Chinas slowing economy and changes to consumer habits present challenges to FMCG businesses

China's slowing economy and changes to consumer habits present challenges to FMCG businesses

Lianhua Supermarket Holdings operates over 4,500 stores in China - a mix of hypermarkets, supermarkets and convenience stores - and its 2013 financial results, issued last week, demonstrate how challenging trading conditions are - and how competitive retailing in the country has become.

In some ways, Lianhua's numbers showed the Hong Kong-listed retailer had made progress on 2012. Its same-store sales were up 2.1% in 2013, compared to a fall of 0.7% a year earlier.

However, Lianhua's profit numbers were less rosy. It saw an 11% rise in gross profit, with margins inching up 0.81 points on 2012. But the retailer's operating profit slid 48% and its net profit tumbled from the CNY339.9m it recorded in 2012 to CNY53m.

Higher selling, distribution and administrative expenses - and a jump in "other operating expenses" weighed on Lianhua's bottom line. Speaking to just-food, a spokesperson for Lianhua said the increase in those operating expenses was due to higher labour costs - including new minimum wage regulations - and rising rents.

In its results announcement, Lianhua said "constantly rising costs" was one of three factors that has prompted the retailer to look to "transform and upgrade" its business. As well as the pressure on costs, Lianhua cited "the ever-increasing fierce market competition and changing structure of demand".

Lianhua had already highlighted the challenges facing the sector earlier the year. Speaking after Lianhua had reported higher first-half sales but lower profits, Ma Xinsheng, the retailer's chairman, said: "With the slowing down of China's economic growth, increasingly intense competition in the retail chain industry, changing consumer habits and rapid growing e-commerce, the traditional retail industry has reached an inflection point."

Reporting its full-year results for 2013, Lianhua pointed to "intense competition", with hypermarkets - which make up 60% of its turnover - under pressure from "specialty stores and shopping malls".

Lianhua peers Wumart and Sun Art Retail Group were able to increase profits in 2013, although their sales growth emphasised it has become more difficult to eke out growth in China. Wumart's same-store sales were up 3%; at Sun Art, sales by that metric rose 2%.

Nonetheless, Lianhua acknowledges it has work to do. It set about making changes to its business in 2013. The company looked at areas including price and promotions, its product mix and its supplier base.

However, most notably, Lianhua said it had "improved" the quality of its outlets, which led to the closure of 168 stores and revised its strategy for opening new stores. In 2013, Lianhua opened three hypermarkets, 153 supermarkets and 156 convenience stores. Sales growth from hypermarkets was was lower last year than from the retailer's supermarkets and c-stores.

"Lianhua will continue to push [the] transformation of its outlets in the future to ensure the overall profitability and brand image of the company," the spokesperson told just-food today.

In response to the pressure from speciality stores and shopping malls, Lianhua plans to offer consumers "more choice". And the retailer insists its scale and reputation in the east of China - where it still plans to focus, despite perhaps growth opportunities further West in the country - will stand it in good stead.

"Lianhua is planning to provide more choices to consumers in the market. We will also introduce more brands and choice to cater the needs of consumer," the spokesperson said. "Because of the size and the overall number of retail outlet and turnover volume, we will enjoy economy of scale in procurement. And because of our strong presence and focus in Eastern China, we also gain better position in finding locations for new outlets compared to any single shopping mall. On the other side, [the] Lianhua brand also has a long history in the region. We believe a household name will help us to build consumer confidence when they are shopping in our outlets."

Lianhua's insistence on focusing on the east of China is interesting. Commentators are pointing to the growth opportunities in the west of the country. There has been significant investment in infrastructure in western provinces and cities in that part of China are thriving - and could provide retailers like Lianhua with fresh avenues for growth away from the competitive east.

Over 80% of Lianhua's sales are in generated in eastern China and, despite the retailer's admission competition is fierce in that part of the country, it says that is where it is focused.

"[The] eastern part is one of the most juicy consumer markets in China. Because of the nature of the market, almost all the retail chains have a presence in the region. Hence, the competitive landscape of the market is different than other regional markets in China. For example, in Shanghai, you would expect to see all retail chain's names in one street, which is not very often in other cities in China," the spokesperson says.

However, the spokesperson adds: "Strategically, Lianhua will still focus on eastern China to maintain its market share in the region."

The retailer does have ambitions for expansion with more new stores planned this year. That said, the accent does appear to be on continuing to build its portfolio of smaller stores, with competition in the hypermarket channel intense.

"As for hypermarket, as there is no restriction on big-size store openings. It is easy to find five to six hypermarkets within a three-kilometer radius of a Lianhua store," the spokesperson says. "Lianhua is planing to open 300 new stores, including four to five hypermarkets, 150 supermarkets and convenience stores respectively. In terms of numbers, convenience stores make up a lot part of the plan in 2014."

However, after a year of falling profits, the spokesperson is at pains to point out Lianhua is paying close attention to the financial performance of its stores. "Lianhua's strategy is also to focus on the profitability of individual stores. We will also further streamline our outlets to ensure the quality and profitability of our newly-opened stores."

China, then, while offering the opportunity for robust growth - and very healthy growth when compared to markets in the West - does present challenges to FMCG companies operating in the country. The recent economic slowdown and changes to consumer habits mean businesses have to adapt. And Lianhua has set out its stall to try to do just that in 2014.