08 October 2012 Business International fdi in retail: thailand

The Thai Message

The foreign ingress into Thailand’s local retail ecosystem is a sobering case-study
The Thai Message
Reuters (From Outlook 08 October 2012)
The Thai Message

Bullets From Bangkok

  • At roughly 300 stores per million Thais (in a population of nearly 70 million), the multi-brand retail scenario is comparable to the US
  • Following a relaxation in FDI rules after the ’97 financial crisis, MNCs had easy access into retail sector
  • Local capital proved no pushover; their protests forced out Carrefour
  • New threat from the proliferating foreign-owned convenience store


Mr Lim, a third generation Chinese Thai, and his family manage to keep their 20-year-old, rundown ‘kirana’ shop open despite poor sales. Last year, in this now affluent part of Bangkok’s Klong Toey district, a brightly-lit 7-Eleven convenience store, open 24 hours, sprang up right opposite his home-cum-shop, and now has a steady flow of customers. Lim doesn’t entirely blame these “Sevens”, as they are known here, for the decline of his business. He notes a larger change in the architecture of the locality and the wider city itself. “There were only a few high-rise condos in this area 15-20 years ago. The last 10 years have seen a noisy, dusty construction boom.” Scores of apartment blocks have come up in the area, formerly on the margins of tourist-infested Sukhumvit Road. “These residents would rather go to Tesco or Big C, the two largest multi-brand retail chains in Thailand today.”

In the next soi (street) is Daily Needs, an Indian shop run by a family of Thai Sikhs, whose sales have increased at an impressive pace in the past five years. It serves the many Thai-Indians and expat Indians living in this area, saving them a lot of trouble procuring their dal, atta, spices, even Indian veggies. It expanded last year, now retailing sweets and savouries, even samosa and chat. Mrs Narang, a Thai citizen, remarks with a smile, “No supermarket, not even the Sevens, offers that in all of Bangkok.” She buys fresh food and veggies at a weekly market or a wet-market and only visits the supermarkets for packaged food and “cleaner” chicken. And most vendors of the famous Thai ‘street food’ sector—some 300,000 roadside eateries and small restaurants— still get almost all their fresh vegetables, meat and fish from large ‘talats’ or wholesale wet-markets and the sauces, rice and noodles from hypermarkets.

Suthira, a mother of two from a high-income household, shops at an upscale supermarket less than a mile from home, where imported farm products include perfectly shaped, 300 gram apples from Japan sold at an equivalent of $6 a piece and local fruits and vegetables at several times the price offered at a wet-market close by. She is, however, discerning in her weekly purchases. “I go with a clear list of grocery items and don’t get distracted by the promotions,” she says. “In this humid weather, I enjoy my visit to this air-conditioned place, and you know what, since I spend at least a 1,000 Baht they provide free home delivery within a couple of hours. Isn’t that attractive?”

At roughly 300 stores per million people (similar to Malaysia and Singapore), compared to an average of 50 in Vietnam or Indonesia, plus online shopping, the Thai multi-brand retail scenario is comparable to that in the US or west Europe. All its formats permeate the city: cash and carry (usually wholesale), monstrous hypermarkets, supermarkets, smaller “express” shops, the ubiquitous “Sevens” and their main competitor, Family Mart, that dot almost every Bangkok soi. Big retail currently handles close to half the total value of a retail trade worth around $480 billion. Wet-markets and traditional grocery stores account for the other half, but with a relatively lower rate of growth, this share is projected to fall.

MNCs like Tesco (UK) and Grand Casino (France)—though curiously not Walmart—found an easy entry into the Thai retail ecosystem after the 1997 financial crisis. FDI rules from the ’70s, when Thailand was under military rule, allowed foreign equity over 50 per cent, with a high discretionary element in permissions. Legislation in 1999—in the wake of the crisis—repealed that and permitted foreign firms to hold up to 60 per cent of equity, with a caveat to ensure there were Thai companies competing in the sector.

