Supermarket management is often the most rigid, because the requirements for personnel quality are relatively low, and staff turnover is relatively high. However, Yonghui's partnership system has carved out a remarkable path, enabling employees to willingly do the rough and tiring work. I (the author) have recently been studying equity and partnership systems, so today I share this material with you, hoping it will inspire you. In this era, relying on wages alone is absolutely not enough! You must use equity to motivate people. (But never use equity just to retain people, as it is prone to failure. We can discuss the reasons in detail another time!)

01 Yonghui Supermarket's Rapid Performance Growth in Recent Years In 2016, Yonghui Supermarket achieved total operating revenue of 49.232 billion yuan, a year-on-year increase of 16.82%, and net profit attributable to shareholders of the listed company was 1.242 billion yuan, a year-on-year increase of 105.18%. In the first half of 2017, Yonghui Supermarket's operating revenue was 28.32 billion yuan, with revenue growth of 15.49%, overall same-store revenue growth of 0.8%, and net profit attributable to shareholders of 1.055 billion yuan, a substantial increase of 58%. Excluding non-recurring items, net profit attributable to shareholders was 1.037 billion yuan, a substantial increase of 57%, surpassing Q1 2017 (50.61%). The overall performance was impressive! As of January 12, 2018, Yonghui Supermarket's market value reached 98.5 billion yuan. It is believed that the company's management reforms, employee partnership system, and supply chain integration have begun to play a positive role, reflected in a year-on-year increase of 0.23 percentage points in gross margin and a decrease of 0.55 percentage points in expense ratio in the first half of the year. Profitability improved significantly, with a net margin of 3.59% in the first half of 2017, a year-on-year increase of 0.88 percentage points. In the first half of the year, 35 new stores were opened (excluding membership stores, Super Species, and Yonghui Preferred), and 54 new stores were signed, with a net increase in operating area of 653,100 square meters compared to the same period in 2016. As of the end of June 2017, the company had a total of 549 stores (excluding 3 pre-closed stores), with a total operating area of 4,524,400 square meters, an increase of 247,700 square meters from the end of 2016, and an average store area of 8,241 square meters. There were 224 signed but not yet opened stores, with a reserved area of 1,834,300 square meters. In addition, as of the end of July 2017, the company had opened 6 Super Species stores, with a total area of approximately 4,470 square meters, and an average store area of approximately 745 square meters. As of the first half of 2017, the company had 51 membership stores and 4 preferred stores, with total areas of 8,857 square meters and 2,005 square meters, respectively, corresponding to average store areas of 174 square meters and 501 square meters.

02 Yonghui Supermarket Launches Restricted Stock Incentive Plan Yonghui Supermarket launched a draft 2017 restricted stock incentive plan, intending to grant up to 167 million restricted shares to 339 incentive recipients, accounting for approximately 1.74% of the company's total share capital. The shares will be sourced from the company's buyback on the secondary market, with a grant price of 4.58 yuan per share. The vesting periods are 12, 24, and 36 months from the date of registration, with unlocking ratios of 40%, 30%, and 30%, respectively. The performance assessment requires that from 2018 to 2020, the annual net profit attributable to shareholders (excluding the Yunchuang, Yunsheng businesses, and this incentive expense) grows by no less than 20% or operating revenue grows by no less than 25%.

Event Commentary By binding core employee interests with equity, the incentive plan covers a wide range of recipients, with a high proportion granted to management. The incentive recipients (numbers in parentheses) include strategic management (2), core management (27), important operational staff (75), and core business backbone (235). Among them, strategic management and core management received 24.26% of the total shares granted. Senior management among the recipients includes the company's board secretary, four vice presidents, and the chief financial officer, receiving 9.18% of the total shares granted. The management incentives are comprehensive and relatively high. Additionally, the incentive scope includes 310 important operational staff and business backbone, covering a wide range, which is conducive to fully mobilizing the vitality of operational personnel. The performance assessment conditions demonstrate the company's ambition to increase market share and layout innovative businesses. We believe that the unlocking conditions of this incentive plan require a choice between operating revenue and net profit attributable to shareholders for 2018-2020, and the assessment of net profit excludes Yunchuang (new business format) and Yunsheng (Caishixian central kitchen) two new businesses, indicating that the company is based on a long-term strategy of increasing market share and innovating business formats and supply chain, giving greater support to innovative businesses in the cultivation period.

