Costs rise for Circle K Hong Kong
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Convenience Retail Asia says sales in its convenience stores and bakeries rose marginally last year, but rising costs dented profits.
CRA, part of the Fung Retailing group, operates 604 retail stores in southern China. It has 329 Circle K stores in Hong Kong and 127 outside the SAR and 148 Saint Honore bakery stores in Hong Kong, Macau, Guangzhou and Shenzhen.
The company has reported revenue of HK$4.736 billion for the year to December 31, a 4.8 per cent increase over 2013. The group says the higher sales were achieved despite unfavourable retail conditions, including flat consumer sentiment, declining spending on festive products and higher operating costs.
But core operating profit fell nine per cent to HK$153 million compared to last year.
“This was largely because of rising cost pressures, which outweighed growth in comparable store sales across all markets. The group made investments in its eCommerce business FingerShopping.com as well as a pilot programme with Sinopec Marketing to manage 10 petrol stations and Easy Joy convenience stores in Guangzhou.
CRA’s net profit declined by 19.5 per cent to HK$121 million due to the same issues impacting core operating profit, as well as reduced interest income from lower bank deposits after a special dividend payout in 2013 and an exchange loss from the depreciation of the Chinese renminbi currency during the year.
The Circle K and Saint Honore businesses delivered “satisfactory performances” in 2014 on the back of solid comparable store sales. Turnover for the convenience store business was HK$3.752 billion, up 4.9 per cent year-on-year. Comparable store sales in Hong Kong and Southern China increased by 5.4 per cent and 5.8 per cent respectively against 2013. Turnover for the Saint Honore Cake Shop business increased by 3.2 per cent to HK$1.049 billion. This was primarily due to low-single-digit comparable store sales growth in Hong Kong in 2014.
“This was primarily due to low-single-digit comparable store sales growth in Hong Kong in 2014.”
Gross margin and other income as a percentage of turnover was stable. Operating expenses as a percentage of turnover increased from 33.2 per cent to 33.8 per cent because of higher rents and operating costs, as well as start-up expenses for FingerShopping.com and the pilot programme with Sinopec Marketing.
CEO Richard Yeung said Circle K and Saint Honore are in “advantageous positions” to capitalise on any rebound in the domestic economy”.
“While our outlook for 2015 is conservative, we are confident in our ability to drive results through aggressive customer acquisition and organic growth. We have many new initiatives to strengthen our brands and our businesses, especially the investment in FingerShopping.com and collaboration with Sinopec Marketing to operate petrol stations and Easy Joy convenience stores in China.
“We believe that a favourable customer experience is the key to building brand loyalty, repeat purchases and positive word-of-mouth referral and we are very pleased with our efforts in this area. Also, our core operations and financials remain healthy.”
The Hong Kong retail sector saw a slowdown in 2014, ending a long period of high growth. Primary causes were flat consumer sentiment among locals and a decline in spending by Chinese Mainland tourists. High rents and the on-going labour shortage continued to impact the group’s operating costs in Hong Kong. On the Chinese mainland, the year-on-year growth of total retail sales posted a slight drop from 13.1 per cent in 2013 to 12 per cent in 2014.
CRA says it responded by focusing on strict cost controls, innovative marketing and promotions, and the continued rollout of employee satisfaction and retention initiatives. In the year ahead, CRA anticipates the slowdown in Hong Kong will continue due to flat local sentiment and moderate spending by Chinese mainland tourists.
“The group also expects high operating costs to continue, particularly in the areas of rent and labour, as well as more challenges on the horizon in Hong Kong due to proposed standard working hours, a minimum wage review and new plastic bag levy.”
The company is more optimistic about the mainland market: “On the Chinese Mainland, the government is expected to encourage spending by the middle class. The group believes this could benefit the convenience retail industry.”
Questions & Answers
Q.What specifically caused the increase in operating expenses for Convenience Retail Asia?
What specifically caused the increase in operating expenses for Convenience Retail Asia?
Operating expenses rose due to higher rents and other operating costs. The company also incurred start-up expenses for its FingerShopping.com eCommerce business and the pilot programme with Sinopec Marketing.
Q.How did CRA's net profit decline more sharply than its core operating profit?
How did CRA's net profit decline more sharply than its core operating profit?
Net profit declined further due to reduced interest income from lower bank deposits, following a special dividend payout in 2013. An exchange loss from the Chinese renminbi's depreciation also contributed to this larger decline.
Q.What initiatives did CRA undertake to address the challenging retail conditions in 2014?
What initiatives did CRA undertake to address the challenging retail conditions in 2014?
CRA focused on strict cost controls, innovative marketing and promotions. They also continued the rollout of employee satisfaction and retention initiatives to manage the difficult retail environment.
Q.Why is CRA more optimistic about the mainland Chinese market compared to Hong Kong for the coming year?
Why is CRA more optimistic about the mainland Chinese market compared to Hong Kong for the coming year?
The company anticipates the Chinese government will encourage spending by the middle class. This is expected to benefit the convenience retail industry on the Mainland, unlike the continued slowdown predicted for Hong Kong.
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