Suning's deal to buy Carrefour ultimately can't get around Ali

Carrefour China is finally sold. It was not Alibaba or Tencent that took over, but Suning.

On the evening of June 23, Suning Tesco made an announcement that it would acquire 80% shares of Carrefour China for 4.8 billion yuan in cash or the equivalent in euros.

According to the content of the announcement, Carrefour China ranks in the top 10 of China's top 100 FMCG (supermarkets/convenience stores) chains.In 2017 and 2018, Carrefour China realized operating revenues of 32.447 billion yuan and 29.958 billion yuan, with net losses of 1.099 billion yuan and 578 million yuan, respectively. Moreover, its total assets in China were less than its total liabilities in these two years, and it was in a state of insolvency.

Suning's 4.8 billion yuan in cash translates into a valuation of 6 billion yuan for Carrefour China - only equivalent to Yonghui Supermarket's 6% market value. Analysts believe that the impact of the Internet, Carrefour China business is in a difficult time, which is also the reason for its low valuation. As of now, Carrefour China's price-to-sales ratio (valuation/sales) is only 0.2 times, far below the A-share supermarket industry's 2018 price-to-sales ratio average of 0.88 times and the median value of 0.7 times.

Upon completion of the transaction, Suning will be the controlling shareholder of Carrefour China. In the announcement, Suning also stated that it will retain the existing organizational structure and business composition of Carrefour China and maintain relatively independent operation for a period of time, and that there will be no significant changes in Carrefour China's personnel, property leasing and other aspects.

At that time, Suning will appoint 5 Supervisory Directors and Carrefour China will appoint 2 Supervisory Directors to form the Supervisory Board responsible for supervising and advising the Board. At the same time, a management board (1 person) will be set up, with the chairman being the CEO of Carrefour China, who will be responsible for the day-to-day management and operation of Carrefour China.

At the same time, both parties have agreed that neither party shall transfer its shares in Carrefour China to a third party within three years after the completion of the equity transfer, except to their respective related parties.

"The brand effect, membership base and supply chain synergies brought by Carrefour will improve Suning.com's efficiency as a whole." A retail analyst said.

For offline stores

Suning explained that the acquisition of Carrefour is mainly to accelerate the development of large FMCG categories, the establishment of large FMCG categories of national warehousing supply chain infrastructure.

Last year, Yonghui and Tencent intend to take a stake in Carrefour, also used the same reason: access to Carrefour's existing high-quality property resources, to enhance the competitiveness of offline stores.

"Carrefour China assets have a more objective assessment of this, as for which side it ultimately stand, the capital market is still a shareholders' interests first to take into account the main body of other interest groups." Galaxy Securities retail analyst Li Ang said.

As of the end of the first quarter of 2019, Carrefour China had 210 hypermarkets, 24 convenience stores, 6 large-scale mega warehousing and distribution centers and 30 million members in the country, and Carrefour's store floor area exceeded 4 million square meters, covering 51 large and medium-sized cities in 22 provinces.

During the same period, Suning has more than 8,881 stores in China in more than 700 cities and is also the third largest e-commerce platform outside of Taobao Tmall and Jingdong.

But at present Suning is also facing the original business mainstay home appliance stores same-store sales decline, it the first quarter of this year, revenue growth of 25.4% mainly from three aspects: the new supermarket stores, mother and baby new stores and new FMCG stores, such as non-electricity store expansion.

Suning's financial report shows that since the second half of 2018, Suning has opened 482 supermarket stores in cooperation with RT-Mart and others; the number of stores at the end of the first quarter of the red children's mother and baby increased by a net of 103 to 163 year-on-year, and the same-store sales increased by 15.7%; Suning's small stores increased by a net of 5,075 to 5,098 stores at the end of the first quarter of this year. According to the plan, Suning small store stores will reach 10,000 by the end of this year.

The rapid expansion of stores is also eroding Suning's profit margins.

At present, Suning's profit from its main business after deduction has been in the red, and it is only through the resale of its shares that it has made a profit.In the first quarter of 2019, after Suning deducted non-recurring gains and losses such as investment bank wealth management and Wanda Commercial, Suning Ease of Use's loss from its main business was as high as 1 billion yuan, which was mainly due to the large loss of Suning Small Store and the phased losses from the expansion of the logistics group's business.

For Suning, it will be a great challenge to see whether Suning's resources and capabilities can achieve effective integration of Carrefour and turn losses into profits. Guotai Junan fast-moving team said that the optimization of supply chain and management efficiency is particularly important, and may be able to improve Suning's operating expense ratio, which is an area in which Carrefour excels.

An analyst said, "According to Suning now do FMCG ideas, do 30 billion sales, a loss of 1.5 billion should be normal, Carrefour 30 billion sales, only 500 million loss, and the future has the opportunity to be able to narrow the loss through the transformation, or even no loss, is a huge victory."

The inextricable Alibaba

Carrefour entered China in 1995 and was also the first foreign-funded retail supermarket in China. But in recent years by the impact of the Internet, Carrefour China revenue and profits have declined, and since 2017 has been repeatedly rumored to be sold.

On May 8 this year, Bloomberg, citing people familiar with the matter, revealed that Carrefour was considering several options, including the sale of its China business, and had begun contacting potential buyers, reporting at the time that "Carrefour may seek about $1 billion ($6.87 billion) for its China business."

In the end, Carrefour China was sold to Suning for a low price of 4.8 billion yuan, also reflecting the sinking of foreign-funded superstores in China.

Wal-Mart, which entered the Chinese market at about the same time as Carrefour, has continuously closed its hypermarkets in Jinan, Shenzhen and other places. Some media statistics, in the past three and a half years, Wal-Mart has closed more than 70 stores in the Chinese market.

Last year, Walmart China also looked for Tencent to jointly announce the official formation of a deep strategic partnership. And Alibaba has early bought Auchan and RT-Mart's parent company Gao Xin Retail ...... Basically, several large foreign supermarkets either quit China or look for Tencent and Alibaba to cooperate.

Some industry insiders said that Suning's deal to buy Carrefour China also has the shadow of Alibaba's new retail behind it.

In 2015, Alibaba had made a strategic investment in Suning for about RMB 28.3 billion, becoming the second largest shareholder. At that time, the cooperation between the two parties included three aspects:

In the field of e-commerce, the two sides will set up a joint venture company, focusing on 3C digital and department stores and other categories, in Taobao dedicated location on the self-management. Tmall will set up "Suning Eshop Tmall flagship store".

Suning's own logistics and distribution system will become a partner of the Cainiao network, and will be open to third-party partners to use in the future.

Finally, online and offline through, Suning national stores and Alibaba system fully open. Suning all stores to Alibaba users open to consumers logistics, after-sales and payment and settlement services, while jointly planning the expansion of overseas business.

At the time, Suning subscribed to 27.8 million newly issued shares of Alibaba for 14 billion yuan. But by the evening of February 28, 2018, Suning sold off its Alibaba shares for the third time - and by that point, had sold all of its Alibaba shares.

This 14 billion yuan investment in 2015 totaled 14.1 billion yuan for Suning over three years, more than the sum of its net profit for two consecutive years.

Founded in 1990, Suning was once one of China's largest retailers. Also hit by the impact of Internet e-commerce, Suning has risen to the occasion since 2008, with layouts in retail, finance, logistics and big data, and ultimately chose to cooperate with Alibaba.

Although Suning's ambitions and layout in the retail wars are not small, it seems to be inseparable from Alibaba.