China Food Retail: The Worst May Be Over but Competition Remains Intense
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UBS believes the worst may be over for traditional Chinese food retailers, positioning 2026 as a potential year for profitability improvement, though upside remains capped by intense market competition. This cautiously optimistic outlook rests on four pillars: mild rebounds in food prices, rationalizing instant retail subsidies, Yonghui's closure of unprofitable stores, and collaborations with e-commerce platforms for front-end warehousing.
However, traditional supermarkets continue to face severe headwinds. Snack discount chains are heavily eroding high-margin packaged food and beverage sales. Furthermore, e-commerce platforms are aggressively expanding into non-food categories while traditional operators undergo expensive store renovations.
According to UBS Evidence Lab data tracking store locations and app usage, Hema, Xiaoxiang Supermarket, and Sam's Club are capturing online market share. Conversely, Yonghui, RT-Mart, and Dingdong Maicai are losing ground. App engagement metrics show that Hema and Sam's Club lead in downloads, while Yonghui's daily and monthly active users have declined.
Despite potential modest profitability improvements, UBS maintains a Sell rating on Yonghui Supermarkets, arguing that the market has overpriced its turnaround prospects. Conversely, UBS retains a Buy rating on Sun Art Retail, attracted by its 10% dividend yield, 22x FY27E price-to-earnings ratio, and potential margin improvements from supply chain efficiencies.