Can new Orchard Road malls thrive despite recession?

Source : Business Times – 29 Jul 2009

Addition of hundreds of new shops will further squeeze retailers’ profits

CAN the three huge new malls on Singapore’s main retail strip thrive despite a limp global economy?

The revamp of Orchard Road, along with two resorts featuring the country’s first casinos opening next year, is part of the government’s plans to make Singapore a regional tourist and shopping mecca and fuel a rebound from its worst recession ever.

But retailers on Orchard Road, which packs some 40 shopping centres into 2.5 kilometres, could struggle for some time.

Locals and tourists are spending less while the addition of hundreds of new shops in nearly a fifth more retail space will further squeeze profits.

‘The timing of the new malls wasn’t great,’ said David Cohen, an economist at consultancy Action Economics in Singapore. ‘Sales could be soft for a while.’

So far this year, Singapore’s retail sales are down more than 10 per cent from a year earlier. Big-ticket items – such as jewellery, cars and furniture – have been especially hard hit.

‘We really started to feel the recession in November, and in the last few months sales have been recovering very gradually,’ said Desmond Png, a manager at a Hugo Boss store in Ngee Ann City mall on Orchard. ‘Before, if a customer liked a shirt, and we had it in three colours, he’d buy all three.’ ‘Now he’s getting just one.’

The biggest of the new malls, the ION Orchard, opened 70 per cent of its stores last week after offering a 30 per cent rebate on rent through October to attract tenants to fill its 640,000 square feet of retail space. Costing about $2 billion, the project includes a luxury 52-storey condominium.

Rents at prime Orchard spaces will likely fall up to 12 per cent this year, according to consultancy CB Richard Ellis.

‘Yes, we’ve just gone through one of the worst global recessions ever,’ said Soon Su Lin, chief executive of Orchard Turn Development, ION’s landlord. ‘But the tenants see this as a long-term investment. We believe the market will improve.’

A regional economic recovery is also key for Orchard Road since tourists from countries such as Indonesia, Malaysia and China account for at least 20 per cent of the country’s retail sales, Mr Cohen said.

Annual tourist arrivals, which fell 12 per cent in the first five months of the year, are equal to 173 per cent of Singapore’s total population, the second highest ratio in the region after Hong Kong.

‘Compared to Malaysia or Hong Kong, I prefer shopping in Singapore because of the comfort and safety,’ said Fitria Evariany, a 33-year-old Indonesian housewife who visits Singapore three times a year to shop. ‘I come here to buy certain brands I can’t get back home.’

Most economists are optimistic that government tax breaks and spending programmes will keep the unemployment rate low, and the economy will grow more than 4 per cent next year after a 5 per cent drop this year.

‘As long as unemployment doesn’t get out of control, consumers will still spend,’ said Selena Ling, an economist with OCBC Bank in Singapore. ‘But if there’s a protracted recession, then it’s a totally different ball game.’