TEXT-S&P report: Asia-Pacific online retail market

(The following statement was released by the rating agency)

Aug 20 - Big opportunities exist for online retail growth in the Asia-Pacific region, where the market is expanding fast and gaining momentum, Standard & Poor's Ratings Services said in a report published today. The emerging sector, however, poses some problems for existing retailers--with extreme competition on pricing topping the list.

"Comparison shopping on the Internet will likely drive retail prices lower, in our view," said Standard & Poor's credit analyst Makiko Yoshimura. "Nevertheless, we believe retailers can turn the fast growth potential of the online retail sector to their advantage and might even be able to make up for lower profit margins with greater volume."

Growing numbers of consumers across the Asia-Pacific region feel comfortable shopping online, and traditional brick-and-mortar retailers will not be able to halt this change in consumer behavior, in our view. Sales in Japan's business-to-consumer (B2C) market (including software and other digital products) overtook total sales of the nation's department stores in 2009. Furthermore, because online retail is a relatively new market, unexpected external events in the broader market are likely to spur new rounds of growth in online retail, in Standard & Poor's opinion. Despite good growth potential for online sales, however, the e-commerce initiatives of retailers we rate still lag those of pure online businesses, which hold technological advantages over physical retailers and will increase their presence in overall retail markets, in our view.

Online retail's percentage of total retail sales in Asia-Pacific varies by country but remains very low--ranging from as little as 2.5% in China to a high of 6.6% in South Korea. Online sales continue to account for only a small portion of total sales at physical retailers we rate in Asia-Pacific. However, the online retail market is expected to grow 26% a year in China and around 10% a year in other Asia-Pacific countries over the next five years, considerably outstripping our forecasts for GDP growth in these nations.

Continuing growth of retail markets in many parts of Asia-Pacific has led many retailers to maintain their focus on opening more traditional brick-and-mortar stores, in our view. However, in those countries where retail markets are more mature, especially in Japan and Australia, leading retailers we rate increasingly have begun to turn their attention to online sales.

"Although it's important for brick-and-mortar retailers to develop a sound online strategy, the credit impact of a growing online market is limited for now," Yoshimura said. "However, we expect growth in online retail to transform the structure of the retail industry in the region."