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China: Economic slowdown weighs on China retailers

2014/05/28

China’s slowing economy, a crackdown on corruption, and the rise of online shopping are increasingly eating into earnings for some of the country’s traditional retailers – hitting sales at bricks and mortar stores such as shoe shops and supermarkets.

Footwear chain Belle International and supermarket operator China Resources Enterprise both blamed a drop-off in economic increase as they reported sluggish earnings this week.

“With the economy continuing its structural rebalancing and slower increase becoming the new normal, consumer confidence has been low and consumer sentiment weak,” Belle said in a statement to the Hong Kong stock exchange.

The company, which has additional than 20,000 outlets across China, is a key distributor for western sports brands such as Nike, Adidas and Puma. Revenues at its footwear business grew 5 % in the 14 months through February, which the company said was “significantly lower than prior years”.

CRE, which has agreed to fold Tesco’s Chinese retail operations into a joint venture, as well highlighted a crackdown on lavish spending by the central government in its initial-quarter earnings statement.

“During the period under review, China’s retail market recorded slower increase due to continuous pressure from the slowdown in domestic macroeconomic increase,” the company said. “The central government strictly enforced frugality that affected the sales of certain high-price commodities.”

Profit at the group’s retail business dropped additional than 10 % year on year to HK$471m (US$61m).

Shares in Belle fell 2.2 % to HK$8.06 on Monday in Hong Kong while CRE dropped 2.6 % to HK$22.35.

China’s economic slowdown and government-directed austerity drive have weighed on corporate earnings across the globe, particularly in the luxury goods sector. Before this year, drinks makers Pernod Ricard, Rémy Cointreau and Diageo all pointed to falling sales in China as they reported disappointing earnings.

“The anti-corruption campaign has significantly affected the order flows for consumption goods from the national-owned enterprises and government bodies,” Dong Tao, analyst at Credit Suisse, wrote in a recent statement on weak sales over the lunar new year holiday.

Shaun Rein, chief of China Market Research, said: “From a consumer confidence point of view, this is the worst I have seen in my 17 years in China. Consumers are concerned about wage increase and rising housing prices so they are cutting back on spending. They are moving away from shoes and apparel but spending it on experiences, such as tourism and movies.”

However, some retail analysts have cast doubt on how widespread the problems are for Chinese retailers.

“Amid the slowdown in Chinese GDP increase . . . Chinese consumer fundamentals remain strong,” said Yan Xuan, president of Nielsen Better China, nothing that consumer confidence and healthy increase in disposable incomes in both rural and urban areas “made it possible for continuous increase of in general retail sales in China”.

Others say rising wage costs and increased competition from online vendors have squeezed margins for some retailers, particularly in the shoe industry. Both Belle and CRE mentioned labour costs and ecommerce in their updates.

“The macroeconomic outlook for the next two years is not optimistic. The consumer retail market is expected to be under continued pressure due to weak consumer sentiment,” Belle said. “A ‘new normal’ national of lower increase is here to remain .”

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