China’s Largest Mass Merchant Turns to Its Own Brands for Growth

Sun Art Retail Group Ltd., China’s largest operator of big-box stores, will boost its own brand offerings and add higher-margin items to increase sales after opening new stores helped raise 2012 profit by half.

The company’s RT-Mart and Auchan chains will add at least 700 more own-label products including stationary and cutlery this year and reduce local brands in favor of higher-end lines, Peter Huang, executive director, said in an interview. The retailer plans to boost own-brand sales to 10 percent of revenue in two years from 8 percent now, he said.

Huang’s shift to higher-end products is intended to help the Shanghai-based venture between Taiwan’s RT-Mart and France’s Groupe Auchan SA maintain its lead over Wal Mart Stores Inc. and Carrefour SA, its biggest rivals. Retailers can earn gross profit margins of between 10 percent to 25 percent on own branded non-food items, said Nice Wang, an analyst with Yuanta Securities HK Co.

“Should Sun Art widen the number of own-brand products and take its product mix upscale, it would definitely help gross profit margins this year,” said Wang, whose brokerage has a buy rating on the stock.

Sun Art’s profit jumped 51 percent last year and the company expects sales at existing stores to increase at least 2 percent faster than inflation this year as rising incomes boost consumer spending, the company said in a briefing yesterday.

“Chinese incomes are rising, and that’s creating demand for more expensive, higher-end offerings” Huang, 57, said in an interview yesterday.

Local Flavor

The Hong Kong-listed retailer, which operated 273 hypermarkets in China as of Dec. 31, plans to open as many as 55 new stores this year, Huang said, mainly in smaller cities in Eastern and Southern China.

Sun Art had a 13.6 percent share of China’s 507 billion yuan hypermarket industry in 2012, compared with 10.9 percent for Wal-Mart and Carrefour’s 6.9 percent, data from researcher Euromonitor show.

Sun Art is confident it can grow its China market share by

0.5 percent this year, Chief Executive Officer Bruno Mercier said yesterday.

The grocer has drawn customers by building American-style megamarts, then filling them with local favorites such as ready-to-eat dough fritters and steamed buns and by recreating the feel of local street markets with hairy crabs laid on table tops.

China’s economic growth accelerated to 7.9 percent in the final three months of 2012 from a year earlier. The pace may pick up to 8.2 percent in the three months through March, according to the median estimate of 26 economists surveyed by Bloomberg last month.

Sun Art’s French and U.S. rivals have yet to find a way to match the company’s growth.

Carrefour, France’s biggest retailer, said on Jan. 17 that same-store sales excluding exchange rates and gasoline in China declined 3.1 percent. Wal-mart is “particularly focused” on improving profitability in China, Charles Holley, CFO of Wal-Mart said on March 13.

Wal-Mart grew its market share in every country under their international division except China last year, he said.

Sun Art’s store locations and scale are also an advantage that allow it “to benefit from the macro trends like urbanization, an economic rebound and the rising spending power in second and third-tier cities,” Lina Yan and Erwan Rambourg, Hong Kong-based HSBC analysts, wrote in a Feb. 27 report.

Yan and Rambourg forecast the company’s sales to double between 2012 and 2017.

Sun Art, which distributes products under own brands including RT-Mart and Auchan, will widen both food and non-food offerings, Huang said in an interview in Hong Kong.

RT-Mart and Auchan branded items retail for about 15 percent less than mainstream brands, Mercier said. It already carries more than 2,000 such products under its own labels, he said.

Competition this year is likely to moderate from 2012, as international rivals have slowed store expansion, Huang said. Sun Art has no plans currently to offer more aggressive promotions than it did last year, he said.

The hypermarket operator is also looking to expand in the e-commerce industry in the next two to three years, Mercier said.