After almost 3 years of the Covid-19 pandemic, Malaysia's retail industry is finally on the path to full recovery.
The strong growth witnessed during the first 6 months of this year and the high expectations for the ensuing third quarter are expected to bring forward a full recovery, thus by the end of 2022, Malaysia's retail industry shall regain its footing back to 2019's sales level.
Expectations for The Rest of 2022
Performance in 2Q 2022 saw the Malaysian retail industry jump by 62.5 per cent compared to the same period a year ago. This was mainly contributed to the Hari Raya period where almost all Covid-19-related SOPs were relaxed or removed after 2 years of lockdowns.
Upon lifting of the restrictions, all retail stores were permitted to open and all economic sectors were allowed to resume business. Malaysians of all walks of life including the non-Muslims took this opportunity to fully celebrate "freedom" as well.
On the back of the positive development, Retail Group Malaysia has revised the 3Q 2022 estimate upwards to 50 per cent. This higher-than-expected growth rate is due to the large contractions experienced in 3Q 2020 (-9.7 per cent) and 3Q 2021 (-27.8 per cent).
The unprecedented high growth rates in 2022 are considered an isolated occurrence and should never happen again unless shops are forced to close in the future for an extended period.
Throughout the 3 major lockdowns experienced in the last 2 years, a few sub-sectors have suffered severely, namely fashion and fashion accessories, and personal care (skincare and cosmetics products) retailers. But now that consumers are back visiting the physical stores, they have begun enjoying a strong double-digit recovery.
Unlike the vanity businesses, the grocery sub-sector enjoyed very good sales right from the first lockdown in March 2020 compared to other retailers. Sales have been brisk these 2 years because many consumers began cooking more regularly at home and even started selling foods from home. This led to frequent visits to the grocers to get their supplies. Sales have nonetheless come back to 2019 levels off late with the majority of the consumers back to their usual lifestyles.
Our projection at Retail Group Malaysia for 4Q 2022 is 1.0 per cent, which may seem low but it comes on the back of the high growth rate achieved a year ago at 26.5 per cent. For the full year of 2022, we are projecting a growth rate of 31.7 per cent and this will be the highest annual growth rate achieved in the history of Malaysia's retail industry.
Traffic is Back, But Not Occupancy Rates
We have been observing the shopping traffic in malls after the Hari Raya festival and major malls in Malaysia continue to be crowded especially on the weekends. A common sight is also Malaysian consumers buying non-essential goods and dining in better quality cafes and restaurants, with events and activities organised by the mall managers well received.
Although shopping traffic may have been back to 2019 levels but shopping centres' occupancy rates and rental rates have not. In particular, new shopping centres opened during the last few years will continue to struggle to secure new tenants and achieve high occupancy rates. As such, a full recovery of the occupancy and rental rates will only take place in 2023.
New Challenges for Shopping Centres in 2023
A majority of the shopping centres in Malaysia have survived the Covid-19 era but new challenges persist to test the survival of the landlords and tenants.
(a)Rising Cost of Living
Prices of necessities and many consumer goods have continued to rise in the country in 2022. The higher retail prices have inevitably led to a higher cost of living for Malaysian consumers. This translates to less disposable income for non-essential goods and services and such a price shock will continue to erode the purchasing power of Malaysian consumers in 2023.
In recent months, Bank Negara Malaysia raised the overnight policy rate (OPR) by 25 basis points to 2.0 per cent on 11 May 2022, the first hike since July 2020, followed by another 25 basis points to 2.25 per cent on 6 July 2022. Then just two months later on 8 September 2022, the central bank raised the rate by another 25 basis points again to 2.5 per cent.
The higher interest rate has compelled Malaysian homeowners to pay higher monthly instalments. Except for car repayments, the risen rate has one way or another delayed Malaysians' purchases of high-valued consumer goods although it has also encouraged Malaysians to put more money in the banks.
Another interest rate hike is nevertheless on the cards and is expected to take place in the near future, which will further shrink Malaysians' purchasing power.
(b)Higher Operation Costs, Higher Retail Prices
Beginning from 1 May 2022, the minimum wage for an employee increased from RM1,200 to RM1,500 per month across the country for companies employing 5 or more staff.
This has increased the cost of operations not just for the retailers but also operators involved in the entire retail supply chain. As a result, prices of consumer goods have increased throughout the country including those in small towns and rural areas.
The never-ending Russia-Ukraine war that has disrupted the global supply chain has also caused higher energy prices, a shortage of raw materials and industrial parts in Malaysia and around the world.
While some retail outlets in Malaysia are facing a shortage of merchandise to sell, many have to deal with a higher cost of retail goods which then led to higher retail prices. The weaker Ringgit in the last few months has not helped the situation either, inducing higher import costs on raw materials and semi-finished goods (to make end-consumers products in Malaysia) as well as higher prices of imported finished goods. Overall, retail prices of many goods in Malaysia have since cost even more to acquire.
(c)Shortage of Staff
For many retail outlets, the lack of staff has affected their sales and operating hours and this shortage is prevalent across the board from the Malaysian workforce to the foreign workers, impacting the entire retail supply chain.
The issue of shortage is more acute in Johor due to the strong Singapore currency. This has given employers in Singapore the financial means to offer very attractive salaries to Malaysians as a countermeasure to the same shortage problem faced in the Republic.
Back in Malaysia, we have seen many Job Vacancies or Hiring signages hanging at the shopfronts of shopping centres. Many of these also stated the salaries and benefits clearly, perhaps to quicken the hiring process.
In shopping centres these days, it is also common to see shops closed momentarily for short breaks (eg. lunch, toilet, etc) with the doors locked or roller shutters down. Shopping centre managers are currently allowing this because of the severe labour shortage in comparison to the better times previously.
(d) Slow Recovery of International Tourists' Arrival
In early September this year, the Ministry of Tourism, Arts and Culture (MOTAC) revised its target for foreign tourist arrival to 10 million but this is still a far cry from the arrivals in 2019 of 26.1 million. The lack of foreign tourists is affecting retail businesses in shopping centres highly dependent on foreign tourists such as the Central Market in Kuala Lumpur and the international airports, especially KLIA and klia2.
The situation is, however, a little different down south in Johor and fortunately, its retail market is recovering well due to the arrivals of shoppers from Singapore.
(e) Oversupply of Retail Space
Before the Coronavirus, shopping centres in major cities and towns (including Kuala Lumpur, Selangor, Johor Bahru, Nilai, Melaka, Kota Kinabalu, etc) were facing weak occupancy rates due to oversupply and competition from the hybrid retail centres. The challenge of oversupply is expected to continue affecting this market segment next year.
In Kuala Lumpur and Selangor, 12 new shopping centres have contributed 5.5 million sq ft of new retail supply in 2022. Another 4 shopping centres are expected to be completed in 2023, contributing a total supply of 2.4 million sq ft.
(f) Looming Recession
At the point of writing, the United States is already in a technical recession while countries in Europe are facing an energy crisis. China on the other hand has been slow in its recovery due to its strict Covid-19 policy. All these will slow down Malaysia's economic growth by the fourth quarter of this year and the first half of next year.
The economic slowdown in these major economies will undoubtedly affect Malaysia's export growth and in turn impact, take-home pays as well as consumer spending in the country. - Henry Butcher Retail