of Parkson’s first fully managed mall, Maju Junction, which has been completely refurbished with Parkson as the anchor store. The company plans a further mall launch in 2016, called M Square located in Puchong. Two other players in the departments store segment are Metrojaya, in business since 1976 and now with seven department stores as well as 40 speciality stores, and Robinsons, with a store at the Gardens, Mid Valley City, KL.

March Of The Malls 

Recent years have seen a significant rise in the number of malls in the country, particularly in the Klang Valley region, but also increasingly in other less-served states. Despite the slowdown in retail sales, more mall space continues to come onto the market. In the first half of 2015 alone five new malls came on-line in the Klang Valley, adding some 1.86m sq feet of net lettable area (NLA), according to statistics from Knight Frank. One of these, Jakel Mall, is due to house LuLu supermarket, the first Malaysian branch of the Abu Dhabi-based retailer, which has plans to invest $300m in rolling out 10 hypermarkets nationwide in the next two years. Another new opening is Mitsui Outlet Park KLIA Sepang, a joint venture outlet shopping mall located within the KL International Airport city.

Further projects for the immediate future include MyTown Shopping Centre, expected to add 1.1m sq feet of NLA in Cheras by the end of 2016; Pavilion Suites at Jalan Bukit Bintang, which will add 240,000 sq feet of NLA in the popular KL downtown area, is due for completion in 2017; a mixed commercial and retail development at Lot 91 of KL city centre scheduled for 2020; a 1.2m-sq-foot retail space as part of the Bukit Bintang City Centre project; the KLS City Mall, with around 2.2m sq feet in Selangor is likely to be the largest mall in the Klang Valley on completion, in 2017; Fraser Square in Petaling Jaya, a project of F&B company Fraser & Neave Holdings, expected to be launched in the second quarter of 2016; and finally, three malls in the Kwasa Damansara township development, offering a total of an estimated 1.1m sq feet of NLA, to be built over a 12-year period.

Previously more underserved parts of the country are also seeing the arrival of more malls. In Eastern Malaysia, the Boulevard Mall in Kuching opened in 2013, joining The Spring, which came on the market in 2008, leading the way for large-format modern retail in the state. In Sabah, Kota Kinabalu has the Suria Sabah, Centre Point and 1Borneo Hypermall.

Lines Of Business

The fast-moving consumer goods segment experienced a slowdown in 2015, with many retailers who spoke to OBG attributing this to the coincidence of negative factors. The introduction of the GST in April 2015 came at a time of ebbing consumer confidence and economic activity, along with ringgit depreciation, with sales for the second quarter of 2015 down some 20%. GST’s actual impact on prices to consumers may have been less than its perceived impact, however, given the above-inflation figures, with retailers themselves shouldering much of the burden in such competitive times.

A degree of uncertainty over political conditions may also have served to magnify consumers’ economic concerns, prompting more conservative spending patterns. Thus, PwC accountancy figures show market demand growth for F&B and tobacco as accelerating from 4.5% to 6.4% between 2011 and 2013, and then slowing to 4.9% in 2014. Forecasts for 2015 and 2016 are 4.2% and 4.3%, respectively.

Naturally, the economic slowdown has also affected the clothing segment, with PwC noting market demand growth rising from 6.8% in 2011 to 7.5% in 2013, before slowing to 6% in 2014. Forecast growth for 2015 was 5.9%, slowing further to 4.8% in 2016. But overall market trends are positive and, as a consequence of rising incomes, increased internet usage and more frequent international travel, Malaysians are becoming more conscious of global-fashion trends. These were likely to have been the push factors behind Parkson’s decision to go into partnership with Super Apparel Supply to launch a new fashion brand, LOL, in November 2015.

One of the largest Malaysian clothing and footwear companies is Padini Holdings, which operates through five segments, managed by different subsidiaries. These are: Vincci Ladies Specialities, Padini Corporation, Seed Corporation, Yee Fong Hung, and Mikihouse Children’s Wear. Despite falling profits in 2015, the company has announced that it will continue with expansion plans, which include 16 new stores, while continuing to roll out its e-commerce platform. Meanwhile, demand for electrical and electronic appliances, TVs and household audio and video equipment continues to see strong growth. The PwC figures for electrical appliances and housewares show market demand growth of 8.4% in 2011 rising to 9.5% in 2014, while household audio and video market growth increased from 7.5% to 9.4%.

The main distribution channel for consumer electronics and electrical items continues to be specialist stores, with a popular format being an entire mall dedicated to these items, such as Low Yat Plaza and Sungei Wang Plaza in KL, or Kompleks Tun Abdul Razak in Penang. These are highly price-competitive operations, although in recent times, hypermarkets have also begun selling discounted consumer electronics. Three key chains in this segment are Courts, with some 56 stores, HLK, and Senheng.

One other new area where this segment is making some headway is in online sales, with Superbuy Online Shopping Mall and Lazada, 11Street.my and Lelong Malaysia all operating in this format.

Outlook

The year ahead looks to be a time of continued expansion for many supermarket chains, despite a slowdown in overall retail growth. The impact of the GST is likely to soften, as is that from recent hikes in electricity prices. Competition itself will likely hold prices down, cushioning consumers, while also wearing away at retailers’ bottom lines somewhat. Much rests on consumer sentiment, too, with many Malaysians adopting a wait-and-see attitude during times of economic and political uncertainty. As these factors progressively diminish in 2016-17, confidence should also pick up again.

For now though, price campaigns and a strongly competitive environment are likely to continue to characterise the sector. The country’s retail industry may also see sizeable growth in e-commerce, which has the capacity to offer lower pricing, although it currently remains a small part of the sector.

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