Faded Sun Art seeks to shine again in China’s changing grocery market

The former hypermarket superstar warned it fell into the red last year, as online grocers continued to eat its lunch

Key Takeaways:

• Sun Art lost 1.7 billion yuan in its latest fiscal year, as it tries to overhaul its business in the face of competition from grocers with stronger online components
• The loss owed largely to store closure-related charges and the company’s falling average value per transaction 

By Lau Chi Hang

When Hong Kongers rush across the border to shop at Sam’s Club Shenzhen on weekends, leading Mainland hypermarket chain RT-Mart can only look on with envy. Its parent, Sun Art Retail Group Ltd. (6808.HK), issued a sudden profit warning this month, saying it tumbled into the red during its latest fiscal year through March 2024 to the tune of a 1.6 billion yuan ($220 million) loss for the year, reversing a slight 78 million yuan profit the previous year.

The massive loss mainly stemmed from charges related to store closures, as well as impairments on its fixed assets and goodwill. Excluding those impairment losses, the net loss totaled between 600 million yuan and 700 million yuan, mainly due to business restructuring costs and a decrease in the average value per transaction caused by less stocking up on goods by its customers at their homes.

Parade of store closures

Sun Art said it would close long-term loss-making stores and consider selling non-performing assets, while continuing to focus on its extensive layout in the Yangtze River Delta, Pearl River Delta, Shandong Peninsula and other regions where it operates. The company still holds sufficient projected cash flow to fully fund its future business development and fend off market competition, it said.

Sun Art’s RT-Mart stores were once a leader in China’s grocery realm, offering a wide array of goods in their massive, brightly lit stores to generations who grew up doing much of their shopping in traditional wet markets. But the business model looks quite obsolete in China’s current grocery landscape dominated by online companies and offline shops that still allow customers to purchase orders online. 

Sun Art is a living example of how detrimental falling out of sync with the times can be. The company has been downsizing nonstop these last few years. It continued that in its latest fiscal year, dropping its store count to 582 by the end of March 2023, from 602 at the end of the previous fiscal year. Unofficial market statistics show the company continued to close more stores throughout last year, collectively shuttering as many as 13.

“I won the battle but lost the war,” lamented Sun Art’s Chairman Huang Ming-Tuan, alluding to earlier days when RT-Mart was king of China’s grocery hill. “When you lose the war, you don’t even get a chance to say goodbye.”

In fact, Sun Art lost 730 million yuan in its fiscal year through March 2022, even though it managed to post the slight profit a year later, before the massive loss for its latest fiscal year. The company is majority owned by Alibaba (9988.HK, BABA.US), but the e-commerce giant’s Chairman Joe Tsai said in February it was considering a slow exit from the traditional retail business.

Sam’s Club as last man standing

While e-commerce is crushing traditional hypermarkets, Walmart’s (WMT.US) Sam’s Club has become one of the last men standing among brick-and-mortar supermarket operators in China with its popular warehouse-style stores and paid membership model. Sam’s U.S. rival Costco (COST.US) has also done well in China using a similar model, though it only has six stores in the market, most in the Yangtze Delta area.

Walmart China, which also operates its namesake Walmart stores, pocketed revenues of 107 billion yuan in 2022, with 61% of that from Sam’s Club stores. Walmart’s China sales reached 28.8 billion yuan in the fourth quarter of last year, up 11.3% year-on-year, all thanks to the continued growth of Sam’s Club and e-commerce, the U.S. retail giant previous said.

The strong performances for Sam’s Club and Costco encouraged Sun Art to open its own first paid membership store, M Club, in the city of Yangzhou in East China’s Jiangsu province last year. Converted from an existing RT-Mart, the store showed some early encouraging progress with more than 50,000 paid members by the end of last September. The company said it plans to convert more stores in Nanjing and Changzhou into M Club stores this year.

To understand why membership stores are thriving, even as hypermarkets sputter, we need to first consider the two business models. Hypermarkets generate revenue from two main sources: the sale of goods, and fees paid by merchants for product placement within stores. As merchant fees are an important income source, hypermarkets often put more focus on product placement within stores, even if that means ignoring consumer preferences. As a result, many stores often become filled with a variety of goods that have little consumer attraction.

Special goods at low price

By comparison, Sam’s Club differentiates itself from the hypermarkets with its more targeted selection of goods and lower prices. Traditional hypermarkets can easily shelve 20,000 to 30,000 products, even if much of that is for show only. Such goods are highly homogenized and can often be bought almost anywhere. Sam’s Club sells a far smaller range of highly selected products, usually around just 3,000 to 4,000, focusing on consumer needs. Many of its items aren’t even readily available in other stores.

Sam’s Club also has its own house brand, Member’s Mark, with about 800 items ranging from daily necessities to baked goods like sweet potato bread, American-style roast chicken, durian cake and Swiss rolls. The house brand not only helps to differentiate Sam’s from its rivals, but also brings higher margins.

As it offers less products and often purchases them in bulk, it’s naturally easier for Sam’s Club to obtain better prices from its suppliers. Moreover, makers of products sold in hypermarkets often pass on their product placement fees within the stores to consumers. As a result, sometimes their goods sold in hypermarkets are even more expensive than prices charged in smaller grocery stores. Sam’s Club stores don’t have this issue, which helps to explain why consumers are willing to pay membership fees for a better shopping experience.

While Sam’s Club is a warehouse-style supermarket, it also still puts efforts into its store appearance, especially in laying out goods. Moreover, some of its stores offer other perks like large amusement areas for kids. 

The success of Sam’s Club may be motivating Sun Art to modify its format, though it’s coming to the game rather late. Sam’s Club has the first-mover advantage with its model, and has already built up exceptional brand awareness. Sun Art’s belated transformation, in the end, is just an imitation. And copycats are by no means guaranteed success.

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