Mainstream
Surviving the online shopping onslaught
Ng Wai Mun 
Online shopping is said to drain at least RM1 bil per annum from brick-and-mortar shops in the country, resulting in hypermarkets, shopping malls and retail shops recording significant falls in revenue.
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THE retail industry is increasingly coming under pressure due to falling sales, no thanks to consumers switching to online purchases.

Online shopping is said to drain at least RM1 bil per annum from brick-and-mortar shops in the country, resulting in hypermarkets, shopping malls and retail shops recording significant falls in revenue.

The latest to shut five outlets was Giant Hypermarket. Earlier, Tesco shut down its Scott Garden outlet in February this year while AEON Big also closed three between February and March.

Local hypermarket chain Mydin slipped into the red last year due to dampened sales.

It also doesn’t help that poor consumer sentiment due to higher inflation and the weak ringgit are making consumers wary of spending.

Downsizing hypermarkets appear to be the current flavour in the retail sector.

Some Giant outlets are being relocated or downsized to superstores, while Tesco Malaysia said it aims to reduce the floor space of its hypermarkets.

Many believe such measures paint a gloomier picture of the already challenging retail sector which, besides competing with online platforms, is also having to compete with the mushrooming of smaller, more cost-efficient convenience stores.

In October, Tesco Malaysia said it will spend some RM27 mil until February to renovate three stores. Six others will be added to this list in the later part of next year.

These renovations are part of Tesco’s Next Generation programme, which looks at decreasing the floor space of the hypermarkets for a more efficient shopping experience.

 

Lease expiry

As for the closure of the five Giant outlets, its owner, GCH Retail (Malaysia) Sdn Bhd, says it was merely due to them having reached the end of their respective lease terms.

However, apart from the rippling effects of such closures on the retail sector, it also affects the property market to some extent. Concerns have also been raised over job losses.

“Retail companies close outlets as they may not be disciplined enough in managing their costs.

“They may have entered into tenancy agreements at less optimal times when rental was high.

“This means they are bogged down with high fixed costs. The moment there is a slight dip in sales, losses will incur,” an industry player says.

Another reason for closures is the much talked about consumer sentiment where the industry player describes the retail sector as experiencing a level of “suppressed retail sentiments”.

“To some degree, closures are related to undesired economic conditions.

“Aren’t decisions to scale down operations a brazen sign of economic conditions?” a senior retail analyst asks.

He says the quantum of rental is also proportionate to sales. Hence, he highlights the example of ground floor rental rates generally costing more than higher floors.

“Whilst one may save on rental, sales may also be lower,” he says.

Anchor tenants such as Giant being located in shopping malls have always been the factor in drawing footfall.

For some, more store closures are to be expected

 

With Christmas and Chinese New Year festive seasons fast approaching, it is imperative that malls have a prominent anchor tenant to help pull in the crowd. This will benefit the other tenants as well.

 

“It will definitely affect the tenants in shopping malls when their major anchors close down. Luckily, some of them found replacements,” Retail Group Malaysia managing director Tan Hai Hsin tells FocusM.

Tan points out that Viva Home shopping mall in Cheras pulled in Super Seven Supermarket Wholesale & Fresh Market to replace Giant when it exited.

Meanwhile, Fiesta Mall @ Axis Pandan managed to secure Matahari, a wholesale and retail supermarket chain to take over the space vacated by AEON Big.

 

Worse to come

For some, more store closures are to be expected.

“This is not a one-off thing. Such closures will be more of a permanent feature. It is another sign of the evolution of the retail sector, so I expect more shops to close,” the analyst says.

This, he says, is mainly due to the growth of online shopping sites in the past few years.

The five Giant outlets that ceased operations on Nov 5 are in Sri Manjung, Sungai Petani, Shah Alam City Centre Mall, Sibu and Selayang Lama.

It is unclear if more Giant hypermarkets will face a similar fate when their leases expire. GCH operates more than 120 stores nationwide.

“Reduced consumer spending has affected all retail sub-sectors, including retailers selling basic necessities.

“This has not just affected Giant but also AEON Big,” Tan says, adding that the latter closed a few outlets as well.

