Analysis: Asia retailers deck the halls with holiday bargains

By Victoria Thieberger and James Topham

MELBOURNE/TOKYO (BestGrowthStock) – Retailers in Australia and Japan such as Myer (MYR.AX: ) and Seven and I (3382.T: ) are bracing for tight-fisted shoppers, anxious about the economic outlook, this Christmas holiday season, putting further pressure on margins and profits.

But the outlook is more festive for stores elsewhere in Asia — in Seoul and Hong Kong, for instance, an influx of shoppers from China and solid domestic income growth is set to lift sales by 20 to 30 percent over last year’s Christmas period, analysts say.

Big retailers around the world make as much as half their annual profits during the holiday season, so the mood of shoppers is key to a good year, but increasingly frugal consumers are leaving gift choices to the last minute in the hope of snaring bargains.

“It’s a hard slog at the moment. Retailers were hoping to ease up on the promotional activity but it is still pretty constant, and that is not going to change much,” said FW Holst research manager David Spry in Melbourne.

Stores are struggling to attract customers as the effects of government stimulus handouts in Australia and Japan fade, and shoppers in Australia baulk at paying full price for anything except Apple (AAPL.O: ) products, games and other gadgets that are among the most popular gift items this Christmas.

It is a similar story for U.S. retailers, who are more focused on poaching customers from their rivals for holiday sales than pinning their hopes on a real change in spending habits as the economy recovers from the worst recession since the 1930s.

JAPAN RETAIL PAIN

Japan’s retailers see signs of consumers willing to splurge on an expensive item or two, but they say this won’t be enough to boost sales much overall given anxiety about the economy.

“I don’t think Japanese consumers will regain the urge to spend until something comes along that eases their worries about the economy,” said Yasuo Takaha, an executive officer at Seven and I Holdings, Japan’s top retailer.

“Consumers recently have been looking more and more for value in things, so sales of expensive, quality goods have gotten better, but they are not enough to pull up sales overall.”

Consumption in Japan is expected to weaken in the fourth quarter after the end of government incentives that lifted spending, while a recent survey by the Nikkei business daily showed annual winter bonuses will fall for the third straight year.

“While corporate earnings have rebounded, it has come from cost-cutting efforts; the macroeconomic situation has not changed so weak consumption experienced last year is set to continue,” said Takayuki Suzuki, a retail analyst at Primo Research Japan.

SPEND LESS, SAVE MORE

Australian retailers are struggling as a surprise interest rate hike on November 2 took the punch bowl away in the critical run-up to Christmas, sparking cries of outrage from retail chiefs. It was the seventh hike in a year and the impact was compounded as banks pushed up mortgage repayments.

Australia’s largest department store, Myer, says sentiment is “fragile.” That view appears to be backed up the data – a key consumer sentiment index slumped 5 percent in November.

Aussie consumers have been cautious all year, paying off loans and trimming discretionary spending in the face of steadily rising rates, despite jobs growth.

“I think there’s just a newfound conservatism and people are still reflecting on the leanings from the global financial crisis,” said David Jones (DJS.AX: ) Chief Executive Paul Zahra.

“Consumer behavior right now is patchy, and that’s by store, by day, by week, by state,” he said, predicting a flat fiscal first half for the upmarket department store chain.

A poor Christmas will bode ill for retailers’ shares, which are down 8 percent this year (.AXDJ: ) but off their lows as conditions appeared to be improving until November.

Stores now need to lure customers with heavy discounting in a season traditionally devoted to full-price sales, with Myer and David Jones offering up to 30 percent off clothes and house wares.

Myer Chief Executive Bernie Brookes said the retailer has been unable to pull back on heavy promotions as planned. “Our level of discounting has been aggressive,” he said.

Analysts say online shopping is also taking a chunk out of retailers’ earnings as more Australians turn to overseas web sites to buy books, clothing and gadgets, especially with the Aussie dollar hovering near parity with the U.S. dollar.

BIG-SPENDING TOURISTS

Holiday prospects are more cheerful elsewhere in Asia.

In China, retail sales growth has remained in double-digits all year, despite efforts to cool the economy, and retailers are keen to tap into the Chinese consumption story.

U.S. clothes chain Gap (GPS.N: ) opened its first store in mainland China earlier this month and luxury brand Burberry (BRBY.L: ) is set to open it largest Asia flagship store in Beijing in December.

For South Korean retailers, the positive wealth effect from a buoyant stock market, rising incomes and an influx of Chinese tourists means the outlook is upbeat.

Large flagship retailers such as Lotte Shopping (023530.KS: ), South Korea’s top retailer that operates upscale department stores and discounters, and Shinsegae (004170.KS: ), the country’s No.2, are forecast to benefit the most from a year-end shopping spree with sales up 10-20 percent.

“We are very optimistic about how sales will turn out this year,” said Kim Keun-soo, an official at Lotte Department Store. “Foreign tourist traffic, particularly those deep-pocketed from China, will contribute substantially.”

The number of Chinese tourists to South Korea jumped 39 percent year-on-year in September, the latest data from the Korea Tourism Organization showed.

Mainland shoppers from China are also expected to flock to Hong Kong, taking advantage of the stronger Chinese yuan and cheaper taxes on luxury goods. Analysts expect 20-30 percent year-on-year growth in sales.

“We expect another year of strong growth in the coming festive season, thanks to a continuous inflow of high consumption-powered mainland tourists,” said Henry Chan, executive director of Emperor Watch and Jewelry Ltd (0887.HK: ), a Hong Kong partner of LVMH Moet Hennessy Louis Vuitton SA (LVMH.PA: ). (Additional reporting by Miranda Maxwell in Melbourne, Jungyoun Park in Seoul and Donny Kwok in Hong Kong; Editing by Dhara Ranasinghe)

Analysis: Asia retailers deck the halls with holiday bargains