Thailand was unable to resist FDI due to a financial crisis. India, with the second largest Asian market, need not rush.

Roi Bak, an advocate, suspects the law was part of IMF’s conditions for bailout funds. In a publication on fair competition, he zeroes in on the nature of conflict between foreign giants and traditional retailers. The former, with their deep pockets, “breached the fragile competitive balance that existed in Thailand between traditional retailers and wholesalers, with unfair methods like predatory pricing, exclusive dealing and resale price maintenance”. Within years, protests erupted against foreign retail, peaking in Mar-Jul ’06. Later, the protests were concentrated in Thailand’s south and northeast, where a vigorous expansion of big retail was taking place. Tesco Lotus, the big name in hypermarkets, became a key target after it took recourse to the Building Control Act (1979) to expand existing branches. Most protests were organised by the Thai Anti-Foreign Retail Union led by Panthep Suleesathil, also the secretary of Chart Thai Pattana, a coalition partner in the current regime.

In 2007, Thailand’s first Retail Act was drafted, aimed at balancing the interests of modern and traditional retailers by restricting hypermarket expansion. The legislation remains in draft form. A recent newsreport raised serious concerns about the decline of “mom-and-pop shops” and called for the speeding up of retail legislation with clear zones for modern outlets. The report quoted Thanavath Phonvichai, vice-president of the University of the Thai Chamber of Commerce, “If mom-and-pop shops do nothing now to adapt and innovate, they will certainly go out of business. If nothing is done, big retail’s marketshare will likely increase to 60 per cent in five years.”

Economist Pasuk Phongpaichit sees FDI in retail as perhaps inevitable due to the degree of complexity involved in modernising the sector. “A cost to be borne to enable the sector to transit from traditional to modern,” she says, warning that “effective legislation concerning urban zoning, monopolistic malpractices and labour issues is a prerequisite”.

FDI in retail is no longer a contentious domestic issue. Local capital proved no pushover: in the past decade, they have wrested a big share of the pie and the sector is clearly oligopolistic in character. They were strong enough to drive out French giant Carrefour in 2010. In fact, in preparation for the ASEAN Economic Community (effective 2015), the focus is on outward FDI in ASEAN and also India.

Yet, there is a recognition that big retail does not merely bring about greater convenience, choice or quality, but an entire reconfiguring of the shopping act. Its sheer architecture, identical whether in Tampa or Taipei, offering the pleasure of driving a shopping cart through rows of goodies, is not merely intended to organise and facilitate, but to induce ‘excess’. Bangkok has seen the impact big retail has on people’s lives: not just altering their preferences as consumers, but affecting lifestyles in unanticipated ways.

But now the battle has shifted scales. The threat to old stores comes not directly from big supermarkets, but from a proliferation of the smaller convenience store found in almost every Bangkok soi: like 7-Eleven, the Japanese-owned chain whose Thai patent is held by local giant, CP Group.. These cater to almost every daily household need, dairy items, baked products, confectioneries, newspapers, cosmetics, tobacco, alcohol, what have you. A large proportion are franchises, not independently owned; just the smaller end of modern retail, conducted and completely controlled by larger chains. There are some 6,500 “Sevens” in Thailand, half in Bangkok. A massive expansion of this format is occurring due to legal limitations on the hypermarket format. Tesco Lotus is focusing on the smaller express format to circumvent these.

Thai retailing has lessons for countries embarking on modernising the sector. The small country was unable to resist “an invasion” due to a financial crisis. But for India, with the second largest Asian market, to liberalise FDI in retail on unfavourable terms and conditions, when a serious economic meltdown afflicts the industrialised world, seems bizarre.

Sriram Natrajan in Bangkok with Khun Tavee and Tiraphap FakthongSriram Natrajan is an independent economics research professional based in Bangkok

Edited online to fix typos on Sept 30.

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