China Paradise Electronics Retail Ltd is to cut its workforce in a bid to reduce operating costs and raise profits.

 

The move comes because the retailer, which operates over 220 outlets in 16 provinces and municipalities, is struggling to meet a profit target following a series of mergers.

 

"We plan to lower our labor costs by 10 percent," said Huang Jianping, the firm's marketing manager, in response to recent market rumors that the company would lay off up to 25 percent of workers.

 

He told China Daily that measures to achieve the 10 percent cost reduction include cutting jobs and making adjustments in the use of manpower at each branch.

 

"The move is a result of rapid expansion," said Sun Luan, an analyst from CITIC China Securities.

 

Shanghai-based China Paradise, also known as Yongle, has adopted a different expansion method compared to its bigger rivals, Beijing-based Gome and Nanjing-based Suning, according to Sun.

 

The retailer has expanded mainly through mergers and acquisitions.

 

It has acquired several local electronic retail chains, such as Guangdong's Dongze and Henan's Tongli.

 

It also signed a merger deal with Beijing's Dazhong Electronics, China's No 4 home appliance retailer, in April.

 

"The company may face some difficulties in its internal business integration, which has pushed it to cut costs," Sun said.

 

Huang, from Yongle, admitted that the firm's profit margin had fallen and this is the reason why it is determined to cut costs.

 

Problems have arisen because the retailer has expanded into emerging markets where consumption is limited and new stores have a relatively low income.

 

Its weighted average revenue per square meter per annum declined from 40,472 yuan (US$5,059) in 2004 to 25,482 yuan (US$3,185) last year.

 

"We aim to cut overall operating costs, not only on workers but also on management, logistics and other operations to ensure our profitability," he said.

 

When Morgan Stanley and Cazenove invested US$50 million in Yongle and helped the retailer list in Hong Kong they set a profit target.

 

Yongle will assign a 4.1 percent stake to the foreign investors if the company's net profit is less than 600 million yuan (US$75 million) in 2007.

 

Its net profit was 321.3 million yuan (US$40 million) last year.

 

Market investors have shown little confidence in the company.

 

Its Hong Kong stock has fallen 57 percent since the announcement of the merger with Dazhong.

 

Strategic investor Morgan Stanley has sold much of its stake in Yongle, saying faster-than-expected cost increases would crimp profits.

 

Citigroup maintained a "sell" rate on Yongle in a recent report and upgraded risk rating from middle level to high.

 

Yongle has been troubled recently with market speculation that its merger with Dazhong had failed because of conflict between the two.

 

However, both Yongle and Dazhong have denied the rumors, saying the merger was proceeding smoothly but could take a year to complete.

 

"We are fully aware of possible disagreements that will occur during the process and are making efforts to reach common ground," the two retailers said in a statement.

 

Yongle's shares remained flat at HK$1.85 (24 US cents) yesterday.

 

(China Daily June 22, 2006)