Liberalisation and new trademark law drive growth in Myanmar's retail sector
As recently as 2011, before economic liberalisation began to gain speed, Myanmar had no access to international brands. In strong contrast, in 2019 Yangon's Junction City Mall had a 100% occupancy rate, hosting a number of popular restaurants, shopping and entertainment venues. The growth of such complexes is striking, as is the potential for further growth in the country's rapidly burgeoning retail sector.
Regulation & Oversight
The Myanmar Investment Commission (MIC) dictates which sectors are open to foreign investment through its list of restricted activities. In addition, it was the body responsible for opening retail and wholesale industry to 100% foreign ownership and joint venture participation in 2017. Under the law introduced that year, retail companies carrying foreign investment of up to 35% are considered domestic. Therefore, they are able lease land, list on the stock exchange and engage in sectors closed to foreign investment by the MIC.
The Ministry of Commerce (MoC), which oversees Myanmar's transition to a more market-oriented economy, is responsible for issuing directives specifying minimum capital requirements: 100% foreign- owned businesses must invest $3m to launch a retail business and $5m to launch a wholesale business. In addition, those with under 80% foreign shareholding must commit $2m to retail or $700,000 to wholesale. The directive states that the goal of foreign investment is to bring down prices while simultaneously increasing choice and quality, and also improving access to technology, logistics and supply-chain expertise.
Meanwhile, all foreign-owned firms or joint ventures with foreign shareholding must register with the MoC and obtain a permit before they commence trade. Successful registration requires the submission of a certificate of incorporation, an MIC permit or endorsement, a recommendation from an existing local development committee in each state earmarked for trading and a comprehensive business plan. In addition, foreign-owned retail companies are required to occupy a space of at least 929 sq metres.
Myanmar does not have value-added tax, but instead levies a commercial tax of 5% on all service transactions. In addition, the Specific Goods Tax is levied at rates of between 5% and 120% on a range of goods. Payments to non-residents for the procurement of goods and services are subject to a 2.5% withholding tax. In the same vein, royalties carry a rate of 15%.
In January 2019 Myanmar finalised a long-awaited trademark law that aims to create a framework for trademark registration and intellectual property protection of both foreign and domestic brands. The law is an important first step, but it remains to be seen how the government will manage enforcement and legal challenges. The law carries criminal penalties for trademark infringement and counterfeiting, including up to three years in prison or fines of up to MMK5m ($3260). Meanwhile, in November 2019 Myanmar's new trademark office announced that it would open for soft launch in December of the same year. The office will require existing trademark holders who obtained their rights under the old 'first to use' method to refile under the new 'first to register' system. It is expected to open its doors to new applicants in 2020.
The government has also pledged to address illicit trade, which totalled some $6.5bn between 2017 and 2018, according to a study by Yangon-based Myanmar Market Research & Development. It found a $1.43bn gap between Myanmar's records of imports and those of exporters in beer, whisky, cigarettes, pharmaceuticals, mobile handsets, cosmetics and personal care products, with researchers estimating that unrecorded shipments account for around $943m each year, indicating insufficient enforcement of Customs and trading standards.
Myanmar's economy remains on a fast-paced expansionary track, with the World Bank forecasting growth of 6.6% in FY 2019/2020 and 6.7% in FY 2020/21. These figures are underpinned by steady service sector growth of 8.3% in 2018/19, though this is expected to moderate slightly to 8.1% in 2019/20 and 8% in 2020/21. Service growth will be driven by foreign investment and enhanced competition in wholesale and retail, as well as the expansion of retail logistics.
GNI per capita has also picked up, moving from $1200 between 2015 and 2017 to $1310 in 2018. Myanmar's population, sitting at about 53m in 2019, is also relatively young. The median age is 28 years, providing a demographic push towards the formation of a national middle class, as well as a base of consumers eager to try new retail products and experiences. Such growth and the resulting rise in demand can be attractive to foreign retail businesses. According to the World Bank, however, Myanmar still tracks somewhat lower than most ASEAN economies when it comes to purchasing power parity. In 2018 it put the country at approximately $6662, versus $7435 in Vietnam and $8935 in the Philippines. 'Foreign brands are aspirational, and social influencers are key to driving this segment. Myanmar is still at early stages in the development of its retail market, but we are seeing trends similar to those in the rest of South-east Asia,' Mark Bedingham, president and CEO of investment and management company Singapore Myanmar Investco, told OBG. 'The emerging middle class, together with wealthy entrepreneurs, make an attractive group of target consumers,' he said.
The World Bank expected the wholesale and retail sector to grow by 8% between 2018 and 2019, following geographic market expansion and the strong sale of new vehicles. According to the US International Trade Administration, in 2018 Myanmar's retail sector was worth between $10bn and $12bn.
