Retail giants urged to shift focus
(China Daily)
Updated: 2006-09-14 08:51

The mainland's retail giants should step up efforts to increase profit margins and streamline acquired businesses before they go shopping again, as the sector enters a new service-dominated era, analysts said.

Years of enthusiastic store openings and acquisitions in the wake of a consumption boom have helped listed retailers maintain strong earnings until the first half of this year.

But the honeymoon period won't last their balance sheets indicate tightening profit margins and slowdowns in same-store sales, analysts said after reading result reports.

"The second half could be a watershed for mainland retailers," said Raymond Ma, an analyst with BNP Paribas. "They will see consolidation and the dominance of service-driven models."

Hong Kong-listed Wumart and Gome and Shanghai-listed Suning all posted strong earnings growth in the first half of the year after they aggressively opened stores and acquired smaller rivals in the past quarters.

They posted net profit jumps of 44.2 per cent, 45 per cent and 109 per cent from January to June respectively.

Cheered by robust gains, the trio all planned to open more outlets and swallow more competitors.

But analysts cautioned that organic growth and acquisitions cannot sustain the high growth rate in the coming years, since the mainland's retail sector one of the few markets fully opened to foreign investors early on has been increasingly consolidated with less room for further deals.

"They will eventually switch their focus from quantity to quality. In the business world, it is quality that matters. Only good quality could help offset fierce competition in the country's retail market," said Andes Cheng, associate director with Hong Kong-based South China Research Ltd.

The experience of Lianhua Supermarket, the Hong Kong-listed arm of the mainland's largest retailer Brilliance Group, reflects such a trend, said Cheng.

"Lianhua used to expand very quickly," he said. "But it's now in an arduous transition to improve the profitability by streamlining its businesses."

In that transition, slowdown of profit growth is inevitable, said Cheng, citing Lianhua's lower-than-average 5.6 per cent interim profit rise as an example.

Wumart, Gome and Suning will soon enter this stage.

Another example of this trend is the sharp profit drop of China Paradise, said Zhang Li, an analyst with Guotai Junan Securities' Shenzhen office.

The mainland's third-largest electronics appliances retailer bowed to poor management amid over-expansion, Zhang said.

The retailer, which has agreed to be taken over by Gome for US$680 million, posted consistent losses in its businesses outside its base of Shanghai. It registered a 90 per cent decline in its net profit for the first half.

"It shows the importance of management and the high risk of over-expansion," Zhang said.

The profit engine is also expected to shift in the coming years.

Sponsorship, paid by goods suppliers for promotional services, will replace sales and rentals as the largest revenue generator.

Of all Hong Kong-listed mainland retailers, analysts gave the highest rating to Parkson Retail, a high-end department store operator, according to a survey of eight analysts by China Daily last week.

They cited its management, the consumption power of its target consumers and sturdy expansion as reasons.


(China Daily 09/14/2006 page12)


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