Friday, March 29, 2024
 
Columnist
Martin Hennecke
 
LIANHUA
HKEx Stock Code : 00980 
 
Corporate Profile
The principal activities include operation of hypermarkets, supermarkets and convenience stores in the PRC, mainly under four major brands of “Century Mart”, “Lianhua Supermarket”, “Hualian Supermarket” and “Lianhua Quik”.

Business Review - For the year ended December 31, 2012

Outlet development

In line with Lianhua's strategic goal of “Becoming a Regional Leader and a National Strong Player,” the Group steadily promoted its strategy of focused development. The Group emphasised quality enhancement of its outlets by implementing strict processes for opening new outlets and strengthening the synergies between operation and procurement, gradually increased its investment in new outlets and proactively optimised the quality of its geographic footprint in accordance with market developments in 2012.

During the period under review, 12 new hypermarkets were opened: four in Shanghai, three in Zhejiang Province, two in Jiangsu Province, two in Henan Province and one in the Guangxi Zhuang Autonomous Region. During the period under review, the Group continued its in-depth development in East China, where it has a dominant position, with 75% of its newly-opened outlets located in the region. The operation of the new hypermarkets improved in five aspects, namely property quality, business positioning, synergies of operation and procurement, market position and continuous operation. Meanwhile, the Group, after careful consideration, proactively optimised the quality of its geographic footprint by closing certain outlets that had been suffering long-term losses and retreating from some markets with unfavorable operating conditions to avoid prolonged losses. The Group closed seven outlets during the period under review, continuing to consolidate its market share in Eastern China and maintain its growth momentum in other cities, thereby increasing the Group's brand influence. Currently, the Group has a total of 133 hypermarkets in Shanghai, Zhejiang Province, Jiangsu Province and Anhui Province, accounting for approximately 85% of its hypermarkets.

During the period under review, 156 new supermarkets were opened, including 21 directlyoperated stores and 135 franchised stores. The Group consistently gave the highest priority to the development quality of its outlets in order to uphold the image of the “Lianhua” brand amid food safety regulation and industry consolidation. During the period under review, the Group maintained the growth pace of its directly-operated stores in the supermarket segment, especially in middle to high-end areas, strictly monitored and controlled its lease-renewed outlets, especially franchised stores, and standardized the procedures for opening new franchised stores, including enhancing the criteria for franchising which helped to ensure that the quality of these stores is aligned with and meet the high standards of the Group's brand. Meanwhile, the Group diversified outlet type and unified standard in accordance with its franchised store optimization program for 2011- 2013. It closed 593 franchised stores during the period under review. The quality of the segment's franchised outlets had been significantly enhanced, thus helping to maintain effective control over operational risk.

During the period under review, the convenience store segment remained steady. The Group emphasized both quantity and quality of outlet development. 226 new convenience stores were opened, of which 78 were directly-operated stores including 11 high-end outlets and 148 were franchised stores. During the period under review, the Group ensured the quality of its new convenience stores by searching for locations in high quality areas. The convenience store segment also effectively coped with a rise in rental costs by managing renewals and sublet renewals. It not only opened new outlets, but also steadily promoted the transformation of existing directly-operated stores by implementing a number of strategies, including encouraging orderly development, reinforcing transformation and opening high-end outlets. 135 stores in total were transformed during the period under review. A number of stores in Shanghai were renovated and the Group worked to steadily optimize products positioning and merchandise display. In Dalian, Liaoning Province, efforts were made to enhance the image and profitability of each outlet through upgradings and other renovations. By leveraging past experience in outlet development, the Group focused on opening new stores and transforming old ones in Zhejiang. In Beijing, the Group primarily concentrated on operating high-end convenience stores and personalizing the merchandise mix to clarify outlet positioning.

As at 31 December 2012, the Group had a total of 4,698 outlets, representing a decrease of 452 outlets from the end of 2011, mainly due to the rationalization of franchised supermarket outlets according to the Group's franchised store optimization program in the supermarket segment with a net decrease of 458 franchised stores. Approximately 84% of the Group's outlets were located in Eastern China.

Operation improvements

During the period under review, the Group actively sought market opportunities and improved its operation system against a backdrop of slower growth in the macro-economy and in the consumer goods market due to subdued consumer sentiment and shrinking consumer demand. The Group boosted its “key outlet strategy”, strengthened operation and procurement synergies and tightened budget management with a view to reduce costs and enhance efficiency, thereby helping the Group to overcome difficulties and continue to steadily facilitate development.