Tan notes that the number of shoppers patronising malls has not reduced significantly

However, he notes that the number of shoppers patronising malls has not reduced significantly.

“Consumers are still visiting shopping malls, especially the large ones, during weekends.

“It is a family outing, friends’ gathering place, movie day and so forth. But compared to two years ago, their purchases have reduced,” he says.

Meanwhile, Minister of Domestic Trade, Consumerism and Cooperatives Datuk Hamzah Zainudin reiterates that the Giant closures were because the respective outlets’ tenancy leases had lapsed, and not due to the economic climate.

Hamzah says the outlets will be relocated and downsized from a hypermarket to a superstore.

The decision to close, he says, is also because online shopping has become a preferred method to buy goods, which are delivered to customers’ doorsteps.

The analyst believes the closure of some Giant outlets was more of a strategic move and not an indication of a dire financial situation.

He says GCH trimmed its net losses to RM33.9 mil for FY16 ended Dec 31 from RM50.9 mil in FY15, while its revenue the past two years has been in the RM5 bil region.

On the other hand, he says if the closure decision was due to its tenancy lease, GCH should have looked for a new place to shift its operations to before it expired.

“Until now, there is no news of where these outlets will be relocated.

“Even if there are new locations in the pipeline but not operational yet, unsmooth transitions means loss of income for a company,” the analyst says.

 

Retail stores

The booming e-commerce business is much talked about in recent years. There are concerns that retail outlets will eventually be phased out.

AmInvestment Bank Research says shopping mall and departmental store operators such as AEON Co (M) Bhd and Parkson Holdings Bhd may face “an existential crisis in the longer-term”.

The research house believes convenience store operators such as 7-Eleven Malaysia Holdings Bhd and Bison Consolidated Bhd, with their extensive store network and increasingly established distribution chain, will play well into the e-commerce theme.

Such stores are regarded as alternatives to last-mile parcel delivery services. Bison operates the MyNews chain of stores. However, many believe physical retail stores will continue to exist.

“Most online shopping operators still have to work closely with the bigger retail players. This is because they don’t market their own merchandise.

“A loss of a conjectural 20% market [share] to the online sector will be detrimental to smaller retailers,” the analyst says.

However, the industry player says smaller retailers are stricter with their cost management.

“Much research and time are spent on looking for potential outlets and they will surely pounce on a bargain when the opportunity arises.

“The bigger players are unable to hunt for bargains as most have invested too much in their IT systems. Their headquarters’ cost is also too high,” he says.

 

Closures are common 

For Tan, the number of hypermarket outlets to possibly close in the near future will be limited.

“Hypermarkets went through rapid expansion throughout the country in the 2000s.

“When the economy remains soft, it will affect stores located in less populated areas and those surrounded by direct competitors.

“Closures of retail outlets, including foreign chains such as Tim Ho Wan, Tours Les Jours and Nature Republic happen every year. When they close, other retailers will take over their shops. One reason for the closure of foreign chains is weak consumer spending,” he says.

Other factors, Tan says, may include the weak ringgit. “It has increased the costs of imported retail goods, but at the same time, foreign retailers cannot increase the retail prices accordingly.

“Those who increased prices had their sales affected. With shrinking profit margins, some foreign retailers had no choice but to close down,” he says.

He says foreign outlets also closed due to poor sales caused by intense competition. As an example, he says there are too many fitness centres and skin-care outlets in the country.

Nonetheless, despite the closures, many foreign retailers have been attracted to set up stores in the country this year.

“Based on our records, 63 foreign brands from 14 countries opened their first stores this year,” Tan says. Among them are HLA, Dome Sky, Chizu, Chicken Up, Wingstop and Kiss the Tiramisu.

Tan says last year, retail sales recorded growth of 1.7%. Sales growth is projected to reach 3.7% this year.

While there has been a lack of statistics on the opening and closing of retail outlets in recent years, the analyst says such statistics are not good indicators of the retail sector’s health.

“Just because retail sales are growing, it doesn’t mean the sector is not under pressure from online shopping, without which the retail sector’s sales growth could be much higher,” he says.

While many traditional brick and mortar retailers have tried their hands at online shopping to keep up with changing trends, it is not as easy as it seems.

