Retail sector faces cautious spending despite modest recovery signs

 

RETAIL GROUP Malaysia (RGM) has kept its retail sales growth projection for calendar year 2026 at 4.0%, though it cautioned that mounting external risks, particularly heightened tensions in the Middle East, could weigh on the outlook, with the full impact not yet reflected in current estimates.

This comes on the back of a weaker-than-expected showing in 2025, where the sector recorded a modest 2.4% growth for the year, said Kenanga.

In the fourth quarter of 2025, retail sales expanded by just 2.5%, falling short of the anticipated 5% despite support from year-end festivities and tourist spending.

The muted outcome suggests that while consumption remains resilient, spending is still cautious and selective, with consumers prioritizing essential and value-for-money purchases. 

This is reflected in full-year sub-sector trends, where mini-markets and convenience stores outperformed (+13%), while more discretionary segments such as furniture, home improvement and electrical goods contracted (-10%), indicating continued deferment of non-essential spending.

RGM expects quarter one calendar year 2026 (1QCY26) growth to improve to 4.4% year-on-year (YoY), supported by the dual festive boost of Chinese New Year and Hari Raya, ongoing fiscal support under STR and SARA, and tourism initiatives under VM2026.

As such, this should support consumer staples players such as F&N and NESTLE, which stand to benefit from resilient demand for food and beverage essentials. 

“This is in line with our in-house view that inflation could trend higher amid the Middle East conflict, with our CY26 inflation forecast revised to 2.1% (from 1.9%),” said Kenanga.

While energy subsidies and a stronger Ringgit should continue to anchor prices, potential disruptions to oil and fertilizer supply chains may lift food and transport costs, thereby eroding household purchasing power.

Tourism prospects may see some near-term uncertainty amid rising geopolitical tensions and disruptions in West Asian airspace, which are pushing up fuel costs and airfares, potentially dampening global travel demand and posing some challenges to Visit Malaysia 2026 (VM2026) targets of 47 mil visitor arrivals and RM329 bil in tourism receipts.

Coffee prices have eased to multi-month lows on stronger production outlooks, before rebounding slightly amid short-term supply constraints coupled with recent uncertainty over global trade flows due to geopolitical tensions. 

Cocoa prices have continued to decline, near the lowest since July 2023, driven by improving weather in key production regions (like West Africa), rising inventories and slowing global demand.

“We maintain our NEUTRAL stance on the sector. While cost challenges and policy changes remain key areas to watch, we believe these headwinds will be partially offset by continued fiscal support, a stronger Ringgit and selective resilience in categories such as F&B,” said Kenanga. — Focus Malaysia