In April, overall consumption was weak, but supermarkets drew the 'winning lot'. Stockpiling under the pandemic drove people to supermarkets. Retail industry practitioner Zhang Jing revealed that some supermarket stores in first- and second-tier cities saw sales double in the past two months. Since March this year, logistics in many places have stalled and cross-regional fulfillment has been restricted. Rather than waiting for uncertain deliveries from Alibaba, JD, and Pinduoduo, people prefer to buy fresh produce, grain, oil, and other daily necessities directly from supermarket shelves. At the same time, supermarket competitors have paused their attacks, giving supermarkets a 'window of opportunity'. Since the second half of 2021, the listed 'front-warehouse' representatives Dingdong Maicai and Miss Fresh have struggled to find profitable paths, while community group buying, once crowded with giants, has continued to exit. The 'old three groups' Shihuituan, Tongcheng Life, and Xingsheng Youxuan have successively fallen, leaving only the 'new three groups' Meituan Select, Duoduo Maicai, and Taocaicai still fighting at the table. A person close to one of the new three groups said that the front-warehouse model has not yet crossed the safety line, and the new three groups failed to meet their KPIs last year and will 'rest and recuperate' next, so supermarkets won't have to deal with price wars for a while. Even street-side fruit shops, bakeries, and convenience stores have many 'disappeared', either closed due to weak risk resistance or temporarily shut due to pandemic controls. April macro data (from the National Bureau of Statistics) shows that total retail sales of consumer goods fell more than 11% in a single month, with severity second only to February and March 2020, the early days of the COVID-19 outbreak. Except for necessities like grain, oil, and medicine, which continued to grow, growth in other categories dropped sharply. When e-commerce platforms, fresh food e-commerce, community group buying, and street-side shops 'step aside' for various reasons, as the only offline consumption venue unaffected, are good times coming for supermarkets? Supermarkets are now tough 'No more coupons?' Qiao He in Beijing, while self-checking out at Wumart, noticed that the Duodian app no longer offered coupons. He asked a nearby staff member and got the reply, 'No coupons, and you're still stockpiling every day.' Qiao He was momentarily speechless. Since May, he has indeed fallen into 'stockpiling anxiety'. 'Actually, we already have enough supplies for one or two months, and recently there's nothing left to buy.' In Shenzhen, more than 2,000 kilometers away, Zhou Yun encountered a similar situation. Every time he goes to the supermarket, his shopping cart is the fullest and tallest in the checkout line. They often 'scout' supermarkets and have witnessed shelves and freezers being emptied, then supplies returning to normal and crowds recovering. But recently, many people, like Qiao He and Zhou Yun, have no activity other than commuting and going to the supermarket to buy daily necessities. With frequent outbreaks recently, offline retail has been hit hard, and it is the main consumers and stockpilers who have made supermarkets the only place not worried about business. Supermarkets are not only tough in attitude, but also in performance. At the end of April and beginning of May, several listed companies released their first-quarter earnings. Consumer staples giants like grain and oil and food companies generally saw both profits and market value decline due to cost pressures, but supermarkets were the exception. Over the past year, the supermarket industry hit a low, with leading companies generally reporting losses in their 2021 annual reports, with both revenue and profits declining. In the first quarter of this year, the situation began to change. According to Flush data, in 2021, the supermarket sector's overall revenue fell 3.6% year-on-year, and non-GAAP net profit attributable to parent fell 331.3%; in Q1 2022, revenue grew 0.2% year-on-year, and non-GAAP net profit attributable to parent grew 68.7%. 'From a single quarter perspective, leading supermarkets saw significant growth in Q1, leading the offline sector,' said Zhuang Shuai, retail e-commerce expert and founder of Bailian Consulting. Looking at leading companies specifically. Excluding Better Life, which has recently been in the spotlight due to abnormal performance and stock price, we use Yonghui Superstores (hereinafter Yonghui), Jiajiayue, and Hongqi Chain as samples. From their Q4 2021 to Q1 2022 earnings, the situation is improving: revenue declines have narrowed, gross and net margins have improved, and the 'three expense ratios' (selling, administrative, and financial) have improved. Among them, Jiajiayue and Hongqi Chain saw revenue growth of around 8% year-on-year, exceeding the growth of the overall consumption market and online channels in Q1. Yonghui's net profit ended five consecutive quarters of losses and turned positive. Its three expense ratio improvement leads the industry, theoretically indicating rising digitalization and management efficiency. Regarding the performance recovery, Jiajiayue said the main reason was improved efficiency at new stores, with digitalization, supply chain optimization, and store optimization; Yonghui's management