Asia’s retail spending boom: Shoppers go on a frenzy, and why not? Asia Pacific Economic Outlook, Q2 2017
As prosperity and access to credit increase in the world’s two most populous countries, China and India, people there are spending more on a wide variety of products—from motor vehicles to luxury vacations. Asia, is thus a lucrative proposition for global brands.
A large and growing retail market
If you are an avid shopper and find yourself in a big city in Asia, you will probably not be disappointed. From the latest brands to more affordable goods, shoppers have never had it so good in the region. Strong economic growth over the years has meant that consumers have more money to spend, even as banks increasingly offer credit for a wide variety of purchases—from motor vehicles to luxury vacations. Adding to the retail buzz in the region is the rise of key emerging markets like China and, to a lesser extent, India. As prosperity increases in the world’s two most populous nations, people there are naturally spending more. No wonder then that Asia is a lucrative proposition for global brands. While many are already increasing their presence, they may not have it all easy as they contend with strong competition, especially from domestic businesses that won’t give in without a fight.
In 2001, combined nominal retail sales for 11 key Asian economies, excluding Japan,1 was about US$ 1.0 trillion, just 41.9 percent of the total retail sales in the United States. Travel forward in time to 2016 and there is quite a change—retail sales for the same 11 economies jumped to an estimated US$ 6.6 trillion (figure 1), much higher than the corresponding US figure (US$ 3.9 trillion).2 The surge is even more apparent when the figures are adjusted for inflation and purchasing power parity (PPP)—combined retail sales for the Asian economies valued at 2012 US$ PPP was 3.3 times the corresponding US value in 2016, according to Oxford Economics.3 While combined sales levels are impressive, so is the growth rate over the years for each country (figure 2). Interestingly, figures 1 and 2 reveal the growing role of China, globally and figure 3, within Asia.
The paths to soaring retail spending
Rising retail spending in Asia is a natural corollary to growing incomes and wealth. For example, over 2001–16, real disposable personal income is estimated to have grown at an average annual rate of 11.5 percent in China, 7.5 percent in India, 6.6 percent in Vietnam, and 5.7 percent in Malaysia (figure 4). In addition to overall income, the size of the middle class in Asia has expanded as millions come out of poverty due to strong economic growth. Figure 4 shows us the average annual rate of growth in the number of households earning US$ 20,000–200,000 in constant PPP for key economies in Asia, with emerging economies clearly outpacing more developed counterparts in the region.4 This trend is likely to continue with the Asia-Pacific region’s share in the global middle-class population expected to rise to 66 percent by 2030 from 28 percent in 2009.5
Asian consumers have also benefitted from rising house prices, a key component of household wealth.6 A quick look at housing data reveals that house prices, on average, have gone up by 14.4 percent every year between 2008 and 2016 in India, by 8.0 percent in Malaysia, and by 7.2 percent in Taiwan. While growth in the national average has been relatively low in China in the above period, prices in key cities in the country have increased sharply in the past two years.7 In addition to home prices, strong equity market returns (figure 5) have also propped up household wealth in the region.
While rising incomes and wealth have helped retail sales in Asia, increased access to credit has been a major catalyst too. In China, for example, a total of about 5.0 million credit cards were issued in Q3 2016, nearly 2.8 times the corresponding value seven years ago.8 In India, personal loans grew at an average annual rate of 17.9 percent between December 2009 and December 2016 (figure 6), while the corresponding figure for Malaysia was 12.9 percent.9 This trend of rising credit for consumer purchases is similar for the Philippines, Singapore, and Thailand.10
Changing lifestyles and the advent of globalization have also opened up the world to the Asian shopper. Demographics is another advantage, with Asia playing host to a large population.11 Add to it the fact that Asia’s population is relatively young and that it is moving fast into urban centers—where avenues for spending abound—and you have a nice mix of enabling factors playing into the retail story in the region.12
What are Asian shoppers buying?
Automobiles are a major item of retail purchase in key Asian economies. In China, the share of automobiles in retail sales at large establishments went up to 27.8 percent in 2016 from 18.3 percent in 2005.13 During the same period, sales of passenger vehicles and two-wheelers—motorcycles and scooters—in India went up per year on average by 9.3 percent and 8.8 percent, respectively. In contrast, the fortunes of automobiles in Taiwan have remained relatively unchanged and have declined in Singapore, where apparel and footwear and food and beverages have instead aided retail growth.
Consumers are also buying more of home furnishing-related items; in China, the category’s share has gone up over 2005–16, perhaps driven by rising homeownership and improved living standards.14 Interestingly, data on retail sales volumes in Indonesia (figure 7) reveal a strong surge in the share of information and communication equipment (ICE), similar to trends in consumer spending in the United States.15
Online retail has been rising fast in Asia, sometimes even faster than in the United States where the share of e-commerce in total retail sales has been increasing steadily.16 In China, for example, sales of goods and services online grew by 26.2 percent in 2016 to US$ 750.5 billion (about 15.5 percent of total retail sales), up from a strong 40.5 percent rise in 2015.17 And China is not alone, with non-store retailers (a proxy for online sales) in countries like South Korea and Taiwan increasing their share in overall retail sales.18 India is also witnessing strong e-commerce growth, with the market likely to touch US$ 60 billion in 2017, according to Deloitte, from US$ 10.9 billion in 2013.19 Forecasts by Morgan Stanley put the market size for 2020 at US$ 137 billion.20
Not an easy road
With the retail market expanding fast and much growth yet to come, Asia is a lucrative proposition for global companies. In the auto sector, for example, the share of Asia Pacific in Volkswagen’s revenues (in US$), has almost tripled to 16.5 percent over 2005–15. Similarly, between FY2005 and FY2016, Toyota’s net revenues from Asia (excluding Japan) nearly doubled.21 And auto companies are not alone. China accounted for 21.5 percent of Apple Inc.’s net revenues in FY2016 compared to nothing 11 years ago; the company is now targeting India to drive growth.22 Global fast-food majors and even luxury brands like Christian Dior are also turning toward the Asian market for revenues.23
The road ahead for global majors is not easy however. They will run up against competition from domestic companies with deep knowledge of the market. Apple Inc., for example, faces competition in China and India from local smartphone makers, some of which price their products much lower.24 In e-commerce, Amazon ran up against Alibaba in China, and is changing track by betting big on India—in June 2016, it said that it would ramp up investments in the country by an additional US$ 3 billion from the US$ 2 billion initially planned.25 But, even in India, it faces a formidable domestic opponent in Flipkart, which started the race much earlier.26 In multi-brand retail, major markets like India are still a hurdle, as foreign investments in the sector remain relatively closed.27 Infrastructure and ease of business concerns are other issues that add to the pain of companies operating in countries like India, Indonesia, and the Philippines.28
So, while Asia may be too attractive a market to ignore for global companies, it may require a lot of innovation, especially targeted at the young population, and patience to win the race. They may need to partner more with local talent and smaller enterprises to carve out a winning strategy, one that also adds value to the economies they serve. Only then will they be able to capture hearts, minds, and wallets.