CRE seeks dominance with bid for retail chain

If China Resources Enterprise is successful in a bid for ParknShop, billionaire Li Ka-shing's supermarket chain in Hong Kong, it will help CRE dominate the market and update its retail unit, experts say.

CRE, a mainland-based retail and beer conglomerate, has said it may join the grocery chain Tesco Plc of Britain to bid for the Hong Kong chain.

Other potential buyers have included the private equity firms KKR & Co LP and TPG Capital, Sun Art Retail Group Ltd, Aeon Co of Japan, Lotte Shopping Co of South Korea and the retailers Woolworths Ltd and Wesfarmers Ltd of Australia.

Hutchison Whampoa, of which ParknShop's parent, A.S. Watson Group, is a wholly owned subsidiary, said earlier that it was considering selling the supermarket chain, one of Hong Kong's largest, in an industry worth $6.6 billion a year. The sale has been forecast to fetch between $3 billion and $4 billion.

Many analysts say CRE is likely to win. The result is expected by the end of September.

CRE says it may raise debt and does not rule out selling non-core assets to fund the planned purchase.

Frank Lai, CRE's chief financial officer, confirmed CRE has submitted a bid for ParknShop, a member of the A.S. Watson Group, which has a 33.1 percent market share of Hong Kong retailing.

The chain, which had revenues of HK$21.7 billion ($2.8 billion) last year, has more than 345 outlets in Hong Kong, Macao and the Chinese mainland.

If CRE's bid is successful, its market share will jump to 40.9 percent and make it Hong Kong's top retailer. Wellcome, the largest supermarket chain in Hong Kong, has a network of more than 270 stores and says it has more than 14 million customers a month on average.

A.S. Watson, a retailer and manufacturer with operations in 33 markets worldwide, has more than 9,300 retail stores selling health and beauty products, luxury perfumes, food, electronics and wine. It also has airport shops. In the first half of this year, turnover in CRE's retail division was HK$47.9 billion, an increase of 13.7 percent year-on-year and profit was HK$637 million, a fall of 63.7 percent year-on-year.

The group operates more than 4,400 stores in China, about 82 percent of them self-operated and the rest franchised. In recent years CRE has developed well-known brands including CR Vanguard, Suguo, Ole, Chinese Arts & Crafts, CR Care, Vivo and Pacific Coffee. "CRE has always wanted to lead the market in Hong Kong," says Hermann Ng, chief executive officer of Retail Nation, a consultancy in Shanghai. "This could serve as a great opportunity to expand its market share.

"ParknShop is no longer a key asset for Hutchison Whampoa despite the large cash flow it generates each year. In the retail industry, such an offer does not come by every day. When it does you should grab it."

ParknShop's strengths in fresh food, its various retail formats and its good locations will boost CRE's bid to strengthen its hold on the Hong Kong market, he says.

In August CRE announced a joint venture with Tesco under which the British company will merge its 131 stores on the mainland with those of the Hong Kong-listed company. CRE will hold an 80 percent stake in the joint venture. The British retailer will own the rest, the companies say.

Euromonitor International says CRE and Wal-Mart Stores Inc of the US shared the second place last year in China's hypermarket industry with market shares of nearly 11 percent each. Sun Art Retail Group Ltd, backed by Groupe Auchan SA of France, was top with a 14 percent share.

In recent years, China's supermarket chains have been cautious in expanding as retail giants such as Wal-Mart and Carrefour have slowed down their plans to open new stores and have focused on strengthening existing stores.