A wave of panic hit yesterday as Chinese stock markets plummeted 9% during the day – their worst daily performance for eight years.
China accounts for 15% of the world economy, so the old adage that when the US sneezes, the world catches a cold can also be applied to the Asian giant. After years of economic growth, China’s balloon has been pricked. We look at what the cost could be for UK retailers.
1. Nose-diving share prices and trouble for luxury retailers
The downward spiral of China’s stock market has spooked investors worldwide, with nearly £75bn wiped off the value of the FTSE 100 yesterday. The Black Monday stock market crash affected companies across the board but China’s slowing economy will certainly be of major concern to the luxury sector. Reports suggest that about 30% of Marc Cain, Gucci, Burberry, Prada and Salvatore Ferragamo’s sales are derived from Chinese shoppers, making them particularly exposed to the Chinese market.
Burberry has become increasingly reliant on Chinese shoppers’ demand for luxury goods. However in its trading update for the three months to the end of June, the retailer said that it had seen growth in the region decline to low single-digits compared to high single digits the year before.
2. Potential fall in Chinese visitors to the UK
The calamity of Chinese Black Monday could spell trouble for British retailers because experts believe it could lead to a drop in Chinese shoppers – known for propping up many of the stores in the West End - coming to our shores.
“The unstable situation in China following the weakening economy will leave shoppers disinclined to travel and it is highly likely this will have a significant impact on international spend in the UK as a whole as the instability ripples throughout South East Asia,” says Kimberly Urbaniak, marketing manager at Global Blue. Chinese visitors make up the largest proportion of international shoppers in the UK, representing 25% of total tax-free spend according to the Global Blue Tax Free Spend Index.
Urbaniak advises that “with Chinese Golden Week, a key period for travel, just around the corner, UK businesses should renew their emphasis on strategies that attract these shoppers to capitalise on the spend potential of those individuals who do come over, making sure the spend growth seen over previous years continues”.
3. Question marks raised over retailers’ Chinese plans
As the Chinese economy grows and demand for UK goods increases, many retailers have opened stores in the region over the years. However, the current economic turmoil could lead to retailers delaying or even cancelling plans to expand in the region as they wait and see how the crisis plays out. Sanpower-owned House of Fraser and Walmart both plan to expand in China over the next couple of years.
4. A knocked-down price for Tesco’s South Korean business
The crisis in China won’t help Tesco achieve the billions it so dearly wants – and needs - for its South Korean business. According to The Independent, the $6bn (£3.8bn) price tag it asked for its Homeplus business is unlikely to be achieved following local currency plummeting because of the stock market issues in China. Homeplus – seen as one of Tesco’s most successful assets – has attracted the eyes of three bidders: Asia-based Affinity Equity Partners and US private equity firm KKR; Carlyle Group and Singapore’s GIC; and north Asia-based private equity firm MBK Partners, together with South Korea’s National Pension Service, said the paper.
5. Fall in prices of Chinese goods
One direct consequence of the crisis is that the cost of Chinese goods and commodities will fall, according to Gifi Fields, chief executive of Coppernob, which supplies clothing to the high street.
He explains: “The cost of Chinese goods will fall as a result of the government devaluing the Yuan to make Chinese goods more competitive. Prices of virtually all commodities throughout the world are falling. The price of cotton and cotton loomstate in particular has collapsed in India and weaving mills have been forced to close or are short time working. This has a knock-on effect in China, for example. Without global growth economies stagnate and commodity prices deflate.”