Retailers may achieve higher sales, but not necessarily better margins

RETAILERS are still forecasting growth in sales this year, albeit at a slower pace than initially projected. However, they expect margins to be hit by reduced purchasing power and the higher cost of doing business.

In addition, any boost to retail sales from higher foreign tourist arrivals, withdrawals from the Employees Provident Fund (EPF) Account 3 or the wage increase for civil servants will not be significant enough to counter the drop in retail sales arising from the higher cost of living, says Retail Group Malaysia (RGM) managing director Tan Hai Hsin.

In June, the retail sales growth forecast for 2024 was revised downwards to 3.6%, from 4% projected in March. Tan tells The Edge that a 3.6% increase in sales would result in an annual sales turnover of RM124.1 billion. In 2023, retail sales grew 2.2% to RM119.8 billion. RGM tabulates quarterly retail sales data for members of the Malaysia Retailers Association and the Malaysia Retail Chain Association.

RGM, in its latest “Malaysia Retail Industry Report (June 2024)” released on June 18, said that the downward revision had to be made because of the rising cost of living. A combination of a weaker ringgit, 10% sales tax on imported low-value goods of not more than RM500 sold online, a higher service tax of 8% since March 1 on retail goods and services as well as the tariff revision on electricity bills of more than RM220 a month, has affected consumer spending.

Even retailers that enjoyed strong growth in the first half of this year — such as those in fashion and fashion accessories, which saw sales expand by 12.6% in the January-to-March quarter and anticipate a 6.7% growth in the April-to-June quarter — are worried about their performance in the second half.

“All retailers are concerned for their performance for the remaining part of the year. This is because the main challenges this year are mostly macro issues. The key issues that have impacted Malaysian retailers are reduced profit margin and reduced purchasing power.

“The reduced profit margin is due to both the higher cost of goods (higher import costs and higher distribution costs) and higher cost of operations (labour, utilities and rental). The reduced purchasing power of consumers is due to the higher prices of retail goods, services and utilities,” Tan points out.

He says retailers’ profit margins have been falling since late 2022 but the factors contributing towards narrower margins are different.

Elaborating on this, he says Malaysia’s retail industry began its recovery in 2022 following the Covid-19 pandemic and managed to recover to 2019 levels in terms of total sales value. However, in late 2022, retailers were faced with a severe staff shortage as those who had left during the lockdowns had not returned. While sales gradually picked up after the pandemic, the cost of goods also rose due to higher material costs, higher production costs and higher transport. In addition, rental subsidies were removed after the pandemic.

Then in the first half of 2023, retailers were hit with an increase of the electricity tariff of between 30% and 50% imposed on commercial users that use medium- to high-voltage power. In addition, the weaker ringgit since 2023 contributed towards higher import costs while the Israel-Hamas war saw the retail sales of selected western brands being hit, requiring them to offer heavy discounts to attract buyers.

Impact of higher tourism, wages, EPF withdrawals

Will retailers benefit from the higher tourist arrivals and spend, the new EPF Account 3 which will allow for regular withdrawals, and the upcoming civil servant salary increase?

In the first four months of the year, Malaysia welcomed more than 7.56 million foreign tourists, a 27.5% increase from the same period last year. In the first three months, tourism contributed RM22.23 billion in foreign exchange, representing a 66% increase. It is noteworthy that shopping typically makes up 30% of what tourists spend. This means that in the first quarter, they may have spent as much as RM6.67 billion on shopping. Apart from tourists — defined as those who stay at least one night — Malaysia also receives excursionists or day trippers. In 2023, 8.94 million excursionists came to our shores.

Traditionally, foreign tourist contribution to total retail sales has been around 12% to 13%.

On the significant foreign tourist growth and their contribution to retail sales, Tan points out that this tends to only benefit pockets of retailers in tourist zones such as those operating in cities, towns and resorts frequented by foreigners.

“The attractive ringgit has led to higher expenditure by Singaporeans and Singapore tourists in Johor and Melaka,” he says, adding that the beneficiaries include grocery stores, food and beverage outlets and service providers such as nail spas, hair salons, beauty salons, slimming centres, foot massage centres, wedding stores, car wash centres and car repair establishments.

Retailers located in the KLCC shopping area, Bukit Bintang shopping district, Chinatown KL, Genting Highlands, George Town and Melaka, which attract a large number of tourists especially from China, are also thriving.

Similarly, tourists from western countries visit many of the islands and beach resorts, resulting in retail shops and F&B outlets in these tourist spots enjoying good business. Yet another segment benefiting from the increased arrivals is outdoor and indoor theme parks, Tan observes.

As at June 24, RM7.81 billion in withdrawals had been made by 3.61 million members from a total of RM11.52 billion that had been transferred into EPF Account 3.

Tan agrees that retailers will benefit from the first one-time EPF withdrawal as consumers may use the money for daily necessities, branded fashion, high-value goods such as home appliances and kitchen appliances or to upgrade their lifestyle by buying devices such as handphones and laptops.

“However, in the long term, we do not see Account 3 having any significant impact on retail sales.”

In May, Prime Minister Datuk Seri Anwar Ibrahim said civil servants would enjoy a salary hike of “more than 13%” starting this December. This hike would be the highest in the nation’s history.

Commenting on this, Tan notes that the impact is likely to be felt at end-2024 and beyond.

On whether the retail sales growth projection for 2024 was conservative in light of the upcoming civil servant wage hike and purchases being made in anticipation of the potential implementation of consumption-related taxes, including the now postponed high-value goods tax, Tan says that even if consumers made purchases now because of those factors, it is not expected to make a significant contribution to total retail sales.

When asked about ways to improve profit, apart from year-round sales promotions, Tan says he has observed that social media hype helps boost retail sales without hurting retailers’ profit margins. Examples include the launch of the latest mobile phone models by Apple, Samsung, Oppo and Huawei.

New overseas stores that opened in Malaysia created excitement too. They included retail stores in The Exchange TRX such as Gentle Monster, Mil Toast House, HEYTEA, Ben’s Cookies, Shake Shack and Apple. “Another example is the recent craze over the Stanley Cup. However, trends tend to be short term; trends are also unpredictable,” he adds, referring to the impact of user-generated content that went viral and drove up the sales of Stanley Cups as the products were being made available for “a limited time”, thereby creating a sense of urgency.

While it is too early to make a projection for 2025, Tan says the performance in the first half is “so far, so good”.

According to the retail report, the retail sales forecast for the April-June period shows that overall growth will be 1.7% year on year, with the best performing subsectors being personal care (17%), fashion and fashion accessories (6.7%), and mini-mart, convenience store and co-op (5.7%). The worst performing subsectors are expected to be department stores (-16.4%) and furniture and furnishing, home improvement and electrical and electronics (-4.2%). 

Source: theedgemalaysia.com