COMMERCE SECTOR - Stick to consumer staples
(06/12/2019 - 09:00)

Thai retailers reported softer SSSg in 3Q19 compared to mid-high single-digit growth in 1H19, suggesting weaker private consumption. However, retailers of consumer staples performed better, reporting low single-digit SSSg while retailers of discretionary products registered negative SSSg. This means the slowing economy (falling wages and employment) and falling consumer confidence is hurting discretionary spending as most durables and semi-durables are big-ticket items. Hence, consumer staples retailers should outperform during this period of weak consumption.

 

Thai retailers’ earnings saved by improving profitability

While most Thai retailers were able to report positive net profit growth, SSSg had dropped substantially across Thailand in 3Q19. Most retailers conducted cost-saving initiatives and tried to increase contribution from private label products (lower price points but higher margins) to improve profitability amid sluggish top-line growth in the quarter. The disappointing SSSg suggests private consumption is slowing down, possibly because of the weak export sector.

 

Demand for non-durables will remain resilient

Despite fiscal stimulus programs, the falling number of total employed workers and sluggish wage growth will continue to weigh on private consumption in 4Q19-1Q20. Upcountry operations will remain challenging due to weak farm income and employment in the manufacturing sector. However, consumption in urban areas should remain strong supported by the resilient high-income services sector.  That said, falling consumer confidence during times of uncertainty and worsening economic data will prompt consumer to delay spending on big-ticket items which are mostly semi- and durable items. Demand for non-durables such as consumer staples would be intact.

 

Retailers of semi-durables will continue to be pressured by online platforms

Following the 11.11 festival, e-commerce sales have continued surge, as reported by SEA and Lazada. Brick & mortar retailers of semi-durables (e.g. apparel & electronic appliances) will be the main losers as online retail platforms gain popularity. Our view is supported by sales mix data from Lazada for October; semi-durables generated 48% of sales, durables 28%, grocery 11%, and beauty & healthcare products 13%.

 

Stay with consumer staples retailers

Looking forward, we remain cautious of a strong recovery in domestic. Consumption would more likely be driven by strong tourist arrivals in 2020. The high-base during 1H19 election spending and weakness in SSSg in 2H19 suggest downside risk to SSSg for the Commerce sector in 2020F. Hence, consumer staples retailers such as convenience stores (CVS), hypermarket, and wholesalers would post stronger SSSg than their counterparts which have a larger mix of discretionary products.