Bracing for a retail shakeup

As Malaysians hunker down in the face of a global economic crisis that has prompted economists to forecast the country’s first recession in over a decade, the local retail industry is bracing for an inevitable shakeup.

With tens of thousands of workers having already lost their jobs and with the Malaysian Employers Federation predicting that 200,000 workers will be laid off during the current downturn, the prognosis on the multi-billion ringgit retail industry that employs over 300,000 individuals is uncertain.

It must be noted, however, that all is not completely gloom and doom. Some shopping destinations and brands do appear to be doing fine, with some establishments going on an expansion plan.

The retail industry sits on the foundation of domestic consumption, which is a key pillar of the economy. With December exports falling 14.9% year on year, the biggest slide since September 2001, domestic consumption may well be the saving grace to prevent the economy from experiencing an even sharper contraction. If it holds up, that is.

Overall, last year was positive for the country’s retail sector, which grew 16.5% in 4Q2008 to RM29.3 billion from RM25.2 billion a year earlier, according to Statistics Department data. However, on a quarter-to-quarter basis, the figures are worrying as retail sales in 4Q fell 6.7% to RM29.3 billion from RM31.4 billion in 3Q. Industry players are anxiously awaiting the release of the 1Q2009 results.

According to Retail Group Malaysia, the country’s northern and southern regions are already facing a drop in retail sales. In Penang, the country’s electrical and electronics hub, even multinationals like Intel, Dell and NEC are cutting staff or offering voluntary separation schemes.

Down south, Johor is also seeing job losses as factories shut down; the situation is exacerbated by the deepening recession in Singapore, where the jobs of thousands of Malaysians are under threat.

Tan Hai Hsin, Retail Group Malaysia (RGM) managing director, expects the country’s retail sales to contract in 2Q2009, slipping into negative territory due to lower consumer confidence and uncertainties in the market, before strengthening in 3Q2009. For the whole year, RGM is forecasting a mere 3% retail growth, down from its initial 5% growth projection.

Fortunately, the central region’s retail sector appears to be generally holding up, at least for the time being.

Still, retail sales have not been affected negatively across the board as states like Sarawak, Sabah, Kelantan and Terengganu have not seen a drastic decline in retail sales. “Klang Valley shoppers are still visiting shopping centres and hypermarkets. Retail sales have been affected, but not significantly,” says Tan.

Joyce Yap, the Malaysian Association for Shopping and Highrise Complex Management (PPK) president, feels that the retail sector is still holding up well. “About 75% of our members reported that traffic count has remained consistent over the past six months,” she says, adding that the percentage is based on traffic count systems, car counts and observation.

“Successful malls, such as Suria KLCC, Pavilion KL, Mid Valley, Sunway Pyramid, 1 Utama, Sungei Wang and hypermarkets like Giant, claimed that the traffic count during the festival period was as good as last year, if not better,” she says. “However, most of the members reported that sales dropped more sharply immediately after the recent festivals than in previous corresponding months,” adds Yap, who is also acting CEO (retail), Pavilion KL.

A mixed bag
Generally, PPK members agree with Tan’s views that not all categories of retail are impacted negatively. For example, hypermarkets and supermarkets are still doing well as ordinary folk still need to buy competitively-priced foodstuffs and household items.

While companies in the retail trade are cutting staff or shutting down operations, Mydin Mohamed Holdings Bhd, which operates Mydin hypermarkets and outlets nationwide, is on a hiring binge. Mydin is looking for 1,200 workers for its new hypermarkets in Melaka and Kubang Kerian, Kelantan, which are due to open in April and June.

The group is on an expansion drive as it believes that during an economic downturn, people will tend to shop at lower-cost retail outlets.

Likewise, UK-based Tesco was reported to have recently purchased a 215,186 sq ft plot of land in the Bandar Universiti Seri Iskandar township in Perak to build a new hypermarket.

In contrast, entertainment outlets appear to be having varying results. Cathay Cineplexes experienced a drop in sales basically because the cinema industry is product-driven and sensitive to the change in consumer spending. Sharon Webber, its marketing manager, says sales figures currently were not as good as last year, but the cinema chain predicts things will brighten in 2Q, thanks to some strong blockbusters coming to Malaysia. While couples and small group of friends are still visiting the cinema, family visits have dropped somewhat as the middle-income earners alter their spending habits.

Another popular entertainment venue is Zouk Kuala Lumpur, which has somehow bucked the trend of a slowing economy. Yean Ng, its head of business development, says although the industry has seen a 30% drop in receipts, Zouk is unaffected by the slowdown and sees an increase in both human traffic and sales.
Ng surmises that the increased demand for Zouk’s services was partly due to the renovation at the club and a new marketing strategy, which gives value-add to regular loyal customers while reaching out to a wider target audience not tapped before.