attributed the gross margin improvement to eased competition compared to last year and continued optimization of product mix. Seeing this, Yonghui's institutional investors quickly reversed their stance. As soon as Q1 2022 earnings were released, 163 brokerages recommended buying and 103 recommended accumulating. The situation for major supermarkets is improving. But many retail practitioners and observers are surprisingly unanimous and calm: supermarkets are still in danger. Ice and fire, short-lived dividend The supermarket industry is currently in a 'ice and fire' situation. To conclude first: in semi-controlled areas, sales improvement is obvious, such as in Beijing; in strongly controlled areas, like Shanghai recently, supermarkets are closed and their survival is worse than fresh food e-commerce and community group buying; in uncontrolled areas, new internet retail formats like e-commerce, fresh food e-commerce, and community group buying continue to impact supermarkets. The performance recovery is mainly in semi-controlled areas, but more than one interviewee believes that this 'dividend period' is basically over. Recently, supermarkets have enjoyed two main 'dividends': one is the so-called 'stockpiling dividend', and the other is the 'competition dividend'. Compared to hard-hit shopping malls, department stores, and offline dining, supermarkets were less affected in Q1 and saw better profits, mainly benefiting from stockpiling of daily necessities like grain, oil, and flour. Zhu Yue, partner at CIC灼识咨询, analyzed that in Q1, the domestic epidemic showed a pattern of multiple scattered outbreaks, increasing residents' consumption of daily necessities, grain, oil, and fresh food. Supermarket order volumes and average order values were temporarily boosted, especially after Shanghai began lockdown management from late March and epidemic prevention was strengthened elsewhere, raising residents' willingness to stockpile. Additionally, government procurement for supply guarantees, and consumption vouchers in some areas like Chengdu and Shenzhen, also boosted supermarket consumption. The same happened in early 2020 when the epidemic first appeared. Zhu Yue cited that in Q1 2020, Yonghui's home delivery business grew 2.3 times year-on-year; in the first half of 2020, Yonghui and Jiajiayue's same-store sales grew 7.4% and 11.41%, respectively. But this round of short-term stockpiling from March to May this year has limited impact on overall supermarket performance. 'Working from home shifted residents' demand for vegetables, fruits, snacks, and beverages from offline dining and takeout to supermarkets, which is a short-term positive to some extent,' Zhu Yue analyzed from a medium-to-long-term perspective. With the current 'dynamic zero-COVID' policy and outbreaks improving in Shanghai, Beijing, and Jilin, this dividend will fade as life returns to normal. Moreover, stockpiling is to some extent advance consumption, and this customer flow is not sustainable. On the competition front, supermarket rivals have recently shown signs of retreat. Community group buying and front-warehouses no longer have the energy for price wars. Zhu Yue told Kailuobo Finance that internet retail formats, mainly community group buying and front-warehouses, have begun strategic contraction under strict government regulation, shifting from scale expansion to profitability optimization. Price wars have eased, weakening their competitive advantage over supermarkets, and some customers have turned to supermarkets. In semi-controlled areas, 'e-commerce fulfillment is unstable due to logistics, and some small and medium retail formats are closed, so some customers flock to supermarkets,' Zhang Jing said. However, once the epidemic improves, these two types of competitors will quickly regroup. In summary, Q1 performance has limited reference value, and the recovery is only temporary. Regarding Q1 2022, new retail expert Bao Yuezhong told Kailuobo Finance that in a single quarter, some expenses are not amortized, so profit has limited reference value. As the epidemic improves, how supermarkets will perform under continued pressure is a big question mark. Competitors persist, Q2 is difficult Under epidemic prevention and control, supermarkets have enjoyed dividends but also exposed weaknesses. Zhang Jing introduced that there is a saying in the retail industry: 'Rise depends on traffic, life and death depend on supply chain.' Competition in retail depends on the supply chain. Outsiders might think that traditional supermarkets' supply chain capabilities, honed over years, are no longer a problem. In fact, once regional epidemic controls escalate, supermarkets are not so calm in response. Supermarket supply chains generally focus on fresh produce, with FMCG as auxiliary and other categories as supplements. First, look at fresh produce, which is a strong category for supermarkets. In this category, Zhuang Shuai believes that supermarkets' supply chain systems are still the most complete, but costs and efficiency are not optimal. Taking Shanghai, which was severely affected in this round, as an example, Zhu Yue commented that traditional supermarket formats performed worse than internet retail platforms, with the gap reflected in delivery efficiency. She said that compared to traditional supermarkets, Dingdong Maicai, Miss Fresh, and Hema have denser warehousing