This article first appeared in The Edge Malaysia Weekly on September 18, 2023 - September 24, 2023

RETAILERS are expecting their cash registers to ring up RM2.4 billion less in sales this year — lower than previously projected — after sales in the April to June period came in below estimates.

Coupled with a conservative projection for the July to September period, the growth forecast for retail sales in 2023 has been cut to 2.7% from the June forecast of 4.8%.

A 4.8% growth would have seen retailers registering retail sales of RM122.8 billion, but a 2.7% increase would only see them doing retail sales worth RM120.4 billion, according to Retail Group Malaysia (RGM).

Nevertheless, total sales value for the year is expected to be RM3.2 billion higher than the RM117.2 billion recorded in 2022, when the country’s retail sales rose 33.3% to recover to pre-Covid-19 pandemic levels.

This downward revision by RGM follows a 4% contraction in sales in the second quarter of 2023 and a conservative growth rate forecast of 1.4% for 3Q2023, published in the Malaysia Retail Industry Report (September 2023), compiled on behalf of two major retailers’ associations — Malaysia Retailers Association and Malaysia Retail Chain Association.

With talk of a potential global recession and China’s economy in trouble, could retail sales get worse? RGM managing director Tan Hai Hsin says that for most retailers the potential global recession and trouble brewing in China are not major concerns now.

“There is no strong indication that we will encounter an economic crisis in the foreseeable future,” he tells The Edge.

Rather, retailers are most concerned about consumers having less disposable income due to a higher cost of living, which would weaken consumers’ purchasing power, he says. The cost of operations for retailers is also higher, which is sometimes passed on to consumers, which means more expensive goods.

“Higher retail prices have led to consumers being unable to buy the same amount of goods [now] compared with 2022,” Tan points out.

“The weaker ringgit against the US dollar in recent months has also led to another round of price increases due to higher import costs for raw materials, semi-finished food products and finished food products. This situation will likely remain until the end of the year.”

Higher loan repayments have also contributed to weakened consumer purchasing power. Tan notes that on May 3, Bank Negara Malaysia raised the overnight policy rate (OPR) by 25 basis points to 3% — its fifth revision since May last year. At 3%, the OPR is at the same level as in November 2019.

“This has eroded the purchasing power of Malaysians,” he says, adding that lower purchasing power means consumers are unable to buy the same amount of goods as they did last year. “[The] higher interest rate has led to Malaysian homeowners having to pay higher monthly instalments. A higher interest rate has also stopped Malaysians from buying high-valued consumer goods.”

High-valued consumer goods include furniture, refrigerators, washing machines, televisions, laptops and desktop computers.

At the same time, the higher interest rate has encouraged some Malaysians to put their money in fixed deposits, which again means consumers will have less to spend on shopping.

Another area of concern for retailers is higher operational costs. “For many retail outlets, the lack of staff has affected sales and operating hours,” Tan says, adding that there is a staff shortage of both Malaysian and foreign workers, which is seen across the entire retail supply chain.

Tan observes that the staff shortage is more severe in Johor due to its neighbour Singapore’s stronger currency. This, he explains, is because Singapore, which is also facing staff shortages, is willing to offer very attractive salaries to lure Malaysian workers across the Causeway.

He adds that higher electricity tariffs on commercial consumers that use medium and high voltages has contributed to higher operational costs. For retail shops, the increase has been up to 40% per month and at shopping centres, the increase has been between 30% and 50% per month.

When asked if the higher cost of operations is being passed on to consumers, Tan says. “Some [retailers] absorb all the cost, some pass on 50% while some others pass on all [the higher cost] to the consumers.

Interestingly, even where the cost has been passed on to consumers, demand has not been affected. 

“Soft-serve cone ice cream was sold at RM1 in 2019. Now, it is sold at RM1.99, which is almost a 100% increase [in price]. But demand is still there. Why? Because it is still cheaper than a scoop of ice cream from an ice cream parlour or a stick ice cream sold at 7-Eleven.

“A freshly made croissant priced at RM16 in a trendy café is still selling well because it is mostly visited by young people who are active on social media.

“A packet of 3-in-1 coffee mix used to sell for about RM13 at the supermarket, but now the prices have gone up to RM17, which is a 30% increase. But most of the brands in the market have increased to these prices now and customers continue to buy because there are limited alternatives at cheaper prices.

“On the other hand, if a popular fashion chain store increases the price of its T-shirts by 20%, demand will drop. This is because customers have many other choices.”

Last Wednesday, it was reported that oil prices had extended their 10-month high, driven by expectations that crude supply will remain tight for the rest of the year as Saudi Arabia and Russia extend crude oil production cuts until end-2023, which could lift Brent futures to above US$100 a barrel before the end of the year.

On the potential impact of oil price increases as well as the government’s proposed targeted fuel subsidies beginning next year on prices of goods and consumer spending, Tan says: “At the moment, fuel price is not a major concern for retailers as it was in the previous years.”

In 2017, high fuel prices led to more expensive food and retail goods and weaker consumer purchasing power. Importers, manufacturers and distributors passed the increase in costs to retailers (and thus) retailers had no choice but to increase prices.

With no details on the targeted fuel subsidies, it is too early to establish their likely impact on retailers and consumers. Similarly, things remain unclear on the demand for and impact on luxury goods as there have been no details on the luxury tax, which was supposed to have been introduced in the second half of the year.

As for plans to reintroduce the Goods and Services Tax, Economy Minister Rafizi Ramli told BFM radio last week that widening the tax base and focus on indirect taxes — whether it is GST or improving the existing Sales and Services Tax collection — is still under consideration because SST collection is expected to surpass RM20 billion in a few years, which would be more than what the country had collected from GST.

The 4% contraction in retail sales in 2Q2023 was attributed to lower sales during the Hari Raya shopping period as the festival fell in April and the high base effect from 2022. Retail sales in 2Q2022 increased 62.5%.

Nevertheless, despite the high base effect, some retail subsectors remained resilient. Retail subsectors that grew include personal care (2.9%), pharmacy (5%) and mini-market, convenience store and cooperatives (11.5%).

According to Tan, Malaysian consumers are spending more on personal care items such as make-up, cosmetics, skincare and perfume. He points out that this is not just a Malaysian trend but worldwide.

He observes that pharmacies, which also carry health and beauty products, are allocating more shelf space to these items.

As for the conventional mini-markets (such as 99 Speedmart and KK Mart) and traditional convenience stores (such as 7-Eleven), Tan says they continue to be popular because the majority of these outlets are located at shop offices with surface parking and near residences. “You just need five minutes to shop in these places compared with a supermarket or hypermarket.”

Retailers are conservative about retail sales in 3Q2023, estimating a growth rate of 1.4%. Again, this is because of the high base effect in the previous corresponding period when retail sales grew 96%. The personal care subsector is expecting the highest growth of 14.5% while the supermarket and hypermarket subsector is expecting to be the worst performer, contracting by 6.7%.

RGM is forecasting that 4Q2023 retail sales will grow 3% compared with a year ago when it expanded 13.7% before closing the full year with a 2.7% growth.

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