China's retailers show new conservatism

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After years of breakneck expansion, retailers in China are scaling back and delaying their growth plans as the maturing market enters a new phase of consolidation fueled by slowing demand and fierce competition.

This new conservatism, far from alarming investors, is actually giving many peace of mind by allaying concerns about hasty expansion despite fast growth in China's retail sector.

"Though retail growth is still better than other countries, the growth is actually slowing and it's sensible for them to slow down expansion," said Bei Fu, a director from credit ratings agency Standard & Poor's. "Overexpansion has been a concern and it's time to focus on store performance."

Recent months have seen retailers making a steady stream of low-key announcements on their China plans, a far cry from just two to three years ago when they trumpeted plans to open dozens or even hundreds of new stores each year across the country to take advantage of growing consumer wealth.

In place of growth, the new mantra is a sharper focus on store performance and prudent spending - a strategy that is expected to allow them to better position themselves to capitalize on consumer spending as the economy picks up.

Retailers from across the spectrum - from supermarket operator China Resources to luxury watch distributor Xinyu Hengdeli and household appliance seller GOME - have said they would scale back previous growth plans to control costs and stay competitive.

Japan's largest electronics retailer Yamada Denki has put off a planned China store opening until the next financial year.

China retail sales grew 15.2 percent in May from a year earlier, up from a 14.8 percent rise in April, but still well below the 20-plus percent growth seen in most of 2008.

As growth has slowed and competition heats up, retailers have become more selective about store numbers and locations, avoiding new outlets in low-traffic areas and taking more care to avoid cannibalizing their own business.

"We have been taking a very cautious approach in our expansion and are more selective in choosing the right locations for our stores," said Zhang Yuping, chairman of Xinyu Hengdeli, a China-focused luxury watch retailer whose share holders include Swatch and LVMH.

Consolidation in store

China's US$824 billion retail sector is one of the world's fastest growing, especially with recent stimulus measures announced by Beijing to fuel domestic demand.

Major global retail rivals include Carrefour and Wal-Mart, as well as Hong Kong rivals New World Department Store, Golden Eagle, Parkson Retail and local names such as Lianhua and Maoye International.

In the toughening environment, those larger Chinese companies are likely to emerge as consolidators, with smaller cash-weak players either bought out or edged out.

"Consolidation is a must among such companies as apparel retailers," said CIMB GK Research analyst Renee Tai. "Those with ammunition and strong financial resources definitely have the advantage over weaker local ones."

Vulnerable companies could include GOME, China's top appliance maker, which posted a 39 percent drop in first-quarter profit and recently sold a stake to US private equity giant Bain Capital.

But many foreign and Hong Kong based retailers see an opportunity to grab a stronger foothold in China, raising their profile and exposure ahead of any economic recovery.

As bigger names win out in the new landscape, many may seize on the current situation to take market share.

"Retailers with cash flow should look for expansion now," said Fiona Wong, analyst at Sun Hung Kai Financial. "Once the economy recovers, expansion will be difficult as costs shoot up."

Hong Kong's top department store operator Lifestyle is looking to China for growth amid slowing prospects at home due to high property prices. It aims to open stores in selective locations in Beijing, Chengdu and Shenyang.

"We see more potential for growth in China in the years to come," said Eliza Lo, general manager of Lifestyle, which runs two SOGO department stores in Hong Kong and three Jiuguang stores in China, with plans to open two more up to 2011.

Instead of scaling back, Carrefour aims to open more stores this year, increasing the number to 28 from 22 in 2008. The French group also says it would compete aggressively on price.

The world's largest retailer Wal-Mart is also shifting focus from mature markets to countries like China, Mexico and Brazil.

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