Fitch: China food retail privatisations suggest long-term restructuring needed

Fitch Ratings says today that the string of Chinese food retail participants that have delisted and gone private are a reflection of the long-term restructuring the industry needs to address the rapidly changing market.

The operating environment for Chinese food retailers has been difficult over the past one to two years, with most companies recording declining same-store sales and shrinking profits. Fitch believes that many factors behind this are structural, such as competition from e-commerce and changing consumer habits.

Many companies have started to implement long-term strategies such as M&A to address these issues, but these measures may dampen earnings for the next two to three years, which make their stocks unattractive to public investors. This, along with historically low valuations, has spurred a number of privatisations in the past year.

For example, China Resources Enterprises (CRE) took its retail arm private in 2015. It had acquired Tesco's China business in 2014, creating one of the largest food retail chains in China. However, losses from the Tesco stores, difficulty in integrating the businesses and continued macroeconomic weakness pushed CRE into a net loss for the first time in 2014. The company said in a statement that turning around the business would take "a significant amount of time and investment capital."

Similarly, Wumei Holdings, the controlling shareholder of Wumart Stores Inc., a market leader in Beijing, in October 2015 offered to buy the rest of the listed company it did not own. While Wumei has not unveiled any plans for after the privatisation, it said it could further expand the chain or undertake M&A, all of which could dent near-term earnings. We also believe that the low share valuation (Wumart's share price was at a five-year low before the announcement) was a key driver for the deal.

Convenience Retail Asia, which operates Circle K stores in Hong Kong and southern China, also decided in August 2015 to sell its unprofitable China business to its parent company. Convenience stores are one of the fastest-growing segments in the China retail industry, and have seen double-digit growth in recent years. However, most convenience store operators are not yet profitable due to relatively small operating scale and a competitive market.