Aggregate retail stock in Yangon exceeded 400,000 sq metres at the end of 2018, up 24% on 2017. The increase was the result of three new projects opening their doors in 2018: Kantharyar Shopping Mall, from the Asia Myanmar Shining Star Investment Company; phase one of the Central Boulevard, from Marga Landmark; and Space @ Yankin Condominiums, from Crown Roofing. Real estate service provider Colliers predicted that a further 150,700 sq metres ' the highest annual total to date ' would be added to Yangon's gross leasable area in 2019. New developments include phase one of Fortune Plaza, from real estate developer Excellent Fortune, and Yadanar Mall, from Yangon-based Crown Advanced Construction. Colliers forecast additional stock in 2020 to be meagre, and it urged developers to invest further in large- scale shopping malls, particularly lifestyle-oriented projects offering leisure and recreational activities (see analysis). City-wide retail occupancy was 90% at the end of 2018, down by approximately 6% on the previous year, and is expected to decline further as more retail space becomes available.
Downside risks to investment include tourism-related retail businesses seeing losses as a result of Western visitors staying away, influenced by the negative international media coverage of ongoing unrest in Rakhine State. Myanmar has addressed these losses by relaxing visa requirements for visitors from Asia and certain EU countries, a change that boosted tourist numbers to around 3.55m in 2018, up from 3.44m the previous year.
The liberalisation of the retail and wholesale industries has led to some notable foreign entrants into the market. In June 2019 the MoC approved wholesale permit applications for Mycare Unicharm, a Japanese distributor of personal care products. Toyota Group's trading business, Japan-headquartered Toyota Tsusho, and fellow Japanese pharmaceutical firm Otsuka Pharmaceutical were also authorised to conduct wholesale business, alongside Swiss market expansion specialist DKSH. Thai-Myanmar company Pacific Andaman (SEA) has been cleared to distribute cleaning products, food and beverages, while Unilever and joint venture Unilever EAC Myanmar will manufacture and market personal and home-care products.
In October 2019 Singapore joint venture Wilmar Myanmar Edible Oils opened its first edible oil plant and flour mill in the Thilawa SEZ. It has also begun work on a rice mill, seeking to develop an integrated agribusiness model in order to produce and distribute its rice products throughout the country.
Meanwhile, in March 2019 wholesale and food specialist Metro Wholesale Myanmar (MWM) opened a 5800-sq-metre warehouse, licensed through the Thilawa Special Economic Zone (SEZ), offering some 300 customers access to 2200 food and non-food products. MWM, a joint venture between Germany's Metro and Singapore-based Yoma Strategic Holdings, was assisted by a $20m loan from the International Finance Corporation. Customers place orders online or by mobile app and delivery is ensured in temperature-controlled trucks. The move is expected to improve standards in the country's wholesale industry, while contributing to growth in the agriculture, tourism and hospitality sectors, and helping to improve sustainability and traceability. Metro is working to source 75% of its products locally and has extended best-practice training to its farm suppliers, several of whom have received Good Agricultural Practice certifications from the Ministry of Agriculture, Livestock and Irrigation.
On the retail side, there has been a proliferation of joint ventures. Japan's AEON is expanding its national footprint with joint venture AEON Orange. In May 2019 it opened its first hypermarket, selling home electronics, clothing and household goods to complement its existing 14 food supermarkets. Elsewhere, Myanmar fast-moving consumer goods (FMCGs) company Capital Diamond Star Group and Japanese firm Mitsubishi formed Lluvia to engage in food manufacturing and distribution, and Japan's Asahi joined local Myanmar company Loi Hein in a soft drinks partnership.
Such approvals will bring a host of new consumer brands and products to the shelves of the country's stores, stoking much-needed competition for City Mart Holding, Myanmar Agribusiness Public Corporation, Myanmar R F S and NCX Myanmar. Furthermore, the reform is expected to pave the way for further entrants, with regional heavyweights like Thai wholesaler Siam Makro, and South Korean retailers Lotte Mart and E-Mart reportedly mulling plans to enter the market. Some domestic retailers, however, fear that the reforms have been too drastic and unfolding too quickly, potentially driving them out of business. The Myanmar Retailers Association has appealed to the government to improve infrastructure and offer technological support to existing local companies, while also working to address challenges such as high land prices and capital constraints.
Indeed, retailers must bear in mind the persistent issue of weak infrastructure and logistics networks. Manufacturing companies report an average of 15 power supply outages each month. There is also an ongoing shortage of middle-management talent in the country, and many foreign companies have opted to train their staff in-house, which can add to associated costs and frequently necessitates additional measures to retain staff once they have been trained. As such, there is high demand for repatriate talent ' returning expatriates who bring international experience and dual language capabilities back into the country.
