A battle between large supermarket operators to tap into Southeast Asia's growing consumer wealth could trigger more acquisitions, with Indonesia, Vietnam and the Philippines seen as the next hot spots.
The competition is set to pit global giants such as Tesco and Wal-Mart against Asian players like South Korea's Lotte and Japan's Aeon Co Ltd as they strive to win a bigger share of superstores in the region.
I think they're here to stay, said Vijay Karwal, head of the consumer industries team in Asia at the Royal Bank of Scotland in Hong Kong, referring to global supermarket firms already operating in Southeast Asia.
There are still several major global operators who are not yet present in the region, who are evaluating strategies to enter.
France's Carrefour kicked off a new phase of consolidation in the region late last year with the sale of its Thai operations to rival Casino Guichard-Perrachon SA for $1.2 billion. Shortly afterwards, Indonesia's Matahari attempted to sell its hypermarket business before scrapping its plan earlier this month. It says it is keen to expand aggressively and dislodge PT Carrefour Indonesia as the country's number one superstore operator.
Southeast Asian economies are forecast to grow between 4 to 6 percent this year and expectations of robust consumer spending mean retailers are likely to step up their presence in the region while new players will enter, say analysts. Karwal, who was part of the team that advised Casino on the purchase of Carrefour's assets in Thailand, said Carrefour's exit from Thailand was an adjustment of its portfolio, but it has no plans to leave Indonesia, China and India. Raphael Moreau, a London-based retailing industry analyst at Euromonitor International, said Indonesia and Vietnam are the two markets most likely to be on the radar of international retailers expanding in Southeast Asia. RBS's Karwal adds Philippines to the list. Lotte, Casino and Wal-Mart had put in bids for Matahari's $1 billion hypermart business in Indonesia, a deal that was scrapped, with sources telling Reuters it did not meet the seller's expectation.
This indicates the likelihood of more global retailers in the near future entering the Indonesian market, which remains fragmented and as a result offers strong growth opportunities, Moreau said, referring to the wide interest seen in Matahari stores.
South Korea's Lotte, the fourth-biggest hypermart player in Indonesia, has in recent years actively snapped up M&A targets across Asia in the face of an increasingly saturated retail market at home. In late 2009, it bought Chinese supermarket operator Times Ltd 1832.HK.
Many Western firms are enthusiastic about China, where economic growth is forecast around 9.3 percent this year, and India. But in practice analysts say it is tough to enter those markets due to regulatory restrictions, limited opportunities and cultural differences.
India and China face similar issues. Those countries are geographically very big and diverse, where there are very different tastes and preferences, said Jeong Min Pak, Senior Director at Asia Pacific corporates at Fitch Ratings.
For any retailer in any market you need to build up sufficient economies of scale and establish a supplier or vendor base. In China, we're seeing a lot of developments in tier two and three cities, so it's become a lot more difficult to build up scale and establish supplier or vendor networks.
Southeast Asia presents its own opportunities and an alternative to expanding in China or India.
The hypermart business in Indonesia and Malaysia could offer 5-7 percent growth for retailers and more mature markets such as Singapore could see growth rates of 2-3 percent, said Karwal at RBS. Prospects for rising consumer demand helped consumer discretionary stocks to be the best performing sector on the MSCI index of Asian stocks outside Japan in 2010. Shares in Matahari and Thailand's Big C BIGC.BK surged last year, with both hitting record highs last month as investors speculated on the potential for M&A in the supermarket sector.
COMPETITION HEATS UP
Big local players are unlikely to cede control of the fast growing supermarket sector without a fight. Matahari's Hypermart is Indonesia's second-biggest hypermarket chain after Carrefour Indonesia, a unit of Carrefour that has 51 outlets in the world's fourth most populous nation. But Matahari is now looking to overtake Carrefour by next year as it expands. Every year until 2015, we're going to add 12 new Hypermart stores across Indonesia, said Carmelito Regalado, Matahari's chief operating officer.
Industry experts say there is tremendous scope for growth across different store formats in Indonesia such as convenience stores. In Thailand, competition in the hypermart sector is likely to intensify after French retailer Casino, a major shareholder of Thai hypermarket operator Big C Supercenter Pcl, agreed to buy Carrefour's Thai operations in November. The acquisition of Carrefour's 42 Thai outlets is expected to level the playing field with Tesco by expanding the Big C hypermarket chain to 103 outlets, narrowing the gap with Tesco. Lotus's 116 hypermarkets. Retailers face risks in expanding into Asia such as rising inflationary pressures, which may not be easy to pass on to consumers.
Still, with shopping demand on the rise, global retailers are unlikely to miss out on opportunity in Southeast Asia.
In Indonesia for instance, shopping demand is increasing outside Java, said Matahari's chief operating office Regalado.
People there have a lot of money, but they don't have access to modern retail because the penetration there is still low. That's where we're going to grow.