Thailand after the coup: Struggle between modern and traditional

Elsevier Food international Vol. 10, Number 1, February 2007
Pascal Kuipers

Tensions in Thailand’s retail sector have been put in a new perspective since the military coup of 19 September 2006. Already in August 2006, disgruntled representatives of traditional food stores established the “Confederation of Thais Opposing Foreign Retailers”. This confederation fiercely protests against the shakeout of traditional mom & pop stores due to foreign retailers’ modern formats that drive small, local entrepreneurs out of business.

The confederation set it hopes on the new military-backed government who ousted the government led by former prime minister Thaksin Shinawatra, who is accused of illegal business practices. The old government did fit well in Thailand’s tradition to pragmatically deal with its Foreign Business Act. This law defines a ‘foreign company’ as any venture with more than 49 per cent foreign equity and it does not allow such foreign firms to partake in many sectors of the economy. For decades, however, Thai authorities turned a blind eye on foreign businesses operating in Thailand by pragmatically distinguishing between nominal equity ownership and actual control of companies. According to a Financial Times report, the Thai allowed multinational firms to preserve an aura of Thai ownership over companies they controlled. Via a loophole of complex, multilayered shareholding structures, foreign investors theoretically complied with the law, while in practice controlling their Thai businesses.
Thailand’s new military-backed government seeks to clear this ambiguous situation and the focal point here is how the new rulers will resolve the dilemma connected to the notorious Shin Corp takeover. Shin Corp is a Thai telecommunications company founded by the ousted former prime minister Thaksin, who sold the business to the Singaporean company Temasek Holdings. Thaksin’s political enemies, however, accused Temasek of violating Thailand’s foreign ownership laws.
The new government should be a new broom that sweeps clean. However, Thailand’s new rulers also seem to struggle with the situation created by Thailand’s ambiguous foreign investment framework. The still uncertain outcome of the decision regarding the Shin Corp case also has an impact on the position of large foreign investors such as Tesco and Carrefour.

Traditional retailers’ wrath
It is this uncertainty, combined with pressure on the new government from the Confederation of Thais Opposing Foreign Retailers, which currently captures the mood of foreign retailers in Thailand. The confederation appealed to the new government to force foreign retailers to suspend their expansion plans for five years, while setting up a central agency to educate Thai people on the impact of multinational retailers on the Thai economy.
In September last year, Carrefour – which operates a network of 23 hypermarkets in Thailand – appealed on international retailers represented in Thailand to stop opening small stores in the country. “They directly compete against local retailers, which have been forced out of business,” the hypermarket operator emphatically said in a statement issued mid October 2006.
Other foreign hypermarket operators such as the cash & carry retailer Siam Makro (owned by the Netherlands-based SHV Holding – see also the Retail Profile in this edition of Elsevier Food International) and Big C Supercentre (a subsidiary of French retailer Casino) agreed to a request by Thailand’s Commerce Ministry to suspend all store opening plans for 30 days pending implementation of new retail-business laws. The only exception was Thailand’s leading retailer Tesco Lotus, who stated early October last year that it would even step up its expansion and open 200 Lotus Express outlets by the end of the year. These small-sized stores in particular provoke the wrath of local traditional retailers. Tesco’s explanation was that the investment plans had already been drawn up and that any delay would create “[…] big losses, not only for the company, but also for our suppliers. Individual tenants will be affected as well,” a representative of Tesco Lotus stated on 4 October 2006.
Mid November, however, Tesco Lotus agreed to a three-month freeze on the rollout of convenience stores while Thailand’s military government would design a law to regulate the country’s retail sector. According to Tesco, this would not delay opening of hypermarkets in Thailand. Still there is fear among the ranks of local retailers that Tesco Lotus will focus on opening its larger sized stores near residential areas and still hurt the business of small entrepreneurs. Therefore representatives of traditional Thai businesses urge the government to speed up the process of designing new retail legislation, which should be aimed at controlling giant retailers’ expansion plans and protecting the interests of small operators.

