RETAILING

Waiting for a referee

While players are counting on the new retail law to help level out the industry, growth in 2007 is expected to be spurred by mega projects although the strong baht and lower consumer confidence remain major threats.

by PITSINEE JITPLEECHEEP

Retailers and wholesalers are waiting and hoping that the interim government will amend retail laws in a way that ensures fair trade and ends a long-standing dispute between big foreign retailers and small local shop owners.

The fast expansion of big retail store chains has sparked strong protests that play on nationalist sentiment. The retail law is expected to help create amore level playing field for all businesses.

The conflict between big and small players in the 1.4-trillion-baht retail sector has dragged on for almost 10 years, but the problems have intensified recently. In 2005, small retailers from several districts across the country appealed to His Majesty the King to help stop the expansion of foreign-owned superstores into their communities by converging on the offices of His Majesty the King’s Principal Private Secretary.

The elected government of former prime minister Thaksin Shinawatra tried to solve the conflict by using retail zoning laws, but it was unable to enforce them properly because it allowed local administrations to approve new retail outlets. This ended up in even more hypermarket outlets opening at a faster pace.

The conflict should end soon, however, because the interim government plans to amend the draft of Thailand’s first-ever retail business law.

With the new retail business law, multinational retail giants will come under strict restrictions in terms of fairer charges, fixed operating hours and store expansion.
The law will have five sections with 55 articles. It will focus not only on retail businesses, but also wholesale trading to ensure fair trade practices between big operators and local small retailers.

The law will also introduce zoning by limiting the number of shops and the distance between them depending on an area’s population.

Central Pattana plans to spend about 3.1 billion baht for new projects in Bangkok and upcountry.

SSuwit Kingkaew, a vice-president of C.P. Seven Eleven Plc, said the new retail business law mentioned that retailers would be required to obtain permission from local administrations.

Since retailers will be requested to submit investment plans for approval from the central administration, it will slow down the speed of new retail outlet expansion.

‘‘Competition will decline because retailers would shift to protect and enhance existing stores instead of opening new outlets. It is more difficult for new players to enter the market. This will make existing operators stronger. However, operators with strong operations would dominate the market at the same time,’’ Mr Suwit said.

He expected that the government to spend about one or two years to amend the new retail business law. ‘‘At that time, the demand for large retail stores may reach the saturation point,’’ he said.

Though retailers have already opened stores in most prime locations, there is still demand for small retailers in the near future.

The interim government’s policy to continue mega project spending, such as the construction of five new electric rail lines with a budget of about 165 billion bath within five years, will create new communities and retail opportunities. ‘‘It’s a big new cake for retailers,’’ Mr Suwit said.

As 7-Eleven waits for the government to articulate its retail policy, the company will improve its productivity by increasing sales at existing stores and focus on selective products that generate higher returns, he added.

Likit Fahpyochon, executive vice president of business development at Central Retail Corporation and a former president of the Thai Retailers Association, said he is not confident the retail sector will see investment in 2007 on par with 2006.

The vague Retail Business Law and Retail Zoning Law will make it more difficult for retail chains, particularly top-spending discount stores and supermarkets, to expand their businesses.

Moreover, Mr Likit expressed concern about the impact of the strong baht on Thailand’s exporters.

‘‘If they have less income from the export market, the new investment from this sector will automatically decline and reflect the decline of consumer spending,’’ he said.

In any case, Mr Likit said that the growth rate in 2007 in Thailand’s retail sector should match the previous year’s level.

In addition, the market analyst expected the same amount as in 2006 to be poured into the retail market in 2007 because retailers will look at securing long-term business.

The companies that already announced investment plans include two firms under the Central Group. Central Pattana Plc, the SET-listed property developer, plans to spend about 3.1 billion baht for new projects in Bangkok and upcountry. Central Retail Food Co plans to spend about 900 million baht on its Tops Supermarket chain.

Siam Makro president Suchada Ithijarukul said the company would need to adopt various strategies to keep its business growing.

‘‘We will focus on our core strengths and reduce our operating costs as a priority,’’ she said.

‘‘Whether the economy is good or bad, the significant factor that makes a retailer stand out in the market is to have the lowest operating cost,’’ Ms Suchada added.

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Competition getting tougher


Retailers struggled throughout 2006 for the first time since the 1997 financial crisis as unexpected and uncontrollable negative factors hurt the economy and consumer confidence.

Higher fuel prices, inflation and interest rates, combined with floods and escalating violence in the largely Muslim South, all took their toll on the 1.4 trillion baht retail sector. The increasing of cost of living has made consumers more cautious about spending money.

