Industry Outlook 2023-2025 Modern Trade

Operators have been steadily expanding their branch networks. This has been most evident among convenience stores, which have been relentlessly extending their reach into communities, but shopping centers, community malls, and superstores have also been opening new branches and extending existing sites (in Q2 2022, the total retail space of community malls and superstores increased by respectively 2.0% YoY and 3.0% YoY). In addition, retailers have been revising their stock lines, for example by adjusting how goods are packaged to take into account increased concerns about public health, and reconfiguring their operations to better respond to the rising consumer preference for shopping on digital platforms. This has involved: (i) using omnichannel digital platforms[7], for example by opening webstores, building mobile applications, developing ‘quick commerce’ operations (i.e., dispatching goods almost as soon as they are ordered), and working with online marketplaces such as Lazada, Shopee and JD Central; (ii) extending online to offline[8] (O2O) operations by offering personal shopper, call and shop, and chat and shop services that are delivered through social commerce channels such as Facebook, LINE and e-ordering; and (iii) increasing the use of digital payment services such as Alipay (online banking), WeChat Pay and Dolfin, as well as the online payment gateways used by domestic Thai banks. By developing along these lines and taking greater advantage of the opportunities provided by the online world, modern trade outlets have been able to increase the efficiency of their distribution networks and connect with new consumer groups.

The situation for individual segments of the modern trade industry is given below.

• Department stores: Companies have focused on investing in high-potential sites alongside expansion in their omnichannel distribution networks.

  • Operators are pushing forward with twin strategies of expanding their online activities in parallel with investing in brick-and-mortar operations in the hope that this will both increase sales and attract new consumer groups, and as part of the latter, players are shifting their marketing to a greater focus on domestic consumers. Developments include strengthening the impact of service channels through the use of chat and shop and call and shop services, and promoting products to consumers through social Media channels such as Facebook Live and official Line brands. The success of this approach has meant that the contribution of online sales to overall income has grown many times over. Thus, Central department store has reported that omnichannel sales’ share of total income has jumped from 3% in 2019 to 10% in 2020 and then to 20% in 2021, and this is expected to reach 25% in 2022.

  • Business conditions will recover steadily through 2022 on: (i) the ending of the pandemic and the positive effect that this is having on social and economic life; and (ii) the return of foreign tourists to Thailand, which will boost department store sales, most obviously in the main tourist areas of Bangkok, Pattaya, and Phuket. For their part, operators have been renovating and expanding sites in expectation of future growth, and so Krungsri Research sees department store sales rising by 3.5% this year, having crashed -11.5% in 2021 (Figure 9).

• Discount stores/hypermarkets/supercenters: Players are focusing their attention on smaller retail units, especially in the Bangkok Metropolitan Region.

  • ​Within this segment, competition is fairly intense, since players have to fight for market share with other types of modern retail operation. This includes convenience stores, supermarkets, and specialist retailers, as well as players selling in other formats that are investing in expansion upcountry and into the hypermarket segment (e.g., Central opens Tops Club). In addition, companies have been building new sources of long-term growth by investing in operations in Vietnam, Lao PDR, and Cambodia, but expansion in branch networks has been held back by the pandemic. Thus, in 2021, total branch networks grew by 2.4% YoY (Table 6), down from an average annual growth of 2.7% over 2019 and 2020. For the first 9 months of 2022, players operated a total of 389 branches.

  • The prolonged Covid-19 pandemic prompted players to shift their focus and to work on expanding their use of online marketing channels. This included implementing a deeper exploration of the omnichannel model, and developing new distribution channels such as: allowing consumers to order goods through their phones or via the Line app; drive-thru services that permit customers to buy, pay for and collect goods without having to leave their vehicles; click and collect services, by which customers order online and collect from a retail outlet; and online express delivery services that dispatch goods within an hour of being bought. Players have also partnered with e-commerce platforms such as Lazada and Shopee and built up their presence on social media (e.g., on Facebook and Line).

  • Although the pandemic passed into the rearview mirror in 2022, sales remain under pressure from the only slow and incomplete recovery in spending power, and this situation has been made worse by this year’s rapid run up in inflation. As a result, the Retailer Sentiment Index for operators of hypermarkets slipped to a 12-month low in June. Nevertheless, in the remainder of the year, recovery will continue, government stimulus spending will help to lift the economy (including THB 5 billion in transfers to welfare card holders), the return of tourists will add to aggregate spending power, and the end of year celebrations will boost sales further. Krungsri Research thus sees 2022 sales bouncing back to growth of 3.0% following a contraction of       -9.0% in 2021 (Figure 10).

