China Consumer

Retail investor

How is Fujian’s Warren Buffett doing as a retailer?

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Seeing red: Chen Fashu

Two decades before he was given control of China, Xi Jinping got the chance to test his management skills in the coastal province of Fujian. It was a period in which new businesses were rapidly being founded. Two entrepreneurs emerged as dominant forces. The first was Lai Changxing, the kingpin who masterminded one of China’s largest smuggling rings. The other was Chen Fashu, a mining-to-property magnate commonly designated Fujian’s Warren Buffett.

Lai founded his now notorious Yuanhua Group in 1994. A year later, Chen opened his first New Huadu department store in the commercial hub of Fuzhou.

Xi reached the top of Beijing’s power structure in 2012. However, there is no sign that the Fujian connection has paid similar dividends for Lai or Chen, both of whom have suffered dips in fortune. Lai’s decline is the more dramatic: he was given a life sentence after ending a 12-year exile in Canada as China’s most-wanted man (see WiC117).

For Chen, the setback is more of a commercial one: his flagship New Huadu Supercentre has gone into the red. The firm reported a Rmb236 million ($38 million) net loss for 2013, compared with a Rmb150 million profit a year earlier. New Huadu operates eight department stores and 112 convenience stores, making it the biggest retail chain in Fujian. But the company had to close 16 lossmaking shops in 2013.

The Economic Observer described New Huadu’s 2013 results as “a shocker”, adding that as one of the first privately-run retail chains to go public in 2008, New Huadu has jeopardised a prime opportunity to become a top-tier brand.

To be fair, other conventional retailers have been having a bad time as more shoppers go online. Competition for tenants has also intensified as newly-completed commercial buildings flood the market. Waow, a fledgling chain of commercial malls backed by beverage giant Wahaha, has also been suffering (see WiC242).

But the Economic Observer also thinks that many of New Huadu’s problems are of its own creation, including the purchase of six China-based superstores owned by South Korea’s E-Mart in 2011 for Rmb125 million. At the time the deal was dubbed “the first Chinese takeover of a foreign retailer”. However, instead of expanding New Huadu’s presence in eastern China, the retailer has struggled with integration problems at the new outlets.

“New Huadu began with department stores. But it expanded into supermarkets when the concept became hyped. In a way it has lost its core competitiveness and a reversal in market conditions has caught the company wrong-footed,” an analyst told the Economic Times.

Of the six E-Mart hypermarkets acquired, four have subsequently been shut down. All are in Zhejiang and Jiangsu, outside Chen’s home territory in Fujian. Critics say his management team has struggled to adapt from their experience with the department store model to running much larger supermarkets.

The cost of closing the failing stores was one of the main contributors to last year’s losses. But another concern aired by fund managers last month at New Huadu’s annual meeting was its partnership with Swiss firm Intersport. According to the Securities Times, the two companies teamed up in 2012 to distribute sportswear, with plans to open up to 100 shops in 10 southern provinces. But investors are unimpressed, asking whether it makes sense to diversify into another crowded space where one of the biggest players Li Ning has been lossmaking.

Shareholders can be forgiven for expressing their unease. New Huadu’s market capitalisation has more than halved in the past three years to Rmb3.6 billion.

Chen is more accustomed to success. Over the years, his privately-owned investment conglomerate has accumulated sizeable stakes in gold miner Zijin, brewer Tsingtao and various real estate firms (see WiC16). Hurun’s ranking calculated his net worth at $4.3 billion last year.

Chen’s retail business isn’t the only headache for the billionaire. He’s also suing state giant China Tobacco for reneging on the sale of the toothpaste maker and pharma firm Yunnan Baiyao. That lawsuit has been ongoing since 2012 (see WiC148).

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