Thailand's consumers shift towards modern retail options

Solid economic growth averaging roughly 4% annually since 2000 along with the country’s solid industrial and export base has fuelled a steady rise in domestic income across all income levels over the past decade and a half, leading directly to a rise in consumer spending power. Although the sector has been buffered by several shocks in recent years, including the 2015 bombing in the central Ratchaprasong luxury retail district, political upheaval in 2014 and devastating floods in 2011, the Thai retail market has proved resilient due to these strong underlying foundations.

Thailand’s retail market has attracted a wide variety of local and foreign retailers all vying for their share of the consumer base, resulting in a highly competitive environment. In 2015 a number of key companies continued to assert themselves as major players within the retail landscape. These include CP All and its ever-expanding national network of 7-Eleven outlets along with Tesco Lotus and network of supermarkets and hypermarkets. Central Retail remains active as well in the hypermarket and supermarket segments while Big C and Home Pro stores operate mostly in upcountry areas.

Recent Recovery

Retail sales expansion peaked in November 2012 at 54% year-on-year growth before political turmoil engulfed the country two years later, sending growth into the negative for the entirety of 2014 and most of 2015.

The downturn was largely the result of widespread protests and an eventual military coup in Bangkok, which effectively restricted the flow of traffic into major commercial and retail districts while also dissuading a large portion of foreign tourists from entering the country.

As the situation normalised somewhat through 2015, retail sales began to recover late in the year with purchases in September increasing 2.79% over the same month in 2014 followed by a 1.04% bump the following month, according to data from the Bank of Thailand. This translated into consumer spending of B1.21bn ($36.4m) in Q3 2015, up a tick from the BT1.20bn ($36.1m) spent the previous quarter.

“Retail has remained resilient over recent years of slowing economic growth,” Pascal Billaud, the CEO of Central Food Retail Group, told OBG. “The wholesale segment continues to grow at a rate of around 10% annually, while convenience stores and supermarkets are each posting more than 5% annual growth.”

Strong Base

Thailand’s 68m-strong population provides retailers with a substantial domestic market to tap into, and while these numbers are eclipsed by larger populations within the region, Thais are among the more financially well-off within the Asia-Pacific region. The country’s GDP per capita increased to an estimated $6108 in 2015 from $6041 the previous year, according to official data. Strong economic growth over the past decade similarly pushed up the adjusted gross disposable income in Thailand 73% between 2005 and 2014, growing from BT7.4trn ($222.7bn) in 2005 to BT12.8trn ($385.3m) by 2014, according to the Office of the National Economic and Social Development Board, providing a greater cash flow available for the retail sector to tap into.

Overall individual consumption expenditure of households increased to BT8.69bn ($261.6m) in 2014, up from BT7.58bn ($228.2m) the previous year and BT4.40bn ($132.4m) in 2005.

Spending is becoming focused on the major population centres around the country as a result of a well-trodden path of urban migration as people from the villages aspire for better jobs and living conditions in the cities. This trend is magnified by another demographic shift which has seen increasing amounts of young city dwellers moving out of the parental homes and into condominiums closer to the central business districts, resulting in a reduction of households composed mostly of working adults and middle-class consumers along with shrinking family sizes in general.

Trending Upwards

Strong economic growth over the past decade has resulted not only in a quantitative expansion of the retail sector, but also a fundamental shift in consumer preferences and behaviour, particularly in the major urban areas.

Once dominated by smaller local shops, these traditional mom and pop stores are now being slowly but relentlessly phased out and replaced by new, modern retail centres and shopping malls. This effect is being compounded by the second wave of smaller convenience stores proliferating across the landscape, led by the ubiquitous 7-Eleven franchise which held a 53% sales market share at the end of 2014, according to PwC’s 2015-16 “Outlook for the Retail and Consumer Products Sector in Asia” report.

Convenience stores now rank as the fastest-growing retail channel in the country and numbered more than 12,000 outlets nationwide by the end of 2014. This growth is being driven in large part by demographic shifts as the proportion of young city-dwelling adults continues to increase.

These urban consumers have shown increasing propensity for convenience, frequenting smaller shops, stores and supermarkets near their workplaces or transportation routes to purchase daily necessities and meals rather than less-frequent, higher purchases at larger traditional markets. Preferences among this demographic for predictable, higher-quality branded products and ready-to-eat food, along with a greater acceptance for imported food, are also shifting consumption habits.

The rise of hypermarkets in Thailand largely follows similar expansions seen across the region as foreign retailers continue to make inroads in the market, although sales growth has lagged behind that of convenience stores and supermarkets. The composition of Thai hypermarkets, however, is somewhat unique in one aspect as their product offerings and atmosphere often seek to replicate those of traditional wet markets such as Khlong Toei, which still hold a strong position within the retail sector. These informal local markets often include dozens of separate stalls with vendors hawking all manner of food ranging from fresh meat and fish to fruits and vegetables and have proven to be stubborn competition for newer hypermarkets. But what they lack in traditional experience and reputation, hypermarkets try to make up for with a wider variety of fresh food while also offering lifestyle and entertainment options.

