Key Takeaways
- We maintain our forecast for China's retail sales growth (ex-petroleum) at 5.8% for 2023. Next year will decelerate to 4.2%, slower than our GDP growth forecast of 4.4%.
- Necessity-related and small luxury items will likely continue to do better than big-ticket or property-related retail niches.
- Our rating actions have trended positive, notably with Health & Happiness International and Meituan. Many companies are cutting expenses and expansion plans to shore up margins, cash flows, and overall credit profiles.
China's rated retail firms have emerged from COVID with a more cautious attitude. Before the pandemic, these companies were expanding aggressively to fight for market share. Now their risk appetites are so reduced that their margins and cash flow will likely improve next year despite cautious consumer outlays.
Some niches will fare better than others. Domestic brands continue to gain share from foreign labels. Households are opting more for delivery instead of cooking at home. In addition, delivery is expanding into snack and catering for occasions. Online penetration that dipped in 2023 will revert to growth in 2024 while "showrooming" and "retailtainment" will transform the physical retail experience.
S&P Global Ratings believes rated issuers have reduced their risk appetite even when measured against 2021. Most of the companies we have spoken to are cautious in spending--be it operating expenses, capital expenditure, or potential acquisitions. In other words, headwinds to revenue growth is coming from the weaker spending appetite rather than an increase in competitive intensity.
Overall rating actions for consumer companies have veered positive in 2023, and we expect some further upside into 2024. These are mainly related to issuers in the food and beverage (F&B), catering, and leisure sub-sectors.
Cautious Consumerism
We see Chinese consumers being cautious with their spending going into 2024. They are saving more and shying away from big ticket items such as property and new cars.
When they do splurge, they are more likely to do so on experiences; thus catering and travel spending has jumped. Or on smaller-ticket luxuries, such as premium F&B products, cosmetics, or electronics.
However, in general, consumers are focused more on needs than wants. Impulse purchases are reducing and savings are increasing. Next year, we expect China's retail sales will rise 4.2%--slightly lagging GDP growth.
Online Penetration Will Deepen While Offline Channels Change
Online penetration for physical goods is set to grow in 2024. We see this as a structural trend backed by logistics and technology. A better and wider cold-chain network will help to reduce costs and to ensure food freshness. Technological improvements such as augmented reality are helping consumers to find a better fit in fashion, which can help to ease resistance in purchasing online.
Consumer companies are relying more on online channel to reach their customers. This includes selling directly from apps or brand websites, using or reaching out via:
- Platforms, e.g., that of Alibaba Group Holding Ltd.'s (A+/Stable/--) Tmall, JD.com Inc. (A-/Stable/--), PDD (unrated), and Meituan (BBB-/Stable/--);
- Short-form videos/live streaming,e.g., that of Douyin and Kuaishou (both unrated).
- Social media platforms, e.g., the Weibo Corp. (BBB/Stable/--) mini-programs.
Larger companies are in a better position to manage and navigate these increasingly complex and diverse online distribution channels. They tend to have more resources, more expertise, and better negotiation leverage with suppliers and media vendors.
Offline channels are capturing impulse expenditure and increasingly focused on improving in-person experience--in part for marketing/branding purposes. 2022 has augmented this structural shift. To cope, offline store operators (such as Golden Eagle Retail Group Ltd. [BB+/Stable/--]) are expanding into features such as aquariums, trampoline parks or art exhibitions to enhance customer stickiness and monetize foot traffic.
Table 1
| Our outlooks for China retail sales | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (%) | 2022 | Previous forecast 2023e | New forecast 2023e | 2024e | ||||||
| China retail (ex-petroleum) (% change yoy) | (1.2) | 5.8 | 5.8 | 4.2 | ||||||
| Offline sales (% change yoy) | (5.8) | 8.9 | 6.7 | 2.6 | ||||||
| Online sales (% change yoy) | 10.7 | (0.9) | 4.1 | 7.4 | ||||||
| Online penetration rate (%) | 31.5 | 29.5 | 31.0 | 32.0 | ||||||
| e--Estimate. yoy--Year on year. Source: S&P Global Ratings. | ||||||||||
Chart 1
By Category, Necessities Will Outperform
Food-related category such as catering will fully recover to its growth path in 2024. The higher growth in catering reflects a return to social gatherings in the dine-in market and a structural shift toward delivery as home-cooking reduces. F&B in turn benefits from higher foot traffic, which drives demand for slightly higher-margin products (i.e., bottled drinks consumed outdoor vs economic packs consumed at home).
Apparel is in recovery phase. Within discretionary spending, consumers' desire to spend on apparel ranks below that of services. We do not expect a full recovery to happen over the next 12-18 months.
Auto retail is still in recovery. This segment is now driven by used cars and maintenance parts and services. New car sales have slowed to 0%-2% growth in 2023 and we do not expect meaningful pick-up in new car sales as consumers turn to used cars for value.
The appliances segment is weak given this segment's tight linkage to the property market and consumer caution on large-ticket items. We believe household-appliance sales could stay below 2021 levels over the next 24 months.
Chart 2
Catering is a relative bright spot
The upwards revision in our forecast is largely driven by food delivery. This is mirrored by Meituan's growth. Catering volumes are rising due to an expanding user base as age group of users widens. Another driver is new consumption patterns, such as afternoon tea or snacks. That said, the fast-growth phase is entering a late stage. We estimate delivery growth will slow to 12% in 2024 from 15% in 2023.