During the period under review, the “key outlet” strategy of the Group focused on the construction of supply chains, transformation of outlets and management of merchandise categories. For hypermarkets, the Group focused on designing more efficient layouts, optimizing merchandise categories and improving the atmosphere within stores. Onsite quality inspection centers were established in certain hypermarkets in order to enhance the Group's ability to carry out onsite inspections of fresh produce and deliver confidence to consumers about the Group's high quality offerings. The supermarket segment retained its mark of differentiation for “freshness and value” among consumers in the market. It also made progress introducing high margin nonfood merchandise and created exclusive sections for imported merchandise to promote sales. Meanwhile, the Group tightened the management of franchised supermarkets to strengthen the formulation of strategies to improve franchising performance, and attempted to offer additional professional guidance to franchisees. During the period under review, the supermarket segment achieved its “Double-Hundred” objective of franchised stores – i.e. the reputation of one hundred outlets was significantly enhanced while sales at one hundred outlets increased substantially. Wholesale merchandise sold to franchised stores recorded an increase of approximately 6% over 2011, while the number of franchised outlets declined during the period under review. Average wholesale purchase made per store increased by approximately 18.19%. The convenience store segment accelerated the renovation and transformation of outlets, emphasizing in particular the establishment of “lean and well-functioning” outlets. As a part of this, the Group optimized merchandise categories and accelerated the adjustment of slower turnover items and categories by reducing stock based on the characteristics of the area in which each outlet is located. In addition to making outlets leaner, the Group also worked to replenish the stock of best-selling merchandise on a timely basis and expanded the number of value-added service items to reinforce the strength of each outlet. Operational capabilities of the enhanced stores and same store growth in the convenience store segment met expectations. The convenience store segment also proactively developed high-end outlets, opening 11 new high-end outlets during the period under review, which helped to improve brand image and bring merchandise quality and individual store sales to new levels.

During the period under review, the Group correctly met market demand, catered to consumer tastes, optimized its mix of fresh products so as to boost fresh food sales and stepped up its efforts in fresh produce bases construction, reducing the costs of procurement, distribution and sales. This led to strong sales of fresh produce and demonstrated the benefit of providing high quality, inexpensive goods in sufficient volume. Sales of produce from the Group's own production bases increased by approximately 15% over 2011. During the period under review, the Group adopted a “fresh produce first” guideline and took the following initiatives to improve the performance of the segment: the Group strengthened the link between production and sales to guarantee the freshness of produce and lower procurement costs, which also helped to improve gross profit. The Group strengthened the link between production and marketing by hosting weekly liaison meetings between outlets and the procurement department to exchange information and improve communication so as to strengthen the operating capabilities of fresh produce, and the Group also took advantage of opportunities related to fresh produce supply through its active on-site management. The Group enhanced its on-site tracking related to the management, marketing and promotion of fresh produce, tracked and analyzed the sales of different products following different marketing campaigns and promotional events, and fine-tuned its strategies when problems were discovered to ensure sufficient sales at each outlet. Actions such as these further increased the operational capability of Group and helped to differentiate the Group's stores in the market.

During the period under review, the Group continued to expand the procurement and sales of imported merchandise based on consumer demand. The Group saw remarkable results during the period under review, with sales amounted to RMB984 million, representing an increase of approximately 24% over 2011. This accounted for approximately 3.74% of the Group's total turnover. During the period under review, the Group also achieved a breakthrough in buyout procurement, recording sales of RMB3.36 billion, which representing an increase of 12.68% over 2011. This strategy helped to ensure a steady supply of best-selling merchandise during peak seasons, such as festivals and holidays, and shifts between seasons. In addition, the Group continued to strengthen the research and development and promotion of its private label products. During the period under review, sales of private label products increased by approximately 8.43% over 2011, and accounted for 3.48% of the Group's total turnover.

During the period under review, customer traffic of the Group decreased rapidly over 2011 due to frequent promotional events launched by competitors, the Group promptly expanded its strategic alliance with suppliers, jointly launching a variety of large-scale marketing events to attract customers and boost sales. Meanwhile, the Group adjusted its marketing strategy on a timely basis and stepped up efforts to promote the sales of daily necessities. The Group launched “Preferential Merchandise” (惠商品) and “Beneficial Life” (惠生活) brands to further improve price perception and draw more attention from customers. The launch of these events successfully brought positive social benefits, mitigated the downturn trend of customer traffic and boosted revenue and same store sales growth. While the Group focused on merchandise mix and promotional events during the period under review, sales growth was slightly lower than the Group's expectation due to, among other things, greater competition and subdued consumer sentiment, which along with high marketing costs, also affected the Group's gross profit.

