Retailing: Growth Driven Partly By Fear

The explosive growth that characterised Thailand's retail industry for several years has ground to a halt since the tanks rolled on Sept 16, 2006.

At home, bombings on New Year's Eve scared away tourists, and proposed amendments to the Retail and Wholesale Business Law, aiming to curb the fast expansion of modern trade stores dampened investment sentiment.

As it happened, the new retail regulations failed to pass before the military-appointed National Legislative Assembly faded into history. It is not clear whether the new government will follow up.

The strong baht and slow investment by the private sector worsened the situation. Violence in the southern part of Thailand also shook consumer sentiment. Another factor threatening to hurt the 1.3-trillion-baht retail market yet further was the US sub-prime crisis, which has had a ripple effect on markets worldwide and triggered an exodus from securities.

The local retail market began to pick up only in the third quarter of 2007, driven by more arrivals in some tourist destinations, new stores opened by existing operators and new players such as J Mart and Sunday Market.

"Same-store sales in 2007 grew only slightly from the same period last year. But the overall growth came primarily from the opening of new stores," noted Likit Fahpyochon, executive vice-president for business development at Central Retail Corporation and the former president of the Thai Retailers Association (TRA).

Despite the negative factors, most retail segments continued to expand over the past 12 months. More rapid growth was seen in some segments, particularly discount and cash & carry stores, which rushed to expand their networks on expectations that the new retail law would limit the areas where they could build.

"Under normal circumstances, retailers will move cautiously when sentiment is poor and consumer confidence is low. But this year was an exception. All modern-trade operators have stuck to their expansion plans and some are moving at an even faster pace, with the new retail law acting as a catalyst," said another executive from the TRA.

As of October 2007, CP All Plc, the operator of 7-Eleven convenience stores, had opened a total of 450 outlets, two months ahead of its original schedule. Siam Makro also opened 12 new stores in 12 provinces with a combined sales area of 81,360 square metres. Ek-chai Distribution System Co, the operator of Tesco Lotus, opened 80 new outlets in 2007, most of them in its small format.

But in the department-store segment, only one outlet was opened in 2007 - Robinson Patong in Phuket.

Retail sales grew only slightly in 2007 but stores expanded at a brisk pace to beat the passage of new rules.

The combined new investment of major retailers such as Makro, Carrefour, Tesco Lotus, Big C, 7-Eleven stood at 30 billion baht, adding more than 150,000 square metres of retail space.

Apart from the rapid expansion, chains stepped up their marketing campaigns and focused on a "green architecture" concept, with wooden materials, open roofs, potted plants, fountains and trees.

"The pace of the expansion by 7-Eleven and Makro is faster than ever," noted an analyst.

Yet the rapid expansion did not translate into the same rate of sales growth. Thanapon Tangkananan, the president of the TRA, forecast that the retail market would grow by 3-4% in 2007, compared to 10-20% in terms of store expansion.

"Normally, the retail business grows at double the rate of GDP growth but the growth this year was about one point behind," he said.

Mr Likhit added that the endorsement of the new constitution, which set the stage for the Dec 23 election, and the belief that state spending on megaprojects would resume, had lifted sentiment to some degree.

"I believe the retail market will improve tremendously in 2008 as a result of the new openings this year," he said.

More importantly, he believes that large retailers will, continue to speed up their expansion plans ahead of the passage of any new retail law.

Each discount-store chain is expected to open at least four to five new outlets while convenience store operators will open around 500 shops, and tens of lifestyle shopping complexes will also be added, with an estimated cost of more than 20 billion baht in new investment.

Where the retail law is concerned, Tos Chirathivat, the CEO of Central Retail Corporation, said it might not be a very good idea to solve one problem while creating another one.

Of all the negative factors faced by the industry in 2007, the debate over the retail law, particularly rules on service hours, was the major concern. A proposed ban on 24-hour operations, for example, would affect more than 6,000 retailers.

In addition to 15-20% in lost sales, these stores may have to lay off more than 20,000 people working night shifts.

Mr Thanapon said the law in its most recent form called for the expansion or establishment of any store with 1,000 sq m or more - or a store from a retailer that earned more than one billion baht in sales over the previous year - to receive approval from authorities.

"If the draft law is enacted in its current state, Thailand's retail business next year will see flat or negative growth, down from an estimated 4% expansion this year," he said.

The view is shared by Kobchai Chirathivat, the president of Central Pattana Plc, the SET-listed property development arm of the Central Group of Companies.

"If the law is enforced, it would affect not only the retail sector but also related sectors such as construction, property and manufacturing. The damage could hit 100 billion baht," Mr Kobchai said.
Think small and prosper

`Lifestyle community malls" have become the buzz-phrase for retail operators looking to gain a greater presence in Bangkok and also get closer to communities.

"While some retail formats will be saturated soon, demand for lifestyle community malls will grow over the next decade," said Somnuk Pojkasemsin, president of Siam Future Development Plc (SF), which pioneered the idea and operates a handful of successful small malls.

A retail market analyst says the community mall fits modern consumer demand. Retail chains are also moving toward smaller formats as prime sites for large developments grow scarce. As well, smaller outlets aimed at upper-income daily shoppers present less business risk.

"With the continued increase in fuel prices, the community mall is a retail format that fits the dramatic changes in customers' needs and lifestyles. Such customers prefer to shop at retail stores that provide one-stop shopping near their homes," he said.