Thailand’s Split Personality

How can a market embroiled in political turmoil, street clashes and extreme uncertainty keep the world’s fashion brands smiling? Market GPS is sponsored by Marvin Traub Associates.

Crowds in front of CentralWorld mall in Bangkok | Source: Flickr

BANGKOK, Thailand — It’s no coincidence that protestors keep targeting the Ratchaprasong area of this sleepless city. Bangkok’s futuristic skytrains whoosh above Siam Square — sandwiched between a temple, a shrine and the surrounding concrete jungle — unloading crowd after crowd in what is already an incredibly busy intersection. But any number of spots around the Thai capital could play host to traffic-paralysing protests just as easily as this one (and, indeed, many have since the turmoil here began with Thailand’s 2006 coup d’état).

What makes Ratchaprasong special is that it is also home to some of the country’s most popular and colossal shopping malls, which attract many of the world’s largest luxury fashion brands. And, from far and wide, they all gravitate to this corner of Bangkok — flush tourists, the bargain-hunting bourgeoisie, eagle-eyed locals and more than a few of the super rich. In a city full of shopaholics, what better way to make mayhem than to cut off its retail jugular vein?

Cause for Concern

Over the past decade, Thailand has endured painful periods of social unrest that have seen hundreds die and hundreds of thousands take to the streets in a complex power struggle between the army, the ailing king and two bitterly opposed political factions. Just last week, the death toll rose when riot police fired on an anti-government protest camp after the latest prime minister was forced out of office. Investors and economists are now understandably jittery while some analysts are beginning to worry whether the country might be slipping toward a point of no return. During the more volatile flashpoints of this ongoing crisis a great number of businesses have been affected — including many of Bangkok’s biggest fashion players.

“To be honest, what started off as a genuine effort to improve the performance of a business in need of investment and leadership, turned out to be the biggest and most exasperating challenge,” says Raj Kaul, CEO of Trans Fashion Indonesia and Thailand, who entered the Thai market in 2007 through the acquisition of a local enterprise that brought in five brands, including Giorgio Armani, Emporio Armani, Chloe, Canali, Tod’s and their seven stores in Bangkok at the time.

“You’d think a country with so much to offer – by way of its history, unique cultural heritage and a people famous for their genuine hospitality, soft-spoken manners and a non-violent faith – you’d think that this environment would be the most conducive and stable. Especially against the backdrop of an economy so dependent on tourism. Regrettably, this hasn’t been the case or my experience in the last six years,” Kaul admits.

“From paralysing ‘red-shirt’ demonstrations to massive floods… to a never-ending political row between opposing parties and now ‘yellow-shirt’ demonstrations, Thailand has continued to be a market which is very, very difficult to plan for or predict,” he adds. “There’s no doubt that Thai retailing standards and the shopping experience as a whole are quite superior or comparable to global standards and expectations. But what’s damaging is the continued uncertainty and lack of confidence. That’s what makes it hard [for local operators] to build a profitable and sustainable business.”

Kaul is by no means alone in his experience. Four years ago, some of Bangkok’s biggest shopping centres near Ratchaprasong – including CentralWorld, Amarin Plaza, Gaysorn and Siam Paragon – were temporarily closed due to massive protests that lasted over two months. Most if not all the boutiques in these malls, from the likes of Chanel and Dior to Gap and Adidas, must have felt a dent in their revenues as a result.

Then, this January when there was another flare-up, the local media reported that some smaller Thai brands in the area were discounting up to 90 percent after footfall plummeted and tourist numbers fell by half. By March, when consumer confidence hit a 12-year low (lower even than during the 2011 floods or the 2004 tsunami), anecdotal evidence suggested that sales at several upmarket malls anchored by global brands had fallen by as much as 60 percent. However, if this latest short-term decline follows similar declines in the past, a partial recovery will be relatively swift and should keep Thailand’s fashion market bright enough to yield solid profits over the long-term.

Ploughing Ahead

“Thailand has undergone significant periods of political instability over the past decades but somehow remains very resilient in spite of it,” says Kullawit ‘Ford’ Laosuksri, editor-in-chief of Vogue Thailand, which launched last year. “Mass rallies and city-centre shutdowns have typically lasted for weeks rather than months and do have a short-term impact on morale and also deter foreign visitors during those periods. So the fashion market is affected – in line with most sectors – but the underlying trend is positive with more brands now entering the market.”

