The dangers of courting Asean consumers; Much of the growth in southeast Asia has been credit-fuelled

June 25, 2013 7:39 pm

Inside Business: Credit dependency looms over Asia’s middle classes

By Jeremy Grant

For furniture shoppers on the high streets of Britain, the name Courts will probably forever be associated with furious customers who attacked the company’s staff and threw bricks through shop windows as it sank into administration eight years ago.

But in southeast Asia, the name is rapidly becoming emblematic of the big trend sweeping the region: the rise of a middle class of consumers, and of companies chasing their wallets.Courts was reborn last year with a listing on the Singapore stock exchange, after Asian rights to the name were acquired some years ago by a private equity consortium which has turned the business round.

Now, Courts does a roaring trade in fridges, microwaves, beds and laptops and is as much a brand name in Singapore and Malaysia – where it has a total of 74 stores – as was its defunct predecessor in Britain.

Analysts have recently been talking up the stock, which trades on a healthy 10.9 times 2014 earnings.

DBS, southeast Asia’s largest bank by assets, says Courts offers “unique exposure” to the retail markets of the Association of Southeast Asian Nations, the 10-member bloc that includes Indonesia, Malaysia, Thailand and Singapore. Rising incomes and increasing consumer appetite for credit are just two of the factors that support its rosy view.

Yet there is a distinct sense of herd mentality in the way that the Asean consumer trend is being talked up these days. It is easy to spot. Companies will trot out impressive numbers, such as the attractive demographics of a young population learning to be brand-conscious, or of gross domestic product growth that seems to be on an ever-upward trajectory.

There are plenty of reasons to believe in this Asean consumer growth story. The region is home to more than 600m people, which is a bigger potential consumer market than India’s.

The economies of Indonesia, Malaysia and Thailand have been standout performers as domestic demand has offset weakening exports, which had for many years been these countries’ mainstay.

The emergence of “second cities” outside Bangkok, Kuala Lumpur and Jakarta, as urban populations grow, show that the consumer markets that companies cite extend well beyond national capitals.

Tellingly, e-commerce seems to be taking off, as young, tech-savvy consumers use their smartphones – not personal computers, if they even have them – to make purchases. Last week, Lazada, a company that bills itself as the “Amazon of Asia”, won $100m from a consortium including German’s Tengelmann supermarket chain, to expand in southeast Asia. Credit card use is rising.

Consultancy AT Kearney says that, while southeast Asia generated only about $6bn in e-commerce sales last year, compared with $100bn in China, those sales are nonetheless growing at 25-30 per cent annually.

And supply chains are proliferating. DHL said last month that it planned to double its size in southeast Asia by investing €140m to open seven new warehousing, transport and IT facilities by 2015.

However, there is a danger of over-exuberance towards this story. Much of the growth in southeast Asia has been credit-fuelled.

There are now worries about the levels of household debt in Malaysia and Thailand.

Credit Suisse thinks that the Asean region has been growing too fast on loose monetary policy and this is a bubble that could burst – slowing economic growth, and hurting the consumer.

A sudden stop in capital flows to the region, as a result of the end of quantitative easing in the US, is the new elephant in the room. Morgan Stanley, in its analysis of a “sudden stop scenario” in capital flows to southeast Asia, concludes that five of the 15 most vulnerable companies in the Asean region are consumer-linked.

But perhaps the biggest question mark rests in how you define the “middle class” consumer. Not so long ago, in 2010, the Asian Development Bank defined this for Asia as those “consuming between $2 and $20 per day”.

Even allowing for some expansion since then, this is hardly the level of purchasing power that will propel sales of the Hitachi flat screen TVs on offer on Courts’ Malaysian website at $376 a pop.

DBS notes that Courts’ “unique business model” is that it offers in-house credit to customers. That will no doubt help seal the deal. But with Asean’s credit story a nagging worry, something’s got to give.