The industry player says: “It is a massive change. Most that tried have not been very successful. Parkson [Holdings Bhd] is a good example.

“The handful that got their formula right are sites like 11Street, Lelong.my and Zalora.

“Consumer tastes are difficult to read as they are very dynamic. There have been numerous  cases where a site marginally increased its service charge and was met by a substantial decline in consumers.”

 

Survival mode

Mall operators may have to tweak the occupancy mix as a result of more prominent tenants departing.

Malaysia Retail Chain Association president Datuk Garry Chua previously said most second-tier malls are expected to change their occupancy mix and use more retail space for food & beverage (F&B) outlets.

This serves to boost occupancy rates and reduce vacant lots. The shift in tenant mix is part of a new strategy being used to minimise the impact of outlets closing in the last couple of years.

Chua says these malls are in what he calls survival mode as shopping malls previously had only about 20% of their tenants comprising F&B players.

The analyst concurs and says malls have been tweaking the mix, with F&B outlets now accounting for almost 40% of retail space.

“But do not misread this to mean that F&B outlets are the ones to draw the crowds. I prefer to think of them as filling the space vacated by the non-F&B shops,” he says.

Quantum leap in online shopping

“RETAIL is entertainment. Nowadays in China, the first greeting is not whether you have eaten, but how many items you have in your shopping cart,” Alibaba Group co-founder and vice-chairman Joe Tsai said recently.

His statement sheds light on the growing trend of online shopping.

China’s top e-commerce giants raked in over US$45 bil (RM188 bil) during the annual online shopping fiesta called Single’s Day. Held on Nov 11, it created a new record in global retail sales for any day.

In Malaysia, the country’s second-largest online marketplace, 11street, saw its total orders surge by four times on Nov 11 compared to a regular business day.

Its products sold overseas on that day increased 600% from average daily orders. Traffic to its site more than doubled with 85% contributed by mobile devices. This indicates the shift to m-commerce due to growing mobile penetration.

International statistics company Statista says the country’s “e-commerce” market revenue has been projected at US$1.08 bil this year. The sector’s revenue is expected to record a compounded annual growth rate (CAGR) for this year to 2022 of 19%. This means revenue in 2022 is forecast at US$2.53 bil.

 

Bullish on e-commerce

Statista also says the sector’s largest segment is electronics and media with this year’s sales at about US$426 mil. The segment accounts for 40% of e-commerce sales in the country.

It is not just Statista’s projection that is bullish. Consultancy firm A.T. Kearney says Malaysia’s online retail market is forecast to grow by 23% per year until 2021 – also largely due to the electronics and media segment.

A senior retail analyst highlights that e-commerce is a much broader platform than online shopping, which is a subset of e-commerce.

“Vaguely, online shopping should account for about 25% of e-commerce sales. If the e-commerce revenue is valued at RM4.5 bil this year, the online [shopping] portion should then be worth over RM1 bil,” he says.

E-commerce growth in the country is phenomenal. As a comparison, despite projecting Singapore’s e-commerce market revenue to be at a much higher US$3.33 bil, Statista projects its CAGR for this year to 2022 at just 10.5%. Similarly, for Japan, Statista has projected its e-commerce market revenue at US$83.4 bil this year while its CAGR to 2022 is a mere 6.4%. Japan’s largest segment is toys, hobby & DIY with a market volume of US$22.4 bil this year.

iPay88 Sdn Bhd, a leading Malaysia-based provider of online payment solutions within Asean, has revealed that last year, it recorded 38 million online transactions via its payment gateway systems.

This contrasts with the 14.6 million it recorded in 2015 and represents a huge 161% growth.

While physical transactions are increasing, the senior retail analyst believes the growth in value per transaction is not substantial.

“It is just that individuals are patronising the online shopping sites more often for their purchases,” he says.

 

Boosting product choices

Earlier this year, Lazada Malaysia CEO Hans-Peter Ressel revealed that last year, the company recorded over 100% year-on-year sales growth and overtook Lazada Singapore as the fastest e-commerce platform.