Uncertainty among foreign retailers
Quoting the Thai Commerce Ministry’s intention to “[…] ensure fairness to all parties involved, including foreign enterprises and traditional enterprises,” Zoya Vassillieva, director at PriceWaterhouseCoopers in Thailand, thinks the uncertainty regarding the status of foreign investment in Thailand will not deter investors. “It was expected that the coup and the issues related to the Shin Corporation deal would deter foreign direct investors, but this is not the case,” she says. “There was a lot of publicity and concern voiced by international retailers and embassies over government’s plans to limit expansion of multinationals. Foreign investors are requesting the government to clarify its investment and trade policies but I haven’t heard of any case where they were deterred by the unknown.”
“We are constantly in contact with the Thai government explaining the benefits of modern retailing,” a Tesco spokesperson says. “November last year we agreed to a 90 day freeze on development of our convenience formats Express and Talad, with the exception of stores already under construction. We are continuously in contact and we are a member of the Thai Retail Association where we discuss things in a transparent way.”
The new retail business legislation is expected to create zones of expansion for major retailers and ban some practices that are considered unfair competition. In addition, the common practice of focusing on the percentage of shareholding instead of voting rights will be put to an end. If and how this will happen, is the key question. The retail sector represents 15 per cent of Thailand’s GDP, so the stakes are high. It will be a tough decision for the Commerce Ministry trying to please both traditional and foreign retailers. The fact is that modern retail structures have been growing to the detriment of traditional formats. A known development in emerging markets and Thailand is no exception to this rule. Strict government intervention will only lead to stagnation, yet economic decline. This is something the military government cannot afford, as Thailand’s economic climate is already negatively affected by high energy costs and soaring inflation.

Supermarkets squeezed
Modern retail formats in Thailand represent five per cent of store numbers, but 45 per cent of total retail sales (see Table 1 and Figure 1). They have been increasing their sales levels by an average rate of 15 per cent between 2000 and 2005, to reach a level of 405 billion Baht (US$10 billion). By comparison: this equals ₤5.7 billion, whereas the UK retail market is ₤265 billion and has a growth rate of 1.5 per cent.
According to PriceWaterhouseCoopers (PwC), the hypermarket is the main store format for over 50 per cent of shoppers in Thailand. Leading hypermarket and superstore operators are Casino. In addition, over 85 per cent of urban shoppers in Thailand use convenience stores regularly with a high frequency of three to four times a week. This growth from both the largest and smallest formats resulted in a squeeze of the middle format: the supermarket. In 2005, the number of supermarkets decreased by eight per cent over the previous year, while the number of hypermarkets and convenience stores increased by ten and 26 per cent respectively.
“The main consequence of this squeeze is that supermarkets are growing at a slower rate than other retail formats, losing their market share in total retail sales,” says Vassillieva. “Eventually some smaller chains like Jusco and Villa will decline, while leading players such as Tops and Tesco Lotus will become prevalent.”
Jusco is the superstore banner of Japanese retailer AEON, which is of limited importance to the Thai market due to the low number of Jusco stores (eight stores with sales of US$88 million, according to Planet Retail). AEON’s core business in Thailand, however, is offering financial services via its more than 70 service locations all over the country, which is a US$226 million business.
The ten Villa supermarkets in Thailand are operated by one of the oldest retailers in the country, Villa market, which was established in 1974. Planet Retail calculates total sales of these stores as US$74 million.
“The supermarket will still be viable in Thailand as it has clear consumer benefits over the large and small formats: more conveniently located than the hypermarket and a breadth of the product selection that can’t be matched by convenience stores,” says Vassillieva. “Also, in urban areas it is not so easy to find a large plot of land needed for the construction of a hypermarket. Furthermore, there are a lot of zoning restrictions. Unless new legislation will prevent it, I think that the trend in Thailand will continue. That is modern convenience stores – like 7-Eleven – will continue to expand rapidly and replace traditional ‘mom & pop’ stores.”

Multi-format strategies
Main hypermarket operators are Casino – who operates 47 Big C hypermarkets through its Thai subsidiary in which the Thai retailer Central holds a 22 per cent minority stake – and Carrefour. Via its 100 per cent Thai subsidiary Cencar, Carrefour operates 23 Carrefour hypermarkets in Thailand. Both Big C and Carrefour are with average store sizes of 10,000 m² and 9,100 m² bigger than Tesco Lotus’ largest surfaces. These Tesco Lotus superstores are some 8,500 m² on average, but have recorded a stronger growth in store numbers last year than Big C and Carrefour.
However, Tesco Lotus and other large surface retailers are also experiencing that land to build these large stores in major urban areas is rapidly becoming scarce, which drives up land prices. This will reduce the growth rate of the hypermarket and superstore format and will lead to an appetite for multi-format strategies. According to PwC, the lower growth rate of hypermarkets and large superstores indicates that the big format segment in Thailand is relatively saturated. “As in most Asian markets, modern retail in Thailand is concentrated in the urban centres where income levels are higher,” says Vassillieva. “With areas such as Bangkok becoming saturated, modern retailers – like Tesco Lotus – increasingly look to expand in rural low-income areas, introducing low-cost-to-build formats like their Tesco Lotus Value discount supermarkets.”
Casino also introduced its discount banner Leader Price in the Thai market, which it endorsed by its main brand Big C. There are currently six Leader Price stores in the Bangkok area and if this trial proves successful, states Casino on its website, then Leader Price “[…] is set to mushroom all over the country.”
The French retailer also operates a convenience format named Mini Big C, but with some 35 outlets this cannot compare to the two leading convenience store retailers, 7-Eleven and FamilyMart. Increasing saturation in the hypermarket sector as well as legislation in favour of building smaller stores has led to an increasing focus on the convenience store sector and especially 7-Eleven (franchised by the Thai business conglomerate Charoen Pokphand Group) and FamilyMart (a subsidiary of the Japanese c-store retailer FamilyMart) rapidly increased their store numbers. Also, the c-store format proved to be responsive to the discounters’ challenge. Discounters caused c-stores’ sales to fall by some eight to ten per cent – especially on grocery items – but the c-stores adjusted their merchandise mix offering more packaged foods, delivery services and non-food items such as CDs, DVDs, books, magazines, phone cards and Internet access.