IT stores such as Machines Sdn Bhd and All IT Hypermarket are reporting steady sales numbers during 1Q2009, although both companies were expecting to see a drop in sales. Esther Phuah, All IT Hypermarket head of marketing, says the performance of its three hypermarkets in Low Yat Plaza, Digital Mall Shopping Centre and Ikano Power Centre and five neighbourhood stores have been steady, although after Chinese New Year, it did experience a dip. However, March 2009 sales are improving. Phuah attributes the heartening numbers to the release of employee bonuses.

Andrew Cheng, director of Machines, which sells Apple products and accessories from its six stores in the Klang Valley and one in Johor, explains that sales from October 2008 till March 2009 have been stable, with the only marked difference being December 2008, when sales increased due to the festive season. He says the launch of Apple’s new iPod shuffle and iPhone plus an updated model of the iMac could have contributed to its stable sales figures although what will happen in 2Q is still a wait-and-see proposition.

On the other hand, food and beverage outlets didn’t fare as badly as first expected.

Sea Cuisine Sdn Bhd, which manages 14 Thai-inspired restaurants, was initially apprehensive of what 2009 would bring. It expected a drastic change in consumer spending, but Sea Cuisine’s drop in sales for the year has not been too significant, according to a company spokesman. In-house stores, such as Basil in Bangsar Village 2 and Absolute Thai in Ikano Power Centre, have benefited from mall activities that draw in the crowd. For fine dining outlets, such as To Dine For and Celadon, regular clients and festive occasions have seen them through this slow period.

However, fashion retailers have had mixed reviews. “Fashion retailers, especially those that are not commercially known and rely on walk-in customers, or are not aggressive, are suffering. High-end brands are not so badly affected as they are very cautious and focus on their target markets. Besides, they do not have so many chain stores,” says PPK’s Yap.

Retailers’ plea for help
As consumers begin to tighten their belts in the face of rising unemployment and the seemingly endless deluge of bad economic news, the retail industry is naturally asking for assistance, in particular, seeking a freeze or better still, a reduction in rents.

However, retailers are finding sympathy from landlords in rather short supply. Pat Liew, CEO of British India, says landlords are reluctant to lower rents. “As expected, there is always resistance from landlords. As rent is one of the highest components in the retailer’s overheads, this will be one of the first things retailers look to curb expenses,” she says. “Perhaps our government can emulate Singapore, where the government there helps property owners with their taxes, which is filtered down to the tenants.”

Sales for British India did register a drop after Chinese New Year and the slowdown is giving the company time to consolidate. “We will not close any stores until such time when it is not profitable,” she says.

Another fashion stalwart, Datuk Farah Khan, president of the Melium Group, also finds discussions with landlords on rents not fruitful. “Most of the landlords are not as open to discussion as they need to be,” she says.

“They know if they don’t reduce rents, stores will not stay open. Most retailers would have run the full gamut of cutting costs, but it is the rent that will kill the individual business. I wish the landlords would urgently address this situation,” says Farah, whose Melium Group markets luxury products such as Hugo Boss, Prada and Stuart Weitzman.

Although Liew and Farah feel that the rent issue should be addressed quickly, Angie Chong, FJ Benjamin Malaysia CEO, believes a cooperative approach is needed between malls and retailers. “What is important is that all mall partners understand that we are in unprecedented times, unlike any we have faced before. It is crucial for both retailers and the malls to be proactive in finding a win-win solution. Without this balance, the ultimate outcome will be detrimental to both parties, and the retail industry as a whole,” she says.

FJ Benjamin Malaysia, with brands such as Raoul, Guess and Gap, has seen revenue slump and margins erode. “With a drop in consumer confidence, shoppers are trending down and are more sensitive to best-value propositions. To cater to the change in sentiment, retailers need to be more aggressive with tactically sound strategies to woo consumers,” says Chong.

Another prominent retailer, Padini Holdings Bhd, which offers Padini, Seed and Vincci labels, is fortunate that the slowdown did not greatly affect it as it did not overstock. “Up till the end of 2008, our sales and profits were still on an upward trend, and our 1H2009 results are better year on year,” says K H Chan, its executive director.

Ironically, this good fortune puts Padini Holdings, which has 89 stores nationwide, in a weaker position when negotiating with landlords over rental reductions. “As our sales revenues from our stores are known to the landlords — and since up to this time sales have not really contracted very seriously — landlords have been reluctant to reduce rents,” he says.

Nevertheless, British India’s Liew says in the current situation, it is imperative that a compromise is made. “Retailers are vital to landlords’ survival. Landlords need to be committed to helping good retailers sustain their business. They must also act as incubators for some potentially good, young retailers. If landlords do this, they are planning for the future when the economy improves,” she says.

“Retailers and landlords have to work hand-in-hand to overcome this potentially long global economic meltdown,” she adds.

FJ Benjamin’s Chong agrees that teamwork is needed between malls and retailers to weather the economic storm. “Landlords and tenants have to come to a mutual understanding This period is a time for support, cooperation and sharing the burden equally.”

Helping hand for retailers?
Are the mall managements doing anything to ensure that tenants are not being hard-pressed? PPK’s Yap adopts a cautious stance. “It is not easy to help tenants because different tenants enter on different commercial terms and also, the margin for the merchandise is different from one to the other,” she says.

