- Retail sales at China's traditional "offline" stores will likely decline in the first quarter, due to the impact of coronavirus.
- Travel-associated retailers will suffer the most, and we envision potential liquidity stress for smaller or cash-poor offline retailers.
- Online retailers will continue to gain market share, in our view, as traditional stores lose footfall amid contagion fears and travel restrictions.
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.
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).
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.
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).
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|
Alibaba Group Holding Ltd.
China National Travel Service Group Corp. Ltd.
Golden Eagle Retail Group Ltd.
GOME Retail Holdings Ltd.
Maoye International Holdings Ltd.
Vipshop Holdings Ltd.
|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;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.