This article first appeared in City & Country, The Edge Malaysia Weekly on October 9, 2023 - October 15, 2023

In its September Malaysia Retail Industry Report, Retail Group Malaysia (RGM) noted that the sector experienced “poorer-than-expected growth”, declining from 62.5% in the second quarter of 2022 (2Q2022) to -4% year on year. The survey was based on retail sales performances recorded by members of the Malaysia Retailers Association (MRA) and Malaysia Retail Chain 

Association (MRCA).

RGM forecast the 3Q2023 performance to remain conservative, with an estimated average growth rate of 1.4% for retail sales. This projection took into account the high base effect from the historically high growth rate of 96% in 3Q2022.

According to the report, department store-cum-supermarket operators expect near-zero growth of -0.1% for the third quarter, while department store operators anticipate a decline of 4.2%. Supermarket and hypermarket operators foresee a sharp decline of 6.7%, making it the worst projection among subsectors.

Conversely, operators of mini­-markets, convenience stores and cooperatives expect their momentum to continue with a 7.1% increase. Fashion and fashion accessories retailers expect near-zero growth of -0.2%, while retailers of children’s and baby products anticipate a growth rate of 5.4%.

Pharmacy operators are optimistic, projecting a growth rate of 5%. The personal care subsector stands out with the most optimistic projection at 14.5%, and operators of furniture and furnishing, home improvement, and electrical and electronics also anticipate growth at 5.4%.

Retailers in other speciality stores — including photography shops, sporting goods, second-hand goods, musical instruments, optical products, health equipment, gifts, arts and crafts and TV shopping channels — expect an expansion of 6.2%.

In June this year, RGM initially estimated an annual growth rate of 4.8% for the retail sector for 2023. However, due to the unexpected -4% growth rate in the second quarter and reduced optimism about consumer spending in the third quarter, RGM revised the annual retail industry growth rate for 2023 to 2.7%.

The second quarter of 2023 saw Malaysia’s retail industry experience a declining growth rate of 4% in retail sales, a stark contrast to the market’s earlier expectations, RGM said. It claimed two reasons were behind this unexpected decline. First, lower sales during the Hari Raya festive season and, second, the high base effect from the previous year.

RGM highlighted Hari Raya Aidlfitri in 2023 did not witness the same retail fervour as the previous year. In 2022, Malaysians eagerly returned to shopping centres and commercial hubs after two years of lockdown, leading to a staggering 62.5% growth in retail sales during the second quarter; the report highlighted that this was the “highest quarterly growth rate experienced in the history of Malaysia”.

According to the report, for the first six months, Malaysia’s retail sector grew by 2.6%, compared to the previous corresponding period in 2022.

The report further revealed interesting insights when the retail sector’s performance was compared with other economic indicators during 2Q2023. Although the national economy grew by 2.9%, retail sales fell by 4%, according to RGM. This overall economic growth, it said, was due to a stable labour market, sustainable consumer spending and increased tourism activities. Meanwhile, the retail sector was faced with falling export growth, a weak commodities market and the aforementioned high base effect.

For example, the construction and services sectors had strong growth rates of 6.2% and 4.7% respectively, while the manufacturing sector only grew by 0.1%. In contrast, growth rates declined in the mining (-2.3%) and agriculture (-1.1%) sectors.

Inflation, according to the report, though moderate, remained a concern at an average rate of 3.4% during 2Q2023. The largest rise was observed in the categories of restaurants and hotels (5.4%), followed by food and non-alcoholic beverages (4.7%). Private consumption expanded by 4.3%, driven by sustainable consumer spending.

As such, the Consumer Sentiment Index by the Malaysian Institute of Economic Research (MIER) was found to have fallen further to 90.8 points during the second quarter, signalling a decline in consumer optimism. RGM pointed to rising living costs and uncertain income prospects as the primary reasons behind this downturn.

Meanwhile, the unemployment rate remained stable at 3.5%.

During 2Q2023, the report revealed the varying performance in retail subsectors as compared to the previous year. Department store-cum-supermarket sales dipped by 9.6%, with department store sales plunging by 16.7%, marking the worst performance among all subsectors. Even during Hari Raya, supermarket and hypermarket sales fell by 6.1%.

In contrast, the mini-market, convenience store and cooperative subsector saw remarkable growth of 11.5%, making it the best-performing subsector during the quarter. Fashion and fashion accessories, as well as children’s and baby products, faced growth rates of -15.5% and -9.5%, respectively.

The pharmacy subsector reported a strong growth rate of 5%, while personal care achieved a moderate growth rate of 2.9%. The furniture and furnishing, home improvement, and electrical and electronics subsector saw a -12.4% growth rate. Other speciality stores, including various niche shops, contracted by 7.7%.

Despite the return of shopping traffic to pre-pandemic levels, the retail industry in Malaysia faces significant challenges in the second half of 2023, RGM said. As aforementioned, inflation remains a primary concern with many struggling against the rising cost of basic necessities and consumer goods. Moreover, while the weakening Malaysian currency has also contributed to rising import costs, further impacting retail prices, higher interest rates — driven by multiple rate hikes by Bank Negara Malaysia — have eroded the purchasing power of households. As a result of rising monthly instalment payments for homeowners, citizens have been pushed to invest in their savings and discouraged from making high-value purchases.

Similarly, retail outlets are struggling with the rising cost of manpower and electricity, alongside increased rental rates. Staff shortages have affected sales and operation hours throughout the retail supply chain, while commercial electricity tariffs have surged by 30% to 50% per month for retail shops and shopping centres.

Food and beverage outlets faced particular challenges, with café and restaurant sales plummeting by 10.1% during the second quarter of 2023. Rising food prices and operational costs, compounded by the high base effect from 2022, contributed to this decline. Conversely, food and beverage outlets (takeaway, kiosk and stall) saw sales rise by 10.1%.

As the economy returns to pre-crisis levels in 2023, the report showed the Malaysian retail industry has evidently had its ups and downs. According to the report, as a result, retailers remain cautious yet optimistic about the rest of the year, despite the setback in the second quarter.

The performance of individual subsectors has varied significantly, with some showing remarkable growth while others unfortunately did not. Hence, the industry’s growth rate has been revised downwards significantly, reflecting concerns about inflation, rising import costs and higher interest rates.

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