The two leading players in the hypermarket segment are Big C, a subsidiary of TCC Group, and Tesco Lotus of the UK. In 2010 Big C acquired more than 40 Carrefour outlets, which have since been rebranded and operate as part of the Big C franchise, while Tesco has countered with its recently introduced Extra lifestyle hypermarket store concept offering a wider range of food and non-food products. The intense battle between the two companies for market share has also driven volume sales growth in recent years.

Continued economic and population growth are projected to boost cumulative hypermarket sales to BT589.24bn ($17.7bn) by 2017, according to Business Monitor International data, with modest annual sales growth rates of 1.55% and 1.27% in 2016 and 2017, respectively. Supermarket sales are expected to increase at a slightly faster clip, up 3.08% and 2.25% over the same time period with national sales totalling BT187.6bn ($5.6bn) by 2017.

Bolstered by the strongest growth rates in the retail industry, convenience store sales are on pace to eclipse those of supermarket purchases by 2017, with the sector expected to tally BT188.65bn ($5.7bn) in receipts for the year on the back of strong growth rates of 4.11% and 3.21% in 2016 and 2017.

Bang For The Buck

Operating at the forefront of the industry, Bangkok’s retail infrastructure continues to expand dramatically with hundreds of thousands of square metres of new retail space being added every year. In spite of the stagnating retail sales in early 2015, there were more than 1.1m sq metres of new retail space under construction in the capital city slated for completion by 2017, according to property services provider CBRE. Of this supply, nearly 500,000 sq metres is located in suburban areas with 41% situated in midtown and another 15% in downtown. This ratio follows the trend of increased focus on the suburbs by both foreign and domestic retailers, which has pushed occupancy rates in suburban Bangkok to 91.2% in Q3 2015.

As of Q3 2015, the Bangkok retail supply totalled 7m sq metres, up 2.4% compared to the previous quarter and 6.3% greater than the same quarter the previous year. This expansion was due to the opening of six new retail centres in the city which added a combined 162,058 sq metres of net lettable area to the market. The majority of this space was attributed to the opening of the new 132,000-sq-metre CentralPlaza WestGate shopping centre situated at Bang Yai intersection. Roughly half of the total retail space is spread throughout the Bangkok suburbs totalling 3.5m sq metres, with another 2m sq metres of space situated in midtown and the remaining 1.5m sq metres located downtown. In spite of continuous expansion of stock, demand remains high in the city, with vacancy rates running at 8.7% in Q3 2015, with the more expensive downtown locations posting a slightly more elevated rate of 14%.

International commercial real estate company Colliers put the figure slightly higher with 7.25m sq metres of retail space located in Bangkok and the surrounding area as of Q3 2015.

Shopping malls accounted for the largest share in the market with approximately 4.23m sq metres of lettable floor space, followed closely by the rapidly growing community mall segment.

In addition to the growing stock of retail space slated to open up in the next few years, retail developers are also embarking on a wave of renovation projects in order to attract new brands, more customers and ultimately, higher rents. Some of these refurbishment projects include Siam Discovery, MBK Centre, CentralPlaza Pinklao and CentralPlaza Bangna.

E-Commerce

Thailand is becoming increasingly digitally connected since the launch of 3G services in 2013, having achieved 94m mobile phone subscribers by mid-2014, one-third of which used smartphones, according to the Hong Kong Trade Development Council (HKTDC). This connectivity is translating directly into the advertising and sales sector, with 58% of Thais reporting that they shopped online using smartphones in 2014, ranking them in the top 10 markets globally for use of a mobile phone to shop online, according to Nielsen. This growing penetration rate, along with increased credit and debit card circulation, has given rise to a dramatic uptake in online retail sales which have grown at a compound annual growth rate of 21% during the 2009-14 period.

Companies are beginning to take notice, both in terms of advertising and direct sales, as traditional store-based retailers are shifting towards multi-channel sales strategies to tap into this growing market. Although online sales are still relatively new to the country and currently represent only a small fraction of overall sales, digital advertising is providing new avenues to boost sales in traditional brick-and-mortar outlets as well.

Key Thai retailers such as the Central Group and The Mall Group have launched mobile applications that include their latest products and promotion activities, while numerous other companies have launched their own marketing-oriented apps to promote products and communicate directly with consumers.

Moving Upcountry

Moving outward from the shopping epicentre of Bangkok, retailers have become increasingly eager to tap into the north and north-east regions of Thailand which are home to roughly half the country’s population. Often referred to as the “upcountry”, the economic growth of the region topped 25% from 2007 to 2012, surpassing even the impressive 16% expansion of Bangkok during the time, according to HKTDC data. Although the substantial population base has always been attractive as a relatively underserved market in terms of modern retail opportunities, it has been only recently that accelerating economic growth of the area has drawn more tangible action from retailers. Much of this is driven by the increased trade with the neighbouring countries of Myanmar, Laos, Cambodia and Vietnam as a result of formation of the ASEAN Economic Community at the end of 2015.

