Published in the april 2008 issue of Retail Asia
As recession rears its ugly head in the US, countries that have trade relations with the economic giant expect to feel the pinch. Industry players and retail observers, however, are one in pointing out that while the going will definitely get tough, Asian retailers are resilient enough to weather the storm. Jennee Grace U Rubrico reports.
For Philippine retailer Roberto S Claudio, the continuing battle between the US and recession
could mean tough times ahead for Asian retailers.
Claudio, chairman of sporting goods chain Toby Sports and the Philippine Retailers Association’s vice-chairman for international affairs, observes that while the economic slowdown is happening in a country thousands of miles away, the impact is pervasive in the region.
“We have what we call an ‘imported recession’. Overall drop in consumer confidence will be felt all over Asia,” he says in an e-mail response to questions from RETAIL ASIA.
Noting that the ongoing property crisis in the US has already put a dent on the Asian country’s retail sector, he adds that Philippine retail sales for the first quarter of 2008 “have dropped almost
10%-15% [from] the same period last year”.
“[The] drop in bottom lines went as much as 50%,” he continues.
Industry experts polled by RETAIL ASIA attribute fears that Asian retailing would be affected by the US economic crisis to the region’s dependence on the latter’s economy. As weakened demand
from the US slows Asia’s manufacturing sector, Asian consumers’ cash and, consequently, spending would also be reduced.
“Merchandise orders slow gradually,” says Scott Langdoc, vice-president for research and business leader for IDC’s Global Retail Insights.
“Any significant manufacturing slowdown will have a trickle effect on GDP (gross domestic product, the value of all goods and services produced by an economy) growth and consumer spending
rates,” particularly in China, which has benefited most from the US demand for cheaper goods.
Paula Rosenblum, managing partner of Retail Systems Research (RSR), a research firm run by retailers, expounds: “[The US] pumps vast amounts of money into Asian economies. Much of this money finds its way into the pockets of workers, who become more affluent.”
“Affluence and discretionary spending power drive retail sales. Therefore, if recession continues for any period of time, I expect Asian retailers to be affected as a consequence of reduced demand in the US,” she says.
Domestic demand to drive growth
Experts, however, stress that mitigating measures to the US economic crisis have
been put in place.
“To the extent that the economy of the individual countries in Asia is dependent on exports to firms in the US where customers are reducing their consumptions, they will be affected. But I think a lot of companies in Asia have diversified their customer base from traditional high-reliance on the US market to other markets around the world. That will soften the impact,” says Dale D Achabal, chairman of the marketing department of Santa Clara University’s Leavey School of Business.
Deloitte & Touche, in a recent study, also notes that Asia’s move to lessen its dependence on the US market would insulate it from a US meltdown.
“The geographic mix of consumer spending growth will shift away from the US and towards Asia. For the world’s largest retailers, this means increased growth opportunities in Asia. It also means that the US market will be a bit more challenging,” the study, 2008 Global Powers of Retailing, states.
Domestic consumption would also cover the slack in US demand for Asian goods, India-based RNCOS E-Services Pvt Ltd chief executive Shushmul Maheshwari notes.
He maintains that India and China because of their population, as well as Vietnam because of its rapidly growing economy will continue to be among the most sought-after destinations for global
retailers. “These markets represent vast opportunities to expand,” he says.
In the Philippines, 95% of retail sales come from local consumption, says Claudio. “The key is to keep this consumption dynamic by offering customers exciting reasons to continue buying.”
RSR’s Rosenblum, meanwhile, says that while affluent Asians might also see the weakening US economy as an opportunity to get US goods at lower prices, demand from them would not be
enough to significantly shift Asian retail spending elsewhere.
“I like to call it the biggest ‘buy-one-get- one-free’ sale. I live in Miami and I already see people from other countries coming here to buy merchandise at a lower price than they would in their home countries. I don’t think this is big enough to cause a dramatic shift in Asian retail economies, except perhaps at the very high end,” she elaborates.
Recently released data on different markets have so far indicated strong support for the Asian retail sector.
AT Kearney’s 2007 Global Retail Development Index named India the most attractive retail market in the world, followed by Russia and China.
Vietnam and Malaysia were ranked fourth and eighth respectively.
