China's Sep Retail Sales: Finally Some Lights, Yet Bad News for Online Players

Today, the National Bureau of Statistics released the domestic social retail situation for September. The overall impression is that offline physical retail, which has been repeatedly battered, has finally made a weak comeback, but at the cost of slower growth in online physical retail. In September, the penetration rate of physical e-commerce even experienced a "backlash".

1) China's Social retail in September finally recovered: Nominal social retail reached nearly 39.8 trillion RMB, a year-on-year growth of 5.5%, which is better than the growth rates in June, July, and August normalized by the same period last year.

The four-year compound growth rate based on 2019 is 4.6%, which is a slight improvement compared to the 3.7% in August.

2) Online retail: Extreme internal competition under negative growth in penetration rate

a. Slowdown in online physical retail due to a high base: While social retail looks good, the marginal improvement does not come from the relatively higher growth rate of online physical retail, but from the bottoming out of offline physical retail, catering, and online non-physical retail.

Although the growth rate of online physical retail has stabilized over the past three years, compared to the high base of the same period last year, the growth rate has further slowed down: the year-on-year growth rate has fallen to 4.6%, lower than the 5.5% of social retail in the same period.

Also, because the growth rate is lower than the overall market, the amount of online physical retail in September, slightly exceeding one trillion RMB, accounts for only 30% of the total social retail after excluding automobiles, which is 0.3 percentage points lower than the same period last year. This is the first time this year that the penetration rate has declined.

Looking at the subcategories, except for food, the growth rates of clothing and daily necessities in September have further declined.

In terms of the third quarter of this year, it is evident that the year-on-year growth of online physical retail has significantly slowed down compared to 2021 (excluding the interference of the low base in the second quarter of 2022).

This trend is consistent with the recent outlook provided by e-commerce platforms such as JD.com and Alibaba for the third quarter. Both companies have lowered their expectations for the third quarter and even the fourth quarter, dampening the outlook for next year, especially JD.com.

And from the recent price trends, as Alibaba begins to refocus on the price competitiveness of Taotian Group, exposing cost-effective products (Taobao Good Price, Taobao Factory, Billion Subsidies Channel, Taobao Grocery) at key positions in Mobile Taobao, combined with the latest slogans of JD.com and Taobao on Double Eleven emphasizing cheap prices, the competition across the entire online ecommerce players has once again returned to the battle for the user's perception of "lowest price" .

The price of physical e-commerce packages seems to have no lower limit.

This also reflects the sluggish domestic demand environment, where users and demand are scarce resources, and serving user needs is the top priority.

b. Offline sales finally rebounded

If the situation in the past few months was that offline physical businesses suffered even more after the reopening, the situation seems to have improved in September. It can be seen that offline contact-based businesses, whether it is offline retail, offline catering, or online non-physical retail (OTA, etc., usually corresponding to offline contact-based fulfillment), have shown marginal recovery in September.

Looking at the recovery of retail sales of goods above the quota, in September, the growth rate of addictive categories such as tobacco and alcohol and essential categories such as grain and oil showed marginal recovery, while the recovery of clothing and footwear should be attributed to the marginal improvement of offline clothing business in the autumn season (at the individual stock level, some brands such as Anta, 361, etc., have seen decent offline sales, based on recent on-the-ground talks).

In addition, with the relaxation of restrictions on the purchase of home appliances, furniture, and building materials, after a slight recovery in real estate transactions, the decline in sales has narrowed.

Overall, the improvement in social retail in September is mainly due to the continued resilience of essential consumer categories, the additional consumption demand brought about by the change of seasons offline, and the marginal effect of the narrowing decline in the real estate chain after the relaxation of real estate purchase restrictions.

Overall, for individual businesses doing offline business, September finally brought some hope, and offline contact-based businesses finally showed some improvement, with a slight decrease in user dependence on online platforms.

This also resulted in relatively bleak online retail in September. Among the forward-looking Internet companies, both JD.com and Alibaba have lowered their guidance, and Baidu's core advertising guidance is also lower than market expectations. Tencent, as the beneficiary of the transfer of advertising revenue from e-commerce platforms, can only say that its growth is within expectations.

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