Revenue Growth to Slow for Chinese Department Stores

Moody's Investors Services expects that revenue growth will slow down for its rated Chinese department stores in 2014-15, as fast-growing online retailers will capture an increasingly large portion of sales traffic.

"We have lowered our aggregate retail sales growth projections for Maoye International Holdings Ltd (Ba1 stable) and Parkson Retail Group Limited (Ba2 negative) to 0%-7% for this year and 5%-8% for 2015, reflecting continued weak same-store sales growth, rising rental expenses, and the increasing threat from online retailers," says Lina Choi, a Moody's Vice President and Senior Analyst.

By contrast, large online retailers are growing fast. E-commerce players Alibaba Group (unrated) and JD.com (unrated) reported year-over-year revenue growth of 50%-60% in 2013.

"We expect these high growth rates to continue," says Choi.

Choi was speaking on Moody's just-released special comment entitled, "Fast Online Retail Growth Slows Sales Growth For Chinese Department Stores."

According to the report, apparel, footwear and consumer electronics are among the main categories in which online retailers are drawing an increasing portion of sales volume from physical stores.

"The range and quality of products available online are expanding and attracting more consumers and 2014 will be another year of strong online retail market growth," says Choi.

According to Euromonitor International, online retail sales will increase to 7% of total retail sales value in China in 2014 from 5%-6% in 2013.

Moody's expects this growth to continue steadily in the next two years, driven by the increasing penetration of mobile shopping applications and improvements in online service, logistics and fulfillment mechanisms.

This increase in online penetration represents 80%-100% year-over-year growth in online retail sales value, compared to 10%-12% growth in overall retail market sales value.

Moody's also expects Internet players will increasingly seek partnerships with retailers and service providers. For example, Alibaba Group has recently invested in department store operator Intime (unrated).

These tie-ups will allow consumers to shop online, then pay for and pick up merchandise in the physical store, which in turn boosts sales and reduces marketing costs for both the online and traditional retail company involved.

So far in 2014, Alibaba and Tencent Holdings Limited (A3 stable) have invested $6.2 billion and $1.5 billion respectively, to acquire stakes in companies in a variety of industries, with the goal of establishing an online e-commerce platform.

However, while such online presence is another distribution channel for retailers and service providers - in theory a credit positive - the effects on the companies' credit quality will depend on the specifics of each partnership.

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