August 11, 2017 12:06 am JST

Hypermarket chain turns sunny on China e-commerce

Taiwanese-French retailer Sun Art banks on online-to-offline strategy

KENJI KAWASE, Nikkei deputy editor

Peter Huang Ming-Tuan, executive director of Sun Art Retail Group, second left, is optimistic about the company's e-commerce business. New CEO Ludovic Holinier, second right, and Senior Adviser and former CEO Bruno Mercier, far left (Photo by Kenji Kawase)

HONG KONG -- It is easier said than done for any brick-and-mortar retailer to build its own e-commerce business. This is especially so in China where retail space has been swiftly taken over by internet conglomerates like Alibaba Group Holding and JD.com.

Sun Art Retail Group, a joint venture between Taiwan's Ruentex Group and France's Groupe Auchan which operates 446 hypermarkets and supermarkets in mainland China, is one of the traditional retail chains struggling to make its e-commerce business competitive.

The company launched its own platform, Feiniu.com, in 2014, but has been burning cash since then and forward-looking comments from the company had been cautious at best.

However, top management has turned optimistic about the company's online ventures. Peter Huang Ming-Tuan, executive director of the company and chairman of RT-Mart China, told reporters Thursday that he is now expecting its e-commerce business to be profitable as soon as in 2019. RT-Mart is one of the brands owned by the hypermarket chain.

A year ago at the same venue at the company's mid-term earnings press conference in Hong Kong, he said "turning the [e-commerce] business profitable by 2020 or 2021 is extremely optimistic."

Asked for the reasons behind this apparent shift in outlook, Huang pointed to the shrinking loss at Feiniu.com. By putting more focus on business-to-business deals, the general merchandise value has doubled to 1.8 billion yuan ($270 million) during the first half of the year. He estimated the loss to be 200 million yuan for the full year, which is significantly lower than the year before.

"If the loss is to decrease in a similar pace next year, turning profitable will not be far. Following this speed, it will be either on 2019 or 2020," he said. "We were a bit too conservative last year."

The recent launch of a one-hour delivery service is another bright spot that turned management more optimistic. After a test run in May, the company officially rolled out a service dubbed as "Ji Su Da," literally meaning urgent

and quick delivery, mid-June. Their online customers -- currently 3.5 million active users of 28 million registered -- who live within a 3km radius of over 370 of their stores could order from a list of 4,000 items, including 1,000 fresh products. According to the company disclosure, this could "satisfy 80% to 90% of [each] family's daily needs."

As effective utilization of real stores has become one of the most urgent tasks for traditional retailers, creating a feasible business model connecting online to offline, or O2O, is where the industry is heading.

CEO Ludovic Holinier, newly appointed in July, said the company is "developing O2O capabilities in order to better leverage our physical store network. We are convinced that future of retail is O2O."

This is especially the case for Sun Art in the leading position it has established in mainland China over the years. According to Euromonitor's data on Chinese hypermarket chains in 2016, the company leads in average sales per store, excluding sales tax, at 222 million yuan, while placing second in market share with 14.6% only after China Resources Group.

Other than its e-commerce platform, Sun Art has ventured into new fields, such as beauty shops. Partnering with Shilla Hotel of South Korea, it opened two outlets, named LLABEAU, during the first half, in two relatively wealthy eastern Chinese cities of Ningbo and Suzhou. Three new ones are being prepared by year-end.

Bruno Mercier, senior adviser and CEO until July, told Nikkei Asian Review that "if the cash flow is positive in the first year, we will push it." Although no concrete plan was revealed, "it is not hard to open," as each outlet is about 200 square meters.

The company does need to find new revenue sources as the first half revenue was just 54.08 billion yuan, a mere increase of 2.1% from the year before. This was due to the opening of 27 new stores in the second half last year, while same-store sales was minus 0.9%.

Net profit attributable to shareholders was 1.75 billion yuan, up 22.7%, but most of the gains came from cost-saving and 460 million yuan worth of income added by the recognition of unutilized balance on older prepaid cards.

The stock market, nevertheless, responded positively to the results released late Wednesday night. Shares rose 5.6% to close at 6.63 Hong Kong dollars on Thursday trading, though still over 30% below the year high of HK$8.88 marked in February.

Linda Huang, analyst at Macquarie Capital, maintained an "outperform" rating on the stock on Thursday, citing reasonable profitability "amid e-commerce and new format business development."

Asia300

Alibaba Group Holding Ltd.

China

Market(Ticker): NYS(BABA)
Sector:
Industry:
Retail Trade
Internet Retail
Market cap(USD): 446,360.92M
Shares: 2,555.89M
Asia300

JD.com, Inc.

China

Market(Ticker): NAS(JD)
Sector:
Industry:
Retail Trade
Internet Retail
Market cap(USD): 54,908.03M
Shares: 2,847.92M

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