A surge in online sales as a result of store closures and quarantines imposed during the coronavirus outbreak has given further urgency to Chinese hypermarket operators' developing e-commerce efforts.
Shares of Sun Art Retail Group Ltd. and Yonghui Superstores Co. Ltd., two of the country's largest brick-and-mortar retailers, rallied during the outbreak due to strong online sales of essential consumer goods, including groceries. Sales were aided by the Chinese government's opening of a "green channel" to ensure a constant supply of food and essential items despite the travel and logistics restrictions that were in place during January and February.
Alibaba Group Holding Ltd.-backed Sun Art said a jump in online sales offset a dip in offline sales in February. The brick-and-mortar retailer said 80% of its stores were closed in mid-February.
Activity on its online platform, Feiniu.com, accounted for 19.4% of its sales in February, according to a Jefferies report. Overall, retail sales plunged 20.5% year over year during the first two months of the year, while online sales of goods grew 3%.
Sun Art, which operates the Auchan and RT-Mart hypermarkets, is a leader in the hypermarket segment. It fulfills orders for Alibaba's Taoxianda fresh produce platform and enjoys membership and supply chain integration within Alibaba's ecosystem. Alibaba said during its 2019 investor day presentation that RT-Mart's online revenue grew 6.5% following its integration with Taoxianda in 2018.
As a result, analysts see Sun Art, whose revenues have declined over the past few years, to be well-placed to transition to an online-first model.
Its rival, JD.com Inc.-backed rival Yonghui Superstores, is expected to report a drop in first-quarter revenue of up to 35%, according to analysts from Haitong Securities.
A Yonghui representative told Chinese media that in February its Yonghui Life app had a record of 400,000 daily visitors and its online sales grew fivefold times month-over-month.
Shares of Yonghui in 2020 have outperformed online and brick-and-mortar rivals such as Alibaba, JD.com, Sun Art, Pinduoduo and Suning. Jefferies analysts Anne Ling and Kerith Chen in a research note said the market may have priced in the brisk business done by Yonghui during the outbreak.
Shares of Suning.com Co. Ltd., China's largest brick-and-mortar retailer by revenue, underperformed during the period due to the impact of the negative consumer sentiment on its core electrical appliance business. The owner of Carrefour hypermarkets in China, however, reported that its online grocery business grew during the outbreak.
According to Chinese news reports, Carrefour's delivery orders surged 300% between Jan. 24 and Feb. 29, while orders for fresh vegetables jumped 600% during the Chinese New Year period.
Suning Food Market, the company's new venture into the grocery business, also recorded a large uptick in sales. The company said in a statement that the volume of click-and-collect orders rose 655% year over year during the outbreak.
Analysts noted that while the shifting consumer behavior bodes well for companies with a strong online grocery business, revenues of major retailers are expected to decline amid cautious discretionary spending.
Asset-light
Despite the stellar showing, their asset-heavy nature means brick-and-mortar grocers are likely to face several long-term challenges, including rising rents and minimum wages, Morningstar analyst Chelsey Tam wrote in a research note.
For example, Sun Art's rental expense as a percentage of revenue increased to 9.8% in 2018 from 6.5% in 2011. Prolonged store closures and reduced operating hours during the lockdown will drive up the rental expense during the first quarter of 2020, putting pressure on the retailer to move more towards an asset-light, e-commerce business model.
Another major challenge for both Sun Art and Yonghui is the emergence of niche grocery apps. As well as the likes of Ding Dong and MissFresh, they face competition from upstarts that are also backed by Alibaba and JD.com. Alibaba's Hema and JD.com's 7Fresh are high-tech supermarkets that are open 24/7 and offer round-the-clock deliveries for online orders.
Both Alibaba and JD.com, who have ramped up online grocery offerings, reported large increases in online grocery orders during the outbreak.
Morningstar's Tam said digital expansion is the way to go for traditional retailers given that the hypermarket segment has reached saturation.
"Once an e-commerce platform reaches a certain level of scale or traffic, it possesses higher operating leverage than traditional offline retailers," Tam wrote. "An online e-commerce platform could have unlimited scale of active buyers, while an offline retailer could only cover a certain distance from a physical store."