The dine-in category has recovered to above 2021 but still below 2019 levels. The past 18 months had been difficult for many smaller operators. We do not expect their full return in the next six to 12 months. In our view, some small restaurants are still suffering from significant financial burden due to losses during the pandemic lockdowns. This is beneficial for larger chain operators (such as hot pot operator Haidilao International Holding Ltd. [BBB-/Stable/--]) as local competition eases.
We expect restaurant chain operators to grow revenue through offering more meal occasions in first- and second-tier cities; plus a paced expansion into lower-tier cities. Restaurant chains are experimenting with new store formats (such as small store format or booth at night markets) to capture the opportunities in lower tier cities.
Chart 3
F&B should grow slightly faster than GDP
Given food is a necessity and food inflation is relatively low in China, F&B should trend between its long-term growth range of 3% and 5% in 2023 and 2024. Price hikes are relatively muted in 2023 as corporations are cautious in light of soft consumer sentiment. We believe food inflation could pick up slightly in 2024 at 1.0%, from our estimate of 0.6% in 2023. Within F&B, performance has varied by category.
Chart 4
Factors affecting consumption are varied. The beverage segment of Tingyi (Cayman Islands) Holding Corp. (A-/Stable/--) is seeing high single-digit growth; this is supported by outdoor traffic, including growing local tourism. Noodle sales are weaker on the other hand, probably from less stocking up. That said, we expect volume to be supported by some consumers trading down to cheaper food choices.
We anticipate flat dairy volume in 2023 and a low uptick in 2024 as consumption habits build at a slow pace. Consumer patterns are scattered, with premium and lower-end products faring better than average-priced products. This is visible from first-half 2023 results. China Mengniu Dairy Co. Ltd. (BBB+/Stable/--), which has a strong premium milk selection, posted 5% growth while Inner Mongolia Yili Industrial Group Co. Ltd. (A-/Stable/--) saw sales decline by 1% in its liquid milk segment.
Apparel spending will likely stay weak
Apparel is rebounding off a low in 2023. Our forecast 11.6% growth in 2023 is only 0.6% higher than in 2021. We believe the weak spending on apparel will continue. Mid-end products are driving growth as consumers pull back on high-end products.
Sector retailers including down apparel maker Bosideng International Holdings Ltd. (BBB-/Stable/--) will have to balance between value, function, and fashion as consumers become more price sensitive. Off-price retailers such as Vipshop Holdings Ltd. (BBB/Stable/--) are likely to grow faster than industry as consumers seek value.
Household appliances likely will track the property market
With a prolonged property downturn, volumes for household appliance are falling at a faster pace than prices are rising. Large appliances make up about 80% of the household appliances market and volume tend to have a relatively high correlation to property transactions.
One constant is air conditioners, a necessity to cope with rising temperatures. Aircon sales for Midea Group Co. Ltd. (A/Stable/--) rose 11% in the first half of 2023, while Haier's were up 19%, and Gree's 2%. Consumers are favoring smart and energy-efficient model during replacement.
Auto retailers and related get some help from used-car markets
Demand for autos will be driven by used cars as well as car parts and services, which we estimate will together grow 13%-15% this year. New car sales will be weak at 0%-2% growth this year and likely the same in 2024. This is as volume growth for passenger vehicles mature, on top of households' declining willingness to spend on large ticket items.
Auto retailers that rely on traditional internal combustion engine powered vehicles are hardest hit. Lack of subsidies will keep car sales depressed. Gross profit contribution per car is declining as pressure to do discounts stay high.
Aftermarket sales will be supported by higher average ages for cars; the used-car business is still at early-stage development in China. This could be a brighter spot, helping to cushion some of the above weaknesses for Zhongsheng Group Holdings Ltd. (BBB/Stable/--).
Demographics Suggest The Pause In M&A Is Not Forever
As Chinese corporations become more risk averse, a focus on reduced spending is helping free operating cash flows to expand into 2024. We also see lower merger and acquisition (M&A) activity in the coming year or so.
Looking further out, China's changing demography will likely push retail companies to seek new avenues for growth. An aging population and low birth rates will change consumer needs. The elderly have a stronger tendency to spend on medical and services, while lower birth rates would, over time, reduce the absolute number of consumers.
To keep growing and overcome such structural trends, Chinese retail companies might seek new opportunities abroad, or buy up industry peers at home. Both strategies imply an eventual pick-up in M&A activity.
Related Research
- China Property Watch: A Slow, Sequential Recovery In 2024, Oct. 16, 2023
- China Auto: Soft Demand Heightens Competition, Oct. 10, 2023
- China Still Has More Policy Tools To Stabilize The Higher Tier Property Markets, Sept. 26, 2023
- Economic Outlook Asia-Pacific Q4 2023: Resilient Growth Amid China Slowdown, Sept. 25, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Sandy Lim, CFA, Hong Kong 2533 3544; sandy.lim@spglobal.com |
| Secondary Contacts: | Aras Poon, Hong Kong (852) 2532-8069; aras.poon@spglobal.com |
| Flora Chang, Hong Kong + 852 2533 3545; flora.chang@spglobal.com | |
| Research Assistant: | Victor Kong, Hong Kong |
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