Continued recovery for the consumer sector
Ng Wai Mun 
Lay Hong Bhd managed to record a three-year net profit CAGR of 36%

At the end of 2016, industry players and analysts were forecasting that 2017 would be a subdued year for the consumer sector, with “slow and cautious spending” by Malaysian consumers. And that’s how the year has panned out for the industry.

Nielsen Malaysia MD Raphael Pereda says so far, all indicators are indeed showing 2017 to be a “subdued consumer recovery year”.

“Our Retail Audit data reveals that consumer spending was slow this year for both of the major festive periods (Chinese New Year and Hari Raya),” he says, adding this was despite the expected seasonal lift in the fast-moving consumer goods (FMCG) sales as well as key economic factors such as exports and GDP, which exceeded expectations.

Pereda expects continued recovery in 2018

“Our Q1 Retail Audit data has shown that FMCG growth contracted for the first time in two years while Q2 recovery was driven predominantly from selected categories in the personal care and health & wellness categories. But overall levels remain below the previous year.”

Nielsen’s latest survey on consumer confidence also reveals positive improvement for Malaysia in the second quarter, which boasts the highest increase across all the Southeast Asian countries. It is now at its highest level since Q1 of 2015.

Pereda explains this is likely a result of the improvement in the key economic indicators, a stabilising currency and no major shocks occurring in the system. However, while its index remains marginally below the neutral level, any increase in consumer spending towards the second half of the year will be driven by continued positive economic news and price stability.


A disconnect

A research manager fears that positive upward shifts in consumer sentiments may be nothing more than mere numbers which may not translate into dollar and cents for the retailers. Depending on how one wants to interpret the Consumer Sentiment Index, she says the index has been growing every quarter, year on year, since the first quarter of 2016.

“Despite recording higher reading every quarter (year-on-year) in 2016, consumer-related sectors in particularly the retail sector were sluggish that year. The index’s continuous higher reading in 2017 may not mean better days to come for the retail sector despite expectations of better sentiments,” she adds.

MIDF Research analyst Nabil Zainoodin concurs that 2017 is a subdued year for the retail sector locally, especially brick and mortar retailers, due to the increasing competition from the e-commerce shopping sites.

As for the food & beverage sector, Nabil says: “2017 is a challenging year for the most F&B players due to the intense competition locally as well as higher commodity prices, which suppressed profit margins. For instance, the international raw sugar price has peaked at 20 US cents (82 sen) per pound in early 2017 from early 2016’s 14 cents.”

He says despite the increase in commodity prices, F&B players have been holding back from increasing their prices in order to maintain market share. Nevertheless, sugar price trended down back to the 14 cents level. Hence, going forward, earnings for F&B players should normalise.

In spite of the negative sentiments and reviews for the year so far, companies involved in the basic necessity goods sector such as food and clothing excelled in 2017.

Integrated livestock farming player Lay Hong Bhd managed to record a three-year net profit compound annual growth rate (CAGR) of 36%. Its share price appreciated by 23% since end December last year to close at 99.5 sen on Dec 13 compared with the KLCI which only rose by 6% during the same period.

Cocoaland Holdings Bhd also managed to achieve commendable earnings and share price appreciation. Primarily a manufacturer of chocolates, hard candy, cookies and snacks, Cocoaland saw its share price appreciating by 31% since end December 2016 to RM2.63 on Dec 13.

Nabil names Padini Holdings Bhd as one of the companies that did well this year. “The share price increased more than 100% since the beginning of 2017. Its financial year ended June 2017 earnings rose by 14.6% yoy to RM157.4 mil.”

He says the reason for the improved performance was due to the opening of 14 new stores, consisting of six Padini Concept Stores, seven Brands Outlets and one free-standing store. About RM71 mil or 4.5% of its total revenue was contributed from these 14 new stores starting from November 2016 to June this year.


Steady recovery

For 2018, Nielsen’s Pereda expects to see continued recovery. He, however, forewarns that a lot will depend on the key economic indicators’ trends and prices.

“This will depend on how companies react. Suppliers and manufacturers should proactively seek out alternative ways to grow, rather than just passing on the cost to the consumers. Additionally, better focus on pipeline management and alternative pack sizes or bundles may also improve returns,” he says.

As to whether 2018 will also turn out to be a year of cautious spending, much like 2017, he says: “There still remains a question of the disconnect between the economic indicators and consumer sentiment which, although moving in the same direction now, still indicates that the average Malaysian consumer is not feeling the impact of the positive economic growth at a grassroots level.”

Pereda believes that whilst the economy remains the number one concern for the consumers, uncertainty will most likely intensify as the general election period approaches.

Nabil also foresees the retail sector to continue its growth in 2018. “Private consumption is not expected to decrease. Traditional brick and mortar retailers will continue to face a challenging year as consumers shift spending to e-commerce channels,” he adds.

This article first appeared in Focus Malaysia Issue 263.