03 Tencent Strategic Investment On December 17, 2017, Yonghui Supermarket announced that its actual controllers, Zhang Xuansong and Zhang Xuanning, planned to transfer 5% of the equity to Linzhi Tencent at a price of 8.81 yuan per share, totaling approximately 4.216 billion yuan. In addition, Tencent plans to increase its stake in Yonghui Yunchuang to 15%. Yonghui Yunchuang is the company's business innovation platform, including business segments such as Yonghui Life membership stores, Super Species, and membership e-commerce.

04 Yonghui Supermarket Partnership System Background for Launch A major problem in the entire supermarket industry is that frontline employees do the dirtiest and most tiring work but receive the lowest wages, and the industry's employee turnover rate is extremely high. During a store visit, Yonghui Supermarket Chairman Zhang Xuansong once discovered that when frontline employees earn only a little over 2,000 yuan per month, they may barely make ends meet and have no motivation. They simply go through the motions, "ringing the bell as long as they are monks." It is almost impossible to see smiles on their faces, which is a huge problem for physical retail under the impact of the internet. If frontline employees are in a state of "going through the motions," when they stack fruits and vegetables, they may "throw them to one side" or "drop them," thinking that sales have nothing to do with them, and the loss of fruits and vegetables is also irrelevant. Bruised fruits and vegetables typically turn black within a few hours, which fails to attract consumers to buy, thereby affecting the entire store. Reasons for supermarket employee slowdown: Intense market competition makes retail enterprises focus more on how to acquire external customers, including retaining old customers and attracting new ones. However, excessive competition also makes enterprises forget their "internal customers," namely employees, especially frontline employees. Although internal customers bring "indirect benefits" to the enterprise, they have a significant impact on consumers' purchasing behavior: if converted into data, the significance of internal employees is whether they make 80% of customers buy more or 80% of customers buy less. But the problem is that directly increasing frontline employees' income is also unrealistic:

  1. Simply increasing employee wages increases the company's cost burden and affects supermarket profitability;
  2. How much to increase is a question: too much and the boss is unwilling, too little and the incentive is weak and short-lived. For example, Yonghui Supermarket has more than 60,000 employees nationwide. If each employee's monthly income increased by 100 yuan, Yonghui would have to pay an additional 72 million yuan in wages annually—about 10% of net profit. Moreover, 100 yuan is a minimal incentive for employees, and the effect is short-lived. It is not feasible to give a 100-yuan raise to all employees every few months. Therefore, to increase employee compensation and save costs (fruit and vegetable loss) and boost operating revenue (attract more consumer purchases), Yonghui Supermarket, under the command of Executive Vice President Chai Mingang, began a revolution in its operating mechanism, implementing a "partnership system" for frontline employees.

05 Yonghui's Partnership System The earliest partners emerged in Italy, the UK, and other countries around the 10th century. At that time, maritime trade was profitable. Someone said, "I want to do this, but I don't know navigation; I can provide capital." Another said, "I know navigation, but I don't have much money; I can provide labor." So they cooperated, splitting profits equally. Naturally, this gradually formed a community of interests under resource complementarity. Now it can be roughly considered that there are three popular partnership models in the market:

