16 April 2014
Negotiating Malaysia’s Retail Regulatory Hurdles
In Malaysia, retail trade is classified as distributive trade (or distribution services sector), alongside wholesale, franchising and direct selling. Retail and wholesale trade is one of the 12 National Economic Key Areas (NEKAs) under the Economic Transformation Programme (ETP), which was implemented in the wake of the 2008 global financial crisis in order to boost domestic demand in this export-dependent country. Malaysia aims to propel itself into the ranks of high income economies with a per capita income of not less than US$15,000 by 2020. With such an ambitious goal, the Malaysian government expects that, through ETP related reforms and initiatives, the country’s retail and wholesale sector may add US$50 billion to the economy and create more than 450,000 jobs by 2020.
Malaysia has a business-friendly environment, according to the World Bank’s 2014 Ease of Doing Business Report, which ranks it sixth overall among 189 economies. Overall, it comes first, third and fourth, respectively, when it comes to securing credit, protecting investors and trading across borders. It should be noted, however, that Malaysia’s retail sector is still subject to a number of rules and regulations that some foreign investors may find cumbersome, if not especially restrictive.
According to the FDI Regulatory Restrictiveness Index 2013, complied by the Organisation for Economic Co-operation and Development (OECD), Malaysia is one of the most open economies in East Asia in terms of statutory restrictions on FDI. In terms of foreign investment in specific sectors, however, Malaysia is considered restrictive when it comes to distribution and telecommunications. The OECD ranked Malaysia’s retail sector as the fourth most restrictive in terms of FDI regulatory restrictiveness out of 58 selected economies, after Myanmar, Tunisia and Jordan.
At first glance, the OECD report may not appear particularly encouraging for foreign retailers eyeing this upper-middle-income country, with a per capita income of around US$10,000 (third highest in the 10-nation ASEAN, trailing only Singapore and Brunei). It should be noted, however, that the Malaysian government has adopted many initiatives aimed at promoting the development of the retail sector, while gradually liberalising the related investment environment.
Major Malaysian rules for retail FDI
Malaysia’s Ministry of Domestic Trade, Co-Operatives and Consumerism (MDTCC) oversees FDI in the country’s retail sector, with foreign companies obliged to obtain its approval when investing in retail businesses. The MDTCC’s Guidelines on Foreign Participation in the Distributive Trade Services became effective as of December 2004. The revised Guidelines were released in 2010 and outline the principal FDI rules for international retailers, as shown in the box below.
According to the Guidelines, all distributive trade (including retail) companies with foreign equity shall:
To start a retail business in Malaysia, companies must be locally incorporated. While the 30% equity Bumiputera requirement still applies to the hypermarket format, wholly foreign-owned department stores and specialty stores have been permitted since 2012. Meanwhile, foreign involvement in supermarkets, mini markets and convenience stores remains off-limits.
MDTCC defines a specialty store as one dealing with one main brand name or product or a line of goods associated with one product. Therefore, lifestyle product brands from Hong Kong can invest in specialty stores in order to establish a high profile among Malaysian consumers, aside from the usual selling through local distributors or consigning goods to department stores.
In the 2013 HKTDC survey on Hong Kong as a lifestyle trendsetter for Southeast Asia’s middle-class consumers, respondents from Kuala Lumpur (73%) regarded Hong Kong’s fashion and accessories as the region’s most admirable asset, followed by electronic products, food and entertainment. Also known for its wide variety of excellent restaurants, Hong Kong is considered not only China’s food capital, but also Asia’s most international city, providing the widest range of food choices. It is not difficult to find Hong Kong’s most popular brands and lifestyle product businesses operating in Malaysia. Prime examples include Optical 88, City Chain, Giordano, Bossini, G2000, Chow Tai Fook, TSL and Hui Lau Shan (see the article Malaysia: opportunities in its dynamic and diversified consumer market).
