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Chinese supermarket chain feels pressure of rising costs and tougher competition

Publication Date : 14-03-2014

 

Despite a booming retail market, Wumart Stores Inc, one of China's largest supermarket chains, on Thursday reported its first decline in full-year net profit in more than six years.

Wumart achieved sales of 18.9 billion yuan ($3.1 billion) in 2013, up 9 per cent But net retail profit fell 23.7 per cent to 459 million yuan, the first slide since 2008.

The company attributed the decline to consolidation and restructuring of the store network in the past year, driven by rising rents and operating costs.

Beijing-aced Wumart closed at least 52 stores of various types last year. It closed outlets where leases were expiring or stores were underperforming.

"Wumart shares were flat over the past two years. But the decline in profit was probably more related to increased operating costs in terms of rent, logistics and labor, since the company failed to grow faster than the market," said Jason Yu, general manager of Kantar Worldpanel.

"The fact that Wumart remains a regional player, with most of its sales coming from the North [of China] and only a limited presence in the East region, also drags down their market performance;' he said.

Last year, Wumart dropped plans to acquire stores and an equity stake from rival C.P. Lotus Corp.

Wumart "needs to strengthen its competitiveness in the face of RT-mart and the fast emergence of Yonghui Super Stores, by either increasing its price competitiveness or store differentiation;' he said.

Wumart feels pressure of rising costs and tougher competition

Wumart, which rivals Walmart, operated by Wal-Mart Stores Inc, and RT-Mart, run by Hong Kong-listed Sun Art Retail Group Ltd, had several years of steady growth in profit in China's booming retail market. Net profit soared from 361 million yuan in 2008 to 602 million yuan in 2012.

But the Chinese retail market has become a tougher nut to crack, even for international giants, as fierce competition and rising rents in a highly fragmented market have forced many retailers to close or relocate outlets.

The Chinese subsidiary of Walmart closed more than 10 stores in 2013 and invested nearly 500 million yuan to upgrade about 50 existing stores. It said these moves would optimize its distribution network and make inventory management more flexible

Liu Hui, a senior analyst of Beijing-aced Join Uni-retail consulting company, said that Chinese retailers are going through a period where they must renew their leases-and finding that they can no longer afford the soaring rents.

"It's a turning point for retailers in China. With already-slim margins, rents have become the last straw for retail outlets, forcing many out of game;' he said. 'Retailers have to adjust their business strategy and focus more on consumers' preferences and purchasing habits to get food right"

He noted that Chinese consumers, who usually tend to buy only a few items per visit, prefer small local stores, so the big-ox store model is no longer popular and grocers need to change their strategies accordingly.

Last year, Wumart established a fresh food business unit to improve its business in produce, meat and prepared meals, which are driving forces for Chinese hypermarkets.

In December, Wumart had 547 stores, mainly located in northern and eastern regions such as the cities of Beijing and Tianjin, as well as Hebei and Zhejiang provinces, compared with 529 a year earlier.

They comprised 155 superstores and 392 minimarts.

National retail sales totaled nearly $2.1 trillion in 2012. It is estimated that by 2015, China will be the world's third-largest consumer market after the United States and Japan, lifted by an expanding middle class.

But 2014 is expected to be another challenging year for retailers, which face slowing sales, higher costs and a tough challenge from e-commerce, according to Kantar Worldpanel.

'We are seeing visits to traditional retailers by shoppers continue to drop,' Yu said.

 

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