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Monday, June 11, 2012

The foreign hypermarket dilemma

DETERRENT: Sudden changes and ad-hoc rules governing their operations may not be the best selling points

The probability of a new foreign hypermarket player in the likes of Walmart, Costco and Metro entering Malaysia is close to nil.

A foreign player here not only has to adhere to stringent regulations on expansion and other requirements but brace itself for ad-hoc rules that most often than not involve extra costs.

Rules governing foreign hypermarket operations in Malaysia have changed numerous times since 2001, so much so that it is easy to lose count on those changes that have been made.

At present, the rules governing foreign hypermarkets in Malaysia come under The Guidelines on Foreign Participation in the Distributive Trade Services Malaysia 2004 (revised in 2010).

The guidelines, to name a few, require hypermarkets to be located beyond the 3.5km radius of a town centre, have a floor size larger than 5,000 sq metres and that only one hypermarket is allowed for every 250,000 population.

The initial rules by the then Domestic Trade and Consumer Affairs Ministry, coincidentally shortly after Tesco announced its entry into Malaysia, were to stop the death of sundry shops.

The ministry started receiving complaints that the expansion of foreign hypermarkets was to the detriment of the traditional mum-and-pop stores.

There were three other major foreign players already in the market at that time - Carrefour, Giant and Makro Cash & Carry.

So, for each new location identified for a new store, an impact study (roughly costing RM25,000) on the neighbourhood kedai runcit has to be conducted.

Ad-hoc rules, some later incorporated into the guidelines, were made when, for example, Tesco decided to operate its stores 24 hours. The ministry wasted no time in coming out to say that no foreign hypermarkets would be allowed to operate around the clock.

Several other rules were introduced along the way.

A five-year freeze on openings in certain location was imposed and about two years ago, the ministry decided that it would not issue new licences but simply swap old unused licences for new ones.

And then, there are other obligations that a hypermarket operator has to adhere to.

Each foreign player had to nurture and teach local small- and medium-sized enterprises (SMEs) how to label and package their products. In fact, a few years ago, it was not uncommon to hear that the more these hypermarkets helped the SMEs, the more brownie points a hypermarket got in terms of being considered for a new licence.

More recently, Tukar (small retailer transformation programme) was introduced.

Hypermarket operators are to help sundry shops to modernise and efficiently manage their stores to improve their competitiveness. Each hypermarket is required to pledge that it will transform a certain number of stores.

The most recent ruling is for the need to hold a public hearing when the population to hypermarket ratio is not met. While this appears to be a good solution as it allows the community to decide if they wanted a foreign hypermarket player in the locale, some local councils simply felt that they had no obligation to hold a public hearing.

This simply means you cannot open a store if they don't hear you out. And if a hearing is held, any expenses incurred are likely to be borne by the hypermarket operator.

Investment is not restricted to expansion but a player must be prepared to spend money on impact assessment, SME education, promoting local products and even the Tukar programme.

To be clear, only foreign hypermarket licences are granted by the ministry and only foreign players have to adhere to these guidelines.

There are no restrictions on where local hypermarket operators can open their stores nor where they can source their products from.

So, is it worth going through all this trouble and enter the market as a new player? Possibly not.

The best avenue to expand for a new entrant would be via acquisition of an existing chain.

Based on trend over the last decade, it is pretty safe to assume that more changes can be expected in the future to regulate the industry.

By Business Times

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