Monday, 12 June 2017

(The Star) What retail space conundrum?

Steady spending: Shoppers checking out clothes and other items on offer at a shopping mall. Growth in the local retail sector will be driven by steady consumer spending and boost in tourist arrivals.
Steady spending: Shoppers checking out clothes and other items on offer at a shopping mall. Growth in the local retail sector will be driven by steady consumer spending and boost in tourist arrivals.

PETALING JAYA: With so many malls within the Klang Valley today, calling it crowded has started to become an understatement.

The higher number of retail space means customers are more spoilt for choice when it comes to shopping. However, it also means that the fight for survival has intensified.

Earlier this year, it was reported that SwhengTee International Sdn Bhd founder Datuk Seri Gavin Tee was predicting that 50% of shopping malls in the Klang Valley would be fighting for survival within the next five years – and about 20% would close down.

Chan: ‘There is room for growth. It won’t be great, but it’s still moving.’

According to US-based real estate research company, Green Street Advisors, about 15% of the 1,100 malls in the US are expected be closed or “repurposed” within the next 10 years.

And in China, analysts have predicted that as many as one-third of the country’s shopping malls will close down in five years due to oversupply and the rise of online shopping.

That sounds bleak.

On the local front, the Malaysian retail sector got off to a sluggish first quarter, shrinking 1.2% in the first three months.

Yet, despite a shaky start, the local retail sector is poised for positive growth this year, driven by steady yet cautious consumer spending, in-store promotional campaigns and boost in tourist arrivals.

This, experts said, was in spite of the abundance of retail space coming into the market, as well as the growth in online shopping.

Malaysian Association for Shopping and High-Rise Complex Management past president Richard Chan believes it is highly unlikely that up to 20% of local malls will close down within the next five years.

“There are about 250 malls within the Klang Valley. If 20% of them shut down within the next five years, it would mean that up to 50 malls will be closed,” he told StarBiz.

Chan admitted that competition for retail space has intensified over the years, and a drop in occupancy rates has been noticed.

“There has been a drop in occupancy rates but it has been small, maybe as much as 1%. But this is comparable to the amount of new space added, which is between 8% to 10%.”

He acknowledges that there have been mall closures over the years – but the numbers aren’t as drastic as reported.

“Some buildings, like Uda Ocean and Plaza Warisan, were shut down to make way for the MRT, not because business was bad. Also, those buildings aren’t actually malls.

“And SS2 Mall, which has in fact closed down, is being redeveloped,” added Chan.

Based on reports, SS2 Mall in Section 19, Petaling Jaya, will be significantly reduced in size and be much more community-based with emphasis on provision of local services and better food.

Positive year for retail

The Malaysian Retail Chain Association (MRCA) is expecting an increase of about 4.5% in retail sales this year, driven by the country’s tourism industry.

MRCA president Datuk Gary Chua concurred that more retail space may not increase shoppers or spending and lead to “a dilution,” as Malaysia has a small population base.

“That’s why the expected tourist arrivals is a welcome boost to the sector.”

Earlier this week, Chua said when the Government implemented the goods and services tax in 2014, consumer sentiment turned cautious, but it had since improved, recording a more than 4% growth in 2015 and below 4% last year.

He said growth was expected to be higher this year due to an increase in tourist arrivals from Europe, the United States, Australia and China.

He added that tourism activities would have a tremendous multiplier effect on local businesses, such as transportation, hotel, entertainment and food and beverages (F&B).

Chan said tourists are spending more and more on shopping when they come to Malaysia.

“About 20 years ago, only about 5% of tourist spending was on shopping. Today, that number is up to 30%. Tourism is the second largest foreign exchange earner for Malaysia, after manufacturing.”

According to Retail Group Malaysia’s (RGM) latest industry report, the Malaysian retail industry shrunk 1.2% in the first quarter of this year due to weak Chinese New Year sales in January 2017.

“Shoppers were careful in their spending on festive goods. In addition, prices of retail goods continued to rise since the beginning of this year, mainly due to our weak Malaysian currency and higher fuel prices,” said RGM.

However, Chan believes that the retail sector actually performed satisfactorily during the first quarter of this year.

“The F&B sector definitely did well, I would dare say good growth. Inflation is definitely up, but private spending and consumption, although cautious, is still there.

“If you look at the other spectrum of retailing by chain stores, there’s growth, despite being in small decimal points. F&B has definitely been a big boost to the sector.”

In its report, RGM noted that in the first quarter, the specialty stores sub-sector that includes retailers selling photographic equipment with photo processing services, had reported a negative growth of 3.1% during the first quarter of 2017, as compared to the same period last year.

Chan pointed out that the photography and camera segment was a “sunset business.”

“In today’s day and age, unless you’re a professional, who uses cameras anymore?

“People use their phones to take pictures. People don’t even print pictures anymore.”

Going forward, RGM projected retail sales growth rate in Malaysia for 2017 to be maintained at 3.9%.

“The poor retail sales result during the first quarter will be offset by the higher projection of second quarter (4.8%). The retail sales growth rates for third and fourth quarters are estimated at 5% and 5.5% respectively.

“Trading condition remains tough for retailers during the second half of 2017.

“The challenges include higher cost of goods and rising operation costs for retailers.”

RGM said the recovery in retail sales will be highly dependent on external economic demand, as well as the performance of the ringgit for the rest of the year.

Chan believes that the local retail sector will record “low single digit growth” this year.

“There is room for growth. It won’t be great, but it’s still moving. Those that operate or work in the malls will just have to work harder.

“At the end of the day, the question is did you plan the mall well? What market are you serving and do you have the right products and services to serve that market?”

RGM has forecast growth at 4.8% in the second quarter of this year. Chan believes that performance during the quarter to be stable, though not as high as RGM’s forecast.

“Its unrealistic. Rent as mentioned hasn’t gone down except for some new malls offering rebates and incentives.

“I believe growth in the third quarter will be better, boosted by Hari Raya, government servants’ bonuses and school holiday spending.”

The online convenience

With some 40 malls gearing up to enter Greater Kuala Lumpur by 2020 – a dozen of which are boasting a net-lettable area (NLA) of one million sq ft – the local retail sector will have its work cut out.

It also does not help that online shopping is gaining traction in Malaysia.

According to UK-based Centre for Retail Research, e-commerce is the fastest growing retail market in Europe and North America.

PwC, in its Total Retail Survey 2016, meanwhile, says about 93% of all South-East Asia consumers surveyed have made online purchases – many of them at regular frequencies.

Chan said one cannot compare Malaysia to other countries, especially China, which has seen an increase in online shopping trends.

“You can’t compare us with the US or China, mainly due to logistics. For shoppers living on the outskirts of the Klang Valley, such as Klang, it may take them between 30 and 40 minutes to drive to a mall within the Kuala Lumpur city centre.

“In China, the outskirts of Shanghai could mean that you live up to five hours away from your closest shopping mall! For them, online shopping would be a more viable option.”

Chan said while online shopping has grown in Malaysia, that growth was still small and would not have a big impact on sales of local “brick-and-mortar” malls.

According to Malaysia Shopping Malls Association advisor H.C. Chan, online retail had grown an average of 18.5% per annum over the past five years.

In comparison, physical stores had grown just 3.2% per year over the same period.