Retail market: The disease and the cure

By Ku Swee Yong,

Feily Sofian

/ The Edge Property |

April 29, 2016 1:54 PM SGT

Here's why it's time to be spooked by the state of the retail market.

1. February retail sales plunged despite leap year, Airshow and more tourists

The Department of Statistics Singapore released the February 2016 Retail Sales Index figures two weeks ago. The data shows that year-on-year, total retail sales value fell 3.2% from an estimated $3.5 billion in February 2015. The decline would have been bigger if not for the sales of motor vehicles, which increased 51% over February last year. On a year-on-year basis, retail sales excluding motor vehicles have been on a declining streak, with occasional blips.

There were 29 calendar days and 19 working days in February 2016. In comparison, there were 28 calendar days and 18 working days in February 2015.

Singapore hosts a major international exhibition once every two years. The Singapore Airshow was held on Feb 16 to 21 this year and according to the show statistics, there were 48,229 trade attendees, out of whom about 30% (about 14,000) were from overseas. The previous Singapore Airshow was held in February 2014.

February 2016 also saw an increase of 11.9% in the number of international visitor arrivals, or about 141,500 persons, over the previous February.

Given the three positive factors — an extra day this February, the Singapore Airshow and the jump in international visitor arrivals — most market watchers expected an increase in retail spending over the same month last year. However, the cash registers in retail sales and F&B services collected $100 million less in February this year.

2. Tourists and locals are not spending

Perhaps in trying to reverse the declining international visitor arrival numbers, the authorities have targeted higher headcount numbers by attracting mass market tourists instead of premium travellers. The Marina Bay Sands and Resorts World at Sentosa integrated resorts reported weaker revenues, lower profits and a drop in contribution from high rollers.

Another reason might be that the year kicked off on a weak note as a result of the turmoil in the oil and financial markets. Weak jobs data and increased layoffs probably led to belt tightening.

3. Online retailers upping their game

While brick-and-mortar retailers are playing catch-up, online retailers continue to reinvent themselves. For example, more online retailers are offering delivery on Sundays. Not too long ago, Alibaba raised its stake in Singapore Post to enhance its logistic solutions and boost overseas revenue. Some online retailers are employing new technologies that allow customers to try on products digitally by entering their vital statistics, while others offer try-before-youbuy schemes.

A recent survey by PayPal and Ipsos, shows that nearly 70% of Singapore online shoppers shopped with both local and overseas retailers. Globally, e-commerce players the likes of Amazon and Alibaba have taken market share from even the biggest international retailers. UK retailer BHS may go bankrupt while Kmart/Sears and Walmart have announced the closure of about 350 stores in the US.

4. Tiny market

The main reason retailers are not performing well is that the local consumer market is tiny. With the presence of e-commerce and Singaporeans travelling regularly overseas to shop, the market will shrink even more.

It is smaller than what we might expect of a population of 5.54 million. About 1.2 million are made up of foreign domestic workers, and S-Pass, student pass and work permit holders, and their purchasing power is limited.

Many of the international retailers entered Singapore in 2011 and 2012, drawn by the growing population and Southeast Asia’s economic boom. Population growth has, however, slowed down to around 1% per year over the past two years.

5. Vicious cycle

As more brands exit the market, Singapore's reputation as shopping destination will be compromised and discourage both maiden and repeat visits among tourists. For locals, the retail scene will become increasingly monotonous, driving them to overseas destinations.

For the whole of 2015, retailers gave up 323,000 sq ft more space than they took up. Strong brands with solid financials in their home markets, such as FrancFranc, Rakuten, Lowry’s Farm and Goods of Desire, closed their Singapore operations in the last two years.

Island-wide, vacant retail space amounted to 4.7 million sq ft as at 1Q2016 - equivalent to five VivoCitys. Another 8.6 million sq ft of retail space are being planned or under construction. As a tiny island, we are not optimising our land resources.

Vacant retail space amounted to 4.7 million sq ft as at 1Q2016 - equivalent to nearly five VivoCitys.

Another 8.6 million sq ft of retail space are being planned or under construction

Rental and labour not entirely to blame

Retail rents and labour costs in Singapore are only a fraction of those in Hong Kong. Rentals in Hong Kong are two to three times the per sq ft price of an equivalent location in Singapore. Hong Kong’s retail and restaurant workers are paid a minimum wage of HK$32.50 per hour, or about $1,276 assuming they work nine hours a day and 25 days a month. But the retail scene in Hong Kong is more vibrant than Singapore’s.

The problems plaguing the local retail scene lie beyond rents and labour costs. Singapore’s retailers need to examine their value propositions and reorganise their business practices around consumers’ preferences. Many retailers simply operate a showroom, selling “me too” products and depend on the shopper traffic that the mall draws to move its goods. Such product pushers with no value-added services will lose out fast.

In comparison, take a look at Apple’s flagship stores. They have an open-concept layout with about 10% of the total floor area used to display the brand’s products. Apple plants the flagship stores in the world’s most expensive real estate locations: Ginza in Tokyo, Regent Street in London, 5th Avenue in New York and Rue de Rivoli in Paris. With only 10% of the space used to display products, the stores are dedicated to servicing customers. Product sale is secondary, as most of its products are sold online and through direct sales channels such as schools and institutions.

Leading retail brands understand this point: When consumers step into your store, they want service, not just products. Products can be purchased online, usually at lower prices.

The flagship stores of Nike and Adidas are service focused. The services include measuring a consumer’s gait to determine which pair of shoes would be most suitable for his style of running. Such a service is difficult to order online, unless the consumer invests in the equipment for the necessary measurements. Cosmetics brands also understand this point well, and the leaders in this category train their frontline sales staff to be beauticians, and not simply order takers.

Retailers need to package their physical store products with excellent service, and provide a good customer experience and after sales service. Good in-store service, attitude of front line staff and returns policy are among the factors that will draw customers back repeatedly.

Focus on experiences, although rents will be compromised

Having said that, rents will naturally be compromised as the retail industry undergoes a massive restructuring. Brick-and-mortar retailers are expected to give up some physical store space as they adopt offline and online, or omni-channel strategies.

Malls are getting creative with their excess space and are evolving into social hubs that focus on customer experience. They are dedicating more space to play areas, KidZania-like edutainment, new-generation cinemas and concept stores. However, these spaces fetch lower rents on per sq ft basis than if they were let out to small speciality stores.

On a more positive note, these new experiences may bring some lustre back to the retail market and help to attactt foot traffic to the mall. They are also more sustainable alternatives than increasing F&B offerings. The latter might involve a lot of investment as F&B is a very competitive segment. In addition, their crowd-pulling capacity is restricted to lunch and dinner hours.

Creating new experiences more sustainable than increasing F&B offerings

Some landlords have adopted new technologies to counter the soft retail market and rents. For example, the CAPITASTAR App is more than just a reward programme to retain customer loyalty; it is a tool to gain insight into customers’ habits and preferences.

Finally, let us accept the fact that our market is tiny. The exit of retail brands will dull the local retail scene and compromise Singapore’s position as a shopping destination, risking more leakage of shopping dollars overseas. Governments and landlords might wish to step up efforts to boost demand such as collaborating with travel agencies and extending discount vouchers for tourists. This would result in higher tourist dollars to make up for the tiny domestic market. Meanwhile, landlords and retailers should focus on how to increase demand for their products and services.

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