Wumart Joins List Of Ailing Retailers
The list of traditional retailers suffering from the e-commerce challenge has gained a new member, with domestic giant Wumart (HKEx: 1025) reporting its profit for 2013 fell for the first time in 5 years. It’s noteworthy to point out the last time Wumart’s profit fell was at the height of the global financial crisis in 2008, when the reasons for the downturn were sudden and severe but also relatively short-term. This time the reasons are much more gradual and signal a longer term decline for traditional retailers like Wumart, which are facing an unprecedented challenge from big e-commerce names like Alibaba, JD.com and Amazon China (Nasdaq: AMZN).
Wumart certainly isn’t the first company to feel a chill from the e-commerce challenge, with domestic names like Li Ning (HKEx: 2331) and Anta (HKEx: 2020) and global giants like Walmart (NYSE: WMT), Carrefour (Paris: CA) and Tesco (London: TSCO) all making adjustments to their China operations over the last year. The most interesting question is what’s ahead for these struggling traditional retailers, which certainly aren’t looking at a very rosy future. I expect we’ll see some mergers ahead for many of these chains over the next 2 years, and we could even see 1 or 2 major closures.
Before we look more closely at the broader picture, let’s zero in on Wumart, which reported its profit tumbled 24 percent last year to 459 million yuan ($75 million). (English article) The big decline came as the company’s sales rose 9 percent to 18.9 billion yuan. The fact that its sales continue to rise may look good superficially, as it’s rarely good to see your revenue drop. But the fact that profit tumbled so much even as revenue grew is a troublesome trend that shows Wumart is having to spend much more than in the past just to achieve the same sales levels.
Wumart is hoping to be a consolidator for the struggling traditional retail sector, announcing a plan last year to purchase 36 stores from rival operator CP Lotus in a deal valued at $2.9 billion ($373 million). British retailing giant Tesco also effectively abandoned the China market last year when it agreed to fold all of its local stores into a joint venture with China Resources Enterprises (HKEx: 291). (previous post) Carrefour was rumored to be looking for a joint venture partner for its China operations last year or even to possibly exit the market, though no deals were ever announced. (previous post)
The big story behind all these woes is the rapid rise of e-commerce, which has exploded in China due to the relative underdevelopment of the traditional retailing market. Many of my friends now buy almost everything online, including even minor items like clothing, computer memory cards and groceries. There’s really very little advantage to buying things at traditional stores these days, since e-commerce offers the advantage of more selection, better pricing and convenient free home delivery. Even the time advantage offered by traditional retailers is quickly disappearing, with e-commerce companies often able to deliver products within hours after an order is placed.
With all those advantages, it’s hard to see how traditional retailers like Wumart, China Resources Enterprise or Li Ning will be able to survive in the future without a strong Internet partner. The only traditional retailers so far to embrace a major Internet strategy are Walmart and electronics retailer Suning (Shenzhen: 002024), but even they are having some difficulties integrating online and off-line operations.
I do expect there’s room for at least 2 or 3 major traditional retailers in the future, though it’s hard to predict who they might be. Walmart looks like the best positioned to succeed among the international players, while Suning could be a strong bet among the domestic firms. Until the dust finally settles, look for lots of turbulence in the space this year, including many more store closures and perhaps the departure of 1 or 2 players later this year.
Bottom line: Wumart’s latest profit skid reflects ongoing malaise in the traditional retailer sector, which is likely to close many more stores and see the departure of 1-2 major players this year.
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