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Bailian to merge supermarket arms

By Zhou Yan (China Daily)
Updated: 2009-07-01 08:06

Lianhua, after the restructuring, is expected to become the major franchising brand in Shanghai. [CFP]

Shanghai Bailian Group, the country's largest retailer by sales volume, is merging its two supermarket chains to form a retail behemoth that can rival the size and clout of such foreign giants as Wal-Mart and Carrefour.

Bailian, controlled by the Shanghai municipal government, has proposed a merger of two well-known Shanghai supermarkets, Lianhua and Hualian. Hong Kong-listed Lianhua and Hualian are controlled by Bailian.

Although Lianhua and Hualian are both ultimately controlled by the same parent, they have been operating under separate managements and competing with each other, especially in their home city. Lianhua has 3,932 outlets, mostly in Shanghai, while Hualian has 1,946.

In February, Bailian bought 21.17 percent share in Lianhua from Shanghai Industrial Pharmaceutical for 1.06 billion yuan. The acquisition lifted Bailian's stake in Lianhua to a controlling 55.2 percent.

The proposed merger calls for the transfer of the entire share capital of Hualian to Lianhua for a total consideration of 492 million yuan in cash. Lianhua said in a statement to the Hong Kong stock exchange that it would take over management of Hualian after the acquisition, but would continue using the Hualian brand in most of the outlets.

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The merger, when complete, will increase the number of outlets under the direct management of Lianhua to 5,268 from 3,932, the company said. Of the total, 3,184 will be full-service supermarkets and the remaining will be neighborhood mini-markets.

The Hong Kong-listed company said its market share in the Yangtze River Delta region, especially Shanghai, would further expand after the merger. "The company will secure a dominant position in the supermarket business in the region," the statement said.

Lianhua's H shares soared by over 11 percent since the merger announcement was made on Monday, but sank 3.08 percent to HK$12.58 yesterday.

According to figures from China Chain Store & Franchise Association (CCSFA), Lianhua has been ranked at the top of all domestic supermarket chains for 12 consecutive years, with 50 billion yuan of annual sales in 2008, up 8.2 percent from a year before.

Completing the merger of Lianhua and Hualian will bring Bailian a step closer to realizing the Shanghai government's goal of creating a behemoth in China's highly competitive retail industry.

"It's a key step for Bailian," said Qi Xiaozhai, director of Shanghai Commercial Economic Research Center. "The restructuring will help the company gain greater bargaining power with suppliers so that it can compete with the likes of Wal-Mart and Carrefour," he said.

"The retail chain franchise business of Lianhua will be improved significantly," the company said, and expected the restructured Lianhua to become the major franchising brand in the Shanghai market, as well as see "substantial growth" in Zhejiang and Jiangsu provinces.

According to the company's 2008 annual report, 2,256 out of its total 3,872 outlets were in Shanghai as on end-2008, while Zhejiang province and Jiangsu province had 559 and 358 stores, respectively.

Because of Hualian's weak profitability, the merger would drag down Lianhua's performance in the short term, analysts said.

CCSFA's figure showed the sales of Hualian dropped 3.9 percent in 2008 from a year earlier, while its number of outlets also shrank by 7.7 percent in the same period with 1,946 outlets by the end of 2008.

In comparison, Lianhua had much better earnings last year with 20 billion yuan in sales, up 14.5 percent year-on-year, while its gross profit ratio rose 0.56 percentage points to 13.55 percent.

"In the short term, the transaction will drag down Lianhua's sales performance, but the profitability of the merged Lianhua probably will rise through wider market concentration, while closing down some non-profit outlets," said Lin Feng, analyst, Guojin Wealth Management Center.

The restructuring of its supermarket business should only be the beginning of the overhauling of Bailian's group operation. "The group will still have to reform its other mainstay businesses like department stores," Qi said.

According to the group's website, Bailian owns some of the biggest department stores in the city, including Oriental Department Store, Yongan, and Shanghai No 1 Department Store.

"One thing is certain, after this acquisition, Lianhua will speed up its plan to float A shares for more capital," said Li Xiangfeng, analyst from Tebon Securities.

Lianhua would probably list under Friendship Group, over 74 percent of whose net profit was contributed by Lianhua in mid-2008.