Introduction: Traditional large supermarkets are undergoing a deep transformation. On December 14, Better Life Commercial Chain Share Co., Ltd. (hereinafter referred to as "Better Life") announced a major strategic adjustment. The content mainly includes two aspects: first, the supermarket business will be closed and fully withdrawn from the Sichuan market starting from the fourth quarter of 2022, with the Jiangxi market significantly shrinking to Xinyu, Pingxiang, and Yichun; Hunan and Guangxi provinces will also close and convert inefficient loss-making stores. Second, shopping malls and department stores in the above markets will continue to operate.

The company also mentioned that this adjustment is expected to incur closure losses of approximately 300 to 500 million yuan.

As the first private supermarket stock in China, how did Better Life, once prominent, gradually decline? What is the overall development trend of traditional supermarkets currently?

An Undignified Exit

As early as May 2022, news of Better Life facing bankruptcy spread.

Under the impact of the pandemic, a wave of store closures hit many physical supermarkets, and Better Life was no exception. It was reported that in the first half of 2022, it closed 23 stores nationwide, with multiple stores in Wuzhou, Qiyang, and other places closing in October alone. Meanwhile, many netizens mentioned on social platforms that Better Life supermarkets had severe shortages of goods; some said the yogurt section was removed, others said snacks lacked desired flavors, and some said familiar beverages were off the shelves, looking very bleak. What attracted more external attention was a series of operations in the secondary capital market. In May 2021, Better Life announced a buyback of 12.57 million shares for 100 million yuan to maintain company value and shareholder interests, at a cost of 7.96 yuan per share. Less than a year after the buyback, Better Life again announced that the purpose of the buyback for maintaining company value and shareholder interests had been achieved, and ultimately sold 12.56 million shares through centralized bidding, with total proceeds of approximately 92.55 million yuan. Source: Company announcement. Subsequently, on April 20, 2022, Tencent and JD.com, which had originally chosen Better Life as a new retail business partner, also reduced their holdings through block trades, reluctantly exiting at a loss. Why? The answer soon came. Two days after JD.com reduced its holdings, Better Life released its "Performance Forecast and Apology Announcement," publicly admitting that its performance had turned from profit to loss, causing the stock price to fall, leaving many retail investors lamenting. A series of events intensified rumors of bankruptcy, and Better Life's offline supermarkets even saw panic buying; consumers holding Better Life shopping cards rushed to nearby stores to spend their cards as quickly as possible to avoid losses. Who would have thought that a once-glorious large supermarket would end in such an undignified manner? How Did Better Life Become "Better Lower"? In fact, Better Life's previous strategies were relatively rapid and aggressive, laying hidden dangers for business operations. In recent years, the retail industry, especially traditional hypermarkets, has suffered from poor operating conditions due to the pandemic, online sales diversion, and slowed transformation progress. Major traditional supermarkets have either exited the market dimly or actively tried new formats and models, integrating online channels for refined operations. Although Better Life also adjusted some strategic measures in a timely manner, it seemed too late. 1. Affected by the Overall Economic Situation First, affected by the pandemic, residents' consumption propensity declined, the physical retail industry faced significant pressure, leading to a large-scale wave of store closures, and the performance of major supermarkets collectively declined. Against this backdrop, Better Life's revenue peaked in 2019, then declined in 2020 and 2021. 2021 was also the first year of loss since listing, with net profit declining by over 200% year-on-year and non-GAAP net profit declining by over 600%. Data source: Better Life financial reports As a regional enterprise, before the pandemic, Better Life's stores were expanding from Hunan to other regions, with store expansion and external mergers being the main sources of income. Currently, affected by the pandemic, Better Life had to slow down expansion and instead improve efficiency and profits through refined operations. In the first three quarters of 2022, Better Life's revenue further declined by 24% to 7.958 billion yuan. Net profit further declined by 90.10% to 17.93 million yuan, but the non-GAAP net loss narrowed. 2. Over-reliance on Real Estate Business In addition to external mergers, Better Life has been building self-owned properties and other long-term assets, such as self-built Changsha Xingcheng Shopping Center, Huaihua Shopping Center, and Shaoyang Shopping Center, but the funding sources are mainly self-accumulation, operating liabilities, and bank loans, which has also burdened it with heavy debt. Before 2019, Better Life's asset-liability ratio generally fluctuated around 60%, but it increased year by year thereafter, reaching 76.44% in 2021, while the current ratio and quick ratio also declined. In 2013, the company's short-term liabilities were 650 million yuan, which snowballed to 7.89 billion yuan by 2021. Data source: East Money Generally, supermarkets should have fairly good cash flow, but Better Life invested too much in real estate, which is the root cause of its capital chain rupture. For example, in 2021, Better Life's investment property reached 10.813 billion yuan, accounting for 148.88% of net assets, while peers such as Yonghui Superstores, Jiajiayue, and Zhongbai Group had investment property ratios of 3.02%, 8.07%, and 1.41%, respectively. Before the pandemic, real estate had not fully declined and was still considered a "money-making" industry by many; investing in real estate to increase income is understandable, but Better Life's overly aggressive strategy planted a "bomb" for business operations. In 2019, its revenue peaked, but there was little time left to "defuse the bomb." The 2022 semi-annual report showed that Better Life's short-term liabilities were 7.162 billion yuan, while monetary funds were only 1.081 billion yuan, and operating cash flow was 1.1 billion yuan, leaving a huge funding gap; moreover, future borrowing may face difficulties. As of the end of June 2022, Better Life's restricted assets reached 13.51 billion yuan, of which investment property mortgages reached 10.397 billion yuan, accounting for 69% of total investment property. Data source: Better Life 2022 semi-annual report. When the capital chain has problems, the company cannot settle supplier payments in time, suppliers are unwilling to supply, which further leads to a decline in customer traffic, creating a vicious cycle. 