•  H1 sales rise 7%
  •  Gross profit up almost 10%
  •  Operating profit down on labour costs 

Hong Kong-listed retailer Lianhua Supermarket has grown first-half sales but increased costs and "fierce competition" drove down prices and hit profits.

Lianhua said total sales, including space expansion, were up 7% to CNY15.6bn in the six months. During the period, the group opened one hypermarket, 63 supermarkets and 85 convenience stores. The company, which operates stores on the Chinese mainland, said that same-store sales were up 3.72%, beating the consumer price index and suggesting that the group is increasing business in its core store portfolio.

Profitability came under pressure and operating profit was CNY320m, down from CNY417.3m in the comparable period of last year. The company said it aims to lower payroll expenses through the implementation of a new labour model designed to improve employee efficiency.

Gross profit, stripping out overheads such as payroll, tax and interest, increased thanks to the formation of a strategic alliance with suppliers, streamlining efforts and an improved product mix. Gross profit increased by 9.9% year on year to RMB2.2bn, the company revealed.

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Lianhua Supermarket Announces 2013 Interim Results
Accelerating Business Transformation and Strengthening Operating SystemTurnover Recorded an Increase of 7% Year on YearSame Store Sales Growth Beating CPI
HONG KONG, Aug. 22, 2013 /PRNewswire/ -

Financial and Business Highlights

Steady financial performance growth through strengthening both internal control and marketing in spite of challenges:

- Turnover was RMB15,605 million, an increase of 7.0% year on year. Same store sales increased by 3.72%, beating the consumer price index (CPI).

- Gross profit increased by 9.9% year on year to RMB2,212 million. Gross profit margin was 14.18%, an increase of 0.38 percentage point year on year.

- Consolidated income was RMB3,741 million, an increase of 4.2% year on year. Consolidated income margin was 23.98%.

Operational pressure due to fierce competition and cost increase:
- Operating profit was RMB320 million. Operating profit margin was 2.05%.

- Profit attributable to shareholders of the Company was RMB191 million. Basic earnings per share were RMB0.17.

Outlet development focused on both quantity and quality to maintain stable growth:

As at 30 June 2013, the Group had a total of 4,637 outlets. Approximately 84% of the Group's outlets were located in Eastern China.

Strengthening operating systems and giving full play to competitive edges in resources: The Group paid attention to the changes of consumer demand and sped up segment transformation; streamlined work flow between the operation and procurement teams and gave full play to the competitive edges of resources consolidation; enhanced marketing promotions and optimized product mix; and accelerating the construction of information systems and logistics system so as to further improve business management and operation.

Accelerating reform and innovation to improve competitiveness: The Group upgraded its business by increased the supplier strategic alliance, made improvements to its membership system, optimized its positioning to attract merchants and accelerated new segment development in order to seek new growth drivers.

Strengthening cost controls and excavating operating potential: The Group innovated new labor model to increase employee efficiency and reduce costs and enhanced efficiency through various channels by energy-saving methods.

Lianhua Supermarket Holdings Co.,Ltd.( http://lianhua.todayir.com/en/index.php) ("Lianhua Supermarket" or the "Company", together with its subsidiaries, collectively the "Group"; HKEx stock code: 980) today announced its unaudited interim results for the six months ended 30 June 2013 (the "Review Period" or the "Period").

During the first half of 2013, the Group developed steadily, with turnover increasing by 7.0% year on year to RMB 15,605 million. Gross profit margin and consolidated income margin were 14.18% and 23.98% respectively, which was a result of decreasing purchasing costs, increasing income from suppliers and optimized pricing strategy.

Same store sales increased by 3.72%, representing an increase of 5.41 percentage points in pace, primarily as a result of effective product promotions, maturing business district surrounding the sub-new hypermarket outlets, the renovation of existing outlets, and the optimization of the Group's product structure. Operating profit was RMB320 million with an operating profit margin of 2.05%. Profit attributable to shareholders of the Company was RMB191 million. Basic earnings per share were RMB0.17 based on the issued share capital of the Company of 1,119.6 million shares. The board of directors of the Company (the "Board") does not recommend the distribution of interim dividend.