• Supermarkets: Growth has remained strong

  • ​The return of economic life to close to normal helped to support solid rates of growth for supermarkets through 2022. This was tempered, though, by the sharp escalation in the cost of living and the resulting need by some consumers to exercise much greater care over their shopping. In response to a changing business landscape, players have adapted their marketing strategies in a number of ways. (i) Supermarkets are developing their use of online channels (e.g., by building membership systems that allow them to record consumer purchases), and offering more personalized marketing through the use of direct mailings, SMSs, the Line app, and mobile applications. (ii) To better meet the needs of wealthier customers, some outlets have been upgraded to premium lifestyle supermarkets (e.g., Big C Foodplace) and product lines have been extended to include more expensive imported goods. Outlets have also been opened in new locations, for example in community malls (in Q2 of 2022, the space available on community malls in the BMR grew 2.0% YoY), as well as in stand-alone locations in higher-income provinces (e.g., where industrial estates are located or in second-tier locations that have significant tourist potential). As such, over 9M22, the number of supermarket branches in Thailand rose 4.8% from the end of 2021 to a total of 503 sites (Table 8). (iii) Operators have formed partnerships with other companies (e.g., GrabMart and Kerry Express) to reduce the friction involved in making purchases. As a result, Krungsri Research believes that the supermarket segment will see overall growth in sales of 6.0%, which would represent a significant turnaround from 2021’s contraction of -8.0% (Figure 11).

• Convenience stores: These have the most extensive branch networks of all players in the modern trade sector and so are well placed to continue taking significant market share from traditional retailers.

  • ​Convenience stores operate extensive networks and so as of 2022, there were 17,446 outlets open in Thailand (Table 9). 7-Eleven enjoys a dominant position within the segment, and with 13,433 branches, it accounts for 77.0% of all convenience stores, followed in importance by Lotus’s Go Fresh (10.6% of the total) and Mini Big C (8.2% of the total). Outlets may be established as larger stand-alone operations, located in service stations, where they meet the needs of both travelers and people living in the immediate neighborhood, or sited in shopping centers. Within the segment, competition is fierce, with this occurring both via intensified marketing efforts and through the type of goods on offer, which now incorporates fresh and ready-to-eat food. Players are also offering a broader range of services, such as allowing customers to pay utility or credit card bills, and partnering with logistics and e-commerce players to offer delivery services. In addition, players are extending the range of sales channels that they are able to exploit by installing vending machines on- and off-site. 

  • For 2022, convenience store income will strengthen on the general improvement in the economy, a rise in incomes in the agricultural sector, and the effects of government stimulus packages on consumer spending (e.g., phase 5 of the We Travel Together program). Players are continuing to steadily expand their branch networks, and this is allowing them to connect to a wider spread of communities, though players are also intensifying their online efforts. The latter has included developing online platforms that connect to retail networks, offering delivery services, and accepting payments through mobile apps and credit cards, and this has all added to operators’ bottom lines. Nevertheless, the steep increase in prices that consumers have been faced with this year has particularly impacted mid-to lower-income earners, and this is dragging on sales growth. Given this, Krungsri Research expects convenience stores to see growth of 4.5% through 2022, up from a fall of -4.5% in 2021 (Figure 12).

OUTLOOK

The modern trade sector should enjoy average annual growth of 4.0-5.0% over 2023-2025 (Figure 13), with the sector benefiting from a range of factors. (i) The economy is expected to expand by 3.0-4.0% per year (Figure 14) and this will then lift consumer spending power. (ii) Both the domestic and international tourist markets will return to close to their 2019 pre-pandemic levels over the period (Thai tourists are expected to make 185 million trips in 2024, and total foreign arrivals should hit 42 million by 2025) (Figure 15), which will then add to income for outlets or branches in tourist areas.
(iii) The government will move forward with spending on megaprojects, and this will inject additional funds into the economy, add to employment, boost incomes, and support an expansion of modern retail chains. (iv) Online sales are forecast to rise by 13.6% per year (source: e-Conomy SEA 2021). (v) Government efforts to stimulate spending and consumption will likely bear fruit. These include raising the minimum wage (from October 1, 2022) and issuing long-term visas to four classes of high-potential visitors[9]. (vi) The IMF sees annual GDP growth averaging 3.5-6.5% in the CLMV countries, which will open up new business opportunities for retailers in major regional centers and in border provinces.

