No buzz for Suning, Germany's Metro
Suning's plummeting profits and Metro's closure of its Chinese joint venture reflect the tough market for electronics retailers, which is likely to continue for the next 3-5 years
Anyone thinking of getting into China's consumer electronics retailing market might want to think again, following the latest downbeat news from homegrown giant Suning (Shenzhen: 002024) and a joint venture involving Germany's Metro Group (Frankfurt: MEO). In the former case, Suning has just reported 2012 results that will hardly encourage investors, including an accelerating decline in profits. In the latter, Metro has formally announced it will shutter its Media Markt stores, confirming buzz that has surrounded the troubled chain that was launched with fanfare two years ago.
Two interesting questions in all this are: When will China's electronics retailing market finally stabilise, and what will the market look like when that finally happens. I'll offer my own views on those questions shortly; but first let's have a look at the latest news, which has Suning's profits continuing to tumble as the company struggles with stiff competition in the electronics retailing space.
The company reported its 2012 profit tumbled 44 per cent to 2.68 billion yuan (US$425 million). That decline compares with a 31.3 per cent profit drop in the first nine months of the year and a 37 per cent drop in the third quarter, which means the company's profit declines continued to accelerate in the last three months of the year. Sales growth also slowed sharply to 4.8 per cent for the year, well behind the growth rate of 7.1 per cent for the first nine months.
There's not too much to say about this, as it's common knowledge that China's electronics retailing sector is already ultra-competitive, with traditional names like Suning fighting with e-commerce newcomers like Jingdong Mall and Alibaba for a slice of the pie.
From Suning let's move on to Metro, which has formally announced it will shutter its modest operation of eight stores in Shanghai by the end of April. Seven of those stores will close down on March 11, while one will remain open through April to handle customer-related issues. Metro had previously hinted at the withdrawal last month.
Metro and Taiwanese partner Foxconn Technology, had big plans for Media Markt when they launched the chain two years ago. Perhaps ironically, the pair launched the new joint venture just months before US-based Best Buy (NYSE: BBY), one of the world's largest electronics retailers, formally shuttered its own fledgling China operations that were also run out of Shanghai. Metro and Foxconn had originally planned to quickly expand their new venture, aiming to have 100 stores across China by 2015. But clearly they underestimated competition in the market, and also the rapid rise of e-commerce.
So now that we've looked at the news, let's return to my earlier question of where the market is headed over the next 5-10 years. I expect that an increasing amount of sales will migrate onto the Internet, with more than half coming through e-commerce channels within the next five years. Suning could continue to be a major player in the new landscape, drawing on its expertise in the area; but the other major traditional player, Gome (0493.HK), could find itself in trouble due to its slowness to embrace e-commerce.
I do also expect we'll see two or three newer online names emerge as major players, with Alibaba and Jingdong Mall both looking like strong bets. But we're still likely to see quite a bit of turmoil in the space for the next 3-5 years before the situation finally settles under this new, more sustainable landscape.
Bottom line: Suning's plummeting profits and Metro's closure of its Chinese joint venture reflect the tough market for electronics retailers, which is likely to continue for the next 3-5 years.
To read more commentaries from Doug Young, visit youngchinabiz.com