RETAILING IN THAILAND: WAITING FOR THE SHOE TO

UNCLAS SECTION 01 OF 02 BANGKOK 002008

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON TH
SUBJECT: RETAILING IN THAILAND: WAITING FOR THE SHOE TO
DROP



1. SUMMARY: Thailand's latest effort to enact a Retail Law
has been rejected by the Cabinet, sending the draft back for
rewriting. Prominent in the debate over the retail law is
the growing influence of large retailers in the Thai market
and their impact on small retailers. With many calling for
protection for traditional Thai retailers against what is
considered foreign competition, the shape of the next draft
law is hard to predict. End summary.


2. On March 27 a draft Retail and Wholesale Business Act was
rejected by the RTG Cabinet and returned to the Ministry of
Commerce for revision. According to press reports, Ministers
objected that the draft law did not make zoning regulations
for retail business expansion clear enough, and concentrated
too much power in the new Retail and Wholesale Supervision
Committee, which could become subject to political
interference, and threatened to discourage investment.


3. Within the Thai retail market large retailers hold an
increasingly prominent position. Major player include
Tesco/Lotus, Carrefour, Makro, and Big-C. These four chains
have 158 superstores in Thailand between them, and another
238 smaller stores. Outlets for these large retailers are
scattered like popcorn throughout the Bangkok metropolitan
area and are also widely represented in other urban areas
around Thailand. The large selection offered by these stores
and their low prices - resulting from large-scale purchasing,
sometimes buying directly from producers, bypassing
wholesalers - are increasingly putting pressure on Thailand's
traditional small, mom-and-pop retailers. Some analysts feel
that one of the principle objectives of the new Retail Law is
to protect small retailers.


4. As a vehicle to protect small retailers the draft Retail
Law would have introduced significant uncertainty for large
retailers. The draft itself made no explicit reference to
large or small retailers, and did not provide any definition
for these categories. Under the draft law, opening a new
retail outlet would have required approval from the central
Retail and Wholesale Supervision Committee. Provincial
committees would have the ability to make recommendations,
but only the central committee would have the authority to
grant permissions for all of Thailand. Significantly, the
draft law did not clearly specify what criteria would be
applied to determine the suitability of an application. The
zoning regulations would themselves fall to the committee to
determine.


5. Significantly, all the major retailers are foreign owned
(although Thailand's Central Group holds 37% of Big-C). It
is therefore perhaps not surprising that the debate has taken
on nationalistic overtones. The rejection of the draft
retail law was denounced by the president of the
Confederation of Thais Opposing Foreign Retailers as a
victory for foreign retailers.


6. Under present law, retail companies having a total
minimum capital of 100 million baht ($2.9m) or greater, or
having a minimum capital for each shop of 20 million baht
($575k) or greater can be more than 50% owned by foreign
owners. The draft amendments to the Foreign Business Act
would eliminate the exemption on size, making all retailing
subject to limitations on foreign ownership without obtaining
permission from the RTG.


7. The decision to reject the draft retail law did find
support from the Thai Retailers Association. The group's
president expressed concern over the authority of the central
regulator and noted that while the act enabled the government
to limit the expansion of large stores, it did not provide
any mechanism for directly strengthening traditional or
family owned shops.


8. Dr. Charles Cheung, Chairman of the Competition Committee
for the Board of Trade, has argued that small retailers
cannot compete against the large-scale retailers, who hold
all of the competitive advantages. Only by introducing some
form of intervention can the small retailers be protected.
Notably, Dr. Cheung also argues that the definition of large
retailers should include formula chain stores, with 10 or
more branches. Indeed, in Thailand the most powerful
retailer may very well be 7-Eleven, with around 3,500
branches in every corner of the country (and owned by Thai
conglomerate CP Group).


9. With the draft retail law returned to the Ministry of
Commerce for rewriting, a new drafting committee is expected
to be named. Some observers expect that the proposed 19
member committee will include more members favorable to small
retailers.


10. Comment. Investors in Thai retail have dodged one bullet

BANGKOK 00002008 002 OF 002


with the rejection of the draft retail law. The law's
powerful central supervision committee, with the authority to
approve or reject proposed expansion, would have introduced
an unwelcome uncertainty into any corporate business plan for
Thailand. Nevertheless, even if the subjectivity of the
process is lessened, it is not certain that a new version of
the law will prove any more favorable to large retailers. As
Dr. Cheung notes, in Thailand sometimes politics comes first,
and at the present time there are strong currents pushing to
limit the further growth of large retailers. For the moment
much is in doubt; both the retail law and the amendments to
the foreign business act are undergoing revision and it is
not clear how the sector will be affected by the final
results. Although no U.S. companies are currently active in
Thailand's retail sector, if the final Retail Act and/or
Foreign Business Act are passed as currently expected, it
will be difficult for new foreign players to enter the Thai
retail market.
ARVIZU