Jewellers set to shine in China's troubled retail sector

Tue Mar 26, 2013 6:44am EDT

* Retail sector hit by weak 2012 economic growth, huge inventories

* Popular jewellery chains not burdened by excessive stocks

* Apparel, appliances and footwear unlikely to see turnaround soon

By Donny Kwok

HONG KONG, March 26 (Reuters) - High street jewellery chains Chow Sang Sang and Luk Fook are best placed among retailers in China to weather what promises to be another turbulent year after an uncertain economy sapped consumer confidence and cut earnings.

Retail sales grew at the slowest pace in nine years this January and February, adding to the woes of top footwear retailer Belle International Holdings and sportswear group Li Ning Co Ltd who, like others, were battered by weaker economic growth, rising wages and huge inventories.

Apparel, footwear and appliance retailers, saddled with mounting stocks, are unlikely to see a turnaround soon. But jewellers with popular appeal do not have an inventory overhang, and that will help them benefit from the modest increase in consumer spending expected this year, analysts said.

"There is nothing solid to confirm an organic recovery of the overall retail sector," said Linus Yip, chief strategist at First Shanghai Securities. "We don't expect demand to pick up sharply this year and we don't expect to see many turnaround stories."

China is forecast to become the world's largest retail market in three years, and global consumer giants such as Wal-mart Stores Inc and Nike Inc have banked on its billion-strong consumers to fuel growth.

The outlook for this year, however, remains discouraging.

Nike, the world's largest sportswear company, said it was still grappling with intense competition in China even though orders for shoes and clothing scheduled for delivery from March through July rose 4 percent.

Domestic retailers including Li Ning, Belle and home appliance distributor GOME Electrical Appliances Holdings Ltd , also warned economic uncertainty and bloated inventories would depress the sector this year after weaker earnings in 2012.

"In 2013, we won't see a significant change in the Chinese economy. We will face greater pressure in the short term," said Sheng Baijiao, chief executive of Belle.

The company, which sells its own brand footwear and distributes foreign brands such as Nike, posted its slowest profit growth since 2008.

Li Ning, which competes with Adidas and Nike, said it expects inventory charges to cut its full 2013 earnings by up to 1.8 billion yuan and has shuttered about a fifth of its stores in a year.

ADAPTING TO CHANGE

The Chinese economy is expected to expand 7.5 percent in 2013, a level it barely beat in 2012 when growth eased to its slowest pace in 13 years.

As the business environment becomes more challenging, retailers are adapting their strategies to stay profitable.

Belle, which has more than 17,700 outlets in mainland China, Hong Kong and Macau, plans to slow its retail network expansion. GOME's focus will be on bolstering its online sales after revenues dropped 20 percent while household electronics sales in China grew 10 percent.

Li Ning said it would shift to a retail-oriented business model from wholesale, and signed U.S. basketball star Dwayne Wade to produce a new line of sportswear to boost brand image.

The company, backed by Singapore sovereign fund GIC and U.S. private equity firm TPG Capital, on Tuesday reported its first annual loss since it listed in 2004.

"The industry itself is still growing with spending increasing due to urbanisation and as people's income increases," Olympic gymnast and company founder Li Ning told reporters after the earnings were announced.

"However, participants in the industry are struggling to deal with the consequence due to over expansion and excessive inventory. It may take two to three years for the operators to adjust themselves."

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