18 September 2018

Supermarket operators find the going rough

Two well-known supermarket chains in Beijing and Shanghai — Beijing Jingkelong (00814.HK) and Lianhua Supermarket (00980.HK) — continued to perform poorly in the third quarter, leading to nearly 50 percent profit decline in the first nine months in both cases. Slower economic growth and changing consumer habits were blamed for the disappointing report cards.

Supermarkets are among the industries that are undergoing vigorous consolidation. Last month, China Resources Enterprise (00291.HK) set up a joint venture with English retail giant Tesco, and Wumart Stores (01025.HK) acquired 36 retail stores from CP Lotus (00121.HK).

Gao Boxuan, senior researcher from market research firm CIConsulting told retailer industry website that giant supermarket retail chains usually dominate in the first-tier and second-tier cities, but these areas are increasingly being invaded by e-retailers. At the same time, rents and labor costs are soaring in these cities, further squeezing the profit margins of the sector.

Things got even uglier for the small players. Numerous small-size to mid-size supermarkets either downsized or simply went out of business, as the 21st Century Business Herald noted. Reckless expansion and lack of systematic sourcing and positioning strategy are some of their key problems.

And the outlook for these smaller supermarket chains is probably going grimmer, as US giant Walmart announced last month that it will open up to 110 outlets across China in the next three years, with more than 80 percent of those earmarked for lower tier cities, the main turf of small domestic chains.

Yonghui Superstores (601933.CN), for example, is heavily invested in Chongqing and Henan. Better Life Commercial Chain (002251.CN) focuses on Jiangxi, Guangxi and Sichuan.

Big domestic names are also expected to expand into these smaller cities in the coming years. Given this situation, supermarket chains — big as well as small players — will face mounting competitive pressure and a likely shakeout process in the next few years.

– Contact the writer at [email protected]



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