AS 2022 draws to a close, retailers may have one final sales boost from between now, for Christmas, and Chinese New Year (CNY) in late January 2023. Post-CNY, retailers may have to brace themselves for turbulent days ahead as signs are that the world is on the brink of an economic recession.
Last week, Reuters reported that Taiwan’s exports fell for the third straight month in November, the sharpest fall in seven years, a result of the worsening state of the global economy, China’s Covid-19 policy, and with inflation and interest rate rises weighing on demand across the world.
Quoting economist Scott Johnson, Bloomberg said the world economy is facing one of the worst years in three decades and forecast a growth of 2.4% in 2023, down from 3.2% in 2022 and the lowest — excluding the crisis years of 2009 and 2020 — since 1993.
Back home, then-finance minister (now minister of international trade and industry) Tengku Datuk Seri Zafrul Abdul Aziz said in August that Malaysia will find it hard to avoid a recession in 2023. The following month, he said the nation will not be spared from the expected economic slowdown in 2023.
Retail Group Malaysia Sdn Bhd (RGM) managing director Tan Hai Hsin agrees that the outlook is not rosy. “The possibility of a recession in Malaysia next year is high,” Tan tells The Edge in an interview. However, Malaysians have yet to feel the effects as their take-home pay has not been affected.
The combination of a technical recession in the US, the energy crisis in Europe and ongoing war in Ukraine, and China’s slow recovery due to its strict Covid-19 policy, are all expected to have an impact on Malaysia’s economy.
“Domestically, consumer prices are still rising. The latest is an increase in packaged instant noodles. Our exports have been affected, too. This will affect our economy,” Tan adds.
He expects a slowdown starting from the fourth quarter this year and into the first half of 2023. RGM tabulates quarterly retail data on behalf of the Malaysian Retailers Association and the Malaysia Retail Chain Association, whose members operate 40,000 stores nationwide.
In 3Q2022, retail sales grew by a whopping 96%, bringing the first nine months’ growth to 45.9% compared with a year ago. These numbers, while encouraging, are unprecedented and predominantly a result of a low base effect.
“The strong growth rates were mainly due to lockdowns in 2021, not due to strong economic recovery or income growth,” Tan points out.
RGM estimates retail sales in 4Q2022 to expand by 6%, lower than the retail members’ expectation of 13.9% after taking into “consideration the high base a year ago and the current challenges in the Malaysian retail industry”.
This year’s growth is estimated at 41.6%, translating into RM124.5 billion in retail industry turnover (not including retail sales from provision and sundry shops, wet markets, other non-formal retail outlets, direct sales and pure-play online shopping platforms), up from RM87.9 billion in 2021 when retail sales contracted by 2.3%.
In 2023, growth is forecast to be 3.5%, representing RM128.8 billion in retail turnover.
This recession may be different
Interestingly, Tan believes that because of changing consumer behaviour and patterns — during the 1998 Asian financial crisis and 2020/21 pandemic — their spending patterns will be different and thus, the impact from the recession may be different, too.
Also, the measures taken by the government during the recession — should it step in as it did during the pandemic — will determine the impact, whether positive or negative, on how Malaysians will shop for goods and services.
According to Tan, in 1998, the net wages of a majority of Malaysians were affected as many lost their jobs and were unable to find new employment. Some even went bankrupt, resulting in all retail sub-sectors being affected. “The worst hit was the luxury goods’ sub-sector as well as furniture and electrical and electronics sub-sector.”
But it was different during the pandemic because of the measures taken by the government and financial institutions, changing employment structure and alternative income sources, the rise of the super-rich and the emergence of buy now, pay later.
The government handed out cash to Malaysians and provided wage subsidies during the pandemic.
“Thus, Malaysians had some money to cover their monthly expenditure,” Tan says.
Retail shops were ordered to close, employees were asked to work from home and consumers were not allowed to travel far to shop, allowing grocery stores to generate good business during this period. During the lockdown period, banks allowed borrowers to delay their loan repayments, enabling Malaysians to continue to buy things.
Tan elaborates that in this new era, there are many alternatives to earn an income. “During Covid-19, unemployed Malaysians started home businesses or became delivery riders. By using modern technology, many Malaysians were able to earn a living even while staying at home.”
He observes that the income of the super-rich dropped during the pandemic, but not their purchasing power. The percentage of this group of people is higher now as compared with the 1998 Asian financial crisis.
“Not all employees were affected during the Covid-19 pandemic. If you were a civil servant or worked in the healthcare sector (including the glove and face mask businesses) or in the IT sector, your take-home pay was not really affected,” he adds.
“Many retailers were offering the buy now, pay later option for Malaysian consumers. This allowed them to continue to generate sales during the pandemic,” Tan points out.
Tan also observed that during the pandemic, many speciality stores such as Speedy Video, Esprit and Home-Fix had to close, but during the 1998 Asian financial crisis, large-format stores like Yaohan, Hankyu Jaya, Aktif Lifestyle and Pasaraya Hiong Kong shut down.
On retail sales performance during the past economic crises, Tan says that in 1998, retail sales plunged by 20%, but recovered in 1999, growing by 7.4%. In 2008, retail sales started to slow down to 5% from 12.8% the previous year, and in 2009, to 0.8%. In 2010, it bounced back to 8.4%.
During the pandemic, retail sales contracted by 16.3% in 2020 and by another 2.3% in 2021.
Consumer behaviour and retail trends during a recession
Tan notes that consumers behave differently during an economic slowdown versus a recession. During an economic slowdown, similar to the current economic conditions in Malaysia, there is no major impact on the Malaysian consumers as their take-home pay is likely the same or just slightly reduced. “Their shopping behaviour and patterns remain more or less the same.”
But during an economic recession, several employees are let go and business owners and entrepreneurs suffer a big drop in income. And when this happens, consumers shift their focus to buying basic necessities such as food and household items rather than high-value goods.
They look for alternatives — cheaper brands, brands that have discounts, in-house or generic brands — to help reduce their daily and monthly expenditure. Consumers will cook at home more and dine out less. When it comes to non-essential goods like jewellery or toys, these are replaced with cheaper alternatives or second-hand goods.
However, luxury brands such as LV, Gucci, Dior and Coast performed well during the pandemic. The super-rich consumers continue to shop amid a recession as their purchasing power is not as severely impacted. Even if their income is less, their ability to shop for branded goods remains.
However, the lifestyle of affluent consumers (middle-upper and upper-class) with large borrowings is likely to be affected and they will cut down spending on non-essential goods.
As the survival of retailers depends on their financial health, Tan’s advice is this: “Retailers need to ensure they have sufficient cash flow during a recession. Thus, they need to conserve cash now.”
He also suggests that retailers immediately reduce their debt as many had to shut down due to overleveraging in 1998.
Retailers with a strong balance sheet do expand as they receive funding from external parties, and banks are willing to lend due to their strong track record. This group also has stronger bargaining power to negotiate with retail landlords for low rent.
Tan cautions that overexpansion without a strong foundation is also likely to lead to eventual closure of retailers. “This is what happened during the last few years and is also the current situation.”
He notes that there is a preference by individuals or small companies to open stores using franchising, licensing, crowdfunding and joint-venture methods following a sudden loss of jobs or if they were unable to obtain new employment. It is relatively less risky compared to the stock market, which requires a lower investment relative to the property market, has an easy learning curve versus setting up from scratch, and relatively low capital outlay. “Unfortunately, the failure rate is very high,” he notes.
Source: https://www.theedgemarkets.com/article/retailers-advised-brace-tough-months-postcny