Business Segment Performance

Hypermarkets: In response to increased competition during the period under review, on one hand, the Group focused on ensuring the quality of its newly-opened outlets by strictly enforcing its opening procedures, while putting greater effort into maintaining and upgrading its sub-new outlets. By establishing "key outlets," the Group was able to enhance and consolidate its market share. On the other hand, the effectiveness of the Group's marketing and promotional campaigns was enhanced with targeted marketing and rational pricing strategies. The hypermarket segment's turnover increased by 8.7% year on year to RMB9,467 million, accounting for approximately 60.7% of the Group's total turnover. Same store sales increased by 3.52%, beating the consumer price index (CPI). Consolidated income margin was 24.29%, representing a decrease of 0.53 percentage point year on year and an increase of 0.48 percentage point as compared to the second half of 2012. Operating profit was RMB188 million and operating profit margin was 1.99%.

Supermarkets: During the period under review, the supermarket segment focused primarily on fresh produce operations and outlet transformation. It steadily carried forward category optimization, enhanced the effect of joint-sales, increased wholesale to franchisees, and thus consolidated the market share. During the period under review, the segment's turnover increased by approximately 4.4% year on year to RMB5,202 million, accounting for approximately 33.3% of the Group's total turnover. Same store sales increased by approximately 3.37%. Gross profit margin increased by 0.21 percentage point year on year to 14.34%. Due to the escalating rigid cost and gradual adjustment or withdrawal of the operation models well-received by consumers, great pressure on performance improvement was induced and consolidated income margin from the segment was 22.07%, representing a decrease of 0.29 percentage point year on year.

Convenience Stores:During the period under review, in response to the challenges from foreign competitors the convenience store segment actively upgraded mature outlets segmented the market and established a niche in the high-end market. It deepened the optimization of its product mix, implemented a marketing mode of operation with core merchandise and core services, and explored methods to leverage scale advantages to provide more value-added services. During the period under review, turnover of the convenience store segment increased by approximately 4.9% year on year to RMB918 million, accounting for approximately 5.9% of the Group's turnover. Same store sales increased by 8.88%. Gross profit margin was 15.60%, representing an increase of 0.34 percentage point year on year. Consolidated income margin was 24.01%, representing a slight increase of 0.02 percentage point year on year. However, due to significant rise in labor and rental costs, operating profit margin of this segment dropped year on year to -3.88% in spite of the fair same store sales growth.

Mr. Ma Xinsheng, Chairman of Lianhua Supermarket commented, "China's chain retailers faced great challenges in the first half of 2013. With the slowing down ofChina'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. At the same time, sharp increase in various costs and change of retailer-supplier relationships have placed mounting pressure on the retail chain enterprises. Facing these challenges, Lianhua Supermarket proactively responded to the fierce competition, strived to win good price image on daily necessities, optimized product mix and seized the opportunity to further upgrade its outlets. As a result, the Group maintained its stable development and revenue growth."

Outlet development focused on both quantity and quality to maintain stable growth

The Group adhered to its guiding strategy of "Becoming a Regional Leader and a National Strong Player" which strictly emphasizes the principles of quality enhancement and steady promotion of its strategy of focused development. At the same time, the Group carefully planned its outlet expansion, continuously optimized the processes related to new outlet launches, and timely streamlined underperforming outlets to ensure steady and healthy outlet expansion for all segments.

During the period under review, the Group opened one hypermarket which was in Hangzhou, Zhejiang Province; 63 supermarkets (including 11 directly-operated stores and 52 franchised stores); and 85 convenience stores (including 30 directly-operated stores and 55 franchised stores).

Strengthening operating systems and giving full play to competitive edges in resources

Facing pressure and challenges from the consumer goods market during the period under review, the Group proactively strengthened its operating systems and paid close attention to changes in consumer demand. The Group enhanced the operating capabilities of outlets through transformation, reinforced price management, optimized product mix, improved the supplier structure and enhanced the capacity for sales.

The Group continued the "Beneficial Life" promotional campaign launched inAugust 2012. Efforts were made to improve marketing management and strengthen execution and monitoring of the campaign, thereby customer traffic increased, and sales grew more than 30%. During the period under review, the Group enhanced promotional activities and launched a series of targeted theme promotions. It offered more guidelines and recommendations to customers and helped outlets boost customer traffic.

At the same time, the Group further improved its merchandise categories and price management to streamline work flow between the operation and procurement teams. It also proactively optimized its product mix to meet diversified customer demand and increase customer traffic and sales. The Group continued to strengthen the connection between production and sales of fresh produce by eliminating unnecessary middleman and continued to strengthen its reach. As at 30 June 2013, the Group had 319 fresh produce supply bases with sales of produce from the Group's own production bases increasing by approximately 21.22% year on year.