Attracted by the prospects of a free flow of goods, capital and labour across borders, industrial activity has gained traction in the uplands, bringing a surge in investments across a number of industries such as food processing, electronics and rubber products. From 2009 to 2014, the inflow of foreign direct investment (FDI) into the north-east region surged at a compound annual growth rate of 49%, more than double the overall FDI growth of the Thai economy as a whole over the same period. Cross-border trade has likewise increased with the removal of tariffs and other barriers, with bilateral trade with Laos more than tripling between 2006 and 2014 to $5.4bn. This flow of money to the north is fuelling job growth in the area, leading to a labour migration to fill new manufacturing positions along cities near the Thailand-Laos border. This windfall has in turn attracted numerous prominent retailers to the region eager to establish a foothold in the budding market. These players include the Central Group, which has established its Robinson Department Stores in Chiang Mai, Udonthani and Mukdahan, while cash-and-carry chain Makro has bolstered its presence in the border areas by launching six megastores in the north and north-east regions in 2014-15. Other companies including Central Plaza, Tesco Lotus and Big C have also established outposts in Udonthani and Nong Khai, which have become busy transit hubs for travellers moving between Thailand and Laos.

Food & Beverage

As the largest single component of household spending, the food and beverage (F&B) sector remains a key factor in Thailand’s retail sector. In 2014 food and non-alcoholic beverage purchases made up a quarter of total household consumption valued at BT1.94trn ($58.4bn) on the year. This was up slightly from the BT1.87trn ($56.3bn) purchased the previous year and nearly double the B1.0trn ($30.1bn) consumed in 2005. Alcoholic beverages, tobacco and narcotics consumption contributed another BT265bn ($8bn) in household consumption in 2014, up from BT205bn ($6.2bn) in 2005.

The types and quality of food consumed in Thailand are also shifting along with rising incomes and greater economic security. The increasingly urbanised customer base is demanding a wider array of processed foods now available in larger supermarkets and hypermarkets, moving away from traditional unprocessed foods sold in fresh markets. A greater exposure to international cultures and foreign food products is also exerting change within the sector in terms of diversifying the product base while the increase in women entering the workplace is also driving demand for convenient, ready-to-eat meals. Frozen food products, particularly frozen-ready meals, desserts and seafood, have shown the strongest growth in recent years along with Western processed food products, which are perceived as being of higher quality than domestically processed food.

Thailand’s growth in this area is representative of larger overall global retail trends in which Asia as a whole has emerged as the primary growth driver for consumer expenditure on food, beverages and tobacco. Driven by shifts in consumer preferences across the region towards packaged, processed and value-added food and drink products, nominal growth for the sector is expected to average 9% annually, well above the 6.4% global average, according to the Economist Intelligence Unit (EIU). Customers purchased $3.9trn worth of F&B and tobacco in Asia in 2014, and this figure is expected to surge to $5.9trn by 2018, at which time the region will account for around 60% of global consumer expenditure in this category.

With a stable and expansive retail base already established for the sector across Thailand, demand growth is expected to continue at a moderate pace over the next few years, increasing by 2.9%, 2.9% and 2.8% annually each year in the 2016-18 period, EIU estimates. If realised, this expansion would exceed average annual demand growth for F&B in the Asia and Australia region, which is projected at 2.0%, 1.9% and 1.9% over the same three-year span.

Outlook

Assuming a stable political environment going forward, Thailand’s retail sector as a whole is expected to continue its upward trajectory which was interrupted briefly by unforeseen events in 2014 and 2015, with the EIU forecasting annual sales volume growth for the sector of 3.6%, 3.4% and 4.3%, respectively for 2015-18. Where Thai consumers elect to spend their money will continue to shift away from traditional markets and towards the increasing quantity of convenience and modern retail options, particularly in urban areas. High mobile smartphone penetration rates and an increasingly young, affluent and tech-savvy population will also drive growth in non-traditional channels such as online purchases. An ongoing shift in geographic focus will also continue, with retailers focusing more on less saturated secondary markets such as suburban Bangkok as well as the northern border regions of Thailand.

The sector is still being held back by a number of factors which will need to be addressed to ensure strong future growth. Long-term institutional stability would go a long way in assuaging investor and consumer concerns over financial growth and safety after the upheaval and strife which has characterised the political landscape over the past decade. Other economic factors could also be improved to spur further retail expansion, most notably the country’s high levels of household debt which exceeded 70% of GDP in 2015, while improvements in the education system would allow a larger proportion of the future labour force to move further up the value-added chain.

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The Report: Thailand 2016

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