18 September 2018

Sun Art Retail outperforms on sublease income

Hit by an onslaught of e-commerce players on one side and mounting rental costs on the other, traditional retailers in China are having a tough time. Companies are being forced to redraw their strategies to ensure profitability in the new operating environment. Some have coped well and risen to the challenge while the others have fallen behind.

One example of the mixed fortunes in the sector is that of Sun Art Retail Group (06808.HK) and China Resources Enterprise (CRE, 00291.HK), two of the nation’s leading street-side grocery retail chains.

Despite having the biggest retail network across the country with over 4,500 stores, with most of them supermarkets under the CR Vanguard brand, CRE has failed to reap the benefits of economies of scale.

The core profit of CRE’s retail division dipped 3.9 percent year-on-year in the first nine months of 2013. A quick turnaround is far from certain as the conglomerate will soon merge with the still-loss-making mainland unit of British supermarket behemoth Tesco.

In contrast, Sun Art has fared much better. The company saw its profit rise 26.4 percent from a year earlier in the nine months to September. Although its store number — 284 — is far less compared to CRE, all of them are hypermarkets, and their combined market share is greater than that of CRE.

In fact, the mega-size standalone stores give Sun Art an unparalleled edge over its rivals. Apart from retailing, the company also makes money through subletting part of its store space. This income stream is really helpful in offsetting the adverse impact of higher rental costs.

Sun Art’s interim report reveals that it reaped about 1.1 billion yuan (US$181 million) from subleasing activities, while it incurred only 1.01 billion yuan as rental expense during the first half this year. The numbers suggest that the company is able to pass the rental pressure onto its tenants.

On strength of its brand appeal, Sun Art has succeeded in opening up an income stream in which it boosts the sublet value of its leased properties by greatly improving the traffic and pocketing the difference in the rental cost and income.

– Contact the writer at [email protected]


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