Global grocers must walk down the aisle with a Chinese mate

Executives from international supermarket chains landed in China with a strong sense of purpose and determination to go it alone, do things their own way. Eventually they realized that selling consumer products to the local market is easier with a Chinese partner.

France’s Auchan has found a marriage made in heaven with Taiwan-based RT Mart. British retailer Tesco was swept off its feet by a Chinese suitor with government ties. Executives at Carrefour, another huge French grocer, have been rumored for some time to be signing up to every matchmaking service possible.

But as many a foreign businessman in China can attest to, finding a partner to live with happily here ever after is no easy task. Dating is an expensive and complicated game.

On Monday, Thai-owned CP Lotus said that a proposed tie-up with Beijing-based supermarket chain Wumart had collapsed. Terms could not be agreed and they are going their separate ways. Unless it can find a new suitor, CP Lotus will struggle to have an impact on the mainland.

It had started so well. Under a deal announced in mid-October Wumart was to acquire 36 supermarket stores from CP Lotus and buy roughly a 10% stake in the Thai group for US$70.5 million. CP Lotus planned to take nearly a 14% stake in Wumart for US$372 million.

The deal would have put CP Lotus in a much stronger position to profit from China’s rising domestic consumerism – to date the firm’s Chinese endeavour has been largely loss making. Wumart would have acquired a firmer presence in markets outside of its key region around Beijing and increased its 0.3% share of supermarket sales in China.

Why it has fallen apart remains unknown. The companies both made utterings about protecting “shareholder interests” in their short press releases without saying much else. There is little expectation in the market that they will try to work through their issues. But the underlying factors in the Chinese supermarket sector that brought them together have not changed.

Consumer research firm IDG sees the Chinese grocery market expanding from US$1 trillion in early 2013 to US$1.5 trillion by 2016. But no supermarket operator has more than a 5% share of the fragmented Chinese market so the winnings are being split up into numerous portions.

This lack of scale makes it hard for foreign operators to implement the business models they have applied successfully back home. Supermarkets in general are also struggling with a raft of problems such as cost pressure, competition, oversupply and emerging threats from e-commerce, noted analysts at Bank of America Merrill Lynch. Going alone is becoming much harder.

Growing through new stores has not been the answer to this. Land and labor is becoming more expensive and emerging internal markets in central and western China behave differently to more mature coastal regions, complicating the process. CP Lotus has reduced its number of stores from 75 to 58, while the likes of Tesco have also shuffled their stores about.

Dealmaking has taken a front seat and “industry consolidation has been a megatrend,” said the Bank of America Merrill Lynch analysts. The biggest deal this year is a joint venture between Tesco and state-backed China Resources Enterprises in which the British firm intends to fold all of its China stores into its Chinese partner in exchange for a stake in a larger business.

Staying single in such a fiercely competitive sector is not advisable. Whether CP Lotus was jilted at the altar or left its prospective match standing remains unclear, and is largely irrelevant. If it wants to stay in China, it needs to walk down the aisle with another suitor as soon as it can.

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