MALAYSIAN consumers are still spending, albeit more cautiously, as evidenced by the packed shopping centres throughout the country during last year's Christmas and year-end holidays, as well as the recent Chinese New Year festival.
The Malaysian Institute of Economic Research's Consumer Sentiments Index rose 13.6 points to settle at 116.1 in the fourth quarter of 2005, up from 102.5 in the third quarter, as year-end bonuses and festivities lifted sentiments.
RAM Consultancy Services Sdn Bhd managing director and chief economist Dr Yeah Kim Leng expects private consumption growth to moderate to 7%-8% this year, a pace which he believes is still robust as well as sustainable.
Last year, private consumption grew at an inflation-adjusted rate of 9.3% for the first nine months. In current prices, it rose 11.6%, which was similar to the growth in 2004.
“Last year's performance affirmed our expectation about the continuing strength of consumer spending, despite a slight erosion in purchasing power due to rising prices,” Yeah said.
According to him, consumer spending would be boosted by continuing job and income growth, new household formation, rise in rural income due to strong commodity prices and, overall, a reasonably positive economic outlook.
He noted that a stronger stock market performance this year, as expected by many equity houses, could also provide the additional encouragement for consumers to spend more.
“Consumer financing, while expected to be more expensive this year due to the likely increase in interest rates to combat rising inflation, remains accommodative as the financial system is flushed with liquidity and banks are competing more intensely,” he said.
That said, Retail Group Malaysia managing director Tan Hai Hsin believes local retailers would still need to use price discounts, free gifts, lucky draws, loyalty programmes, advertisements and instalment schemes to attract shoppers to buy more in 2006.
Tan said higher borrowing costs would affect sales of big-ticket items, including home furniture and fixtures, home furnishing goods, household appliances as well as electrical and electronic goods.
“The higher borrowing costs will also mean consumers will now have to pay more for their monthly housing loan instalments and spend less on retail goods and services. This will have some impact on retail sales,” he said.
RAM’s Yeah concurs. “While growth opportunities abound, retail players will have to brace for a higher-than-expected cost increase and credit tightening, which may crimp consumer demand.
“At the same time, they would have to develop market niches and customer loyalty programmes to differentiate themselves from the growing number of competitors, including new distribution channels such as online purchases and direct sales,” he said.
Mayban Research noted that retailers would have to brace themselves for tougher times ahead, especially as consumers were now more cautious of their spending.
“Retail sub-sectors, which recorded the lowest growth in the first half of 2005, were the specialty stores – photography, optical, sporting goods, jewelleries and toys – reaffirming our view that consumers are shying away from non-essential items.
“We believe this trend will persist in the near term, with departmental stores, fashion retailers and hypermarkets emerging as the winners in the current operating environment,” the research house said.
On a brighter note, Tan expects the price war among major retailers like the supermarket and hypermarket operators to continue this year, thus keeping prices low, especially for essential items.
“This will help to maintain the purchasing power of consumers,” he said.
In addition, Tan anticipates retail spending to increase as the Government has been giving generous allowances to civil servants since last year.
The retail consultant is still maintaining its retail sales growth projection of 8% for the year.
Mayban Research, meanwhile, has a neutral stance on the retail sector.
The Store Corp Bhd continues to be the research house's top pick for the retail sector due to its compelling valuations.
“A major drawback of this stock though is its lack of liquidity,” it said.
Mayban Research also likes Aeon Co (M) Bhd's business model and experienced management. However, it is maintaining a “hold” call on the stock due to its rich valuations.
“A generous dividend yield continues to be Amway (M) Holdings Bhd's main investment case, although we are concerned about its sluggish core distributor force growth and weakening margins due to intense competition in the direct-selling industry,” it said.