Traditional retailers need to adapt to an online revolution or risk sinking
Though Malaysia has managed to be ranked as third place in the Global Retail Development Index 2016, there are still substantial obstacles for smaller conventional retailers to overcome in our country. The 6 per cent goods and services tax (GST) implemented last year coupled with hardening economic conditions has resulted in a huge hit to consumer sentiment in Malaysia.
The saturated market share and slowdown in consumer spending is expected to bring further impact on local retailers, thus it is now vital for them to realise that going digital is not the only way, but just one of the several alternatives they need to embrace in order to retain their existing customers and even capture new markets.
Before going into how to achieve better sales, retailers should know the five reasons of why they need to transform the business model instead of solely depending on ‘brick and mortar’ model:
E-commerce has been swiping market share
Strong growth in online shopping via websites and mobile applications has been registered in the past two years and Malaysia is expected to see a further rise in these transactions, as currently it only accounts for 9% of the total retail sales from last year.
The emergence of e-commerce platforms such as Lazada, Zalora and 11street that are aggressively expanding will also be a key factor in this growth of e-commerce’s market share. In a recent report, PricewaterCooper House research firm (PwC) notes that these players are launching various promotional campaigns to attract even more new customers.
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In turn, these promotions have further reduced the reliance of local consumers on the ‘brick and mortar’ retailers for purchasing goods and services at lower prices. For example, Zalora recently offered to absorb GST for its customers and on the other hand, Singapore-based Shopee launched free shipping services to all buyers and sellers through their partnership with Pos Malaysia.
The increasing burden from fixed costs
Fixed costs can attribute for up to 90 per cent of the total costs faced by ‘brick and mortar’ retailers, in the form of rental, electricity and water bills. Eventually, these costs will go up and as time goes by, smaller retailers also face other costs like property refurbishment, upgrades for keeping ready stock and many more.
Retail rental rates have been ranging from 10 per cent to 15 per cent averagely for the past two years across Malaysia and this is expected to continue into the next two years at a slower pace due to an expected glut of retail space in 2017.
However, property owners in strategic locations such as Bandar Utama, Midvalley and Sunway Pyramid will not take a cut in rental but offer less hikes in their annual rental revision. At the same time, it is also possible for the government to cut subsidies in electricity and other utility expenses in the next year due to the pressure to push for gross domestic product (GDP) growth of more than 4 per cent.
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The last electricity hike was in January 2014, where those whose monthly consumption was above 300 kilowatt hour (kWh) saw a 15 per cent increase in their electricity bills – what once was an average monthly bill of RM 100 (US$25) has now increased to RM115 (US$27.50).
It is harder to hire to good employees
The brain drain issue in the executive and professional level has been on-going for a while now and yet little improvement has been achieved or shown so far, despite efforts undertaken by the Government and other employment agencies.
Smaller and traditional retailers are struggling to find good managers and employees to carry out their daily operations due to unattractive salary package while on a management level, larger corporation and companies are finding it hard to source for competitive talents to help run the business.
A shortage of supply and lack of qualified talents in the local workforce has led to many Malaysian companies to outsource foreign workers and that has backfired somewhat, as customers are still relatively more comfortable shopping in places filled with familiar faces.
In order to resolve this issue, retailers must prioritise the importance of providing adequate training in communication and sales skills for foreign workers. But on the other hand, the flow of local talents into other foreign companies indicates the outflow of ideas into foreign countries and this is a loss not only for the local retail industry but across all sectors as well.
Saturated market share
The purchasing power of the middle income group continues to reduce sharply due to higher debt, increased basic living expenses (rent, transportation, food and utilities) and slower salary increments has led to slower consumer spending, particularly in the retail market.
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Despite accounting for 40 per cent in total household income groups, the middle income group is believed to be the group that supports the majority of the retail activities in Malaysia. However, government policies and external economic factors in recent times have damaged consumer confidence and this is already reflected in retail industry.
However, the 40 per cent of the low income group are finding it increasingly harder to lift their status into the middle income group, considering the hiring freeze and workforce cutbacks by companies despite them owning qualified certifications from universities and colleges.
Moving forward, the tourism industry in Malaysia is not growing as fast as it should be to provide more support for local retailers. The slower growth in China’s GDP and negative publicity, such as Malaysia being ranked for having the worst taxi services in the world, rising crime rate and financial scandals have been quoted as some of the key factors causing fewer tourists visiting the country.
And with the decrease in local and foreign spending, the market share for retail industry will certainly become smaller in size.
Cutthroat competition against multinational players in the market
Bigger isn’t necessarily better, but when it’s backed up by a large multinational company’s infrastructure and distribution network, this can result in heavy losses for local and smaller retailers.
However, there are local company outlet chains with a successful track record in conquering the mass market via their wide distribution and sales points such as Padini, Aeon, Daiso and Tesco. These companies then leverage on economies of scale and are able to provide their customers with better coverage and affordability.
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Whereas for the smaller ‘mom and pop’ retailers, they only have exposure to the market within the vicinity of their outlets, a lack of economies of scale then puts their operating costs averagely higher than the giant players.
Bear in mind that slowly but surely, the multinational ‘giants’ will being increasing their presence and exposure in more neighbourhood areas, and as they expand this will gradually wipe out many of the smaller retailers who simply can’t afford to compete.
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Image Credit: NejroN / 123RF Stock Photo
Shen Ooi works as a senior content writer in Comparehero.my, which is Malaysia’s leading online financial comparison portal. The website seeks to increase financial literacy in Malaysia by providing free, transparent and detailed product comparisons for credit cards, personal loans and broadband plans. For details, visit www.comparehero
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