Wanting cashback

Sale now on?

Asia’s richest man Li Ka-shing likes to stay ahead. He is said to set his watch 20 minutes fast, for instance. An early riser, he also wakes at 5am to listen to the news on the radio (and also tries be the first to make it onto the golf course so as to get a round in before work).

So when news broke that Li may sell the supermarket chain ParknShop, which is owned by his conglomerate Hutchison Whampoa, analysts were soon deciphering the signals. Some reckon Li wants to sell because Hong Kong’s grocery market lacks growth (“Hong Kong is a mature market, and the city is fully saturated with supermarkets,” commented Tom Holland, a columnist with the South China Morning Post). Others say Hutchison needs to raise cash to fund growth in its telecoms business. Just last month it agreed to buy Telefonica’s Irish unit for $1.1 billion.

ParknShop, established in 1973, has about 350 outlets in Hong Kong, Macau and China. As of last year, the chain enjoyed a market share of 33.1% in Hong Kong, second only to Wellcome, owned by rival Dairy Farm, says research firm Euromonitor.

Compared with Hutchison’s retail siblings, ParknShop looks like the ugly sister. In addition to the supermarket chain, the conglomerate also owns the beauty and healthcare chain Watsons and electrical appliances stores Fortress. Both businesses are higher return than grocery, where ParknShop reportedly makes less than 1.5% in net profit margin. Plus there’s the China factor: the South China Morning Post reckons that Watsons opened more than 1,000 shops on the mainland between 2007 and last year. In contrast, ParknShop has enjoyed less succcess in China.

Although it entered the mainland market as early as 1984 with a store in Shenzhen, business has been rocky. So far ParknShop has only 48 stores in China, compared with Walmart, which opened its first store in 1996 and boasts over 370 outlets. In Shanghai, where it focused a great deal of its expansion efforts, performance was poor. In 2000, ParknShop sold all but one of its stores to a local player. Six years later, the company opened again in Shanghai with a huge new megastore, apparently turning its back on smaller supermarkets. Hutchison insisted that hypermarkets were the future, with a fuller range that would better appeal to Chinese shoppers. But after only two years of operations, ParknShop quietly closed this venture too. “The investment in building a megastore is very high but ParknShop’s appeal to shoppers is not very strong, so towards the end it was losing a lot of money every month,” a former staffer told the China Business Journal.

Undeterred, Hutchison tried again in 2011, launching another new store Taste, which it positioned as a more upscale supermarket, also in Shanghai. But Securities Times reported this week that this store will also be closing later this month.

China’s supermarket sector is notoriously fragmented with no dominant player. But ParknShop ranked only 20th in turnover in 2011 among the foreign supermarket chains in China, taking only Rmb4.3 billion ($700 million) in sales, compared with Walmart and Carrefour, which both recorded over Rmb40 billion in revenues in the same year.

Industry observers say ParknShop’s problem is that the chain didn’t have supply chain efficiency or scale advantage over larger rivals. It has also had trouble defining its commercial approach. “ParknShop couldn’t seem to make up its mind about its China strategy,” a senior manager at Carrefour told China Business Journal.

Selling ParknShop could still fetch as much as HK$30 billion ($3.86 billion) for Hutchison, with China Resources, COFCO and Japan’s AEON Group all mentioned as potential buyers, says Sina Finance. As of last year, China Resources’ Vanguard Supermarket was the third-largest supermarket player in Hong Kong with a 7.8% market share, while AEON’s Jusco had a 2% share.

If China Resources does acquire ParknShop, it would become Hong Kong’s largest supermarket operator. However, judging from the scandal in which China Resources is currently embroiled (see page 15), the timing could be far from ideal.

Then again, a sale may not be as imminent as media initially thought. On Wednesday, one of Li’s top executives said the chain was not for sale “at present”.

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