RETAIL: Lianhua Gets Lifeline Amid Supermarket Shake-Out
Bottom line: Poorly run traditional supermarkets like Lianhua are destined for extinction in the next 5-10 years as they get overtaken by the rapidly rising e-commerce names like Yihaodian and JD.com.
A couple of supermarket headlines are casting a spotlight on a Chinese market that is rapidly transforming, putting pressure on traditional stores operated by domestic players like Sun Art (HKEx: 6808) and global chains like Carrefour (Paris: CA). The first headline has Shanghai-based operator Lianhua (HKEx: 980) selling a major stake of itself to smaller but more nimble rival Yonghui (Shanghai: 601933) in a $120 million deal. The second has Yihaodian becoming the first online grocer to break into an important annual industry ranking list, underscoring the rapid rise of Internet-based supermarkets.
Chinese supermarkets have a much shorter history than their counterparts in the west, and have really only become a major retailing force in the last 20 years with the nation’s rapid economic rise. As a result, most domestic chains are smaller, less attractive and not as well managed as the slick, massive supermarkets that are a favorite among shoppers in places like the US and Britain. Many Chinese supermarkets are often quite empty, even during peak shopping hours, and I’m frankly surprised that many can stay in business as they never look very busy.
Against that backdrop, it doesn’t come as a huge surprise that Lianhua, a major national chain based in my adopted hometown of Shanghai, has just sold 21.2 percent of itself to larger rival Yonghui for HK$929 million, or about $120 million. (English article) In this case Lianhua is much larger in terms of store count, with 4,412 outlets compared to 339 for Yonghui. But Lianhua is clearly struggling, with revenue and same-store sales both down about 5 percent last year as profits fell by an even larger 10 percent.
Lianhua was once one of China’s rising stars in the early reform era, building up a chain of supermarkets in the 1990s that quickly became popular among a generation of people used to buying such goods in wet markets and smaller shops. But the company has failed to maintain its momentum into the 21st century, and I do suspect it will eventually get taken over by a better-run rival like Yonghui if its major stakeholders allow such a deal.
Next there’s the survey of supermarket suppliers, who named Yihaodian as one of their top 10 favorite store operators — the first time an online company made it onto the list compiled annually by Kantar Retail. (English article) Not surprisingly, the highest spots went to some of the nation’s biggest chains, with Walmart (NYSE: WMT) and Sun Art’s RT-Mart topping the list. Yonghui moved up two spots to take the spot for fifth most popular operator, spotlighting its rapid rise despite its youth and relatively small size.
Yihaodian just managed to make it into the top 10, coming in 10th place. Its ground-breaking performance isn’t a huge surprise, since the company was one of the earlier e-commerce firms to focus on online grocery shopping and also has a strong retailing partner in its controlling stakeholder, Walmart. China’s 2 leading e-commerce operators made it into the top 20, with JD.com (Nasdaq: JD) and Alibaba’s (NYSE: BABA) Tmall coming in at 11th and 15th place, respectively.
At the end of the day, many of the mid-tier and less efficient traditional grocery chains like Lianhua are probably destined for extinction, being forced to close or perhaps purchased and overhauled by up-and-comers like Yonghui. Perhaps 2 or 3 of the best and largest traditional chains will ultimately survive and thrive, as there will always be a market for that kind of grocery shopping experience. But I do expect to see online grocers take a growing slice of the market, and wouldn’t be surprised to see JD and perhaps even Alibaba break into the list of the top 10 favorites among suppliers next year.
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