A Bloomberg survey, meanwhile, reports that China, the retailers’ mecca, posted a 20.2% growth in retail sales for the first two months of 2008.
The Nielsen Company’s online survey also indicates that retail spending in the country has not been affected by movements in stock prices, which have been impacted in large part by global
sell-offs stemming from the US property woes. The survey polling stock-market investors in Shanghai, Beijing and Guangzhou reveals that two-thirds of the respondents did not take the stock
market’s performance in consideration when spending.
Moreover, Philippine consumers have been showing signs of optimism, a Philippine central bank report indicates.
A survey by the Bangko Sentral ng Pilipinas, released last month, bares that the Philippine consumer confidence index in the first quarter of 2008 improved to negative 21%, or by 6.2 index points from the first quarter of 2007, and by 6.5 index points from the last three months of last year.
“The consumer confidence in Q1 2008 and in the near term (next quarter and next 12 months) was borne out of expectations of better business conditions and additional income for the family due to the increase in the number of employed household members locally and overseas,” the survey states.
Meanwhile, Hong Kong continues to reign as the luxury shopping destination in Asia, posting a 19.5% increase in the value of retail sales an a 15.3% growth in retail volume as of November
2007, data from property services company CB Richard Ellis show.
More pressing concerns
More than the effects of the US recession, Asian retailers feel they have more to fear from the impact of high oil prices and inflation which target the core of retail — cost of production and prices.
The Nielsen survey shows that while the performance of the stock market was a non-issue to Chinese investors, 61% say that inflation and oil-price hikes would affect spending habits.
Says RNCOS’ Maheshwari: “As most economies in Asia are on their growth trajectory, the rising inflation level and oil prices are major concerns not only for retailers but also for the governments across these countries.
Rising inflation can put brakes on booming consumption thereby slowing the growth of the retail industry.”
Government regulations that put restriction on the expansion of modern retail also hinder retail growth, he adds.
Claudio, for his part, notes that high oil prices “will make customers cut on their spending”,
The Bangko Sentral survey lends support to Claudio’s assertions, pointing out that Filipinos still plan to hold back on big-ticket items like consumer durables, motor vehicles and houses.
“On the average, the ratio of consumers who expressed the intention to buy in Q1 2008 was slightly lower at 19% from 23% in Q4 2007 and from 20.7% in Q1 2007,” the Bangko Sentral states.
Other factors that worry Philippine retailers are the high cost of doing business, particularly power costs, shipping and transport, Claudio adds.
Similar to the US recession, these threats can also be addressed. For instance, Philippine retailers offset the negative factors by better inventory planning, says Claudio.
As the Asian retail sector weathers these storms, some markets are expected to do better than others.
IDC’s Langdoc predicts that while China has been seeing pullbacks of planned expansion into the market by US retailers, local and foreign retailers would still expand into the country’s underserved Tier II and III cities.
India, Langdoc adds, will remain attractive to foreign retailers because of “a combination of expanded consumer spending by a broader middle class … and the reduction in restrictions on
foreign direct investment by retailers”.
Japan will be a steady market, with limited retail space and an “overstored” environment tempering retail growth.
“While growth will be moderate, further consolidation among retailers will occur in the next 12-18 months,” Langdoc adds.
RSR, meanwhile, sees Vietnam and Indonesia as emerging markets. “The only obstacles are infrastructural — enough roads, water, high-speed Internet access, and electricity to power new
retail centres and manage logistics,” says Rosenblum.
As for the retail segments that are likely to enjoy growth, retail experts believe that more markets are likely to be shielded from the negative effects of these concerns than are to be affected by them.
Achabal says high-end products and low-end goods are not likely to suffer.
“Retailers that are positioned in the mid- to lower-end of the marketplace tend to do well in recession. But the high-end tend to be recession-proof because the customer is not that sensitive to the economic fluctuation. The retailers in the middle tend to get hurt more as the customer trades down.”
Rosenblum also predicts continued robust sales for low-end products. “I don’t think consumers stop spending; they just trade down. Unless we are headed into an extremely disastrous situation… the demand for goods and services won’t decrease, it will just shift. Even if the problem globalises, consumers will still want to consume. We’d like to say that even in a down economy, retail
winners emerge,” she concludes. ra
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