Home made: The focus shifts to serving the local market with domestic products

While the world has focused on high-profile retail openings in Mongolia – especially Louis Vuitton in 2009 and KFC in 2013 – and the notable absence of shoppers at some of the country’s high-end malls in recent months, much has been going on in the broader market. Retail has been developing steadily below the super-high end and big brands. Malls have been opening, major local players have been expanding and people are, indeed, shopping. Many legitimate questions have been raised about the retail boom that hit the country in 2010, and some projects may be cut back and rents are certainly under pressure. The market appears to have been ahead of itself, but outside the downtown areas there has been a proliferation of shopping establishments. Supermarkets, malls, do-it-yourself and convenience stores, have popped up to cater to the new middle class and new homeowners. Retail activity is no longer characterised by super-rich spending, but by average Mongolians shopping near new housing developments.

“About 50% of the population in Mongolia is under 25 years old, so the next 10 years have a great potential for retail growth. Consumption of soft drinks, for instance, has been very high, and could enable us to double our business in the next decade,” L. Myagmarjav, the managing director of MCS Coca-Cola, told OBG.

Retail Tradition

Mongolia started at a great disadvantage in terms of retail development. Historically, it has been a nomadic country, largely dependent on barter. Most trading was done by Chinese or Russian merchants. After the 1921 revolution, distribution was quickly centralised and Soviet trading firms took over for the merchants. In 1929, Chinese traders were expelled. Although the imposition of centralised control was not always possible due to the size of the country and the lack of population in some areas, the state ultimately prevailed. By the 1980s, about 84% of all retail trade was through state-owned establishments. More than 1000 shops and over 500 restaurants existed in the country, but almost all of these businesses were government enterprises. Reforms were initiated slowly at first. In the 1980s, self-service stores were introduced, so people no longer had to wait in a number of lines to get their products; they just picked what they wanted and paid. Informal markets also existed, especially for used goods and spare parts.

After the democratic revolution of 1990, the economy collapsed and retail spending fell along with it.

Household final consumption dropped from $1000 per person in 1988 to a low of $151 in 1993. But since then, the market has recovered significantly and gone from being statistically insignificant to a sector of great interest. The State Department Store, a retail landmark founded in 1924, was privatised in 1999. After that, mineral wealth and foreign investment increased, the GDP grew rapidly, and consumer spending picked up with it. Household final consumption broke the $1000 mark again in 2008 and hit almost $2000 in 2012. As the economy improved and spending increased, the retail sector exploded. MAD Investment Solutions, a Ulaanbaatar property investment firm, counts 50 major retail developments in the city, and only a few existed prior to 1990. A flood of interest followed after 2000.

Upscale Boom

Much of the construction has certainly been on the high end. MCS Central Tower went up in 2009 and is anchored by Louis Vuitton. Sky Department Store, established in 2001 and connected to the Chinggis Khan Hotel, is an upscale supermarket stocking expensive imported goods. Ulaanbataar Department Store is a 25,000-sq-metre, six-storey building on Peace Avenue built in 2010, with international brands throughout the lower floors. Other higher-end establishments include Max Mall (2011), which is connected to the Ramada Hotel; Naran Shopping Centre (2011), on Seoul Street; Peace Plaza, on Peace Avenue near Ulaanbaatar Department Store; and Metro Mall (2008).

At the same time, much of the development has been aimed toward the local market. Tedy Centre, for example, was built in 2005 and is a high-volume computer and mobile phone bazaar, with small shops and booths selling all manner of electronics goods (the first floor has a MobiCom retail centre). Home Plaza, while somewhat upscale, targets new homeowners and urban professionals with a wide selection of imported and fashionable goods, including clothing and household items.

Nomin remains the trend setter at the high end and to a large extent in the mass market. It continues to improve upon its landmark State Department Store, maintaining the nostalgic charm while simultaneously offering a modern shopping experience. The Nomin Supermarket on the ground floor remains popular despite the proliferation of competitors, while the department store itself has become home to a number of trendy brands. A new Mango boutique, for example, opened in late 2013. At the same time, Nomin has been able to build upon this base and expand. The diversified group, which recently entered the vehicle manufacturing segment, has about 18 retail outlets (one in Erdenet and one in Darkhan), including supermarkets, hypermarkets, an additional department store and a do-it-yourself outlet, Nomin Standard.

International Impact

The major international brands cannot be ignored. Their arrival has had a significant impact. KFC opened a store in May 2013 with the intention of having 15 outlets in the country in five years. While the move was greeted with a great deal of scepticism – and a measure of criticism on health grounds – the restaurant has proven popular and has started to influence development in the city. While the food may not be as healthy as the local fare, the delivery and cleanliness of the establishment has impressed the market, and could raise the bar on local restaurants seeking to compete. The service standard alone has set a benchmark. Ulaanbaatar has also attracted a number of smaller chains. Cinnabon opened on the top floor of the State Department Store and Round Table Pizza opened nearby on Peace Avenue.

The challenge for franchises like these is to maintain the international quality while offering a product that is attractive to the local consumer. Round Table Pizza, for example, is required to make sure all its ingredients meet strict standards set by the US corporate headquarters. This means sending samples of water and flour back to California for testing. Given the distances and transportation difficulties, these smaller franchisees are forced to keep prices relatively high. A typical pizza at Round Table Pizza might cost MNT25, 000-MNT30,000 ($16.52-18.75), far more than the average Mongolian is willing to spend on a meal.

Luxury Overdose

While the market is developing, it has been facing challenges. Slowing economic growth, inflation, the falling currency and declining consumer confidence are affecting business and the plans of developers. Just two years ago, luxury retailers were eager to enter the Mongolian market. Now, they are hesitant as the spending population appears too small to justify a store. The market already appears saturated. Many of the high-end malls are poorly utilised, boasting a few international anchor tenants on the ground floor, while the upper floors are empty or occupied by local merchants selling a variety of run-of-the mill goods. Some of the downtown malls are indeed totally local retail. The real opportunity may be in serving the new middle class at suburban malls and via mail order. The young professionals of the country know that the economy is a bit shaky and that they have to be careful with their money. At the same time, Mongolians are high-information consumers. They are well aware of what is available globally and what products should cost, and they want a reasonable shopping experience and good prices. The flashy boutiques do not appeal to the consumers who, collectively, have the most to spend. It is even possible that a Costco type operation would do well, as those educated abroad are familiar with the model, and tend to be the most price-conscious and least concerned about appearances.

Despite the slowdown and concerns about the future of high-end retail, Mongolia remains one of the most promising retail markets globally. It still has the right mix of wealth and income growth that will make for good sales in the medium and long term. In AT Kearney’s annual “Global Retail Development Index”, Mongolia was ranked 7th place in 2013, up from 9th in 2012 (the first year the country made the rankings).

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The Report: Mongolia 2014

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