PriceSmart, a leading membership supermarket group in China, is sunk in a debt crisis, but managers claim that they will solve the problem as soon as possible and are to cooperate with counterparts to get out of the dilemma.

However, experts and insiders do not believe PriceSmart can recover soon given its unhealthy expansion model and fractured capital chain.

Entering China in 1997, the first PriceSmart Membership shopping started in Beijing and attracted a group of high-end consumers.

Based on its primary success, PriceSmart opened four more membership outlets in Beijing, Kunming, capital of Southwest China's Yunnan Province, and Chengdu, capital of Sichuan Province.

But due to different consuming habits, the membership operation model taking cash for membership card and enjoying preferential prices was unacceptable to a majority of domestic consumers.

PriceSmart turned its focus to the development of N-mart its hypermarket brand.

By the end of last year, the chain retailer has launched over 10 membership stores and more than 30 N-mart hypermarkets in China, with sales volume amounting to 6 billion yuan (US$722 million) last year.

On the other hand, the brisk expansion in terms of numbers and regions brought a heavy debt burden to PriceSmart.

And many of the commodity suppliers and store-furnishing operators, who have not been paid for a long period of time, rushed to stores to dun for a payment.

This led to closure of PriceSmart membership stores in Shenyang, Jilin, Qinhuangdao and Changsha.

Last Thursday, two vans of a supplier from Qinhuangdao stopped at the door of PriceSmart's Beijing shop to ask for the company to pay its debts, forcing the shop to stop operations for that day.

Fu Yu, a manager with PriceSmart's marketing department, acknowledged that the company had met debt problems recently.

"We must settle a 200 million yuan (US$24.1 million) banking loan this year, which has led to a funds shortage," said Fu.

Fu said that PriceSmart was in negotiations with large retailers from home and abroad, seeking to resolve the dilemma via cooperation.

"Problems will be resolved soon, we are responsible," Fu said.

Fu declined to name possible partners but insiders say that Shanghai Bailian, the largest domestic retailing corporation, Taiwan-based President and Brit-ain's B&Q had all had contacts with PriceSmart about a possible deal.

Compared to PriceSmart's optimism and confidence, some experts doubt if it can survive.

Zhong Wei, professor with the Finance Research Center of Beijing Normal University, pointed out that unreasonably fast expansion had been fatal to PriceSmart and the causes of its brisk growth should be challenged.

Sources close to the chain retailer said that PriceSmart China is not foreign-funded as people think.

"Nuoheng Holding Corporation, a private company, obtained authorization from US PriceSmart to use the PriceSmart brand in China, but PriceSmart China's operation model and management structure differ from the US conglomerate," said a source.

Nuoheng used this method to enjoy preferential policies offered to overseas retailers in local markets.

"Nuoheng's rapid expansion strategy might be attributed to their making full use of preferential policies before China fully opens its retailing sector to the outside world by the end of the year when foreigners will enjoy national treatment."

The fast business growth, in line with Nuoheng's principles of high speed, high standards and low costs, was based on a large amount of banking loans and outstanding payments to goods suppliers and store furnishing operators.

"Such an unsound fund-raising model damaged the corporate's cash flow. Therefore, it may cause capital structure collapse," said Zhong.

Taking the assets quality of PriceSmart China into account, it is very likely to be acquired or taken over by seeking cooperation from other retailers.

(China Daily November 29, 2004)