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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