Retail decline in China, says Fitch report

China’s traditional retail industry is continuing to decline with demand likely to “remain muted” into next year, according to a new Fitch report.

The credit rating agency’s report covers shops and and department stores.

“Not only are shopping preferences changing, but declining consumer sentiment affected retail sales in several categories this year,” analysts Yee Man Chin and Cathy Chao say in the report. “We think the rapid change in shopping formats will increase competition, and therefore expect persistent weak sales for traditional retailers as consumer preferences evolve.”

In the first nine months of this 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 last year, according to the China National Business Information Centre.

Despite the country’s middle class expanding, sentiment has been dampened by a devalued renminbi and the economic slowdown, says Chin and Chao. Shoppers are now increasingly favouring eCommerce, 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 run their own stores with a fixed cost base for rent and staff, the analysts say.

While the retail sector expanded 10.4 per cent in the first-three quarters of the year, the growth was largely from online sales, which surged 26.1 per cent year-on-year to 3.5 trillion yuan (US$513.8 billion), 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 group Intime Retail, which is backed by Alibaba, had a 3.7 per cent fall in sales in the first nine months of the year.

More competitive

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

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,” says the Fitch report. A Chinese athletics brand, 361 Degrees has seen same-store sales growth rebound by more than 5 per cent since 2013.

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

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

“We believe technology will come into the market, and artificial intelligence or virtual reality will enhance the shopping experience,” she says.
Her colleague director Daniel Shih says social media will be a focal point for the future, for both retailers and shopping centres.

These strategies have been evident in the roll-out of the annual Singles Day shopping event hosted by Alibaba, reports the South China Morning Post.

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.

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