Prior to setting up as a specialty store, businesses must obtain approval from MDTCC. In addition, there are several licences and approvals needed to operate the store. For instance, retailers need to obtain a local authority licence to shown any signage or display advertisements outdoors, even on lampposts.
|Classification of retail channels|
Sales floor area
3,000m2 – 4,999m2
Max. foreign equity share
|*Only companies operating a hypermarket may apply to operate a superstore format|
Source: Malaysian Investment Development Authority
Regulations at operational levels
While Malaysia has gradually liberalised the equity ownerships of retail entities (with many Hong Kong retailers successfully operating in this dynamic Southeast Asian consumer market as a result), there are several regional differences to bear in mind. Unlike Hong Kong, where sales and discounts are timely and flexibly administered to maximise footfall and sales, Malaysia regulates the number and duration of its sale periods. Within each calendar year, retail operators in Malaysia are only allowed to conduct discount sales on six occasions, with three decreed by the Malaysian government and the other three chosen by retailers, subject to MDTCC approval.
According to the Enforcement of Cheap Sales, implemented by MDTCC, each sale period shall last for only 30 days, while the registration number and date of the sale period must be stated in any advert. A 14-day interval is required before commencement of the next sale. During the sale periods, at least 70% of all goods displayed for sale in the retail premises must be offered at a discounted price. Retailers should also be aware that several marketing terms, such as “sale,” “discount,” “best price,” “best buy” and “special price”, are only allowed during sale periods.
National sales in 2014
1Malaysia GP Sale
15 March – 6 April
1Malaysia Mega Sale
28 June – 1 Sept
1Malaysia Year End Sale (MYES)
15 Nov – 4 Jan 2015
|Source: The Ministry of Domestic Trade, Co-operatives and Consumerism|
According to MDTCC, the Enforcement of Cheap Sales shall not apply when the price reduction of goods:
Retailers in Malaysia rely heavily on price reductions as a major promotional tool and they can account for a substantial proportion of annual business turnover. This, in turn, influences the purchasing decisions of Malaysian consumers. In light of the pre-determined sale periods, many Malaysian consumers spend carefully, especially when a major discount period is approaching. Many would rather wait for bargains during promotional periods, especially for non grocery products, such as watches and apparel. As a result, lifestyle product retailers plan their sale and stock strategies after the dates of national sale periods have been ascertained, with the coming schedule usually announced at the end of the preceding year. Many tourists are drawn to Malaysia during sale periods as a result of these substantial discounts.
In addition to discount sale rules, the opening hours of retail businesses are also regulated. With the exception of Kedah, Kelantan and Terengganu (see box below), the opening hours for most retail channels in Malaysian states are set from 10am to 10pm, Monday to Thursday and Sunday, whilst retailers are allowed to operate from 10am to 12 midnight on Friday and Saturday.
Different opening hours in Kedah, Kelantan and Terengganu
Most people in these three states are Muslims. In order to facilitate religious duties, such as prayers on Friday and Saturday, they are considered weekends in these three states.
Therefore, the standard opening hours for retailers are as follows:
Sunday to Wednesday and Saturday: 10am to 10pm
Thursday and Friday: 10am to 12 midnight
Also, the official weekend in Johor Bahru has been switched since January 2014, with government offices closing every Friday and Saturday. This is not, however, mandatory for private businesses.
Retailers can operate from 10am to 12 midnight on public holidays, including the eve of public holidays. During major festivals such as Hari Raya Puasa, Chinese New Year, Deepavali (Divali), Christmas, Hari Raya Haji and Kaamatan Festival, retailers are allowed to operate from 10am to 12 midnight for seven days prior to the festival.
Future regulatory issue: implementation of goods and services tax (GST)
Malaysia will introduce its first-ever GST in April 2015. The GST will be levied at 6% of the value of goods transacted or services rendered. Unlike the existing sales tax and services tax, GST is generally charged on the consumption of goods and services at every stage of the supply chain, with the tax burden ultimately borne by the consumers.
To alleviate the impact, the Malaysian government has attempted to boost the income of Malaysians, implementing a minimum wage as of January 2014. Meanwhile, retailers are preparing for GST implementation in order to avoid business disruption, with new administrative or processing systems being put in place to mitigate any penalties arising from mistakes in tax declaration. Generally, retailers feel there will not be a largely negative effect on consumption, though both retailers and consumers may take time to adjust to the change.
Related information: Malaysia infographics