Outlook for individual segments

• Department stores: Sales will strengthen from 2021’s 3.5% expansion to growth of 4.0-5.0% annually. This will be a result of the abating of the Covid-19 pandemic and the shift in business strategy to developing omnichannel platforms and using 5G and AR technology to offer new and enticing consumer experiences. Players will also step up their investments in high-potential markets in the broader region, and this will help them to develop additional sources of income.

• Discount stores/hypermarkets/supercenters: 2022’s growth of 3.0% will inch up to 3.0-4.0% over the next three years as operators increasingly adapt and diversify their store formats according to the demands of individual locations. Players will also expand into local communities across the country, which will help them connect with a wider range of customers. Alongside this, they will continue to put their efforts into the development of digital platforms, all the while selling goods at prices that undercut those of other types of retailers. However, operators will face stiffer competition as a result of the lack of strong product differentiation marking their product lines off from those on sale in other segments of the retail market.

• Supermarkets: Annual sales growth may move up slightly from the 6.0% achieved in 2022 to 6.0-7.0% in the coming period. This segment will enjoy the highest growth within the retail sector thanks to players’ ability to match their marketing strategies to the needs of their shoppers, most of whom are mid- to upper-income consumers with significant purchasing power. Supermarkets gain from the high-quality of their produce, and from strategies that include: (i) rebranding outlets as premium lifestyle supermarkets that offer higher-priced imported goods; (ii) expanding their presence into higher-income provinces; (iii) developing their online offerings to make consumers’ online experience as smooth as possible. In light of this and the benefits that they gain from their size, supermarkets will likely be able to sustain healthy turnover.

• Convenience stores/minimarts: Income rose by 4.5% in 2022, and annual growth will continue in the range of 4.5-5.5% over the next 3 years. The continuing expansion in the coverage of branch networks, the extension of services to include sales of ready-to-eat food, and an increase in the use of online channels will all help to build additional income. This will, though, be balanced by an intensification of market pressure as direct competitors open branches to challenge convenience stores, and indirect competitors (e.g., hypermarkets) increasingly adapt their retail formats as they look to steal market share. Thus, the move by major players to partner with traditional retailers is helping these establish a presence on the high street, and this is then affecting convenience store takings. As such, average branch incomes are likely to fall from earlier highs. Nevertheless, while franchisees will face an increased threat to their operations, franchisors will continue to generate profits.

Modern trade operations will continue with their strategy of building out new branches, developing online distribution channels, and investing in new business models that exploit recent technological innovations as they look to make up for delays to expansion plans and ground lost during the pandemic. However, against a backdrop of changing consumer spending patterns, players will need to build greater consumer awareness of their apps if they wish to more fully develop the potential offered by online distribution. With regard to business expansion, several possibilities are in play.

1. Branches may be either shrunk or expanded to allow for a nimbler approach to siting new outlets and thus of entering new markets, building new customer relationships, and expanding total branch coverage.

2. Branches may be opened in new formats, such as smaller lifestyle shopping malls that are being set up in less prominent provinces and larger districts. Alternatively, reduced-size retail outlets may be opened in locations where players will be able to benefit from changes to consumer behavior that are seeing shoppers make fewer trips to large outlets and instead to increasingly shop near home.

3. Players will expand their use of social media platforms and other direct to consumer (D2C)[10] online channels as they try to bring their operations more into line with changing consumer lifestyles. In addition, quick commerce will also become more popular as consumers shift to a preference for on demand shopping, buying small selections of items that are dispatched within half an hour.

4. Operators of discount stores, hypermarkets, and supercenters will tend to expand via sales of their own-brand products distributed through traditional retailers serving local markets in Bangkok and upcountry. This will allow players to develop a new source of long-term growth, as well as strengthening their negotiating position relative to suppliers.