During the period under review, the Group continued to strengthen its operation and management and enhance its brand image. In terms of merchandise pricing, the Group tightened its pricing and price adjustment process both at headquarter and the store level, which helped to push through flexible and rapid pricing changes at stores as well as ensure manageable pricing strategies. In terms of managing merchandise categories, the hypermarket segment optimised its operation and management system. The commodity management department worked to directly link its operation with stores and continued to improve its management of different merchandise categories. The supermarket segment, as a way of specialisation, promoted a classification system of main merchandise directory in stores. The Group strengthened the management of its procurement process to optimise its performance by formulating plans for the procurement, promotion, and evaluation of new items. Dealing with the strict regulations from six ministries and state commissions related to charges on suppliers by retail chain enterprises, the Group rationalised the structure of income from suppliers, and standardised the criteria of and reduced the types of charges on suppliers, helping to create a win-win situation where the Group's interest were tied more closely with the sales of suppliers. The Group's Caoyang Distribution Center further worked to create a more efficient distribution process, and the value of distributed products handled by this warehouse to hypermarkets increased by 30% over 2011 to RMB1.48 billion. The Group continued to implement its Enterprise Application Suite (EAS) from Kingdee, strengthened the supervision of the system, and stepped up efforts to control its budget and review all expenses so as to enforce responsibility and further enhance cost control. The Group strengthened quality control of various commodities by implementing comprehensive measures at various levels and from various channels and ensured food safety through regular random examination of supplier qualifications, on-site review of suppliers, and tests on specific items. For example, the Group conducted quick on-site inspections of, among other things, levels of pesticide residue, by establishing food safety laboratories in certain hypermarket stores and commissioning third party institutions to test items randomly selected from outlets. The Group also dynamically tracked food safety, proactively assumed its social responsibilities and formally initiated a vegetable tracking system. In collaboration with the government, the Group installed a pork and vegetable tracking system, which has already been recognized by the government and society. In addition, the Group further enhanced the construction of fresh produce self-operation function in stores as well as strengthened its “Central Kitchen” at a fresh produce process and distribution center, which helped to control food quality and safety and minimize related risks.

Business development

During the period under review, the Group tested hypermarket outlets that have more amenities. For example, in March 2012, in Hangzhou, Zhejiang Province, the Group opened a one-stop outlet of approximately 39,000 square meters featuring areas such as a hypermarket, exclusive shops, restaurants and other services. And in cooperation with Bailian Group Co., Ltd, the ultimate controlling shareholder of the Company, the Group developed another hypermarket outlet in Yuqiao, Shanghai which has more than 40,000 square meters of floor space and feature department stores, exclusive shops and restaurants. The development had already met expectations, and reinforced the Group's market share, and through this development, the Group acquired important experience developing this kind of outlet.

During the period under review, the Group continued to amend and improve its member data. The membership system was gradually expanded from its original function as a rewards card to a more in-depth system featuring membership activities, and membership data is now actively tracked and analyzed. Positive progress was achieved in building the membership system, and in 2012, the Group commenced a series of targeted marketing activities based on membership data analysis. With continued improvements based on membership data, the Group expects to keep reaping the benefits of more precise marketing over time.

During the period under review, the Group achieved significant breakthroughs in its Jiangqiao logistics center project. The roof of main structure was completed. The Group started to install and commission equipment and facilities in accordance with process planning. Operations are expected to commence in the first half of 2014 and the Group will strive to conduct a pilot run by the end of 2013. The Group's new fresh product processing and distribution center in Gouzhuang district, Yuhang, Zhejiang Province was fully put to operation, which further increased the Group's satisfaction rate of fresh products for outlets in Zhejiang Province. The Group also submitted an application to build a normal temperature distribution center in Zhejiang Province, which is planned to commence operation in 2015.

During the period under review, the Group's shopping website, “Lianhua Mart” (www.lhmart.com), received a “Top Ten” award at the “Online Shopping Season 2012” event hosted by the Shanghai Modern Business Promotion Center. Since its formal launch in December 2011, “Lianhua Mart” website has seen a steady increase in user numbers and shipping volume as a result of innovative marketing campaigns, fast shipping, and great customer service, and has been able to leverage the Group's advantages in scale, merchandise depth, information technology and brand influence.

