Mongolia: Retail therapy

Expectations that Mongolia’s retail industry will be transformed by the nation’s rapidly growing mining sector appear on track, although rising inflation and a lack of human resources could threaten the sector’s potential.

In mid-June, Mongolia made its first appearance in the AT Kearney Global Retail Development Index, earning a creditable ninth place in a survey of the world’s top-30 emerging retail markets.

Beating major destinations such as Malaysia (11th) and Turkey (13th), AT Kearney reported, “Mongolia’s tremendous growth potential and democracy present an opportunity for retailers seeking a steady base of wealthy customers and a stable political environment.” The international management consulting firm added, “several small gems [such as Mongolia] … appeal to retailers targeting a concentration of wealth and seeking to be first movers in fast-growing markets”.

The strong showing reflects growth of the wholesale and retail trade sector, estimated at 51% by the World Bank during the first quarter of 2012, following expansion of 70.5% in the fourth quarter of 2011.

Despite having a relatively small population of 2.8m and a GDP per capita of $2470 in 2011, in recent years the country has seen luxury retail giants such as Louis Vuitton, Hugo Boss, Cartier, L’Occitane and Dunhill open shops in Ulaanbaatar, the capital.

Sales are expected to surge in the coming years, once the economic benefits from the country’s huge coal and copper mining operations begin kicking in, with GDP anticipated to double in the next decade. As an affluent middle class emerges, urban migration is expected to see the country’s nomadic traditions dissipate and the capital’s population hit an estimated 1.4m in 2020 from its current 1m.

The State Department Store (Ikh Delguur), run by Nomin Holdings, offers 27,755 sq metres of grade-A retail space spread over five floors. The most modern and prestigious mall is Central Tower, where the majority of international brands with operations in Mongolia are located. The city’s largest mall is the luxurious Ulaanbaatar Department Store, a 30,000-sq-metre space opened in 2010. Ralph Lauren, Gucci, Dolce & Gabbana, Chanel, and Giorgio Armani are located there.
Set to open in 2013, an office, retail, entertainment and hotel complex located in the centre of the capital will also feature a number of leading brands such as Burberry, as well as a 34-storey, five-star Shangri-La Hotel and a multi-level movie theatre.

However, there are also plans for a number of innovative sites, including a retail village that is set to become one of the country’s largest shopping destinations. Construction at “Village @ Nukht”, located halfway between Ulaanbaatar and the Chinggis Khaan International Airport, is expected to be complete by June 2013 and will feature 10,000 sq metres of retail, dining, entertainment, and office space. So far, some 30% of construction has been completed and total investment has reached $7m-8m.

Meanwhile, the Mongolian Growth Group (MGG), a real estate and financial services conglomerate, noted in July that per-metre rents were rising as much as 50% in grade-A locations of the capital, as multi-branch businesses seek increased retail presence on streets with the highest footfall traffic. In particular, the firm said it had seen material increases in market presence from banks, chain restaurants and mobile phone companies.

“Recently, we have seen inquiries from international brands that now have Mongolia on their radar. Over time, it is only natural that these international brands will also need retail space,” wrote MGG.

Potential limiting factors for the future of the retail sector are rising prices and consumer confidence, with international finance institutions warning over the perils of inflation caused by an overheating of the economy, particularly a repeat of the 34% inflation spike seen in 2008. The World Bank noted that inflation touched 16% in April, well above the Bank of Mongolia’s inflation target of 10%.

In its quarterly economic update for Mongolia in June, the World Bank said, “Mongolian policy-makers need to adopt a cautious macroeconomic stance, which will entail limiting the build-up of vulnerabilities in the banking sector, reining in the growth of government expenditures, minimising off-budget financing activities and ensuring that the lending of the Development Bank of Mongolia is within the framework of the Fiscal Stability Law”.

With agriculture still providing a livelihood to approximately 40% of the population, and quality education often not reaching sparsely populated areas, human resources have been identified as another area that could limit retail growth.

While Mongolia’s retail sector is experiencing unprecedented growth, to ensure the sector becomes a significant contributor to the economy, enhanced training and education, as well as the development of small and medium-sized enterprises, will be necessary to encourage retail expansion.

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