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E-Commerce Provides Some Support As Coronavirus Knocks China Retail Sales

E-Commerce Provides Some Support As Coronavirus Knocks China Retail Sales

China's large-scale e-commerce infrastructure may help the country avoid a contraction in quarterly retail sales as the new coronavirus outbreak stalls household spending. S&P Global Ratings anticipates that "offline" retail sales will decline in the first quarter of 2020; however, digital shopping will keep total retail sales from turning red for period.

The Chinese government has locked down Wuhan, the epicenter of the new coronavirus outbreak, and closed off movement in and out of nearby provinces and major cities including Beijing, Shanghai, and Tianjin. Many China-based consumers are avoiding public places, including shopping malls. They are also cancelling travel plans.

While we believe the virus will be globally contained by March, with virtually no new transmissions in April, the negative impact on retail sales will likely stretch for two quarters.

China already has one of the most digitalized retail markets in the world. This episode should support a further transition to an e-commerce retail economy.

The Impact Will Linger Longer Than During SARS

Our baseline assumes that the new coronavirus will turn out to be less deadly (as a proportion of infected) than the severe acute respiratory syndrome (SARS) that struck in 2003. However, this new virus is spreading faster, giving rise to tough containment policies, in both China and globally (see "Coronavirus To Inflict A Large, Temporary Blow To China's Economy ," published on RatingsDirect on Feb. 7, 2020).

We expect consumer spending to see catch-up activity once the crisis passes. However, the rebound is unlikely to come as quickly as did during SARS. In that episode retail sales were hit hardest in May 2003, with the World Health Organization (WHO) issuing an emergency travel advisory in mid-March of that year (see chart 1). Chinese retail sales had recovered by June 2003.

Chart 1


With respect to the coronavirus outbreak, WHO declared a global emergency in late January 2020, and we expect a peak of infection rates by March. Yet, the negative impact on consumer sales and sentiment will likely last into the third quarter because scale of this outbreak is larger than that of SARS (if less deadly). As of Feb. 10, 2020, more than 40,000 people had been infected worldwide, while SARS cases peaked at around 8,000 in 2003.

Offline Retailers Will Lose More Share To Online Retailers

China's active and sophisticated e-commerce market will help offset some of the negative impact on retail sales. This alternative was not available to Chinese consumers in 2003, when retail activity was centered around physical outlets. Today, online retail purchases account for 24% of total retail sales in China (as of 2018).

Chart 2


The coronavirus will depress overall retail sales in China. However, we have not changed our pre-virus forecast of annual online sales growth of 17%-22% in 2020 and 2021, in part because we expect some market share in retail sales will shift online. Moreover, online activity will likely prevent a decline in overall retail sales for the first quarter.

We anticipate offline retail sales in the first quarter 2020 will decline compared with the same period last year, given the weak sentiment and loss of market share to online retailers. As the coronavirus stabilizes, consumption will likely rebound in the second half of 2020 due to deferred spending from earlier this year. For full-year 2020, we project offline retail sales will grow at low single digits.

However, if the epidemic is more serious than base-line assumptions, then online retailers would also feel the fallout, amid cautious discretionary spending. A prolonged epidemic and associated lockdowns could also have supply-side impacts on procurement, logistics, and delivery.

China's blistering rate of online retail sales has decelerated somewhat but remains in double digits (see chart 3). We believe that this year's health crisis will further the long-term structural shift to e-commerce shopping.

Chart 3


Travel-related commerce is the most vulnerable

The Lunar New Year, which usually falls in late January to mid-February, is a seasonal peak for travel and travel-related spending in China. The viral outbreak resulted in a mass cancellation of tours and individual travel plans to various destinations, domestic and international.

Moreover, we believe that the negative impact on travel-associated retail could last longer than on general household consumption. Travel restrictions are likely to be lifted only gradually after the epidemic comes under control; our base case is late in the second quarter. Furthermore, travel is usually a large ticket item that usually gets deferred when consumer sentiment is weak. We note that travel in and out of China was slow to recover during SARS (see charts 4-5).

Chart 4


Chart 5


Smaller, Cash-Poor Retailers Will Face Higher Liquidity Risks

Some of the retailers we rate are internet firms or have large digital sales. We do not expect this episode to affect their credit standings.

Offline retailers are more vulnerable. China National Travel Service Group Corp. Ltd.'s revenues will likely decline significantly, mostly from the outbreak's impact on its travel agency and duty-free shop business. We believe the company's strong liquidity position will help it navigate the crisis.

We have a negative outlook on GOME Retail Holdings given fierce competition in the industry, mostly from online space. The coronavirus impact would add further pressure to the household-appliance retailer's revenue growth and profitability. Maoye International Holdings Ltd. has a tight liquidity position, which may deteriorate if retail cash inflow declines. While the negative impact could be a short term one given that first quarter is the low season for department stores, we see a greater risk in the company if the outbreak prolongs.

List Of Rated Retailers
Issuer Credit rating Outlook

Alibaba Group Holding Ltd.

A+ Stable

China National Travel Service Group Corp. Ltd.

A- Stable

Golden Eagle Retail Group Ltd.

BB Positive

GOME Retail Holdings Ltd.

B+ Negative Inc.

BBB Stable

Maoye International Holdings Ltd.

B Stable

Vipshop Holdings Ltd.

BBB Stable
Source: S&P Global Ratings.

This report does not constitute a rating action.

Primary Credit Analyst:Ava Chang, Hong Kong (852) 2533-3530;
Secondary Contacts:Sophie Lin, Hong Kong (852) 2533-3544;
Clifford Kurz, Hong Kong (852) 2533-3534;

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