Jan 21, 2009
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Global retailers feel China chill

Jan 21, 2009

By Kirby Chien - Analysis

BEIJING (Reuters) - Recession shockwaves are swamping China's main coastal export zones and spreading, pushing a fragmented and once fast-growing retail sector to consolidate as sales and profit margins shrink.

Global giants such as Wal-Mart Stores (WMT.N) and Carrefour (CARR.PA) will benefit along with China's growing consumer class, but rapid expansion has caught some over-extended, as their home markets collapse in the face of a sharp economic downturn.

China's $824 billion retail sector is still one of the world's fastest growing. Smaller than Germany's in 2003, the market could be almost twice as big by 2013, according to Euromonitor.

"As the large get larger, major domestic and foreign players with strong parents should survive as the market consolidates," said Mavis Hui, retail analyst with DBS Vickers in Hong Kong.

Department stores such as Hong Kong-based Parkson Retail (3368.HK) are pushing discounts to regain sales, and Kingfisher (KGF.L), Europe's largest home improvements retailer, is closing stores ahead of the week-long Chinese New Year shopping period.

As China's economy slows sharply, some retailers may be forced to rethink their strategy.

"We're aware of some foreign retailers in China trying to sell their operations, which could be picked up by someone else at bargain prices," said Graham Matthews, partner with PricewaterhouseCoopers in Shanghai, noting, with others, that home improvement chains are being hit hard by the global property market collapse.


Standard & Poor's downgraded its outlook for Parkson, China's second-largest department store chain, to stable from positive earlier this month, after a weak 7-8 percent same-store sales growth estimate. "We expect the weak sales trend to persist in 2009," S&P said.

Retailers globally are struggling as consumers cut back on spending amid rising unemployment and fears of a deep recession.

U.S. department store chain Gottschalks Inc (GOTT.PK) filed for bankruptcy last week, the latest in a list of battered retailers. Hong Kong-based garment retailer U-Right International (0627.HK), which rapidly expanded to over 600 stores throughout China, filed for bankruptcy in October after running out of cash.

But Carrefour, China's leading hypermarket retailer, which is buoyed by its recession-resistant grocery business, expects to open 28 new stores this year, up from 22 in 2008, though the French firm has said it would compete aggressively on price.

"Total retail sales could still rise by the mid-teens this year," said DBS Vickers' Hui. "But the steep discounts we're seeing could pressure margins for selective players."


Deals may slow in the near term as risk appetite is low and those with cash may want to hold it, PWC reckons. But it sees opportunities.

Kingfisher, owner of the B&Q franchise, is seen as a prime target. It posted a surprise third-quarter loss in its China operations late last year as sales slumped by a third.

Home improvement stores such as Kingfisher and Home Depot (HD.N), which has also expanded aggressively in China, have been hurt by a global property market slump.

Kingfisher expects more store closures in China, a sharp turnaround from mid-2007, when B&Q China sales growth was humming along at over 40 percent and it had plans to open 8-12 stores annually to over 130 locations.

Still, even during the best of times, China only accounted for a small fraction of total sales for the big global retailers.

Wal-Mart, the world's largest retailer, is shifting its focus from mature markets to countries like Mexico, China and Brazil. But China accounts for just over 100 stores from a global stable of some 7,200 Wal-Mart facilities.

Other niche players such as coffee shop chain Starbucks (SBUX.O), which is closing stores in its home U.S. market, will continue to expand because their penetration in China and other emerging markets is still at a relatively early stage.


Three fifths of consumers in major Chinese cities expect to spend less this year on luxury goods, branded apparel and entertainment, according to consultancy Data Driven Marketing Asia. And the outlook is not likely to improve any time soon.

U.S. retail sales fell a steep 2.7 percent in December, signaling a sharper economic contraction than had been thought.

That is bad news for China as the United States is its single largest export market. Analysts forecast the Chinese economy could grow 8 percent this year, a level widely regarded as a minimum to absorb millions of new job seekers.

High-flying Chinese consumers had once snapped up luxury cars at a record pace, but the global downturn has exposed a fragile spending class that must increasingly plan and pay for its own healthcare, education and retirement.

"Quite frankly, I'm not particularly thrilled with (China's) policy recipe," Stephen Roach, Asia chairman for Morgan Stanley, told a conference in Beijing last month. "China needs to shift its growth dynamic away from investment and exports ... and increase consumption."

China's household consumption in 2007 made up just 35.3 percent of economic output, a record low for a major country in peacetime. In the 1980s, it was over 50 percent, versus 72 percent in the United States.

The reluctance to buy is evident at Solana, one of Beijing's newest mega-malls with over 200 stores and vendors, but where spending customers are sparse on weekdays and many stalls are still waiting for tenants.

"You can see business is not good, how can it be good?," said a sales clerk at an up-scale clothing boutique, gesturing at an empty pedestrian walkway.

($=6.83 yuan)

(Editing by Ken Wills and Ian Geoghegan)

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