3. Intense Industry Competition and Slow Cultivation of New Markets Intensified competition among peers and the rise of various new formats are also reasons for Better Life's gradual decline. The retail industry originally has low profit margins, earning hard-earned money. But before the pandemic, major companies were expanding outward. Better Life originated in Hunan, with most supermarkets located in Hunan. To quickly capture market share, it entered Sichuan, Chongqing, and Guangxi in 2013, increasing promotional expenses. Until 2018, Better Life still mentioned in its financial reports that the market share in cultivation periods was low and promotional expenses were high. The company also repeatedly mentioned that it lacked scale effects in other provinces and had weak profitability. In the 2017 financial report, the sales per square meter of comparable stores in other provinces was significantly lower than that in Hunan. Data source: 2017 annual report. Whether compared with Yonghui Superstores, known for fresh produce, or Walmart's strong supply chain, Better Life seemed to have no outstanding highlights. Based on this, Better Life's expansion speed was also hindered. In 2020, 2021, and the first half of 2022, the total number of stores closed due to underperformance or inability to renew leases was 15, 52, and 23, respectively. In fact, in 2018, before the pandemic, Better Life closed 15 stores for the same reasons, the same as in 2020. Additionally, after the rise of online e-commerce, low prices formed through channel reduction intercepted customer traffic from physical supermarkets. Better Life launched online business in 2013 and invested in cultivation costs, but because it treated the online electronic platform as a single project and did not achieve online-offline synergy, its Yunhou.com, which carried online business, was announced to be shut down at the end of 2017. In response, Wang Tian, chairman of Better Life Group, once said, "We spent 200 million yuan but failed to break through." Data source: East Money. In subsequent years, new formats such as community group buying and front warehouses also impacted traditional supermarkets. Therefore, it can be seen that Better Life's net profit began to decline in a curve from 2013. Data source: Jiufang Investment. The overall economic downturn, intense market competition, difficulty for regional advantageous enterprises to expand to other provinces, and especially the high-debt model of continuous investment, property mortgages, and increased bank loans are all reasons leading to Better Life's eventual downfall. The Era of Traditional Hypermarkets Has Passed Not only Better Life, but under the general environment, major supermarket companies are either forced out or experiencing performance declines and tentative transformations. Carrefour, which had been in Henan for 16 years, closed its last store in Zhengzhou on November 15; Walmart's warehouse membership model has become a "new trend" imitated by other companies; other "elephants" like RT-Mart, Yonghui Superstores, and Jiajiayue are adjusting their transformation pace. In the first three quarters of 2022, some supermarkets such as Yonghui Superstores, Lianhua Supermarket, Hongqi Chain, and Sanjiang Shopping achieved positive revenue and profit growth, but Yonghui and Lianhua still had net losses. Most supermarkets, such as Beijing Jingkelong, Zhongbai Group, Better Life, Liqun Shares, and Hualian Comprehensive Supermarket, fell into a situation of declining revenue and profit. Although the overall economy is gradually recovering, the hypermarket model of traditional supermarkets is no longer suitable for today's social development. With the booming instant retail business, customers increasingly order online, and the "one-stop shopping" appeal of hypermarkets has weakened. Previously, the focus was on "goods," but now it has shifted to "people," competing on who provides better service, better product quality, and higher cost performance. In such a situation, the aforementioned large supermarkets are transforming to save themselves, and some common trends can be seen, such as transforming into warehouse membership stores. This model mainly relies on strong supply chain capabilities, attracting customers by introducing high-quality products at low prices, but the premise is charging customers a membership fee to maintain profitability. With the successful experiments of foreign brands like Sam's Club and Costco, domestic local enterprises have followed or adapted this model. Hema X Membership Store directly benchmarks Sam's Club, while Yonghui Superstores, combining its own approachable image, has developed its own new warehouse store format by removing membership fees. Secondly, there is the construction of a fresh produce moat. After the rise of community group buying and front warehouse models, fresh food, being difficult to "conquer," is widely recognized as the last "fortress" for traditional supermarkets. Perhaps based on this, some companies have increased their attention to fresh produce supply chains. For example, in 2019, Better Life fully launched a supply chain reform centered on fresh produce, hoping to reduce intermediate links and increase gross profit margins through direct sourcing from bases. In addition, there is the development of instant retail business through digital capabilities. The cooperation between instant retail and large supermarkets forms a 1+1>2 effect in the integrated development of online and offline. With reduced offline customer traffic, large supermarkets can also transfer some operating costs to the online front on the basis of unchanged fixed costs. For consumers, the instant retail business of large supermarkets can meet their psychological need for "speed," and product quality is more reassuring than traditional e-commerce and community group buying platforms. It can be seen that traditional large supermarkets are undergoing a deep transformation, not only competing to cover the "last mile," but also competing in overall operational capabilities from dimensions such as supply chain, refined management, and online-offline integration. In such a situation, do distributors also need to change accordingly? How can they keep up with the pace of the times? You can leave a comment below to share your views.