5. Wider exploitation of the possibilities offered by new technology will help operators better penetrate niche markets. For example, advances in AI will help retailers design discounts and sales promotions that more precisely match consumer needs and behaviors, and to do so in an increasingly personalized way.

6. Expansion into markets in neighboring countries that have both the wealth and size to make this viable will support growth in long-term income. Thus, by 2026, Central plans to have invested THB 30 billion in new retail operations in Vietnam.

Despite this broadly positive outlook, headwinds will blow against the sector, and these will include the following. (i) Competition will tend to intensify as a result of the constantly increasing number of outlets. Competition will come from within the same segment, from other parts of the market, and from major Thai and overseas corporations that see the growth potential of the Thai market and are acting accordingly. (ii) The number of online competitors is also rising, and this includes both Thai and non-Thai players in the consumer to consumer (C2C)[11] market and those operating on e-marketplaces (e.g., Lazada, Alibaba, Shopee, JD.com, eBay and Amazon). Indeed, the e-Conomy SEA 2021 report indicates that the value of the Thai e-commerce market will reach THB 35 billion by 2025, up 66.7% from 2021 (Figure 16). As such, players will need to be diligent in managing their e-commerce supply chains, which will need to be flexible, responsive and efficient, and to ensure that their online distribution meets the standards expected by consumers, players may need to partner with companies that have expertise in transport and logistics. (iii) To maintain and to sharpen their competitiveness, operators will also need to adapt and exploit modern technology by: (a) developing omnichannel operations that take advantage of 5G technology; (b) using AI to evaluate consumer demand and expenditure, and to maintain optimal stock levels; and (c) building augmented reality (AR) and virtual reality (VR) systems that offer consumers the possibility of experiencing a convincing simulation of the products they are considering buying.

[1] One reason that large modern trade operations are able to offer goods at price points below those of traditional retailers is that they are in a position to set up condition to collect fees from manufacturers and distributors that wish to sell through their shops. Sources of income include: (i) initial fees for stocking new lines; (ii) charges for marketing and other services for, e.g., hosting display stands, access to shelf space, signage, bonuses in the case that sales exceed monthly targets, and the transport and logistics fees incurred in shipping goods from distribution centers to stores; (iii) the fees for producing leaflets and flyers, as well as the provision of free or additionally discounted goods on special occasions (e.g., New Year, the opening of new branches, store renovations and re-openings, and during festivals); (iv) credit terms that extend to 90-120 days; and (v) contracts that allow players to terminate business relations unilaterally.
[2] The 1999 Foreign Business Act allows non-Thais to operate in the retail and wholesale industries (reserved occupations as per Appendix 3 of the Act) if they invest at least THB 100 million in Thailand. Potential investors must also apply for a license from the Foreign Business Committee.
[3] The Standing Committee on Commerce, Industry and Labour has designated large self-service wholesale cash & carry operations such as Makro as a particular type of distributor, but this paper considers only retail operations..
[4] Shopping centers/shopping malls are single structures within which many goods and services are retailed, though the exact products that are available will depend on decisions made by renters/occupiers of retail space; these sign contracts with the landlord operating the shopping center to pay rent for this space for a specified period.
[5] In 2021, the Charoen Pokphand Group bought Tesco Lotus, which was rebranded across the board as Lotus’s. This was with the exception of Tesco Lotus Express, which became Lotus’s go fresh.
[6] Colliers International Thailand
[7] Omnichannel is a form of distribution that mixes online (e.g., websites, social media, or e-commerce) and offline (e.g., in store) marketing and sales. Information gathered on customers from these diverse sources is gathered and analyzed to give retailers an overview of the market and to provide a better understanding of consumer needs and intentions, and this puts them in a better position to offer more comprehensive assistance to potential and actual buyers.
[8] O2O, or online to offline, marketing combines the advantages of both the on- and offline worlds, and this allows companies to raise the quality of their services, expand sales, and engage with a broader consumer base.
[9] These are: (i) high net worth individuals; (ii) wealthy pensioners; (iii) professionals and expats working in Thailand; and (iv) highly skilled professionals.
[10] D2C or direct to consumer marketing describes the use of online channels to sell directly to shoppers. This may be through websites and apps, but sales do not pass through an intermediary.
[11] C2C or consumer to consumer selling is an e-commerce model that allows consumers to buy and sell directly to and from one another