Decreasing profit margins for brick-and-mortar retailers
Pandemic-related lockdowns and lower sales in 2020 and 2021 negatively affected the business performance and credit risk of many Malaysian consumer durables retailers. However, with the lifting of restrictions and reopening of cross-border travelling (especially with Singapore), consumer durable sales have started to rebound, up 14% in Q1 of 2022. We expect private consumption to grow by more than 7% annually in 2022 and 2023, sustained by higher disposable household incomes and rising employment. Domestic appliances, furniture and consumer electronics sales will benefit from pent-up demand in the coming months, and we forecast retail sales to increase by more than 8% this year. However, rising inflation is a downside risk, as it could affect the purchasing power of Malaysian households.
Many brick-and-mortar retailers recorded deteriorating margins in 2021 due to lockdowns. While a recovery is ongoing, they face the challenge of coping with the increased competition from their online peers, who benefit from changed buying patterns. Online sales grew by 30% in 2021. Along products, fashion accounted for 31% of online sales revenues, followed by electronics and media (28%), while furniture and domestic appliances accounted for 13%.
Brick-and-mortar retailers have to make additional investments in order to build up online sales channels, enabling them to cope with changing market conditions. At the same time, passing on higher input prices to end-consumers is difficult, due to the highly competitive market environment. Therefore, we expect that profit margins of retailers will decrease again in the coming months. However, fiscal support worth MYR 332 billion (EUR 73 billion) in order to boost the post-Covid recovery of businesses and households should also benefit retailers.
Gearing of businesses is generally low in the Malaysian consumer durables retail sector, and there are no restrictions on accessing bank loans. Payments take 30-60 days on average, and we expect no increase in payment delays or business failures in the coming 12 months, due to the ongoing economic recovery. Our underwriting stance is open to neutral for businesses in all main subsectors.