How new retail may boost the value of AS Watson's global chain

March 25, 2019 09:22
A.S. Watson boasts 15,000 retail shops worldwide, making it the world’s largest retail group.Photo: Reuters

Chinese internet giants Tencent (00700.HK) and Alibaba are reportedly competing to buy a 10 percent stake in A.S. Watson Group held by Temasek Holdings.

In recent years, global internet firms including Alibaba, Tencent and Amazon have been betting big on a new retail model, which integrates offline and online channels. That has made brick-and-mortar retail assets valuable again.

In November 2017, Alibaba paid HK$22.4 billion to acquire 36.16 percent of China's largest hypermarket chain Sun Art Retail Group, which owns 446 hypermarkets across China. The transaction valued Sun Art Retail at HK$62 billion, or about HK$140 million per outlet.

Also in that year, Amazon spent US$13.7 billion to acquire Whole Foods, the ninth largest supermarket chain in the United States, or about HK$200 million per store.

Whole Foods owns around 500 supermarkets in middle-class neighborhoods in America. Amazon introduced a wide-ranging retail reform after the takeover, and listed fresh groceries online. That enabled Whole Foods to expand its presence, which in turn helped Amazon to compete against rivals like Walmart and Costco.

Amazon leveraged on Whole Foods' physical stores to build its offline presence. Customers can now pick up their online purchases in nearby Whole Foods outlets.

The e-commerce giant also designated part of the stores for self-service, and used the outlets to promote Amazon products such as Kindle, Echo and Prime membership. No wonder Amazon was willing to pay that much for Whole Foods.

By comparison, A.S. Watson boasts 15,000 retail shops worldwide, making it the world’s largest retail group. Most of its shops are located in developed nations in Europe and licensed to sell pharmaceutical products.

Taking into the account A.S. Watson’s store size, a rough estimate points to a market value of HK$750 billion for the global healthcare and beauty chain, a lot higher than its valuation when Temasek bought the stake.

Both Alibaba and Tencent are keen on going global. That makes A.S. Watson a natural fit for their international ambitions, even if it means paying a price premium.

In the past, CK Hutchison Holdings (00001.HK), which controls A.S. Watson, is known for its infrastructure and telecom businesses, but new retail might emerge as its most important growth engine.

This article appeared in the Hong Kong Economic Journal on March 22

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist