Without ParknShop, HW's image among locals may improve

Updated: 2013-07-23 07:23

By Li Kui-wai(China Daily)

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Without ParknShop, HW's image among locals may improve

What are the economics and business reasons for Hutchison Whampoa Ltd to sell the flagship supermarket chain, ParknShop? It was reported that the sale could reap $1 billion to $2 billion to Hutchison Whampoa, which is controlled by billionaire Li Ka-shing. The news sparked immediate political sentiment as to whether Li is withdrawing his investment from Hong Kong, or is unhappy with the way Hong Kong has been governed. Li has without delay made it clear it is a normal business transaction that has no political implications.

The first economic view is that a distinction has to be made between the sale of ParknShop as a brand name and its operation, and the properties which the various branches of the supermarket occupy. Given its popularity in Hong Kong, and its large number of branches, the sale price could probably reflect only the sale of the brand name and its operation, while Hutchison Whampoa will continue to be owner of the properties. The future supermarket operator will have to pay rentals to Hutchison Whampoa.

In short, it is likely that the company will remain in the property business, and collect rents instead of running the supermarket business. This may redress some of the negative public sentiment that has built up over the years that the company has been monopolizing various businesses in Hong Kong. In withdrawing from the supermarket business, it will allow unrelated companies to engage in the supermarket business in the city.

Second, supermarkets are generally not a lucrative business when compared to property development in Hong Kong. A supermarket involves a large number of suppliers, and the price and supply conditions surely differ from one supplier to another. Agreements between the supplier and the supermarket could involve not only price mark-ups, but minute decisions, such as the space and shelving of the product, or whether the product is placed in an eye-catching spot inside the supermarket. In addition, supermarkets are a labor-intensive business. The rising labor costs caused by the rising minimum wage, especially in times of a low-growth economy, make supermarkets an unattractive business, unless the operator is very innovative.

Hence, it would be preferable for the company to sell the supermarket business to another supermarket operator, which would be more advanced, innovative or internationally oriented. From the competitiveness point of view, it is likely that the welfare of consumers will increase if the new operator has good knowledge on international sourcing. However, it depends on the relationship between the property holder and the new operator, as the high rental cost may lead to higher prices charged by the new operator.

As an international conglomerate like Hutchison Whampoa, it is totally acceptable for the company to diversify its investment portfolio, and that does not mean the investment climate in Hong Kong is declining. A decision to invest in Hong Kong will differ considerably from a decision to invest abroad. Given the downside of the world economy since 2008, it is not surprising for a capital-strong company to shop around for cheap investment that would be profitable in the long run when the world economy picks up.

On the contrary, investing in Hong Kong will have a different consideration. Typically, the mainland market is what many investors will relate Hong Kong to. The city has attracted a lot of foreign investment, but much of it is directed to the mainland economy eventually.

By letting ParknShop go, the Hong Kong public may have a favorable view on Hutchison Whampoa, as it has been a popular view that much of the daily life of people in Hong Kong is controlled by the company. What concerns Hong Kong people is the problem of cross-industry monopolization. Thus, the property developer should not use its space and shops to run supermarkets, or even form a company to manage the property, as consumers may feel there is a lack of fair competition.

The author is an associate professor at the Department of Economics and Finance, City University of Hong Kong.

(China Daily 07/23/2013 page1)