The Lazada Group is present in Singapore, Malaysia, Indonesia, Thailand, Vietnam and the Philippines. Its fast growth is attributed to the fact that the online sector is well supported by logistics and courier facilities.

Lazada reportedly plans to triple the number of products sold on its platform to 30 million by year-end from 10 million to 12 million currently. And this is just one company.

The analyst says other online shopping sites like Lelong.my and Zalora will undoubtedly boost their respective product choices as well to enhance future earnings.

The online shopping sector is also well complemented by easier cashless payment methods, particularly via online facilities.

On credit card transaction growth, the senior retail analyst believes it is not a reflection of the online shopping sector’s health.

“Credit cards are used in a substantial number of non-online shopping-related transactions as well [and cannot be attributed solely to online transactions],” he says.

Based on Bank Negara Malaysia statistics, the number of credit card transactions for the first nine months of the year grew by 5% compared to 6.5% for the whole of last year.

As for online shopping being only popular with certain age groups, the senior retail analyst disagrees with such an assumption.

“While sites like Lazada may target the younger generation, other online shopping sites may have older and different target audiences. The threat of online shipping to traditional retailers is very real.

“The only setback for online shopping’s potential growth is the relatively expensive internet services in Malaysia. Imagine if it was cheaper. Surely online shopping will experience higher sales,” he says.

 

Behind the closing down of supermarkets

CHALLENGING economic and business operating conditions in recent years have forced some foreign-owned supermarkets and hypermarkets to either close down, relocate, restructure or consolidate their operations.

This is part of the overall alignment of business and sustainability strategies to keep their operations viable and competitive.

GCH Retail (Malaysia) Sdn Bhd which operates the Giant Hypermarket chain is the latest to announce the shutting down of five stores, including one that’s to be relocated.

The bleak announcement seemingly suggests the domestic retail business environment continues to remain challenging in terms of sales, revenue and operating costs, not to mention competition from other shops and supermarkets.

What is puzzling is that the announcement came at a time when the economy performed stronger than expected, registering an annual growth of 5.7% in H1. Consumer spending grew 6.9%, and the wholesale and retail trades expanded by 5.8% and 9.6% respectively for the same period. So why the disconnect?

 

Sentiments unfelt

In a nutshell, the “feel good” factors and sentiments were not fully felt across-the-board with performance being mixed and varied. Some sectors, especially exports and related businesses enjoyed brisk sales, which saw gross exports growing 21.3% in the first nine months. It posted high double-digit rates in six out of those months.

This was attributed to real improvement in global demand, especially for electronics and electrical products, chemical and chemical products, petroleum products, rubber products, palm oil and crude oil (both in price and volume). The weak ringgit also aided the exports gain.

The prevalence of tightened wallets brought on by the Goods and Services Tax, subsidy rationalisation, and cost-related pressures caused consumers and households to exercise prudence and discretion in their expenditure.

The fact also remains that the ringgit has lost a cumulative 22.5% against the US dollar –  from RM3.2815 per US dollar at end-December 2013 to RM4.2325 on Nov 3.

The wider impact from the closing down of hypermarkets must not be grossly underestimated. It has resulted in job losses, though some workers may be redeployed to other outlets or absorbed elsewhere.

That apart, the closures have a dampening chain-effect on other ancillary services such as manufacturers, product and packaging suppliers, distributors, transport operators, and other shops and retailers operating in surrounding areas.

We must view the closing down of hypermarkets or department stores in a rational manner. Besides reflecting part of the business rationalisation and sustainability strategy, hypermarkets and department stores are seemingly having to battle harder than ever for survival.

They face an increasingly competitive retail industry where good quality, fairly-priced products, and excellent customer services have become more of a demand.

The shift in consumerism seems to be moving towards online and convenience shopping. This has pointed the way for everyday low price shopping among budget supermarket chains. In the ever-changing world of retail, a fundamental shift is occurring.

What is apparent is that hypermarkets and supermarkets need to reassess their operating concepts and how to remain sustainable in the face of changing lifestyles, consumer shopping habits, and a fiercely competitive market. Lee Heng Guie 

Lee Heng Guie is the executive director of Socio-Economic Research Centre (SERC), an independent research organisation



This article first appeared in Focus Malaysia Issue 259.