From a six pack of Miller's at about 45 yuan (about HK$50) to a bottle of 1982 Rothschild Lafite at 53,200 yuan, China Resources Enterprise (CRE) has it all at one of its four brands of supermarkets on the mainland. The Hong Kong-listed and Beijing-backed company is more than a household name among red chips. Operating on both sides of the border with about 2,400 supermarkets, some fashion lines, a health-care chain and a premium Chinese merchandise department store, the company is striving to become the country's No1 consumer play. And having shifted its focus on to the world's largest consumer market, where household wealth expands quickly, CRE is off to a good start. Last year, earnings soared 79 per cent to HK$4.96 billion from the year before, above market expectations. The retail, food processing cum distribution and beverage business logged solid growth, lifting underlying profit 11 per cent to HK$2.05 billion excluding one-off gains from asset disposals and revaluation of investment properties of HK$2.91 billion. This year, however, the group's operating environment is getting more difficult as inflation climbs, raw material costs rise and government price controls loom on the mainland. In a business with wafer-thin margins, will China Resources be able to leverage on the growing affluence of its primary market against the hardships and improve profitability meaningfully? With the profit margin of its mainland supermarket division at just 0.9 per cent last year - even though that was tripled from 0.3 per cent the year before - China Resources would be 'most vulnerable' to the government's price control measures, warned Simon Cheng, an analyst at Deutsche Bank. Such a margin is below the national range of 1.5 per cent to 2 per cent and the global average of 3.2 per cent. Including the Hong Kong supermarket operations, the margin improved to 1.6 per cent last year from 0.8 per cent in 2006. Apparently, heavy capital expenditure on store expansion has taken a toll on the company, trimming margins. 'Although management remained upbeat at its results presentation, we believe 2008 will be a challenging year for CRE to extend its success story,' Mr Cheng said. Morgan Stanley is more optimistic, projecting that CRE's supermarket segment will raise its mainland margin to 1.8 per cent by next year. China Resources' long-term target is to lift to 2 per cent its margin for supermarkets operated as CR Vanguard, Suguo, Ole and Vango on the mainland. Meanwhile, as the prices of pork and beef rose on supply shortage, the net margin of its food processing and distribution business shrank to 6.38 per cent from 7.14 per cent in 2006, excluding the disposal gains of its minority stakes in two food-related associates. Last year, Ng Fung Hong, its foodstuff processing and distribution subsidiary, also lost its monopoly of wholesale pork trading in Hong Kong, leading Morgan Stanley to predict its market share in the city's livestock distribution will fall from 80 per cent last year to 65 per cent this year. However, the investment bank also noted that this decline would be offset by strong growth in the abattoir and meat processing businesses, especially on the mainland. China Resources has had better luck with its beer unit, a joint-venture with SABMiller of South Africa. Using cheaper barley to offset rising raw material costs, the brewer's net margin rose to 4 per cent last year from 3.6 per cent in 2006. The group appears steadfast in a strategy fixed nine years ago to transform from an unfocused conglomerate into a leading consumer group. It sold almost all its non-core assets, leaving only a 10 per cent stake in Hong Kong International Terminals, which will soon be put on the block, and its textile business which will also be disposed of in the long run. It invested HK$3.6 billion in 2006 and HK$10 billion last year, mainly to expand the supermarket and beer operations, and has earmarked HK$7 billion to HK$8 billion in capital spending for this year.