I have been busy and haven't written about Yonghui. From the data, the effect of Yonghui's adjustment is acceptable, with both stock price and foot traffic rising, and market attention increasing. So in this article, I will discuss my views on Yonghui's adjustment and the current round of supermarket adjustments. There is a lot of information online about Yonghui's adjustment data and the methods behind it, so I won't go into too much detail, but focus on some essential things. First, my core view is that traditional supermarkets have an opportunity for value regression in China's retail market today.
- The opportunity for value regression for traditional supermarkets refers to their ability to return to their original value (as traveling merchants) by changing their outdated business model (as sitting merchants).
- Large KA supermarkets still have important value in China's retail industry and will not be completely subverted by the discount industry. But we also need to be clear:
- Value regression does not mean that the adjustment will be fully successful; there is still uncertainty in the overall success of the adjustment.
- Value regression only means that supermarkets return to their original value, which is still far from better value creation. Value Regression In the past, China's offline retail industry has been in a state of long-term deviation from its essence. The hypermarket format entered China through Carrefour, and the system of front-end and back-end fees caused the retail industry to deviate from its essence for a long time. Retailers became advertisers and real estate developers, rather than consumer-oriented service providers. Therefore, in the new era, traditional retail enterprises have faced huge challenges. As a result, there was a view in the market that traditional retail represented by KA had completely declined. However, in reality, the inherent value of KA in China's overall retail landscape is stable. Historically, other countries have also faced similar problems as their economies developed, but they eventually corrected the traditional retail sector. These are just objective laws of development. Why is the fixed value of KA stable? First, let's think within this framework. We can sort out the landscape of China's retail formats based on two dimensions: distance from consumers and store size. It can be roughly divided into: 1. Community convenience supermarkets; 2. Community BC supermarkets; 3. Shopping mall collection stores; 4. KA supermarkets; 5. Outskirts traditional hypermarkets. In the past, we know that KA occupied the core B1 locations in shopping malls and extended to community ecosystems and hypermarket ecosystems (after 2021, warehouse membership stores), forming a pattern of "one body with two wings," which I call the "platformization" strategy. With the transformation of China's circulation business and the shift of traditional retail from a sitting merchant model to a traveling merchant model, each segment is now pregnant with potential changes. Specifically:
Snack discount stores and wholesale supermarkets replacing community convenience supermarkets
Community hard discount supermarkets/fresh-enhanced supermarkets replacing community BC supermarkets
Shopping mall discount collection stores/IP stores replacing shopping mall collection stores
Adjusted supermarkets/value-oriented supermarkets replacing traditional KA supermarkets
Warehouse membership stores replacing traditional hypermarkets Why is the inherent value of KA very stable? First, from the perspective of competitive landscape, wholesale supermarkets will not squeeze KA. Overall, due to the lack of fresh supply chain capabilities, wholesale supermarkets have almost no room to expand downward. At the same time, community hard discount represented by Aldi, its business model naturally determines that it will not enter large store models like KA. Second, in the past, traditional retail enterprises attempted too many cross-format and cross-store-type experiments, and the competitive landscape and value positioning of some formats did not match KA's capabilities. With the reduction of investment in community formats and hypermarket formats, when KA chooses to concentrate resources and energy within the shopping mall system and abandon the platformization strategy, KA's value positioning is still quite stable. So, from the perspective of landscape and value positioning, KA's value in China's retail industry has always been very solid, and its value must exist, but it has not been released in the past. The past mistakes were: 1. The essence of retail did not return; 2. The misunderstanding of "platformization strategy" - too much exploration in store types and formats, without returning to and holding onto their advantageous store type. Value Creation However, value regression does not mean value creation. 