China Retail Slows As New Mega-Shops Open 中国零售业放缓 大型零售店继续开张
The China retail scene is buzzing with conflicting signals from these last few weeks, as established names like Tesco (London: TSCO) sound negative notes amid a rapid economic slowdown, even as newcomers like Apple (Nasdaq: AAPL) and Forever 21 open massive new stores. In fact, there really aren’t too many contradictions in this latest news, since these new mega-stores were probably in the planning stages before China’s economic slowdown began. Thus these newer stores are more indicators of investments for the future rather than bets on the present.
Let’s start with a look at the more downbeat news, which has seen retailing giants Walmart (NYSE: WMT), Tesco and Carrefour (Paris: CA) all curb their China expansion plans due in part to the nation’s economic slowdown. (English article) Tesco’s same-store China sales fell 1 percent in the second quarter, while Carrefour said its China same-store China sales fell 6.1 percent in its most recent quarter, contrasting with the strong growth from previous years.
This kind of slower growth was almost inevitable, as all of these companies had been aggressively expanding and have already opened stores in most of the best locations. That means they will have to look to less obvious locations in big cities like Shanghai and Beijing, and to second-tier cities for future growth — a much more difficult task that is likely to yield less profitable stores. Fast food giants KFC (NYSE: YUM) and McDonalds (NYSE: MCD) are facing a similar challenge, with both companies looking to alternative strategies like opening shops in electronics stores and gas stations to keep their China growth alive.
While the foreign companies struggle, domestic players are also having to cope with the same combination of an economic slowdown and increasing saturation of their home market. Li Ning (HKEx: 2331), a top homegrown seller of athletic apparel, made headlines last week when it disclosed that its namesake founder, a former Olympic champion gymnast, was selling 25 percent of his company to another investor. (English article)
The buyer of the 25 percent stake was a talent management company which also counts Li among its investors. But some Li Ning shareholders also interpreted the sale as a sign that Li intends to gradually sell down his stake in the company, causing Li Ning shares to drop 7 pct last week. (English article) The company’s share now trade at less than half their 52-week high, as Li Ning has also seen steady profit erosion over the last year and recently said it could post a loss for 2012.
Now that we’ve looked at the bad news, let’s move on to more upbeat reports that come in the form of massive new store openings by Apple and Forever 21, a leading US clothing chain that caters to young people. Media are reporting that some 1,000 people lined up over the weekend for a chance to be first to visit Apple’s newest China store, a massive 40,000-square foot, 3-story shop in Beijing’s popular Wangfujing shopping district. Perhaps not coincidentally, the Apple shop — its largest in Asia — was in the same complex where Forever 21 opened its own massive 25,000 square foot store in August as part of its aggressive entry to China.
Forever 21 went on to open an even bigger 86,000 square foot, 4-story mega-store in Shanghai late last month as it established a footprint in that city as well. These kinds of mega-stores are big headline-grabbers, and are certain to attract crowds for at least the next few months. But look for business even at these big stores to also slow sharply in the months ahead, posing an early test for the resolve of not only Apple and Forever 21 but also the other big retailers that have recently come to China with big hopes.
Bottom line: China economic slowdown is already hitting big domestic and global retailers, and is likely to spread to recently opened new Apple and Forever 21 mega-stores once initial hype fades.
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