What do Western retailers need to know about opportunities in Southeast Asian nations?
In 2015, 10 Southeast Asian nations will form a single market with 625 million people, a GDP of US$2.4 trn and growth of 6 percent a year. What do Western brands and retailers need to know about this opportunity?
When WHSmith was launching a new store in the ASEAN region, at Kuala Lumpur airport in 2012, the company’s International Director had his own view on which books should be stocked. “We need some Joseph Conrad,” Louis de Bourgoing told Bison, WHSmith’s local joint-venture partner. “He wrote a lot about Malaysia.” For De Bourgoing, Conrad’s novels set in the Malay Archipelago would be perennial sellers, much as Wilfred Thesiger’s Arabian Sands was the company’s most popular book in Oman. That granular attention to detail is one of the keystones of success in the ASEAN region.
Ten countries comprise the Association of Southeast Asian Nations (ASEAN) – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. By the end of 2015, ASEAN aims to have created a single economic market, to be known as the AEC, built on a collective population of around 625 million and a GDP worth about US$2.4trn.
It’s easy to be dazzled by the figures. By 2020, Nielsen estimates, 400 million people in ASEAN will belong to the middle class, more than in Brazil, France, Germany, the UK and the US combined. GDP in the region is expected to rise by 6 percent per annum between 2011 and 2016. The demographics favor ASEAN, too: in the coming decades, it will have more prime-age adults (between 25 and 54) than ever before. Add in the optimism that pervades consumers in many of these countries and you can see why some companies might overlook the very real challenge posed by the region’s cultural, legal, political, and economic diversity.
The 10 ASEAN countries harbor vast differences in wealth (Singapore, the richest, is more than 50 times wealthier than the poorest, Myanmar); in population (Indonesia’s 248 million dwarfs Brunei’s 420,000); in religion (Myanmar is predominantly Buddhist, Indonesia is mainly Muslim, the Philippines largely Roman Catholic); and in political and economic systems (democracies and dictatorships, communism and capitalism are in close proximity). Understanding these differences is important to any business operating in the region.
The old-school approach for multinationals looking to tap into the ASEAN market was to set up an HQ in Singapore and assume the challenge was sorted. Yet Ian Thornhill, Advisory Director at KPMG in Thailand and Myanmar, says that brands need a much more nuanced strategy if they are to flourish across the region. “Companies need to study the subtleties of consumer demand. Some international brands will acquire, or work with, a local partner to understand different markets and grasp the balance of quality and price the customer is looking for.
“For example, they need to consider prices and the size of the products they’re selling. In some poorer markets, they might be better off selling sachets.” One advantage for Western brands, according to Thornhill, is that they are perceived as being of higher quality than local ones, “yet they still need to be affordable. For example, one globally famous premium ice-cream brand effectively withdrew from the Philippines market after 12 years.”
As critical as price points can be in ASEAN, they aren’t the only conundrum that consumer goods companies must face. “Distribution and access to market can be a challenge,” says Yasuhide Fujii, Managing Partner at KPMG in Myanmar. “Local supply chains can be quite complex and it can be difficult to access certain parts of the country.”
Some markets are more open than others, which is why WHSmith has opted for a joint venture in Malaysia and appointed IDP as a franchise partner in Indonesia. “Many people like to think that going direct is the best answer in the long term,” says De Bourgoing, “and they may be right. But running a joint venture can be effective because there are always things you don’t understand and it is an interesting challenge to have to agree – and align – with a partner. You provide the expertise and the best practice and they have the local knowledge to help you make fewer mistakes.”
One mistake Western brands can make is to extrapolate the factors that drive their developed markets to the ASEAN region. Omnichannel is a troubling reality in most Western retail markets, yet it is not so important in Southeast Asia, according to Terry O’Connor, CEO of the furniture, electrical and IT retail giant Courts Asia. “In some countries, shopping is seen as an irritation; in ASEAN it is a pastime,” he says. “In Singapore, the mall is a social anchor, with food courts, cinemas and kids’ theaters. E-commerce accounts for [only] around 1.1 percent of retail in Singapore, less in Malaysia and Indonesia.”
O’Connor is not arguing that the ASEAN consumer market is protected by some kind of exceptionalism. The group has just revamped its online offering, eCourts, and he believes e-commerce can help the company move into new territories. But he is convinced that the region’s shopping culture gives retailers such as Courts longer to adapt than equivalent companies in the West.
