How to Profit From China's Growing Retail Industry

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 |  Includes: CRHKY, CRRFY, GMELY, YUM
by: David Hunkar

One of the fastest growing sectors in the emerging markets of Asia and Latin America is the retail sector, where consumer spending is increasing due to rising income levels. According to HSBC estimates, consumer spending in developing countries is expected to grow by about 6% this year and next compared to just 1.4% in developed countries. Hence companies that are well positioned to take advantage of this consumer-driven growth are sure to perform well.

The U.S. restaurant chain Yum Brands (NYSE:YUM), which owns KFC, Pizza Hut and Taco Bell, reported strong earnings today due to growth in international markets, especially China. Same-store sales grew 6% in China compared to just 1% in the U.S. and international division. “We continue to make progress at all three divisions and are especially pleased with the continued strong results from our China business,” Chief Executive David Novak said in the earnings report. “The combination of high-return, new-unit development, same-store-sales growth and increasing margins drove operating profit growth of 23% in China for the quarter.” Last year China accounted for 34% of Yum’s total revenue. To further raise its market share, the company opened 90 restaurants across the country last quarter.

In the retail industry, three western companies are well established in China and appear in the ranking of the top retailers.

The Top 10 Retail Companies in China 2010:

Rank Company Ticker 2009 Sales (in US $ millions)
1 Gome Electrical Appliances Holding OTCPK:GMELY 10,084
2 China Resources Enterprise OTCPK:CRHKY 8,925
3 Suning Appliance Chain Store (Group) 8,527
4 Brilliance Group 8,003
5 Wal-Mart Stores WMT 7,508
6 Auchan China 7,356
7 Carrefour (China) CRERY.PK 5,379
8 Bright Food (Group) 3,885
9 Dashang Group 3,072
10 Belle International Holdings 2,833
Click to enlarge

Source: Euromonitor International and Retail Asia

The three international companies in the above are list are Wal-Mart (NYSE:WMT) of U.S. and Auchan and Carrefour (CRERY.PK) of France. Wal-Mart’s total sales in 2009 reached $7.5B from 279 outlets. In 2008, the company had 240 stores and sales totaled $6.1B. Wal-Mart first entered China in 1996. From Wal-Mart China website: “Walmart China firmly believes in local sourcing. We have established partnerships with nearly 20,000 suppliers in China. Over 95% of the merchandise in our stores in China is sourced locally.”

Carrefour’s total sales last year was $5.3B from its 156 stores in China. Carrefour is the world’s second-largest retailer and the largest in Europe. The group currently operates over 15,000 stores worldwide in four main grocery store formats: hypermarkets, supermarkets, hard discount and convenience stores. For the first six months of this year, sales rose 5.9% to EUR 43.7 billion boosted by strong growth in new markets like China and resilience in the home territory of France. Carrefour’s ADR closed at $10.88, just shy of the 52-week high.

Auchan (China) is part of the Auchan Groupe SA, another global French retail group. The company is private and operates 114 hypermarkets in China under the Auchan and RT Mart brands.

Carrefour and Wal-Mart offer a convenient way to gain exposure to the growing Chinese retail sector. The common equities of Chinese domestic retailers Gome Electrical Appliances Holding (OTCPK:GMELY), China Resources Enterprise (OTCPK:CRHKY) and Belle International Holdings trade on the OTC markets and have daily low trading volumes. China’s top retailer, Gome had sales of over $10B last year.

Disclosure: None