March 08, 2023 (MLN): Competition in China's online retail, or e-tailing sector is heating up among both general e-commerce and on-demand food delivery, challenging leading incumbents' market share and revenue growth momentum, Fitch Ratings stated in its latest report.
Investments to defend market position could hurt margins, although our rated companies' strong balance sheets and free cash flow generation should help them weather potential challenges in the near term.
"Our base case expects online and offline goods retail sales to rise at a similar pace in 2023, compared with a 9.6-percentage-point gap between the two in 2022 when more consumers shopped online amid pandemic-related mobility restrictions," the report read.
Online penetration of goods retail sales will consequently remain largely flat at around 30%. The online sales growth will be supported by improving employment among the younger population, who have a higher propensity to shop online, growing storage and logistics capacity following strong fixed-asset investment growth in the associated sectors in 2021 and 2022, and e-tailers' more aggressive marketing efforts, such as subsidies.
However, individual companies could face slower revenue growth as the industry attracts more entrants and becomes increasingly fragmented. A more competitive operating environment will likely widen the gap between market share winners and losers.
The ability of incumbent companies to defend or expand market share is a key aspect in our assessment of their business profiles and, in turn, creditworthiness. JD.com, Inc., one of the largest e-commerce platforms in China recently stepped up its promotional tactics by offering significant subsidies, aiming to drive more traffic and improve its market position.
"We believe this could trigger a price war between the leading e-tailers, although this is likely to last for only a short while, as the subsidies could be depleted within several months," it noted.
E-commerce companies with less efficient operating strategies amid the intensifying competition could lose market share. The operator of TikTok's Chinese version, Douyin Co., Ltd., through its leading social-media streaming platform is expanding into the on-demand food delivery business by taking advantage of its access to a large audience.
This raises uncertainty among the dominant incumbents, including Meituan (BBB-/Negative) and Alibaba Group Holding Limited's (A+/Stable) Eleme, and poses risks to the competitive landscape in the food-delivery sector that has stayed largely stable in recent years.
Meituan and Alibaba have already established an extensive and reliable network of riders and merchants, giving them an essential competitive advantage in defending market positions.
Both companies' food delivery segments are highly synergistic with their other business units, although they currently produce thinner margins. This is because of the wide range of functionalities Meituan's and Alibaba's ecosystems offer that allows users to conveniently access various consumer services, providing a highly engaging customer experience and enhancing loyalty.
This will give them an edge in defending their market positions as competition heats up. Companies with a less-diversified business mix may face greater pressure.
"Our recent downgrade of Vipshop Holdings Limited's (BBB/Stable) ratings reflects the rising risk of intensified competition in China's e-tailing industry," it said.
The company has been a leading e-tailer for discount apparel-related products in China, but its ratings are constrained by the niche nature of discount retail relative to China's overall e-commerce industry and a lack of business diversification.
The report believes that the lack of scale at these companies could limit their ability to defend or grow market share as competition increases and online penetration slows.
Copyright Mettis Link News
Posted on: 2023-03-08T12:08:11+05:00
