It was widely predicted that April’s Government Service Tax (GST) implementation would cause a fall in consumer spending. This has been the case. At the beginning of the year, the Government’s expected growth rate for 2015 stood modestly at 5.5% - this figure has been adjusted down for the second time, now standing at only 4%. With consumer confidence remaining poor and retail operating costs increasing, many local businesses are finding their profit margins rapidly shrinking. Are there any winners in this scenario?
Malaysian consumers started holding back their spending even before GST was introduced; with little understanding of what would happen to prices after April 1st, saving was considered the smartest move. Only in the final weeks of March, when retailers heavily promoted their products and published post-GST prices, was there a surge in spending.
This can be clearly seen in the automotive industry – vehicle sales in March topped 67,314 and fell to a mere 45,187 in April, the lowest level in almost two years. The Malaysian Automotive Association was quick to attribute this to “adjustment to the post GST environment” and balancing the numbers sold in the previous month. However, a study by AC Nielsen showed that many Malaysians perceive the country to be “in recession”, with one third of respondents more likely to put aside savings than make major purchases at this time.
Despite the fact that GST implementation should have reduced the price of many retail items, consumers are seeing increases – Malaysiakini reported news of a famous nasi kandar restaurant in Bukit Jambul whose roti canai telur costs RM1.80 before GST and RM2.20 afterwards. “On paper, there really should have been no price increase - in fact a drop in prices considering that the old taxes that the GST replaced is at the same rate or lesser,” said lawyer Charles Hector on his blog.
Perhaps because of this, in order to save more, a survey conducted by JobStreet.com found that 56% of Malaysians have minimized having lunch with colleagues, 47% going as far as to bring their own food from home.
The Biggest Losers
This thrifty behaviour has had a knock-on effect on small stall holders. These small stall holders with annual revenues of less than RM500,000 are not permitted to pass on GST to their customers – so they end up paying more for the few customers they manage to keep. Added to that, some fear raising prices could scare away customers; “If we do, our customers will run away since they are also on a budget,” said another food stall owner in Klang. Stall holders also report that fresh food suppliers have raised their prices, despite not qualifying for GST.
Even during Ramadhan, usually one of the busiest shopping periods of the year, there was a spending drop as much as 20% compared with 2014 – the Malaysian Institute of Economic Research showed that consumer sentiment has dropped to its lowest level in six years. A seller of traditional Malay costumes at the Tunku Abdul Rahman bazaar told Reuters that shoppers have become more cautious with their money, walking past and window shopping but in the end, not buying much.
Datuk Shamsuddin Bardan, executive director of the Malaysian Employers Federation, which represents over 5000 individual companies and 22 trade associations, agrees that it’s not just these small stall holders who are suffering. According to the Malaysian Insider he said “about 20%” of its members were considering options such as staff retrenchment and voluntary separation schemes. These companies cover all economic sectors “from retail to hospitality to manufacturing.”
To combat slowing sales, retailers fight harder for their piece of the shrinking market share, through additional discounts and bundle buys. This often means accepting smaller profits, said H.C. Chan, chief executive of Sunway Pyramid Shopping Mall, one of the largest malls in the country, reports Reuters. This can be seen in countless stores and supermarkets across the country – whilst the price of everyday goods has stayed the same, seasonal sales and special promotions encourage shoppers to continue buying less essential and luxury items.
But the statistics remain the same - strong growth in the first quarter of 2015 quickly gave way to plunging numbers by the end of the second quarter. According to the Retail Group Malaysia (RGM), sales have plunged by the 11.9% from one year ago, representing the worst quarterly retail growth rate since the Asian financial crisis in 1997/98. RGM attributes this to the current political situation and weakening, causing import costs to rise. The segments seeming to do well in spite of this are premium brands - for example, vehicles by Lexus and BMW saw increases of 7% and 21% respectively from March to April 2015 this year.
A Positive Outlook
Looking at the data and considering stories from retailers, those struggling the most after GST implementation are the smallest and lowest income retailers, with luxury (and mostly foreign) brands continuing to see growth. As consumers cut back on everyday luxuries such as eating out, food stalls and small chains see a reduced customer base as well as paying more overheads. Slightly larger companies are better able to cope with shrinking profit margins as well as being able to pass on GST costs directly to consumers.
Despite retail figures falling further than expected many industry observers are confident that growth will pick up by the fourth quarter of 2015. The Malaysian Retail Association stated, “Malaysian consumers will get used to the GST by the last quarter of 2015. Retail spending will return to normal again by this period. This industry is expected to recover strongly with a 6.9% growth rate.” For the sake of the neighbourhood laksa stall, let’s hope so.