1. The current supermarket adjustment still faces significant challenges From a global perspective, whether in Japan or Western Europe, there are few cases of large traditional retailers achieving transformation of their main business. We see that most successful paths are through mergers and acquisitions or incubating new sub-brands. The internal resistance and capital needs faced by large enterprises in transformation will be far greater than those of small retail enterprises. Therefore, not every enterprise can achieve successful adjustment. All enterprise problems are ultimately people problems. People have a natural loss aversion nature when facing change. Internal organizational resistance and existing interest barriers require comprehensive KPI loosening, corporate culture rebuilding, or simply replacing people. So it is very difficult for an enterprise to achieve adjustment without external force. The reason Yonghui has the possibility today is because there is an external variable at the equity level, and it can also provide subsequent financial support. If Yonghui can complete a comprehensive successful adjustment and achieve organizational change, it will be the most significant stroke in global retail history. 2. Value regression is on the way, but there is still a long way to go for value creation Although traditional KA has a huge opportunity for value regression today, there is still a large gap to value creation. This means that this round of supermarket adjustment only returns them to their original value, but "from ordinary to excellent, even to outstanding" still requires a long period of time. Today's adjustment of Chinese supermarkets, or the so-called "Pangdonglai-ization" transformation, has basically determined the basic tone of the future supermarket industry: it will not go in the direction of efficiency, nor in the direction of platformization and scale, but in the direction of refined, localized, value-oriented supermarkets. But this is also a path that requires a considerable period of time to achieve accumulation. Although the entire commercial circulation sector has already achieved extremely high expectations in the secondary market, we believe that what is realized here is only the part of value regression, while value creation requires a long cycle. What is value creation in retail? Value creation is not only about retail technology, not only about developing new high-quality private label products. More importantly, it is the rebuilding of corporate culture. Pangdonglai, as a new value benchmark in China's retail industry, frankly speaking, its retail technology is just basic operations globally, and its truly scarce value is its unique corporate culture. If we borrow Costco's framework to understand the corporate culture of retail enterprises, it is:
- How to treat employees
- How to treat suppliers
- How to treat consumers Today's retail enterprises can deeply understand these three things, which is more powerful than copying a model and making a platform-based retail enterprise. Because it will form a path of "positive culture → efficient organization → leading retail format". If there is any moat in the retail industry, one is scale and the other is culture, corresponding to the two best retail companies, Walmart and Costco. In China, at present, only wholesale supermarkets/savings supermarkets and online platforms can have companies with absolute scale leadership. Other enterprises need to have a deeper understanding of culture to form differentiated competitive advantages. But today many people have not realized that culture can create huge commercial value. Why did Ye Guofu invest in Yonghui? This may be another interesting topic, but if you understand my value positioning map, you can see Ye Guofu's strategic intention. Ye Guofu also talked about this in interviews, saying that it is necessary to "switch from low frequency to higher frequency". Miniso belongs to the shopping mall collection store format, which has a natural ceiling. It plays a role in differentiating from KA in some categories in shopping malls. And to be able to dominate shopping malls, of course, is to further extend downward on the coordinate axis. So, when Ye Guofu completed this investment, he was able to clearly recognize the inherent value of KA, even though its commercial value has shifted somewhat today. Yonghui's past failure was due to too much exploration of the platformization strategy, and not returning to the essence of retail. The overall decline of the business model cannot be solved by store type exploration alone. This is what I call falling into the misunderstanding of platformization and scale. So, if Yonghui can complete the adjustment of its business model, it can achieve "value regression"; if Yonghui can leverage the external force at the shareholder level and the introduction of Pangdonglai's culture, in the long run, it may achieve "value creation". Of course, Ye Guofu's ambition is far more than this, because he also mentioned in interviews that "the ultimate dream is to be China's Costco". That is, to further extend to the right on the coordinate axis. This should be his ultimate dream, after all, warehouse membership stores are an extremely difficult format to replicate and represent the most advanced expression of the retail industry. The success of warehouse membership stores requires two core elements: scale + culture. Chinese retail enterprises started a wave of converting to warehouse membership stores in 2021, but to this day, all have ended in failure. The core reason is that they only have scale but not culture, or neither scale nor culture. So many enterprise decision-makers actually did not see the essence of Costco. Now, Ye Guofu has Pangdonglai's culture and Yonghui's scale. Whether he can succeed is uncertain, but I think he seems to have figured out the path. Of course, warehouse membership stores are another more interesting topic, and if I have the opportunity, I can write an article to discuss it further.
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