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MICRONESIA EXPANDS ITS RETAIL FOR TOURISTS, LOCALS

By Steve Bergsman

Retail in Micronesia depends on tourism, and this, in turn, ebbs and flows with the economies of Asia. Most of the tourists to these islands of the western Pacific, particularly to the U.S. territories of Guam and the Commonwealth of Northern Mariana Islands, are from Japan. There is a quickly rising flow of tourism from South Korea as well. And for Palau, Taiwan has become a very important source of tourists.

John Baldwin, a principal at Bridge Capital, says he understands well the relationship between the Asian and Micronesian economies in this respect. This financial services firm, which relocated to Saipan, Northern Mariana’s largest island, in 2006, lends to developers in both regions.

Locals play a part too, though, in fueling retail expansion. Triple J Enterprises, in the Republic of the Marshall Islands, opened three Pay-Less supermarkets on the islands and is considering a fourth, reports Guam Business. No fast-food retailers have opened in the Marshall Islands yet, but Ace Hardware and Do It Best hardware franchises have, says Jerry Kramer, CEO of Pacific International, an investment firm in Majuro, capital of the Marshall Islands.

Guam, the largest of the Micronesian islands, home to 170,000 people and numerous U.S. military bases, enjoys a great deal of retail, split between that which serves the local population and the stores that cater to tourists. “The island boasts five major shopping centers, with 1.4 million square feet of retail,” said Nick Captain, president of Guam-based Captain Real Estate Group of Cos.

Guam is the best example of the duality of the retail experience in Micronesia. Two of the island’s major shopping locations, Tumon Sands Plaza and DFS, are geared to tourists, being based in Tumon Bay, the heart of Guam’s tourist district. Both offer solely high-end stores attractive to the Asian visitor, especially to the Japanese, for whom shopping is cheaper here than back home.

But many retailers are tentative about coming to Hawaii, let alone to these islands, says Kim Lord, senior director of retail services at CB Richard Ellis, in Lihue, Hawaii. “There is really a large span of time between when a retailer expands in California and then moves west,” Lord said. “It’s simply because of logistics — how do you operate there, and how do you handle goods and services? Once they figure out Hawaii, then they again have to make that same business decision moving into a market that is even farther away and smaller.”

Some major retailers, though, have yet to figure out Hawaii, says Lord. Neither Bed Bath & Beyond nor Victoria’s Secret, for instance, operate there. Others have begun expanding there only recently. Home Depot has been in Kauai less than two years and is just building a store in Hilo, on the Big Island of Hawaii, says Lord. “Costco only opened in Kauai in 2006,” Lord said. “It will take some time for Costco to say, ‘Where’s the last part of the United States that we can expand to?’ ”

On the smaller islands of Palau and Saipan, the population bases and demographics are too shallow, says Lord. “It takes a visitor market to establish luxury shopping, and it will take a long time for those markets to brand themselves for the shopping visitor.”

Some islands say they have no wish to brand themselves as a shopping destination. Palau, renowned for its natural beauty, will be getting an Outrigger hotel, and a new road has been built on its biggest island. But “we don’t want to overdevelop,” said Alan Seid, a member of the Palau National Congress. “We want an economy that is in balance with our way of life, and we want to grow in a controlled way.”

Palau gets 200,000 to 300,000 visitors a year. Though tourism from Japan and the U.S. has been steady, the island’s visitations have been growing, because of its relationship with Taiwan. “There was a big jump in tourism from Taipei,” said Walter Dias, staff vice president at Continental Micronesia, a division of Continental Airlines.

Dias is not so sanguine about Guam and Saipan, though, where the market share for Japanese tourism has been dropping. “Year to date, Japan arrivals are down about 2.5 percent to Guam,” said Dias. “One of the things we are concerned about is that Guam and Saipan properly invest in their own marketing. We have seen a lot of cost-cutting in the Marianas Visitors Authority over the years, and now they are reaping what they sow. It’s definitely impacted visitations from Japan. Unfortunately, the same thing is happening in Guam. There is a lot of budget pressure on Guam. They keep looking outside the budget for money, and, unfortunately, the tourist attraction fund, which is supposed to be used for marketing Guam, has been diverted to the general fund for the last couple of years.”

Outside Guam perhaps the biggest impediment to new retail development for either the local or tourist markets is the scarcity of land. The land is there, but it is communally owned on many western Pacific islands and cannot be sold, only leased. In places like Saipan and the Marshall Islands the leasehold is for a limited amount of time: about 35 to 55 years. “We definitely have land-tenure issues,” said Kramer. “Land reform is way off in the Marshall Islands.”

Palau was in a similar situation, but as of this year, at least, a constitutional amendment allows 99-year leases. “Unlocking the value of real estate will require reform of policies relating to real estate,” said David Cohen, deputy assistant secretary of the interior in the Office of Insular Affairs.

In Micronesia real estate investment by off-islanders is generally done through long-term leasehold arrangement, except in Guam. But where the length of lease time is restricted, returns are depressed and financing options and exit strategies are limited, says Cohen. “Throughout Micronesia, policy-makers are taking a fresh look at property laws,” said Cohen. Among the issues being raised are the extension of lease terms and the introduction of provisions allowing foreigners to own land.

Such reforms could bring in the retail boat very smoothly indeed.