Sun Art shows foreign hypermarkets can actually make money in China. The French-Taiwanese retailer boosted net profit by 15 per cent last year, even as rivals like Wal-Mart struggled on the mainland and Tesco pulled out. Tight control of operating costs was crucial to its success. Encroaching online rivals make that all the more important.
Foreign businesses have had a difficult time in China's highly fragmented grocery market. A lack of ready-made logistics services has forced retailers to build up their distribution chains from scratch. Those became stretched as chains sought growth beyond China's developed coast. Some like Wal-Mart decided to cut back on expansion. Britain's Tesco, which made a net loss of 3.6 billion yuan ($590 million) in China in the three years to February 2013, withdrew by folding its stores into a joint venture with China Resources Enterprise (CRE).
Sun Art's earnings are rosy by comparison. Jointly controlled by French retailer Auchan and Taiwan's Ruentex, the group has become China's biggest operator of hypermarket stores, according to Euromonitor. Revenue from its 323 hypermarkets rose 10 per cent in 2013, with a net profit margin of around three per cent. CRE's net margin for retail was half that in the six months to June.
Sun Art's success comes down to tight cost control. Although it has a lower gross margin than some of its foreign rivals, operating expenses as a percent of revenue last year were half of Tesco's. Sun Art aggressively controls the staffing level of its stores: wages rose only 0.2 per cent last year. A better system of planning inventory may have also helped. One cloud on the horizon is online retailers, which have lower fixed costs. Competition from e-commerce may explain why Sun Art's same-store sales shrunk in the fourth quarter, according to Morgan Stanley calculations. While Wal-Mart has bought a controlling stake in an established online retailer, Sun Art has only just launched its own shopping website, Feiniu, which translates as flying cow. Controlling costs will be all the more vital if Sun Art is to carry on making money in China.
