Ghostly in the Mall - S&P moots store downgrades

WITH the online share of China’s retail market up 11-fold in six years, ratings agency Standard & Poor’s is warning that China’s large department stores face the prospect of credit rating downgrades . .

In less than six years, the market share of online operators in China’s retail sector has risen from just one per cent (2008) to 11 per cent (2014). By comparison, over the same period total retail sales of consumer goods grew 12.9 per cent, and total sales at department stores rose 14 per cent, according to the international ratings agency Standard and Poors.
S&P is signalling that China’s largest department stores face the prospect of credit rating downgrades.
In a note published in late April, S&P says Chinese department stores face dwindling sales as China’s anti-consumption drive continues to bite deeply — at a time when the stories  face a high level of debt caused by rapid expansion.
But S&P says it is the rapid rise in e-commerce that is casting an even greater shadow over department stores.
Between 2008 and 2013, total online sales rose at a compound annual rate of 56.6 per cent — significantly higher than those for brick-and-mortar stores.
“We believe strong online sales will weaken growth prospects for department stores. The competition will reduce sales in some traditional categories, such as electronics, books, and basic clothing,” S&P says.
“Online operators who initially targetted lower-price and commodity products are now moving into higher-price categories (affordable luxuries) to compete head-to-head with traditional department stores.”
Interestingly, S&P says the competition for customers is not coming just from domestic online players in China — it is also coming from overseas at the high end. Chinese customers are becoming increasingly sophisticated, eyeing countries with lower taxes or weaker currencies, such as Japan and parts of Europe.
The ratings agency says reduced advance purchases by customers are an early sign that consumption may weaken for department stores. As of June 2014, the aggregated balance of prepaid revenue for China’s four major department store groups, had dropped five per cent to RMB8 billion (US$1.3 trillion) from the end of 2013. That follows three consecutive years of double-digit growth since 2010.
S&P expects prepaid revenue to continue to fall over the rest of this year — indicating the likelihood of weak spending for the next two years, at least.
At the same time, Chinese companies with aggressive expansion appetites and a preference for self-owned properties have increased their leverage. China is scarred by empty shopping malls and under-utilised retail centres,
especially in lower-tier cities.
Yet department store operators still embrace the idea of opening larger “lifestyle” shopping centres to attract customers, to increase store diversification, and to fend off the challenge from online rivals.
S&P says these require large initial investments for larger floor areas. Sales per square metre for non-retail areas — such as food and restaurant, cinema, and other recreational facilities — are generally lower.
Operators, it says, may need to offer lower, attractive commission rates to attract anchor stores or key suppliers, given the profusion of shopping centres. That said, China still offers growth potential with growing GDP — and an
increasing middle class available to boost domestic consumption.
S&P believes leading US operators, such as Macy’s and Nordstrom, are still eyeing the large Chinese market in the long run.
It is not just the fortunes of department stores which are being buffetted by the rapid rise in e-commerce in China. All shopping centres are seeing wrenching change.
Rapid development of Internet shopping in China has led to a curiously Chinese phenomenon, known as online to offline (O2O), which seeks to further boost online sales to the detriment of stores and shopping centres.
O2O was born out of the need to combine bricks and mortar shopping with online purchasing. e-tailers establish showrooms of their own in shopping centres so that potential shoppers are able to browse through merchandise before making the purchase online.
Online sales have moved beyond groceries and clothing to large items like furniture and cars. In April, Taobao, the internet platform of China’s e-commerce giant, Alibaba, stepped up competition with bricks-and-mortar retailers by launching a five-story home furnishings showroom in Beijing.
Taobao, through which an estimated three per cent of all retail sales in China pass, opened the showroom for customers to try out sofas,
tables and other big-ticket items before placing an order online.
Taobao says its Beijing mall is aimed at overcoming a hurdle hampering growth of China's Internet commerce even though online retailers offer significantly lower prices — customers don't like to buy furniture and other major items without examining these items in person.
Another branch of Taobao’s business, 3T-Mall, is in part a marketplace where businesses can “set up stores” to sell to customers. It holds “exhibitions” to facilitate sales ranging from furniture to cars.
Inroads made by China’s e-tailers are more extensive that those made by e-tailers in other parts of the world for the simple reason that the Chinese now have more mobile phones than any other country — including the US — and they are continuing to exploit mobile technology as a channel of retail sales.