Before mall managers can come up with a “temporary tenants’ retention” programme, they will have to analyse the situation on a case-to-case basis. Basically, they have to review the tenants’ sales performance over the past 12 months, their occupancy cost, branding, marketing efforts, future plans, issues of slow or bad sales and so on.

“Once it’s done, mall managers will assist in terms of promotions, downsizing, allowing tenants to add or change merchandise, relocation or some temporary rent rebates or, as a last resort, termination of the tenancy. To do that, the managers usually will have to consider the intangibles such as value-add and goodwill factor,” says Yap.

“Besides, both mall managers and retailers will have to take various cost-control measures to ensure they stay afloat but not at the expense of consumers’ comfort and convenience. There must be no short-changing of customers in terms of services and value.”

Ensuring that mall tenants are well supported during such uncertain times is not lost on one mall owner — Datuk Teo Chiang Kok, the developer and owner of 1 Utama in Bandar Utama, Selangor. “We always believe in a business partnership with our tenants and will work with them on promotions and mall events to drive traffic. We have increased our A&P (advertising and promotions) budget this year to give more value shopping to our patrons,” he says.

“We are currently running a RM1 million ‘cash back’ incentive programme to stretch the ringgit of our shoppers, which will result in more turnover for our tenants,” explains Teo, a director of See Hoy Chan Holdings Group, the developer of the Bandar Utama township.

“If the tenant’s product quality, price line and style fit market expectations... we believe we can drive, sustain and stretch the spending budget of our shoppers,” he says.

On the other hand, Suria KLCC’s prime position in Kuala Lumpur City Centre is key to seeing its tenants through this period, says CEO Andrew Brien. However, even having arguably the most prestigious address in the city has not prevented Suria KLCC from experiencing a 3% drop in sales to RM2.23 billion in 2008 from RM2.3 billion in 2007, according to an industry source.

“As a whole, we expect a slowing in growth but we are fortunate enough to be part of a world-class integrated development that includes the world’s tallest twin towers, hotels, a convention centre, a 50-acre park — all that makes our centre a ‘must visit’ location,” says Brien.

“We will continue to work closely with our retail partners to maintain cohesiveness and ensure the impact of the economic slowdown is minimised by making the best offers to our customers,” he adds.

Challenging outlook
The retail sector may well be hit by a double whammy of falling domestic consumption and an oversupply of retail space in a softening market. The National Property Information Centre recently posted its preliminary “Vacancy in Commercial Building 4Q2008” report that revealed a slight increase in vacant space in shopping complexes to 18.9% in 4Q2008 from 18.7% in 3Q2008 out of the total space of 30 million sq ft.

This year, it is estimated that 1.715 million sq ft of nett lettable area will be added to the industry in both the KL and suburban regions, according to Regroup Associates last December.

Of this, 1.393 million sq ft is based in the suburbs. The major question is, will there be enough tenants to fill them?

“We continue to see demand for retail space weakening, especially those not in prime areas. Rents will come under pressure as consumers become more cautious on spending, especially those related to discretionary expenditure as well as big-ticket items,” says Goh Tian Sui, CH Williams Talhar & Wong managing director.

Even with the government’s two stimulus packages, totalling RM67 billion, to boost the economy, industry players are not optimistic that it will have a direct or immediate impact on the retail industry.

“Unfortunately, both packages will have minimum positive impact on the retail trade. Most of the incentives do not directly or immediately put cash into the normal family budget to allow spending and spur the economy,” says See Hoy Chan’s Teo.

PPK’s Yap suggests a more direct approach: “The government should review electricity rates and the Ministry of Tourism should help the private sector in terms of promotions and tie-ups.”

“Liberalisation of property management will also help reduce the business cost of malls. Allowing tax rebates for renovation will also be another great move to help the industry as it is a norm that every three to five years, malls and shops need upgrading,” adds Yap.

(Under the Valuers, Appraisers and Estate Agents Act 1981, registered valuers have the right to call themselves property managers. Most shopping malls have their own teams to manage and run shopping complexes and with management fees running into the millions, find the extra cost of engaging a valuer an unnecessary expense. Thus the call for the liberalisation of property management to cut costs.)

Retail Group Malaysia’s Tan holds a contrary view on the stimulus packages. He believes the packages will have a positive effect as they address the issue of increasing public spending to create more jobs and economic activities, reduce the cost of living and help the private sector get easier access to credit. “The second package is the correct rescue package that will benefit the retail industry in the near term,” he says.

It is becoming clear that Malaysia’s retail industry is sailing into uncharted waters. Therefore, it is imperative that key industry players and the government come up with viable solutions to deal with a major contraction in domestic demand.

Different needs and issues must be tackled and that can only be done in open discussions. When that will happen is anybody’s guess but, for the sake of the economy, it seems prudent that this be pursued sooner rather than later.



This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 749, April 6-12, 2009