Daxue FAQ – CRE Selling its Retail Unit

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China Resources Enterprise (CRE) sold its retail unit back in April to focus on beer production. What drove the decision and how is the retail sector in China currently coping?

In answer to your first questions, it’s a relatively simple case of Chinese Resources Enterprises focusing on what can turn a profit and handing off responsibility for the increasingly difficult retail business to it’s parent. Profits from its beer division are roughly half the losses from retail, so hanging on to a business that might not start turning around for another three to five years would be a poor decision in the short-term. With Snow Beer’s high market share and international best-selling status, it’s a safe and lucrative bet that will allow CRE to focus on its strengths.
China’s retail market is doing fine; the slowdown, anti-corruption crackdowns and rise of online retail (with huge and consistent growth the last few years) have hurt sales at brick-and-mortar outlets, but it still reported healthy growth in 2014. Grocery retail, in particular, has been hit, but is still posting comfortable growth.

Is it easier for companies to survive in the slowing economy by focusing more heavily on niche and narrow markets?

Yes, it’s easier to focus on narrower and niche markets. Chinese consumer tastes and purchasing decisions are beginning to favour businesses that offer higher value-for-money and better service. Having the lowest price and the widest availability is no longer the advantage it once was, especially in the highly fragmented retail space where most competitors can offer similar conditions. Even CRE’s venture with a major international player like Tesco didn’t take off quickly enough.
It’s not unlikely that we’ll see more sales like this, particularly in the large and multifaceted state-owned firms. As the slowdown continues, it’s in the interest of companies to focus and develop their strengths. The growth of the market is no longer fast enough to allow for unlimited expansion into new businesses, and with government seeking to balance its economy and encourage consumption, the focus is on developing the most competitive product for consumers.
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