Currently, the average sales per transaction already exceeded RMB160, which demonstrated the site's sound development in the e-commerce industry. The Group is further leveraging its numerous competitive advantages, further centralising innovative features, linking social resources and increasing customer service to strengthen the trust of consumers of online merchandise. The Group also provided better services to its clients through customer management and by leveraging the improvement integration of online and offline network, including distribution and collection from multiple physical locations, all of which helped to establish “Lianhua Mart” as an online supermarket for communities. The Group expects this to further propel future sales growth.

During the period under review, after careful market research and planning, the Group's joint venture – “Sakura Kobo” cosmeceutical store opened its first outlet in Shanghai on 1 June 2012 and as at 31 December 2012, a total of four outlets had been opened. “Sakura Kobo” offers more than 7,000 items of merchandise, about 70% of which are Japanese products, including many well-known Japanese cosmetics products. The stores also set up Japanese and Korean products counters, and for the first time, introduced 19 “Sakura Kobo” branded products, providing a new space for consumers who are interested in health care and beauty products. As the “Sakura Kobo” brand becomes more widely known and the Group's commercial areas within its outlets will be increasingly integrated with “Sakura Kobo”, the Group believes that cosmeceutical merchandise could be expanded to other Lianhua stores.

Business Outlook - For the year ended December 31, 2012

In 2013, stabilizing growth will remain the main priority of the policies of the Chinese government. In light of the importance of consumption on economic development, it is expected that the government will promote a series of measures, such as accelerating urbanization, increasing income of citizens, and improving public investment in order to increase domestic demand and stimulate consumption. As the total retail sales of social consumer goods have rebounded steadily since August 2012, the retail industry is expected to recover.

However, in consideration of the weak recovery of the global economy, the potential fallout from the “Fiscal Cliff” in the U.S. and the ongoing debt crisis in Europe, it is not expected that there will be material improvements in the near term. With the slowdown in the Chinese economy, which used to be a very important growth driver for the retail industry, the rising overall production costs and tightening regulations in the retail industry, the retail industry is expected to adapt to the new environment and large and medium-sized enterprises should stand out.

Opportunities and challenges shall coexist for the Group in 2013. As for challenges, many of the Group's outlets may face considerable competitive pressure and some outlet will also suffer during renovation and alternation. Additionally, the Group will likely need a period of transition after a variety of internal reforms are pushed through and improvements are made to procedures and standards. But there are also a number of opportunities. First, the Company, with an established strategy of “Becoming a Regional Leader and a National Strong Player,” clarified its objectives for each region. Second, the Group implemented a number of reforms aimed at enhancing its bargaining power through centralized procurement, creating a more flexible operating mechanism by implementing business flow grading management, and pushing specialization according to different segments of the Group. Lastly, the Group clarified the transformation and development of its outlets. With steady quality improvement being seen across the Group's existing outlets, the success of new outlets and favorable same store sales growth are becoming increasingly assured.

The Group's key strategies for 2013 are as follows:

Optimize business structure and consolidate competitive advantages. In 2013, the Group will continue to implement a development strategy which is focused on the Yangtze Delta Region, strictly control its property locations and conditions, and put more efforts in segment positioning, pre-opening preparation and outlet incubation. The Group will make adjustments during its development in order to achieve an optimised business structure and better layout. The Group plans to open 327 new outlets, including 10 hypermarkets, 157 supermarkets, and 160 convenience stores. For the first year after the opening of hypermarkets, achieving a certain level of sales and market share is critical. In view of this objective, stricter controls will be taken in terms of site selection, property condition, design, opening and incubation in order to ensure that the opportunity for competitors to open outlets nearby is minimized. Development of directly-operated stores in the supermarket and convenience store segments will be accelerated smoothly in order to optimize organization and explore new development, with an aim to stabilize and consolidate market scale. A balance between speed and quality is essential for the expansion of franchise businesses, while the contribution of franchise businesses to the convenience store segment should increase gradually. On the e-commerce side, the Group will accelerate the implementation of a system linking online and offline businesses, and explore value-adding opportunities at physical stores by taking advantages of ecommerce technologies,which should help to lower down the overall operating costs. In addition, the Group will further optimize the business model of its cosmeceutical stores, and link the cosmeceutical business with its main segments in terms of merchandize and sublease cooperation. The sales volume of imported goods, buyout merchandise and fresh products should also increase.