  1. Partners are nominal shareholders (i.e., shares), and some also call actual shareholders partners; this is just a change in name.
  2. Due to corporate governance needs, a limited partnership enterprise is registered as a shareholding platform. In the partnership, there are two roles: a general partner (GP, the company founder or controller) and a limited partner (LP, investor). Here, LPs are all investors without decision-making or representation rights, sharing investment returns (i.e., profit rights).
  3. Value-added partners (OP) centered on building team operators: OPs contribute money and effort, create incremental value, and share value-added benefits. As a representative enterprise implementing the partnership system in the supermarket industry, Yonghui Supermarket's partnership system began piloting in the Fujian region in 2013, was promoted nationwide in 2014, and delivered good results in early 2015. Although Chai Mingang, the main person in charge of the partnership system project and Executive Vice President of Yonghui Supermarket, has left, many of Yonghui's practices in the partnership system are still worth learning from for retail enterprises. (Note: All of Chai Mingang's remarks in this article were made during his tenure at Yonghui.) Intense market competition makes retail enterprises focus more on how to acquire external customers (including retaining old customers and attracting new ones). However, excessive competition also makes enterprises forget their "internal customers," namely employees, especially frontline employees. Although internal customers bring "indirect benefits" to the enterprise, they have a significant impact on customers' purchasing behavior. If expressed in data, the significance of internal employees is whether they make 80% of customers buy more or 80% of customers buy less. To this end, Yonghui Supermarket introduced a "partnership system" and innovated it, injecting strong vitality and high morale into frontline employees through the "new partnership system." Initially, the partnership system was only piloted in sales positions for certain fresh food categories, because sales performance is easier to quantify. In 2014, Yonghui Supermarket promoted it company-wide, and the sunshine of the partnership system reached almost all grassroots positions. "This is also a process of trial and error. We hope to find a scientific mechanism in the future, like Huawei and Vanke, to share benefits with every employee," Chai Mingang said. "Yonghui's partnership system has had as many as seven or eight versions, and currently, there are two or three plans depending on the region."

I. Redistribution of Incremental Profits To understand the essence of Yonghui's partnership system, one must grasp its core: the headquarters and the operating unit (partner representative) set a performance standard based on historical data and sales forecasts. If actual operating performance exceeds the set standard, the incremental profit is distributed between the headquarters and the partners according to a ratio. The so-called operating unit is the other party with which the headquarters shares benefits. Since Yonghui has tens of thousands of employees, it is impossible for the headquarters to meet with every employee to finalize the details and assessment standards of the partnership system. Therefore, the operating unit is generally a store or a counter group, representing grassroots employees in the partnership plan and discussing the crucial performance standards and assessments with the headquarters. "Generally, partners negotiate with the headquarters on a store basis. Yonghui headquarters representatives, store managers, department managers, and section chiefs meet to discuss a target gross profit as the performance standard. In the future, during store operations, the incremental profit exceeding this performance standard will be distributed according to the partnership system: either 30-70, 40-60, or 20-80. After receiving the bonus, the store manager will make a secondary distribution based on the contribution of each position in the store, ultimately ensuring that the bonus mechanism takes care of every grassroots employee," Chai Mingang said. Chai Mingang mentioned, "We began communicating with employees that after the category, counter, or department reaches the basic set gross profit or profit target, the enterprise and employees will share the revenue. The sharing ratio is negotiable. In the implementation of Yonghui's partnership system, 50-50, 40-60, and even 30-70 splits have occurred." In this way, employees will find that their income is linked to the income of the category, department, subject, or counter. Only by providing better service to consumers can they get more returns. Therefore, the partnership system is a form of "increasing revenue" for employees. Additionally, since many employee groups agree with the enterprise on profit or gross profit sharing, employees will also pay attention to avoiding unnecessary cost waste. Taking fruits and vegetables as an example, employees will at least handle them gently when stacking and pay attention to preservation procedures. The saved cost is the so-called "cost reduction." This explains why, when the loss rate of the entire fruit and vegetable department in China exceeds 30%, Yonghui Supermarket's loss rate is only 4% to 5%. Under the partnership system, the enterprise's delegation of authority goes beyond this. For departments, counters, categories, etc., hiring and firing decisions are made by all members of the employee group—"Of course, you can hire 10 employees, but all benefits are shared by everyone." This avoids situations where some have nothing to do while others are exhausted. Ultimately, all this binds Yonghui's frontline employees together as a common group rather than separate individuals—greatly reducing the company's management costs and significantly reducing employee turnover. Of course, this partnership system is tailored to each "store" in Yonghui Supermarket. In a single store, it can be based on departments, counters, categories, or subjects, making it very flexible.

