Mainstream
Retailers unaffected by fast-growing e-commerce
Ng Wai Mun 
Loke does not see e-commerce as a direct competitor to retailers
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Retail sales surged by 4.9% in the second quarter, reversing the 1.2% decline in Q1 and translating to a first-half sales growth of 2.5%, says the Malaysia Retailers Association (MRA).

Despite the uptick in sales, traditional retailers are not optimistic of the sector’s outlook for the second half of the year. For some, the pessimism even flows into next year.

On a brighter note, the fast-growing e-commerce business has not been the cause of the dampened retail sales and is unlikely to affect the brick-and-mortar retailers’ sales.

MRA deputy president James Loke does not see e-commerce being a direct competitor to retailers. “The majority of the products marketed by e-commerce (players) are different from those (sold) by the retailers,” he points out.

Nielsen Malaysia head of retail vertical Manisha Kinalekar concurs. “With e-commerce currently at the embryonic stage in Malaysia, contributing only about 2% to the total market, the impact on retailers’ sales is relatively minimal,” she tells FocusM.

Kinalekar says e-commerce contributes only about 2% to the total retail market

However, she warns of the potential threat in the near future especially from top-up shopping players such as Happy Fresh, Honest Bee and also from the non-fast moving consumer goods sector.

Happy Fresh and Honest Bee are online concierge and delivery service providers which give consumers the convenience of having groceries from their preferred supermarkets delivered to them.

 

What caused the Q1 decline?

MRA had earlier projected Q1 retail sales to grow by 0.9% instead of the actual 1.2% decline.

MRA council member Raymond Teo explains that the shortfall in the association’s projection was due to the supermarket and hypermarket subsector, whose performance was below expectations with sales declining 4.8%, based on MRA’s computations. Teo didn’t elaborate on what MRA’s initial sales projection was for the subsector concerned.

According to Loke, the lower sales were due to the combined effect of lower spending per person and fewer people spending. Of the two factors, he believes the decline is more due to each person buying less. He adds that urban spending is still sustainable but people in non-urban areas remain cautious.

“With the recent price increase pressure, it shows that consumers are prioritising spending on essentials, cutting down on buying new clothes and seeking a more affordable range when shopping,” Kinalekar adds.

MRA clarifies that its sales figures took discounts into account. Loke agrees that the discounts offered by retailers in the first half of the year, on average, were higher than those given in the corresponding period last year, enabling the sector to post higher sales in the first half of 2017. 

A retail analyst says: “The 2.5% (first-half sales) growth is good news. At least higher discounts are reciprocated by higher purchases.”

Loke describes the retail sector’s outlook as tough and challenging. MRA is looking at a sales growth of 3.7% this year, slower than the 4.8% pace last year.

For Nielsen Malaysia, the expectation for the entire year is a single-digit growth below the 5% level, with some positive impact in the second half.

The retail analyst says: “Retailers are basically a tough lot. Many of them believe the sales (growth) in Q2 will not overflow into Q3 and Q4 as it (Q2 growth) was due to the Hari Raya festive season.”

The analyst points out that despite the Chinese New Year festive season in Q1, the quarter’s sales still declined, year-on-year. He believes the Q2 growth points to the start of a turnaround in the retail sector as opposed to a one-off effect of the festive season.

In Q2, all subsectors including supermarkets and hypermarkets registered year-on-year sales growth.

 

Currency comes into play

“Currency is one main factor which retailers monitor closely before they are convinced of a better outlook for the sector,” Loke says.

He explains that most suppliers seek raw materials from overseas. The currency factor will have a domino effect from the supplier right up to the end-consumer, with various degrees of the higher cost, caused by weaker ringgit, being passed down to the next level.    

Loke, however, plays down the currency’s negative impact. He says currency should also be seen as a “friend” as he claims the weaker ringgit has brought in more foreign tourists, boosting some of the retailers’ sales.

MRA expects specialty stores to excel. “Specialty stores are those operating in less than 20,000 sq ft of space on average, focusing on products of only one or possibly two categories,” he adds.

In contrast are department stores which usually operate in premises of above 60,000 sq ft and have various types of products.

Loke sees rising cost and rental, and the slow growth in disposable income as the main challenges facing retailers. “The association does negotiate with shopping malls and premises owners to minimise rental hikes to optimise the retailers’ earnings,” he adds.

“With the ageing population and increase in health awareness among Malaysians, healthcare has the greatest potential to grow further as it has recorded significant growth since last year,” Kinalekar says.

On the other hand, she expects retailers of carbonated beverages with high sugar content to continue to face a tough year.

With poor consumer confidence and the pressure of price hikes, retailers are reducing prices to encourage consumer spending, she adds. They are expected to continue doing this in the near future as consumers stay cautious about spending.



This article first appeared in Focus Malaysia Issue 253.