China reopening: Recovery of consumer sentiment ‘will take some time’ – A.S. Watson MD

A.S. Watson Group is the retail arm of Hong Kong-based CK Hutchison Holdings (CKHH). It operates a number of retail brands, including Watsons, Superdrug, and The Perfume Shop across Asia, Europe and the Middle East.

According to the firm’s financial figures for the first half ending June 30, revenue increased by 3% to HKD84.9bn (USD10.8bn). EBITDA and EBIT decreased by 10% and 12% respectively.

The group was impacted by the major city lockdowns in China that started in March.

“If you look back at the COVID situation, China was relatively stable in January and February this year. However, the situation rapidly deteriorated in March, resulting in the largest and most severe outbreak. Many cities across China were partially or fully locked down for weeks or even months,”​ said Dominic Lai, deputy managing director of CKHH and group managing director of A.S. Watsons Group.

The situation impacted A.S. Watsons gravely, with around 14% of its stores forced to close temporarily.

“At its peak, almost 600 of our stores [in China] were temporarily closed, as well as some of our warehouses, as a result, it led to a 30% footfall decline. And in terms of sales, total sales for the first six months of the year, including online sales have dropped hefty 17% year on year, thus resulting a 60% decrease in EBITDA,” ​said Lai.

Dampened consumer sentiment

Lai highlighted that consumer sentiment was also impacted by the COVID-19 outbreak.

“Consumer sentiment in the country was for sure affected because we see similar shopping mall traffic drops both in infected cities and in cities not impacted. Whether the city is affected or not, we see similar footfall drops in the malls. So, in our view, it is a sentiment thing as well.”​

While the company expects things to improve in the next half of the year, Lai highlighted that the company still expects some challenges, including the recovery of consumer sentiment.

“We expect the second half performance to improve with the easing of movement restrictions and we have already seen some improvement after we opened Shanghai. But the condition I must say is still challenging as the recovery of consumer sentiment will take some time.”​

In response to this, the company will leverage its strengths in its online + offline model and customer relations management.

When the going gets tough

Victor Li, chairman and group co-managing director of CKHH added that while the firm is facing difficulties in China, it has a competitive advantage over its competitors.

“The situation being tough in China is not a secret. It's not only affecting us it will be affecting also our competitors. But our competitors will also have additional problems of potential cash flow and morale issues. Whereas the Watsons Group in China would have the support of the whole Watsons Group with international business and also all of CKHH.​

“In terms of relative competitive position, when things get tough, is actually to some extent, beneficial to our competitive advantage.”​