Category: General

Chinese consumers are buying more luxury items at home, but it may not be enough to save struggling department stores – particularly those that don’t boast a restaurant, cinema or ice rink.

Offline shops may benefit from a recovery in domestic luxury spending, but the future is still gloomy for traditional retailers that have been increasingly losing out to e-commerce platforms, according to analysts at Fitch.

The stores need to focus on providing a ‘shopping experience’ in order to win over the country’s internet-savvy consumers and survive the fierce competition, said analysts Yee Man Chin and Cathy Chao.

“The previous few years have been difficult for Chinese brick-and-mortar retailers, who had to grapple with increasing competition both offline and online as well as changing spending patterns, with consumers choosing experiences over shopping,” they wrote. “The pick-up in luxury spending could provide some relief, particularly for mid-to-high end retailers.”

China’s domestic luxury sales have been recovering recently due to the ‘wealth effect’ from higher property prices – meaning homeowners spend more since they feel more secure about their wealth – and a drop in overseas purchases, the analysts said.

Weak consumer sentiment and the government’s anti-corruption crackdown had caused a slump in luxury spending in the last five years, while a gulf between prices at home and abroad prompted many to shop in places such as Hong Kong, Japan and Europe.

To encourage people to spend at home, the Chinese government has cut import taxes and allowed more duty-free stores. Some global luxury brands have cut their prices in China amid sluggish demand.

A weaker yuan against the Japanese yen and US dollar, and a series of high-profile terrorist attacks in Europe, have also encouraged Chinese buyers do their shopping on home turf.

International brands have recently reported improving growth momentum in China. Coach said its Greater China local-currency sales rose 6 per cent in the last quarter of 2016, while Swatch spoke of “very good growth” in mainland China sales from November to January, according to Fitch.

This trend could boost sales growth at department store operators Golden Eagle Retail Group and Parkson Retail Group, as well as watch retailer Hengdeli Holdings, Fitch said. All three have seen their profit margins shrinking in the past few years.

However, the boost from luxury sales is no long-term solution to the threat from online stores and fancy shopping malls.

Consumers are choosing e-commerce. Even when they buy offline, people go to shopping malls rather than department stores/

In November, the credit rating agency issued a “negative” rating for China’s 2017 retail sector outlook. Parkson was in January downgraded to B- as its profitability worsened, while Golden Eagle Retail was downgraded to BB- last year due to changes in consumer behaviour.

“Consumers are choosing e-commerce. Even when they buy offline, people go to shopping malls rather than department stores,” Chin said. “The amount of retail space has also increased, so there is much more competition.”

Analysts said offline retailers need to offer food and beverage, lifestyle and entertainment options to attract China’s young consumers who are increasingly demanding a full shopping experience.

Although young consumers have been buying more online, they still go to physical shopping centres to relax and socialise, according to property consultancy CBRE.

A 2015 survey of 1,000 Chinese millennials showed they ate out an average of 5.9 days per month and went to the cinema or live events on four days, according to CBRE.

A quarter of the respondents said they considered “seeing and feeling the products” as the primary reason for shopping in physical stores.

Chin said many traditional department store chains were adding restaurants and cinemas to their portfolios.

“They don’t necessarily get people to shop, but they at least get people to go in those places,” she said.