To charm or to blame
This dynamism and proactive attitude of c-stores is a sharp contrast with the attitude of certain representatives of traditional businesses who call upon the government to intervene in market development, which in Thailand is similar to other emerging markets in the region. Traditional structures like mom & pop stores and wet markets are irreversibly being replaced by modern retail formats, owned by both Thai and foreign companies, which have one thing in common: high levels of innovation, retail technology and innovation.
Carrefour, who last September was among the first foreign retailers to agree to a freeze on store development, announced in October 2006 that it will double the value of Thai made products sold via its stores to six billion Thai baht (US$159 million) over the next three years. In addition, Carrefour said it will encourage its global outsourcing team to buy more Thai products and Thailand was to be among Carrefour’s priority markets for outsourced products.
Where Carrefour opts for a charm offensive in an attempt to safeguard its own interests, another foreign retailer chooses the strategy to simply blame its foreign peers while underlining its own importance to Thailand’s traditional trade. This is exactly what Suchada Ithijarukul, president of Siam Makro, did on 31 October 2006 when her statements were published in the Thai press. Outlining the cash & carry business model of Siam Makro, the Thai subsidiary of Dutch-owned SHV Holdings, she stated that her company’s target customers are professionals like small and medium sized enterprises, retailers, hotels, restaurants, caterers and institutions. “In short, the target groups are anyone but end-consumers or end-users,” Ithijarukul said. “We’re like the upstream operator in modern trading as we also serve as wholesaler for small ma-and-pa corner shops, which are being squeezed out of business by the highly competitive giant retail chains. At present, we have about 350,000 clients that are small grocery shops nationwide. As an efficient modern wholesaler, we’ve been helping these community stores survive the onslaught from giant retail chains.”
Despite these different styles of approaches to tackle the problem of safeguarding its own interests in Thailand, the business perspectives of all foreign retailers in the Asian kingdom lie in the hands of the Commerce Ministry. It has to balance between the interests of the country’s 287,000 traditional shop owners and retailers developing modern formats who are increasingly contributing to the country’s economy.

Concern about the future
Last month the Thai government disclosed its plans for the revision of the Foreign Business Act, which implies that overseas investors have 12 months to disclose the exact holdings in their local operations. Then they have one year to reduce their holdings to less than 50 per cent and another year to adjust their voting rights. If they fail to comply with this, companies can be fined up to five million Bath (US$140,000) or face a daily fine of 50,000 to 250,000 Baht (US$1,400-7,000), which adds up to between US$510,000 and US$2.5 million per year.
Companies operating in farming, forestry, protected professions, the media, culture, handicrafts, transportation, aviation, mining and those deemed essential for national security are subject to the new law. The new rules do not apply to retail, most services (e.g. banking, insurance, brokerage), some agriculture and engineering. Such companies only need to register with the authorities and declare their status.
The plans of the Thai government have led to a great deal of criticism in the local media, which argued that the economically inexperienced military government is severely harming  the Thai economy and that the country is highly likely to lose foreign direct investment to other countries in Southeast Asia with friendlier investment climates (e.g. Vietnam). On 8 January, the Joint Foreign Chambers of Commerce and Trade (JFCCT) issued a critical press release, expressing concern about the future of foreign direct investment, especially if the new laws would be applied retroactively to foreign companies that are already established in Thailand. “Many investors have told us that they view such action as compulsory divesture, no matter what grace period is offered to them to come into compliance,” the JFCCT press release reads.
Despite the exemption status of retail, the Thai retail sector faces a revised retail legislation, which will be announced later this year and could well include compelling expansion limits for foreign retailers. Until then, the adage to foreign retailers remains to wait and see.