Such is a sentiment shared by Chart Chirathivat, who just unveiled a gargantuan luxury-only retail emporium called Central Embassy, where he sits as managing director. Thailand’s largest retail conglomerate and department store operator, Central Group, spent a staggering 18 billion baht ($553 million) on the project, which welcomed Tom Ford, Prada, Ralph Lauren, Saint Laurent and 200 other luxury brands to this new location in Bangkok. Perhaps most tellingly, the lavish opening party they threw a couple weeks ago was dubbed “Infinite Possibilities.”

Not to be outdone, Central Group’s main rival The Mall Group announced this month that it will be investing 50 billion bhat ($1.5 billion) in six shopping centres, including three in a new Bangkok complex called District-Em and others inside recreational-entertainment complexes in resort cities like Hua Hin and Phuket. Vice chairman of The Mall Group, Supaluck Umpujh, cited the (optimistic, if not altogether realistic) goal of economically integrating the Asean Economic Community (AEC) by 2015, which Thais hope will bolster the country’s position as a regional tourist, shopping and entertainment hub for the 10 countries of the Southeast Asian region.

Yet for all the bullish attitudes, shortly after the new year, Central Group’s chief executive Tos Chirathivat conceded that sales were down at two of the firm’s Central shopping locations in central Bangkok. Nevertheless, with a portfolio that boasts over 20 Central shopping centres and 25 Robinson’s Department Store branches nationwide, not to mention the firm’s vast e-tail arm www.central.co.th, Central Group still expects sales to increase overall in 2014.

Like The Mall Group, Central Group is also planning or building several new outlets in other Thai cities and resorts – most notably on Koh Samui island. Several high street brands have already gained a footprint in Thailand’s provincial cities thanks to shopping centres built by these and other mall operators. H&M is in the Northern Region city of Chiang Mai and Zara in the Central Region coastal playground of Pattaya. Mango has even reached as far as the smaller cities of the remote Isan Region in the northeast including Udon Thani, Ubon Ratchathani and Khon Kaen.

Another goliath of the Thai market sending somewhat mixed signals is Club 21. The Singapore-based retail operator is a major player around the Southeast Asian region and has been present in Thailand since 1994. Today, the firm carries more than 20 brands – from Alexander McQueen to Balenciaga to Comme des Garçons – in over 50 monobrand franchises and Club 21 multibrands across Thailand.

“Fashion is about mood,” says Sopavadee ‘Noon’ Bejrajati, marketing division manager for Club 21 Thailand. “In the midst of all the uncertainty around our political situation, the economy has already been affected… As long as the situation is still unsettled, the overall market will suffer. There are already some local Thai brands closing down because of financing problems.”

Bejrajati noted a recent slowdown of footfall in Club 21′s Thai shops, especially during the February-March period when she says there was a mob blocking the road right in front of some of the shopping centres where they are located. Yet the company’s expansion plans seem to fly in the face of her words of caution.

“This year will be another big year for us as we expand our business in terms of new brands in our portfolio as well as opening more shops in the newest shopping destinations in Bangkok like Central Embassy and, when it opens towards the end of 2014, in EmQuartier as well as the new phase of Emporium on Sukhumvit Road. We’re doing the first freestanding stores in Thailand this year for Proenza Schouler, 3.1 Phillip Lim and Calvin Klein Collection,” she says.

The Bigger Picture

The country has been so resilient to turbulence – so far at least – that some economists have nicknamed it “Teflon Thailand.” What then, in spite of the past decade of political chaos, has been propelling this style-hungry market forward? For one, the bigger picture reveals an economy that has been growing annually at enviable rates over the same ten years, apart from two blips. Although some 9 million or so of its 70 million people live in abject poverty, the percentage of poor has been decreasing fast according to World Bank figures. In just four years (2007 to 2011), the number went down from 20.9 percent of the population to 13.2 percent. But whether such broadly positive economic trends can be sustained going forward is the million-dollar question.

