Tougher Near-Term Period For Food Retailers Like Wumart

The Chinese food retailer Wumart, not to be confused with Walmart, has established itself as one of the leading food retailers in Mainland China, although like many of its competitors, it has a lot of room for expansion going forward, especially in China's second- and third-tier cities. After seeing its share price increase by more than 160% between 2009 and 2010, the past two years have been tougher for Wumart. With the cost of doing business rising quickly, especially in tier-one cities (on the back of higher rent prices and rising labour costs) the food retail industry will face challenges going forward when it comes to growing margins. This is despite an excellent fundamental outlook for the industry, which is highlighted by the second chart.

More Challenging Of Late
Wumart Daily Share Price (HKD) And 200-Day Simple Moving Average

Over the past five fiscal years, Wumart's operating margins have decreased from about 5.8% to about 3.2%. While expansionary investments can affect margins, rising costs is a real concern for a lot of the food and drink industry. In the case of retail, one long-term method to improve margins is through greater scale, and this in an area we believe Wumart has the potential to do particularly well. While expansions in the Chinese first- and second-tiered cities are likely to remain a priority for Wumart in the near term, we believe the retailer will gradually turn its head towards the rural and under-retailed areas of China over the longer term to tap into the exciting demand dynamics in the rural markets.

Great Outlook
China Total Organised Food Retail Sales (US$bn)
This article is tagged to:
Sector: Food & Drink
Geography: China, China, China, China

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