II. Clear Division of Labor as a Prerequisite Yonghui started with fresh food operations, forming a distinctive fresh food operation model: each position in operations has a clear division of labor and responsibilities, and the number of store staff is half or even higher than that of similar hypermarkets. Therefore, Yonghui has higher requirements for the dedication, ability, and work status of grassroots employees, and the absolute value of labor costs is also higher. This is the fundamental motivation for Yonghui to implement the partnership system to motivate grassroots employees. Taking the fruit and vegetable category as an example, the moment the fruit and vegetable category arrives at the store, it enters the operational stage. First, acceptance inspection is required. The receiver at Yonghui stores is a very important position, playing a gatekeeping role for the quality of fresh food. In addition to integrity and excellent skills, Yonghui Supermarket has many strict conditions for this position. Even in the early years of Yonghui's development, the acceptance position was generally held by local Fujian people and required recommendation by Yonghui headquarters personnel at the manager level or above. To improve fresh food gross profit, after acceptance, the fruit and vegetable category goes through a processing room for screening, selecting premium vegetables for packaging. The initially processed fresh food is then displayed in the store. At this point, the front-end stock clerk takes over, contracting the counter on a per-person basis, responsible for calling goods from the back and replenishing the counter to ensure the products are full. In addition, there are front-end auxiliary personnel responsible for repacking, cleaning, and scale operations. To respond more flexibly to the market, Yonghui's fresh food prices change several times a day. Before business hours, the fresh food manager leads section chiefs to price one or two hundred varieties one by one. During business hours, the fresh food manager may reduce prices at any time based on the condition of different products (e.g., fish freshness, vegetable freshness). Near closing time, stock clerks can negotiate prices with customers and, after consulting the manager, offer significant discounts. Thus, due to the flexibility of Yonghui's fresh food operations, the meticulousness of position settings, and the refined management of operational processes, Yonghui relies heavily on the quality of frontline employees' work. This is why Yonghui Supermarket needs to further stimulate the enthusiasm of grassroots employees.

III. Equity Incentives for Professional Buyers Among frontline employees, there are some important ones with specialized skills, such as store managers and clerks with licensed pharmacist qualifications in pharmacies. For Yonghui, the most important are those related to fresh food. Therefore, on top of the partnership system, Yonghui provides these professional buyers with greater benefit sharing—equity incentives. Buyers are Yonghui Supermarket's agents at the bottom of the supply chain. For buyers, after years of exploration, they are very familiar with local vegetables. In this regard, Lin Zhongbo, General Manager of Fuzhou Yonghui Modern Agriculture Development Co., Ltd., gave an example: "For instance, when is the best time to harvest vegetables to maintain freshness longer? Perhaps in April and May, you need to harvest in the early morning; in June and July, you must harvest before dawn; and in August and September, you must harvest the night before. This knowledge and experience have been gained through years of trial and error by Yonghui and its buyers, and the relevant knowledge varies for different vegetables and different regions." Because buyers are familiar with the conditions of villages and towns and know the characteristics of vegetables inside out, their work is very easy to carry out. However, this also makes buyers targets for other companies, which may try to poach them with higher salaries. Therefore, the most important issue Yonghui faces is ensuring the stability of the buyer team. For the buyer team, Yonghui does more than just the partnership system. Yonghui has taken the partnership system to a new level by providing equity incentives to buyers through the partnership system, thereby anchoring them to the company. This can also be understood as a "higher-level partnership system." At Yonghui Supermarket's fruit and vegetable cooperative in Wenzhou Village, Zhuqi Township, Minhou County, Fuzhou City, Fujian Province, a buyer responsible for Wenzhou Village told reporters that he has worked at Yonghui for 10 years. "All this is thanks to our equity incentive system," Lin Zhongbo said. In addition to establishing mid- and high-level partnerships with internal employees, Yonghui Supermarket has also established a cooperation similar to a "partnership system" with local farmers. In this regard, Lin Zhongbo mentioned, "Signing cooperation agreements with farmers is the legal basis, but the law is always the bottom line. After more than ten years of exploration and accumulation, we have found that the most important thing between us and farmers is 'trust.'" After years of cooperation, Yonghui has gained a group of loyal partners, which has become Yonghui's core competitiveness in fruits and vegetables. These are the advantages brought by the "partnership-like" relationship between Yonghui and farmers.

