For almost half a century, the business of China Resources was selling Chinese goods and commodities in Hong Kong. These days, the company makes most of its money using international retailing strategies that it imported via Hong Kong back to the mainland.
The turnround has been a great success. China Resources is now one of the mainland’s largest food retailers, with more than 3,000 stores and a much wider network in the world’s most populous country than close western rivals Carrefour and Walmart.
“Our strategy is to target the entire country,” Wang Weiyong, senior vice-president of China Resources’ retail group, says.“We want to be the leading player in the domestic market. We have more understanding of the market.”
The group’s goal, Mr Wang says, is to more than treble annual revenues from $4.6bn to $15bn within five years and become one of China’s three largest retail companies, projecting the opening of 60-80 hypermarkets among 500-600 total new stores each year.
China Resources’ voracious appetite for growth contrasts with its relative stasis until the mid-1980s. At that point, it operated five downmarket department stores and a similar number of Chinese Arts & Crafts stores, all in Hong Kong.
Both store groups were the legacy of patriotic efforts to promote Chinese products in colonial Hong Kong and earn hard currency for the mainland.
As an arm of what is now China’s commerce ministry, China Resources had a monopoly over most trade between the mainland and Hong Kong, including pork and most produce. As China embraced market reforms, China Resources in 1984 capitalised on its role as food supplier to open its first supermarket in the British colony and soon became a solid but distant number three behind entrenched chains owned by Hutchison Whampoa and Jardine Matheson.
“Business in Hong Kong was good, but the market was too small,” says Mr Wang.
In the early 1990s, China Resources opened its first supermarkets and department stores in the mainland.
Soaring consumer sales and Beijing’s desire to cultivate domestic chains that could stand up to the likes of Walmart when entry to the World Trade Organisation removed investment barriers to foreign operators led China Resources Enterprise, the group’s Hong Kong-listed arm, to set its focus on the mainland officially in 2002.
Growth has come from a combination of new stores and M&A, with China Resources Enterprise gradually taking over a series of store groups with support from its parent, China Resources (Holdings). This has expanded the company’s store base from southern China up the coast toward Shanghai and Beijing and, with an acquisition this year, into several interior provinces. Sales have climbed, as the company has upgraded stores and opened niche outlets.
Although Hong Kong now accounts for only 6-7 per cent of China Resources Enterprise’s store count and retail revenue, the city’s outlets generated an outsize 41 per cent of the group’s retail earnings before interest, tax, depreciation and amortisation.
The company’s profit margin is 10 times higher in Hong Kong than on the mainland owing to a combination of expansion costs and oligopolistic gains in the former colony’s mature market, according to Matthew Crabbe, managing director at Access Asia, a market research company in Shanghai.
Hong Kong remains a key centre for China Resources’ retail technology development, planning, store management and design efforts. “Hong Kong is a very good place to test new concepts,” Mr Wang says.
The company launched a convenience store format from Hong Kong and the neighbouring mainland city of Shenzhen three years ago. This year, it opened its first two standalone wine shops in Hong Kong and last month debuted a new health and beauty chain with two city stores. This year it also launched a new supermarket concept positioned between its mainline and upscale chains with two outlets in Hong Kong before taking the brand to Shanghai.
“Because Hong Kong is an international city and the retail market is very prosperous, it can serve as a platform for innovation,” Mr Wang says.
This year, China Resources also bought Pacific Coffee, a Hong Kong-grown rival to Starbucks, for HK$330m (US$43m). The company plans to put outlets into its upscale hyper- and supermarkets in China to reinforce their affluent appeal.
Additional reporting by Tracy Tu
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