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  • Apr 19, 2014
  • Updated: 4:04pm

Retail mergers on cards as competition heats up

PUBLISHED : Monday, 01 January, 2007, 12:00am
UPDATED : Monday, 01 January, 2007, 12:00am

Mergers and acquisitions by domestic and foreign players dominated the headlines in China's retail sector last year and are likely to do so again this year as competition heats up in a retail market that rose 13.3 per cent in the first half of 2006 to 3.64 trillion yuan.


Foreign retailers, mainly from Europe and America, are spending hundreds of millions of dollars to buy out Chinese counterparts.


Analysts say the opening of the retail sector to foreign competitors - one of China's obligations under its World Trade Organisation accession agreement - is bound to speed up mergers and acquisitions since competition will squeeze margins and force consolidation.


Before China joined the WTO, it required foreign retailers operating in the country to form ventures with local partners that had to retain a stake of at least 51 per cent. Now foreigners can establish wholly owned China subsidiaries.


Big mainland players, such as Gome Electrical Appliances and Wumart Stores, were among the first China retailers to raise expansion funds by listing on the Hong Kong stock exchange, However, the challenge is the influx of foreign competitors whose international brand names appeal to China's young.


'Local market leaders are big in size but weak in staving off competition in their home markets,' Deutsche Bank said in a recent research report on China.


Warning bells on profits have rung for local retail chains, particularly in consumer electronics where takeovers were rife. Hong Kong-listed China Paradise, the mainland's third-ranked electronics retailer, saw first-half earnings slump 89 per cent on strong price competition and surging rental and staff costs.


Facing poor earnings prospects China Paradise, which had been listed for less than one year, agreed to be taken over by the electronics sector leader Gome for HK$5.2 billion.


Before reaching a deal with Gome, China Paradise had already agreed to merge with Dazhong Electrical Appliance, the market leader in Beijing and No4 nationwide.


However, Dazhong recently declared its agreement with Paradise invalid, arguing that Paradise had breached the terms and conditions by doing a deal with Gome. The dispute remains unresolved.


Supermarkets and hypermarkets are another sector seized with takeover mania.


Foreign retailers such as Wal-Mart Stores and Tesco have accelerated their expansion in China and challenged local players such as Wumart Stores, Lianhua Supermarket and Beijing Jinkelong, which were already trying to fend off foreign retailers such as Carrefour and Metro.


The latest takeover was engineered by Tesco, Britain's biggest retailer, which last month agreed to pay #180 million (HK$2.7 billion) for 40 per cent of its mainland Hymall superstore venture from local partner Ting Hsin International Group, raising its share to 90 per cent.


US retail giant Wal-Mart, which has more than 60 stores in China, was reported in October to be planning to buy Taiwanese-invested firm Trust-Mart and its 100 stores for about US$1 billion.


In response to more intense competition, Hong Kong-listed Wumart Stores, Beijing's largest supermarket chain, will buy 50 per cent of Jiangsu Times Supermarket for HK$1.14 billion to become China's No5 retailer.


Jiangsu Times runs 45 supermarkets in eastern China and had secured 10 to 12 locations for new stores while Wumart has 46 superstores, 221 ministores and 257 franchised outlets in Beijing, Tianjin and Hebei.


Wumart completed recently the 370 million yuan acquisition of a 68 per cent stake in Beijing MerryMart Chain Stores Development. MerryMart, Beijing's No4 supermarket chain by sales, operates 23 supermarkets.


Wumart also acquired 27.7 per cent of Shanghai-listed retailer Yichuan Xinhua Department Store in April for 176.7 million yuan to expand into northwestern China.


However, shares of Wumart have been suspended from trading since mid-November following former chairman Zhang Wenzhong's involvement in an investigation into Wumart's financing. Zhang later resigned as an executive director.


Foreign retailers are also attracted to China's home improvement market.


Home Depot last month agreed to buy Homeway for US$100 million.


Joining rival B&Q, which has 48 stores and plans to open up to 100 stores by 2010, Home Depot's purchase of Homeway, which has 12 outlets in cities such as Beijing and Qingdao, is seen as the first step in its mainland push.


Foreign players do not only pose a threat to the market share of local players; they are also driving up labour costs and rents as they expand.


Analysts say both factors raise key concerns about the profitability of local players.


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