During the period under review, the Group enhanced development and promotions for private label products to increase revenue. Absolute sales of private label products saw a stable year-on-year increase of approximately 5.14%, accounting for 3.5% of the total sales. At the same time, the Group focused on improving its produce classification system and optimizing its sourcing channels for imported produce, recording a significant rise in the purchasing amount of direct import products.

During the period under review, the Group accelerated the construction of information and logistics systems. By establishing a unified and improved corporate information management platform, the Group optimized the operation of the business. The unified payment system was improved to include the processing of both rent and merchant payments. The Group also improved the efficiency of its supplier management by enhancing its B2B management system. The Group's Jiangqiao logistics center project progressed smoothly and on schedule. The new logistics center is expected to conduct its first full trial run by the end of 2013.

After acquiring land for the new logistics center in Yangxunqiao, Zhenjiang Province in May 2013, the Group is currently preparing for construction project bidding, which shall further optimized the logistics system in Yangtze River Delta area.

In terms of food safety management control, the Group focused on upgrading service quality, establishing standardized systems and instructing store inspection, and thus intensified link control in outlets and standardized process management at the same time. Immediate measures to enhance consumer confidence were adopted by the Group following the outbreak of bird flu in April 2013 along with immediately adjustments and follow-up monitoring on product structure, resources on display, safety propaganda and marketing activities.

Accelerating reform and innovation to improve competitiveness
During the period under review, the Group continued to strengthen mutually beneficial retailer-supplier relationship, make improvements to its membership system and optimize its core business model as it explored new retail channels and business segments, through which the Group created additional revenue streams.

To strengthen retailer-supplier relationship, the Group modified contracts with suppliers, adjusted the original charge structure in accordance with new regulations issued by the government and encouraged suppliers to increase sales. The Group believes the change will help building stable and mutually beneficial retailer-supplier relationships.

The Group continued to make improvements to its membership system by better leveraging member data to target specific marketing promotions to customers so as to strengthen loyalty and increase sales to members, which shall benefit the Group's long-term development.

In terms of upgrading business segment and innovation, the Group optimized its positioning to attract merchants in order to increase profitability and improve branding image. Luxury brands such as Gucci, Prada, Burberry, and other are now found in a new 39,000 square meter "Glora Citta" hypermarket, renovating the concept of one-stop shopping. The Group completed the development and adjustments to the functionality of its one-stop shopping website "Lianhua Mart" (www.lhmart.com ) by adjusting online products and item categories accordingly.

The Group also attracted more online members by offering additional value-added services. In the second half of 2013, "Lianhua Mart" will continue to optimize its operating processes, strengthen the synergies between online and offline business, implement delivery services through retail outlets, and promote steady progress.

The Group's "Sakura Kobo" cosmeceutical stores, which were launched in 2012, are also becoming more sophisticated with five stores as of 30 June 2013. The stores are gaining popularity among customers and providing a brand new shopping experience for shoppers in their pursuit of health and beauty.

Strengthening cost controls and excavating operating potential
During the reporting period, the Group adopted a series of cost control measures to cope with the pressure from rapidly rising costs. The Group integrated staff recruiting channels and further tested labor outsourcing. The Group ran the "Taking Delivery on Credit" project in several outlets to simplify internal procedures and a "one step" concept for goods collection for retail outlets in close proximity for improving management efficiency of night shift workers. Meanwhile, it also encouraged staff at supermarket outlets to develop multi-functional skills in order to further boost labor efficiency. The Group also managed to reduce costs and enhance efficiency with expense-control projects and outlet energy-saving transformation.

Speaking about Lianhua's future development, Mr. Ma commented, "There remain many uncertainties in China's economy in the second half of 2013 and fierce industrial competition will be continuously challenging for retail companies. The Group, however, will accelerate the optimization of development and management model and enhance the brand image of "Lianhua". By leveraging economies of scale from our centralized procurement system, the Group will strive to provide products to customers at low prices, develop creative growth channels to increase revenues and leverage its competitive advantages. In the meantime, we will further strengthen cost controls to enhance operating efficiency, allowing the Group to seize the opportunity and move forward better-equipped and create more values for shareholders, employees and society."

Original source: Lianhua Supermarket