Broker's View

China’s traditional retail industry to remain weak as shoppers stay home, says Fitch

The top 50 Chinese retailers saw sales fall by 1.9 per cent in the first nine months of the year, while online sales jumped 26.1 per cent

PUBLISHED : Thursday, 10 November, 2016, 3:37pm
UPDATED : Thursday, 10 November, 2016, 10:19pm

A decline in China’s traditional retail industry is set to continue amid sluggish sales and changing consumer habits, analysts say.

The outlook for the sector - which includes department stores and other bricks-and-mortar shopping outlets - is negative, with demand likely to “remain muted” into 2017, a Fitch report said on Tuesday.

In the first nine months of the year, the top 50 domestic retailers saw sales fall 1.9 per cent, representing a slowdown in growth of 2.6 per cent compared to the same period of 2015, according to the China National Business Information Centre.

“Not only are shopping preferences changing, but declining consumer sentiment affected retail sales in several consumer categories in 2016,” Fitch analysts Yee Man Chin and Cathy Chao said in the report.

We expect persistent weak sales for traditional retailers as consumer preferences evolve
Fitch analysts

“We think the rapid change in shopping formats will increase competition, and we therefore expect persistent weak sales for traditional retailers as consumer preferences evolve.”

Chinese consumers have undergone a recent shift in their shopping preferences as the country’s middle class expands, but sentiment has been dampened by a devalued renminbi and the economic slowdown. Shoppers are now increasingly favouring e-commerce, which makes up 20 per cent of the country’s retail sector, and shopping malls over traditional channels such as department stores and street level stores.

This is reducing profitability for retailers who operate their own stores, which have a fixed cost base for rent and staff, Chin and Chao said.

While the retail sector expanded 10.4 per cent in the first three quarters of 2016, the growth was largely from online sales, which surged 26.1 per cent year-on-year to 3.5 trillion yuan, according to data from the National Bureau of Statistics (NBS).

Same-store sales for Parkson Retail Group fell 9.7 per cent in the first half, while for the Golden Eagle Retail Group the drop was 8.7 per cent. Chinese shopping centre operator Intime Retail, which is backed by Alibaba, posted sales that fell 3.7 per cent in the first nine months of the year.

Parkson and Golden Eagle have also seen their margins — the difference between sales prices and cost of production — shrink since 2011, while those of luxury watch retailer Hengdeli have contracted since 2013.

Weakness in the industry is making the retail environment increasingly competitive. Retailers can gain an edge by improving their product mixes, because certain industry segments such as sporting goods are continuing to grow, according to Chin and Chao.

Sports companies went through consolidation in 2012, and with consumers becoming more health-conscious, suppliers like 361 Degrees International “should benefit accordingly from sales growth,” the Fitch report said.

361 Degrees, a Chinese athletics brand, has seen same-store sales growth rebound since 2013 by more than 5 per cent.

Traditional retailers are also resorting to new tactics to attract customers. These include “experimental shopping” whereby outlets increase their food and beverage, lifestyle and entertainment options, as well as linking online-to-offline shopping capabilities, the analysts said.

Through “gimmicks” and technology adoption, retailers can draw millennial and middle-class shoppers by offering digital and personalised shopping, according to Joanne Lee, associate director of research and advisory at Colliers International (Hong Kong).

“We believe technology will come into the market, and artificial intelligence or virtual reality will enhance the shopping experience,” she said.

“Social media will be a focal point for the future, for the retailers and shopping centres,” said Daniel Shih, director at Colliers International (Hong Kong).

These new strategies have been evident in the roll-out for the annual Singles’ Day shopping event hosted by Alibaba, which owns the South China Morning Post. The event includes star-studded promotions, virtual reality and augmented reality components to draw consumers to shop online and offline.

While retailers can take steps to reduce costs, such as reducing inventory or closing stores, Fitch says the “structural challenges facing the retail sector are likely to persist.”