networks and relatively sufficient transport capacity. In contrast, traditional supermarkets like Yonghui and Metro focus on covering more communities with dispersed layouts. Although they have sufficient supply, intra-day dispatch of transport capacity is difficult. As for FMCG and other categories, supermarkets' supply chain capabilities have fallen behind traditional e-commerce platforms. Zhuang Shuai explained that compared to JD, supermarkets generally have incomplete sub-categories, insufficient brands, shallow inventory, and high procurement costs. After experiencing successive epidemic battles, supermarkets should re-examine their competitors. Multiple interviewees believe that Q2 is not optimistic for supermarkets: first, offline formats will continue to face pressure due to repeated outbreaks; second, the competitor landscape has changed significantly, but the overall impact on supermarkets has not weakened. First, look at the most turbulent community group buying. The market generally believed that internet giants' community group buying would take away supermarket traffic and break their profit models. For example, Yonghui once attributed part of its losses to 'low-price expansion of community group buying'. Entering 2022, community group buying underwent a major reshuffle, leaving only a few leaders like Meituan Select, Duoduo Maicai, and Taocaicai, which have entered a state of rest. So, is it no longer a threat? Lin Qing, a practitioner close to Yonghui, told Kailuobo Finance that it seems the decline in performance of leading supermarkets like Yonghui coincides with the rise of community group buying, and the regions with revenue declines are also where community group buying aggressively entered. But the core users that community group buying takes away are elderly people who want cheap fresh vegetables. These users have low loyalty and go wherever there is 'burning money for attention', contributing limited to supermarkets' average order value and profits. 'Community group buying has limited impact on offline supermarkets,' Zhu Yue holds the same view. The reason is that community group buying offers only 1/10 of the SKUs of supermarkets, and its nature is 'buy today, arrive tomorrow', so its core target group does not overlap much with supermarkets' immediate customers. Compared to community group buying, supermarkets should be more wary of fresh food front-warehouses. From a target group perspective, fresh food front-warehouses focus on delivery within 30 minutes, similar to supermarkets, serving customers who require high timeliness. Leading companies like Dingdong Maicai and Miss Fresh have begun to focus on improving operational efficiency and achieving profitability, reducing competitive pressure on supermarkets in the short term. From another perspective, front-warehouse fresh food e-commerce is becoming more mature and cannot be ignored. Yesterday it was community group buying, today it's front-warehouses, tomorrow it might be another format. In recent years, supermarkets have never lacked competitors. Bao Yuezhong described that the trend of retail diversification is unstoppable. 'In the golden age of supermarkets, you couldn't find a few hypermarkets in a city. Now, there are retail formats everywhere,' and multi-channel, multi-format retail entities will inevitably continue to divide the supermarket pie. Conclusion The supermarket pie continues to be divided, and the underlying logic is that Chinese consumer demand is constantly changing, so supermarkets cannot sit idly. 'Without transformation, there is no recovery; without transformation, there is no way out,' Bao Yuezhong said, but the new problem is that some of supermarkets' transformation directions are wrong. For example, 'blindly going online' without adjusting the offline product and operation systems, just moving them online. 'Adding a mini-program is not enough; it's like a last-minute effort and won't solve the problem.' Another example is that supermarket transformations all shout 'digitalization'. 'This slogan easily misleads companies into thinking that building a digital technology platform is the key to transformation,' Bao Yuezhong said. This is wrong; digitalization is not solved by a single system but should be based on the digitalization of the entire chain with coordination across the company. Leading supermarkets began accelerating digital transformation in 2018. Up to now, Zhuang Shuai believes that in terms of digital capabilities, Wumart leads; Yonghui is strongest at the front end, with mid and back ends to be strengthened; most other supermarkets are regional companies, mostly relying on JD, Alibaba, Tencent, and Wumart (Duodian) for digitalization. Overall, multiple industry insiders believe that most traditional supermarkets' transformations are still in the exploratory stage, with no proven path yet. 'For one or two quarters, they can rely on luck,' Lin Qing said. Leading supermarkets must take their fate into their own hands, and the only way is deeper reform. 'The next five years will still be a period of transformation and upgrading for supermarkets,' Zhuang Shuai gave a timeline. *Cover image from Visual China, in-text images from Unsplash. At the request of interviewees, Zhang Jing, Qiao He, Zhou Yun, and Lin Qing are pseudonyms. Source: Kailuobo Finance (ID: kaiboluocaijing), Author: Jin Yufan -END-