Then, there is the flip side of the income equation – Thailand’s ever increasing wealth. The 2013 Global Wealth Databook published by Credit Suisse reveals that the amount of wealth per capita has more than tripled in the decade from 2001 to 2011. At the top end of the scale, the growing number of rich Thais has been especially significant. In 2013, there were nearly 25,000 Thai millionaires (in US dollars), of which 285 were ultra high net worth (UHNW) individuals with assets of over $50 million. This means that the number of UHNW super rich in Thailand now outnumbers that of the United Arab Emirates or Kuwait.

The third positive pillar is the country’s growing demand for fashion itself. From 2008 to 2013, Thailand’s apparel and footwear market grew 41.4 percent and is forecast to increase 38.9 percent more over the next five years, according to market research firm Euromonitor International. Within that, the designer ready-to-wear category grew 31.4 percent and is forecast to increase 31.6 percent over the same periods.

“In my opinion, every segment of the market is exciting in Thailand nowadays because the Thai customer is always open-minded to new brands from all around the world. But now Thai brands are becoming popular too – for Thai customers and for overseas customers,” says Pilan Sriveerakul, editor-in-chief of Marie Claire Thailand. Indeed, designer brands from Thailand like Nagara Sambandaraksa and Sretsis as well as contemporary labels like Greyhound long ago conquered the domestic market and have been making inroads internationally in more recent years.

Many experts believe that the wild card in Thailand’s deck is tourism. Assuming there is no immediate resolution to the country’s ongoing political and social strife, a deciding factor will be whether Thailand can remain an attractive place for tourists. This could tip the fashion market toward either profit or peril. In 2012, a record-breaking 22.3 million visitors came to Thailand, which was more than those travelling to other sun-kissed destinations like Mexico or Turkey. But by most estimates, recent instability is beginning to hit the tourist trade in a noticeable and distressing way – in particular those from China.

“It’s the tourist dollar that really counts and drives retail, especially in the luxury segment. Estimates vary depending on category but generally it’s safe to say that tourists contribute anywhere between 60 to 70 percent of an international fashion brand’s retail sales in Thailand,” explains Trans Fashion’s Kaul. “On the other side, import duties and VAT make buying international brands locally expensive and the price differential against Hong Kong retail prices, for example, can be anywhere between 30-40 percent. So typically the upper end of wealthy Thais who travel often prefer to shop overseas,” he adds.

According to Global Blue, a company handling tax refunds for international shoppers, outbound Thai tourists’ spent a whopping 23 percent more on tax-free shopping abroad in 2013 than they did the previous year. Their total number of transactions were also up by a 17 percent and the average amount they claimed for their tax refund was €804 (about $1,103). Top destinations were the fashion capitals in Europe and Singapore.

Hedging Bets

If the more gloomy of forecasts does materialise – of an economic stasis and a continued political stalemate – how should international fashion firms approach the puzzle of an otherwise appealing market?

“They should carefully monitor and fine tune the right timing and strategy to tap in the market. Some big brands might feel that it’s actually a good timing for negotiations while others prefer to wait till the [buoyant] mood is back,” says Club 21 Thailand’s Bejrajati.

To anyone who has yet to put down roots, Vogue Thailand’s Laosuksri is bolder with his advice. “[The current instability] does make new entrants wary, but with more luxury retail space opening in central Bangkok and elsewhere, those sitting on the side-lines risk missing out on the best retail exposure. I’d strongly advise them to get into the market now, at least to establish a brand footprint in one of the premium sites, and then to build from that as and when the political scene stabilises somewhat.”

Taking comfort in that twin streak of optimism and resolve that runs through so much of the national psyche – and hence Thai business culture – even the more hardened observer seems to find a silver lining in what many see as one of the country’s darker hours.

“Uncertainty is the only noticeable way forward until we see some serious effort on the part of Thai people and establishment to take ownership of the country and make a concerted effort to focus on building confidence and stability,” says Trans Fashion’s Kaul.

“Having said that, one should never underestimate the courage and character of the Thai people… This is the only country in Asia which has never been colonised and has emerged from countless coups and bloodshed… I believe Thais will eventually come out of this unfortunate moment as a unified and better society. And Thailand will always be the jewel of tourism in Asia.”

marvin-traub-associates-logoMarvin Traub Associates is a global business development and management consulting firm focused on growing businesses in the premium fashion retail and consumer products industries. Clients range from brands and retailers, to real estate developers and technology companies.