06 Details of Yonghui's Partnership System Objectives of Yonghui's partnership system:

  1. Taking the store as a unit, with the achievement of the store's overall performance task as a prerequisite for participating in profit sharing, from operational departments to logistics departments, from employees to store managers, all participate, reflecting the purpose of full participation and joint management of the store.
  2. Fully mobilize employees' work enthusiasm, motivate employees to exceed the company's operational targets, and practice the corporate culture of "integration and sharing, achieving excellence."

I. Scope of Application of the Partnership System II. Prerequisites for Profit Sharing: Store sales achievement rate ≥100%, total profit achievement rate ≥100% III. Partner Bonus Pool: Store bonus pool = (Store total profit excess/loss reduction) × 30% Store total profit excess/loss reduction = actual value - target value Store bonus pool cap: When the store bonus pool ≥300,000 yuan, the bonus pool is paid at 300,000 yuan. IV. Partner Bonus Calculation: V. Settlement Notes

  1. Distribution coefficient: Based on the ranking of department gross profit achievement rates, determine the corresponding distribution coefficient for each department. For example: If a store's fresh food department ranks first in gross profit achievement rate among the four major operating departments, the fresh food department's corresponding distribution coefficient is 1.5, meaning the distribution coefficients for the fresh food department's manager, assistant manager, section chief, and employees are all 1.5.
  2. Total shares Total shares = ∑ (number of personnel at the same level in each department × distribution coefficient corresponding to the department's gross profit achievement rate ranking) Note: 1 Manager-level shares: including assistant managers; section chief-level shares: including deputy section chiefs. 2 The total shares counted above: excluding departments or sections that did not achieve both indicators at all levels.
  3. Attendance coefficient Attendance coefficient = (days of attendance due in the quarter - days of personal leave/sick leave/maternity leave/work injury leave) ÷ days of attendance due in the quarter
  4. Bonus payment Settled quarterly, bonuses are paid together with the next month's salary. VI. Case Illustration For example: In the first quarter, Store A (a hypermarket) achieved 100.1% of sales, 106% of total profit, with a profit excess of 330,000 yuan, and the store partner bonus pool was 100,000 yuan. The following are the number of personnel and achievement in each department:
  5. Bonus pool for each level
  6. Calculation of total shares for departments and sections participating in profit sharing (achieving sections: 5 in fresh food, 4 in food and supplies)
  7. Average bonus per person at each level
  8. Actual bonus payment 1 The fresh food department manager, if fully attended in the first quarter without leave, would receive a bonus of 1,570 yuan. 2 The fruit section of the fresh food department, with a sales achievement rate of 101% and gross profit achievement rate of 98%, if the section chief attended fully without leave in the first quarter, the bonus would be 1,168 yuan per person, and employees would receive 828 yuan per person. VII. Effects of the Partnership System With fresh fruits and vegetables as its core competitiveness, the loss rate of fruits and vegetables is the biggest challenge for Yonghui Supermarket. However, in the store partnership system, there is no assessment of the fruit and vegetable loss rate. Does that mean Yonghui Supermarket has given up on assessing the fruit and vegetable loss rate? We found that in Yonghui Supermarket's partnership system, each business department sets a gross profit target, and departments are ranked based on the achievement of their gross profit targets. According to the ranking, each department's partners multiply their bonus by the coefficient corresponding to the ranking. This is very interesting. To increase gross profit, there are only two means: one is to increase the selling price, and the other is to reduce costs. The selling price of fruit and vegetable products is controlled by the market, making it difficult to manipulate. On the cost side, Yonghui Supermarket's procurement of fruits and vegetables is unified, so the only way to widen the gap is through loss reduction. Therefore, Yonghui Supermarket's fruit and vegetable loss rate is only 5%, far below the industry average of 30%, reducing fruit and vegetable loss by 83%.

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