Political uncertainty has also dampened sentiment among foreign investors and led to a decline in tourism.

Sales of almost all retail operators retreated to single-digit growth after staying in double digits every year since the financial crisis.

According to the Bank of Thailand, the local retail business in the first six months of 2006 grew by 6.9%, down from 11.8% in the same period of 2005. Though more measures were launched to stimulate consumer purchasing power, retail sector growth in Thailand is expected to slow to between 5-6% in 2006, down from 10-12 % in 2005.

Yuwadee Chirathivat Bhicharnchitr, managing director of Central Department Store, the country’s largest department store chain, said Thai retailers were still better off than those in other countries.

‘‘Sales of major retailers in Europe and Asia, except China, grew by an average of only 1% to 2% in the first nine months of this year,’’ she said.

Despite the negative environment, Thailand’s retail sector in 2006 witnessed a sharp increase in new investments by both local and foreign players despite the poor economic conditions. Most retailers sought to brace themselves for more intense competition and lay a foundation for future growth.

According to Bangkok Post monitoring, most large foreign retailers—particularly discount stores—did not suspend investments even though the Commerce Ministry ordered them to suspend business-expansion plans in Thailand to ease concerns among small retailers who have protested against the spread of multinational chains.

Giant retailers spent an estimated 50 billion baht in 2006, a bit higher than what they spent in 2005.

Ex-Chai Distribution System, the operator of Tesco Lotus discount stores, led the way by spending about seven billion baht. Central Retail Corporation followed with 5.3 billion baht, and Central Pattana Plc, the SET-listed property developer under the Central Group, spent 4.9 billion baht.

C.P. Seven Eleven Plc, BigC Super center and CenCarCo, the operator of Carrefour hypermarkets, were set to spend three billion baht each on outlet expansion and renovation.

The Mall Group in 2006 spent about 1.5 billion baht to renovate its Ramkhamhaeng and Ta Phra branches this year, while Boots (Thailand) Co and Watsons, the health and beauty store, also spent 300 million baht each.

Rani Group, an Indian garment firm, entered the Thailand retail market by spending 1.2 billion baht on a new one stop shopping complex in the heart of the Phahurat-Sampheng area.

Apart from the existing retail formats, new smaller outlets with less than 300 square metres were prevalent. They include Mini Big C of Big C Super center and Central Food Retail Co’s Tops Daily.

The new compact-size supermarket allows greater flexibility in expanding its supermarket and would comply with local retail zoning regulations in the provinces, which prohibit the opening of any large-scale complexes.

The new compact-size supermarket has also opened in small communities and gas stations.

According to current regulations, hypermarkets cannot open major stores in urban areas, though they are not barred from opening outlets smaller than 300 square metres. That rule has encouraged several multinational companies to change their formats to fit the requirement, It is expected that retail space of about 650,000 square metres will soon be added to Thailand’s market. About 85% of the additional retail space comes from the CentralWorld shopping complex at the Ratchaprasong intersection. The rest comes from several others, including the Ayutthaya branches of both Ampotrade and Robinson Department Store.

In addition to the huge investment in new outlet expansion, retailers have adopted various strategies to keep growing. These include differentiating stores from rivals, reducing operating costs, focusing on core strengths and turning rivals into partners.

It is expected several billion baht will be spent this to attract consumers, improve logistics, train staff and build brand loyalty to retain long-term customers. Analysts also anticipate head-on competition between two large shopping centres: Siam Paragon and CentralWorld at the Ratchaprasong intersection.

Sales and massive promotions offering huge discounts and prizes are expected to be launched every few weeks by the stores in conjunction with strategic partners such as credit card firms.

This should make 2007 a great year to be a consumer. It will be the time Thai customers can get up to a 25% discounts in a supermarket or purchase a new 46-inch Samsung LCD TV with a 50% discount.

In the face of declining purchasing power at home, several companies are looking abroad to lift sales. State agencies such as the Tourism Authority of Thailand, as well as other businesses looking to expand customer bases, are helping with this effort. Preecha Ekkunagul, president of Robinson Department Store Plc, said that Thailand’s retail market had seen increased consumer confidence since late October, even though the country only had a temporary government.

Not all retailers are confident that the market will improve in 2007, however. Chalit Limpanavech, dean of communication arts at Assumption University and chairman of the Marketing Management Group, says market sentiment will improve if the government stages elections as promised in 2007.

‘‘Even so, I don’t think any policy will be launched immediately after the new election,’’ he said. ‘‘So 2007 will be another closely watched year for retail and wholesale.’’

He added it will be harder for retailers to turn a profit due to increased competition from international companies, particularly those based in countries that have signed free-trade deals with Thailand.