China retailers face saturation, e-commerce challenges

Although China's retail market continues to expand, growth opportunities have moved out of the first- and second-tier cities into less developed cities and online shopping sites. As a result, retailers in China have to move nimbly to solidify their positions or risk being squeezed out of the market.

In the Q&A below, Hong Kong-based Michelle Leong and South Korea-based Jeong Min Pak with Fitch Ratings discuss the threat of saturation and e-commerce in China's retail sector and the macroeconomic trends that will affect the industry over the longer term.

Q: Why is the Chinese retail sector facing significant deceleration in same-store sales growth?

A: Growth has slowed because consumers have become more cautious at a time of weaker economic growth, the Chinese government's austerity drive and an official crackdown on corruption. On top of that, the retail sector is also facing market saturation and the rapid growth of online shopping.

Q: Is market saturation a nationwide phenomenon in China's mainland?

A: Market saturation is most apparent in first-tier, followed by second-tier cities. For example, some department stores in cities such as Beijing and Shanghai experienced contraction in same-store sales in 2012 and the first half of 2013. In contrast, the retail markets in third-tier or lower ranked cities will grow quickly because the process of urbanization is still at an early stage and the majority of their populations are still experiencing increases in disposable incomes.

Q: What are some measures that retailers have taken to protect their market shares?

A: Some retailers have set up new stores close to existing outlets to prevent new entrants into the area. While there is a certain amount of cannibalization, retailers would rather that happen than lose market share to a competitor over the longer term. Retailers in developed markets have also employed this strategy, although at a much slower pace. In China, retailers have moved more swiftly to open stores in this manner due to the rapid economic growth and change in competitive landscape. Those with mature store networks have also been actively renovating their stores to stay competitive. With growth shifting to less-developed cities, retailers' capital expenditures for new stores are mainly channeled to these cities.

Q: What impact has online shopping had on the Chinese retail market?

A: In Fitch's view, online shopping platforms are the main emerging threat to traditional retailers in China. E-commerce has expanded more quickly in China than in other emerging economies. In terms of product segments, generic consumer products, such as consumer electronics goods, have suffered the most from the emergence of online shopping — consumer electronics retailers have posted sharp deceleration in same-store sales growth. Fashion and apparel is another segment vulnerable to the threats of e-commerce.

Q: How have retailers attempted to counter the e-commerce threat?

A: Department stores have started to offer more diverse shopping experiences, including food and beverage, cinema and other lifestyle elements. Some retailers have also started their own online shopping platforms. These developments are still in the early stages; it remains to be seen whether these moves are enough to defend their positions over the long-term.

Q: What is Fitch's view on retail sales in China over the long term?

A: The pace of retail sales growth will vary across different regions in China as they develop at different rates. Overall though, Fitch expects retail sales growth to pick up over the medium-term, driven by continued urbanization and income growth. Efforts by the Chinese government to move toward a more consumption-oriented economy (as opposed to the investment-oriented one now) would also contribute to long-term sustainable growth. Within the retail segment, traditional retailers would likely continue grow at a slower pace than online shopping platforms and other new retail formats.