FMCG & Subsectors
Growth of the FMCG sector is propelled by food and beverages, which accounted for the largest portion of an average shopping basket in 2018. Personal care and household products are the second-most popular segment, while consumer electronics, fashion and luxury goods are tipped for future growth. Market research company Nielsen records double-digit growth in FMCG categories such as tea mix (18%), energy drinks (13%) and fish sauce (11%), while household and personal care products show promising signs in rural markets, with 6% growth for shaving razors, toilet cleaners and facial foam. Nielsen notes that the most popular products are cheap or midpriced, and that exceptional growth opportunities exist in Bago, Ayeyarwady and Sagaing. Nielsen also identified opportunities to sell premium products in Yangon. Premium confectionery is one of the fastest-growing segments, as it is among the most accessible for aspiring consumers. 'Foreign brands are for occasional, conspicuous consumption, and social influencers are key to driving this segment,' Bedingham told OBG.
Alcohol also shows significant potential for growth. 'The 'double income no kids' population is growing and showing consumption patterns more akin to regional norms. In beer consumption, we see people trading up from low-cost to premium lagers,' Christoph Vavrik, CEO of Carlsberg Myanmar, told OBG, adding that consumption remains relatively low, at under 10 litres per head annually, compared to around 40 litres in Laos. Economy brands like Yoma Beer account for the majority of sales, and the market is gradually shifting away from beer stations in favour of more formal chain establishments. In September 2019 manufacturer and whisky distributor Seagram Myanmar launched its 100 Pipers Blended Scotch Whisky in Yangon, a move that indicates market readiness for more premium products.
Automotives is another fast-growing segment, with sales of new cars reaching more than 17,000 units in 2018, as the government works to nurture domestic production. Furthermore, the rising rate of car ownership is attracting ancillary retail brands. For example, PTT Oil and Retail Business, the retail arm of Thai energy company PTT, intends to form a joint venture with Myanmar-based Kanbawza Bank to establish a filling station and a reserve facility in the country in 2020.
Products that are branded 'made in Myanmar' are showcased at a number of fairs for fabrics, woodcrafts and food products, but small suppliers are held back by difficulties obtaining the Myanmar Food and Drug Administration (FDA) certifications necessary to distribute their products to the mass market. Although the FDA is improving, for example introducing food import health certificates, these measures add to importers' costs, and foreign companies seeking to develop value-added foods complain that food safety standards are not fit for export. However, a new National Food Law is currently in development and should work to address these deficiencies. In the meantime, civil society bodies such as the Food Science and Technology Association Myanmar and the Myanmar Consumer Union are active in improving standards and identifying ongoing issues.
Myanmar is just beginning to see e-commerce penetrate the market, with online sales remaining a small fraction of overall retail trade. In 2018 Myanmar ranked 125th out of 151 nations in the UN Conference on Trade and Development's Business to Consumer E-commerce Index, falling two places from the previous year. The poll uses four indicators: internet use penetration, secure servers per 1m inhabitants, credit card penetration and a postal reliability score. Although Myanmar demonstrates smartphone penetration on a par with developed countries and relatively high for mobile connectivity, its score suffers due to weak logistical networks, particularly in rural areas. In 2017 just 0.06% of the population used credit cards and around 0.7% used mobile money platforms.
The country's internet landscape is almost entirely dependent on Facebook, and acquisition costs to attract users to brand-owned platforms are high. Consequently, operators are limited in their ability to gather and leverage consumer data. 'We can do targeting on geography, but that is the limit. We cannot do interest targeting, as the buying profiles are disparate and fragmented,' U Aye Chan, chief strategic officer at e-commerce platform Royal Golden Owns (rgo47), told OBG. Rgo47, which mainly trades in locally made apparel products, maintains its own logistics network serving 230 cities and towns nationwide.
The issue of payment through e-commerce platforms must also be resolved. Cash on delivery is still the most popular form of payment, accounting for 80% to 90% of transactions, while digital payments make up the remainder. Wave Money processes the majority of transactions, with 65% of the total. However, it has yet to offer corporate services, and e-commerce businesses must open new accounts when they exceed the MMK10m ($6519) threshold in their existing accounts. Integration of payment systems is hindered by the lack of a national switch system, a central bank that is resistant to change, and costs associated with moving money in and out of mobile wallets at offline merchants.
There are also concerns regarding consumer protections. Data protection legislation is non-existent, and although the government has stated that it will address related issues in an upcoming e-commerce law, there are fears that over-regulation could squash the nascent market. According to the World Bank, in order to fully realise Myanmar's e-commerce potential, 'policy responses to improve the legislative framework, digital literacy and information technology skills, and electronic payment infrastructures' are needed.
Considering the government's current reform-minded trajectory and the lack of tough international sanctions, Myanmar's retail industry is unlikely to be diverted from its current path of strong and steady growth. More foreign companies are expected to enter the market as infrastructure continues to improve, with e-commerce exhibiting breakout growth if the government can strike the right legislative balance.