On its homepage, Courts makes much play of its promise to the community. Corporate social responsibility statements are familiar in the West but have particular resonance for Western brands looking to move into ASEAN. “It is important that companies show that it’s not entirely about their own business,” says Fujii. “American companies investing in Myanmar, for example, have set a high standard for responsible business conduct, working with partners and NGOs to improve the quality of life for the Myanmar people.”
Western brands would also be foolish to overlook the political uncertainties that affect such key markets as Myanmar and Thailand. Even so, the opening up of Myanmar has been spectacular, with 15 US companies, including Gap, investing there in the past year. Most recently, Colgate-Palmolive acquired a local toothpaste maker. But what some analysts see as a gold rush mentality has sent real estate costs rocketing and prompted some potential entrants to wait for the market to cool down. “The growth is coming, but Myanmar is a long-term play,” says Fujii. “In the short term, you may see better growth from other ASEAN countries that are starting from a higher base.”
So it may be no coincidence that these markets are the priorities both for WHSmith, a global retailer making inroads into ASEAN, and the Singapore-based Courts. The latter is already the second largest player in its sector in Malaysia but O’Connor says the company is determined to keep expanding. “We aim to grow our footprint in Malaysia by an average of six stores a year,” he tells ConsumerCurrents. “On top of that, we have just entered the Indonesian market with our largest ever ‘Big-Box’ Megastore in Bekasi.
“Indonesia is a very exciting market,” he adds. “The consumer segment has seen a very strong emergence as there are about 135 million middle-class consumers. We’re looking forward to being a long-term player in the country. There is a lot of scope for players like us to bring something different to the market.”
WHSmith has targeted the same markets in the same order, but using different models: Malaysia through a joint venture with Bison, followed by Indonesia, through franchisee IDP. Though De Bourgoing is instinctively reticent when asked strategic questions, the modus operandi seems clear. Get a foot in an ASEAN market, learn the right lessons, and then, when it is stable and the moment seems right, look for the next market. “The good thing about retail,” he tells ConsumerCurrents, “is that you can test, adapt and react.”
Whereas Courts covers more sectors as a retailer, WHSmith is something of a specialist. In ASEAN, its focus is on travel essentials – be they neck pillows (its bestseller), soft drinks, books or magazines – yet the strategy for growth is not dissimilar. Courts, which opened its first store in Singapore 40 years ago, moved into Malaysia then Indonesia; the Philippines and Vietnam are now of particular interest.
This is also effectively the strategy noted by Fujii: “Given the differences in consumer tastes across the region – and the challenges supply chains can pose – many companies look to establish a hub and export, or move into, neighboring markets.”
Conventional wisdom suggests that, for multinationals, it can take a long time to profit from emerging economies. Yet De Bourgoing says WHSmith’s first store, at Kuala Lumpur airport – a photograph of which hangs on his wall in his London head office – was trading profitably from day one. The company’s international division is now five years old – he previously spent a decade building up a similar business for Lagardère – and is growing fast. This is not, he hastens to add, due to any particular genius on his part: “If you’re selling travel accessories at an airport in Malaysia, where traffic is growing by 12 percent a year, all you have to do is get on the train.”
Will the single ASEAN market help that train accelerate? O’Connor is cautiously optimistic. His company saw revenue increase by 4.6 percent in the year to March 2014, although profits fell by 31.6 percent due to increased costs, in particular the credit difficulties of some customers. “Confidence levels across the region are robust,” he says. “Being realistic, 2015 is the first step on a journey but if it brings down barriers, makes the ASEAN market more open and encourages investment, it can only help the expected economic expansion.”
O’Connor’s optimism is shared by the respondents to the Economist Corporate Network’s survey in 2013. When asked whether ASEAN will build a true single market by 2015, only 6 percent said yes. But a further 89 percent expect it to be completed eventually. As Pushpanathan Sundram, Managing Director for Asia of EAS Strategic Advice, says: “Remember that the goals for the ASEAN Economic Community are very bold. Even if they only achieve 70 percent of their targets by 2015, that will still be a huge achievement.”
If ASEAN were a country, it would be the world’s fourth largest economic power. With most members expected to enjoy growth rates that would leave developed countries dollar-green with envy, ASEAN offers an opportunity that seems too good to resist for many Western brands and retailers. Yet multinationals eyeing the region could do worse than heed De Bourgoing’s advice: “Be organized. Be patient: there are complexities that will take time to resolve. And be optimistic: these are dynamic markets with a lot of resources, people and potential.”