Reform to make breakthroughs and optimize the system. In 2013, first, the Group will further improve its organisation system of merchandise procurement and operation management to achieve synergies between operations and procurement. The merchandise department will reduce the purchase price of goods by making greater use of bulk purchasing, while the operations department will enhance its capacity to sell effectively with professional management. At the same time, the Group will focus on improving on-site management and customer service at the store level. Second, recognizing the importance of shelf placement on the sales performance of merchandise, the Group will optimize its management of merchandise and categorize merchandise suitable for each individual store based on the market position and location of these stores. Lastly, the Group will analyze its operations by using information management systems, which should help to provide guidance in the management of various businesses while improving organization and category management. Construction on the Jiangqiao logistics center is on track. Integrating the center with the Group's operations, and installing and commissioning new equipment and facilities will be implemented in 2013, and the Group will strive to conduct the pilot run by the end of 2013. Unlike the existing logistics model of categorization by segments, the Jiangqiao logistics center will require the Group to run on a unified procurement platform where dispatching and distribution are based on the demand of individual stores. This change will require the Group to revolutionize its existing model of handling orders, improve category management and store layout in all types of stores, and require more suppliers to start delivering directly to the Group's distribution center instead of its stores. In 2013, the Group plans to take advantage of its enhanced ability to scale based on centralized and direct procurement, and greater bulk and exclusive purchasing of merchandise. Complying with requirements of the government to regulate charges on suppliers, the Group will also strive to attract greater investments in marketing resource by suppliers and increase cooperation with them in order to improve sales and consolidated income.

Improve profitability through innovation. The objective of chain supermarkets is to provide consumers with high quality goods and services at low prices. This can only be accomplished by constantly increasing scale and efficiency. As such, the Group has to improve its monetization model, and accelerate the optimization of its revenue mix. The Group will streamline its operations, clarify its category strategy, increase sales of key merchandise categories and items, increase marketing investment from suppliers and provide incentive rebates. The Group will also continue to conduct market segmenting, improve classification of merchandize directories in stores, and lift efficiency to boost its sales progressively by making use of category management technologies. The Group selects the best supplier for each merchandise category through a selection process and competitive bidding and this is expected to help increase consolidated income. The Group will establish a robust and unified membership program, accumulate and improve member data, and continuously expand its member database. On the marketing side, various marketing initiatives will be combined with the Group's membership system, and the percentage of discounted goods available to members will be increased significantly in an effort to raise sales from members. In addition, the Group will improve store layouts, attract marketing partners, optimize marketing mode and increase income from concessionaire tenants.

Tighten cost control and improve efficiency. The Group will leverage its advantages in terms of chain scale, allocate its resources reasonably, simplify its working process and make full use of its potential to strictly control costs and reduce expenses and charges. The Group will take advantage of centralized capital management to improve capital utilization efficiency. The Group will strictly comply with government's regulations on its use of commercial single purpose prepaid cards, and increase card issuance volume with its network advantages. The Group will make appropriate decisions according to the operating environment, conduct in-depth research and strive for preferential taxation treatment. The Group will support business reforms and optimize internal evaluation methods in compliance with market principles in order to break operational bottlenecks, achieve synergies between departments, and enhance management efficiency.

The Group will optimize its income structure by insisting on the idea of “Profits are Generated from Sales and Gross Profit Leading to Gains” (利潤源於銷售,毛利主導收益); enhance customer relationship management and make use of effective pricing strategies to establish a brand image of high quality at low prices by adhering to the idea of “Sales are Driven by Store Traffic and High Quality Service” (銷售源於客流,服務主導運營); change from a passive business approach to an active one, drive innovation in the Group's procurement model, optimize category structure and increase gains from merchandise by pushing through the idea of “Optimization Stems from Innovations and Structure Sets the Direction” (優化源於創新,結構主導方向); as well as attain diversified and coordinated development, and proactively seize opportunities by upholding the idea of “Rooting on and Serving the Main Businesses” (立足於主營,服務於主營).

Source: Lianhua Supermarket (00980) Annual Results Announcement
Chairman Ma Xin-sheng Issued Capital (shares) 373M
Par Value RMB 1 Market Capitalisation (HKD) 1,591M
 
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