Everything has two sides; what once brought extraordinary benefits can become a fatal shackle. This is the case for Hongjiu Fruit, the 'first fruit stock.' In 2022, Hongjiu Fruit went public on the Hong Kong Stock Exchange with its unique 'end-to-end' model, reaching a market value of up to 60 billion yuan, and founder Deng Hongjiu was hailed as the 'Fruit King,' completing a rise from a 'Chongqing porter' to a listed company boss. Now, less than two years later, Hongjiu Fruit is mired in delayed annual reports, auditor resignations, founder's pledged shares, and store closures and layoffs. A series of negative news has snowballed. Currently, Hongjiu Fruit has been suspended for three months, with a share price of only HK$1.74, and its market value has plummeted from a peak of 60 billion to HK$2.795 billion, evaporating over 95%. With storm clouds gathering, how did Hongjiu Fruit collapse step by step? Facing huge market changes and the company's difficulties, can the former Fruit King find a way to break the deadlock and rise again? ****Suspension, Delayed Annual Report, Store Closures and Layoffs What happened to Hongjiu Fruit? Founded in 2002, Hongjiu Fruit focuses on the full industry chain operation of high-end imported fruits and high-quality domestic fruits. But it peaked at listing, and within less than two years, its operating status underwent a huge transformation. Behind this is closely related to its once-proud 'end-to-end' model. The so-called 'end-to-end' model means directly connecting fruit origins with retail terminals, eliminating intermediate distribution layers. This model once made Hongjiu Fruit unique in the industry, as it not only enhanced its bargaining power but also ensured fruit quality and reduced costs by reducing intermediate links. In 2021, Hongjiu Fruit's loss rate was only 1.3%, while the industry average loss rate was 1%–5%. Founder Deng Hongjiu once called it 'the most effective business model I have developed over 36 years.' However, what makes something succeed can also make it fail. While the 'end-to-end' model brought competitive advantages to Hongjiu Fruit, it also planted the hidden danger of a cash flow crisis. To ensure a stable fruit supply, Hongjiu Fruit needs to pay order fees to orchards in advance. But after selling fruits to B-end customers such as supermarkets, wholesale markets, fresh food e-commerce, and community group buying, it has to wait months or even longer to collect payments. Especially in the current market environment, supermarket operations have been severely affected by the pandemic, and the rise of community group buying and online e-commerce has intensified industry competition. Many leading supermarket companies are facing store closure waves, directly leading to difficulties in collecting payments for Hongjiu Fruit. As of June 30, 2023, Hongjiu Fruit's trade and other receivables amounted to approximately RMB 10.151 billion, and the trade receivable turnover days increased from 144.8 days at the end of 2022 to 188.5 days. The ten-billion-yuan receivables directly affected Hongjiu Fruit's cash turnover. As of June 30, 2023, Hongjiu Fruit's net cash flow from operating activities was as high as -314 million yuan. Facing high receivables and tight cash flow, Hongjiu Fruit had to seek transformation and began to try to expand to C-end business, such as attracting consumers to Tmall, Douyin, and other flagship stores through online marketing, and increasing live-streaming e-commerce efforts. But this transformation did not achieve the expected results, instead increasing the financial burden. In the first half of last year, Hongjiu Fruit's sales and marketing expenses were approximately RMB 121 million, a year-on-year increase of 22.34%. Unable to owe upstream money and unable to stop downstream customers from 'defaulting,' Hongjiu Fruit is struggling and has to rely on debt to survive. Financial reports show that as of June 30, 2023, the company's bank loans had reached RMB 2.776 billion, a year-on-year increase of approximately 49.22%. The glory of the former 'first fruit stock' is no more, and founder Deng Hongjiu's wealth has also plummeted, disappearing from the 2023 Hurun Rich List. High-Priced Fruits Are Hard to Sell The Fruit King's Surface Glory There has always been a saying in the industry: 'Fruits are sweet, but the business is bitter.' From planting to retail, fruits need to go through a series of cumbersome steps such as picking, sorting, packaging, preservation, storage, and transportation, each accompanied by losses. In addition, due to scattered production areas and uneven planting techniques, quality uniformity becomes a major challenge. Moreover, the fruit retail market is highly homogeneous with low branding. Consumers only focus on category and origin, and have low brand loyalty. This makes product differentiation at the retail end not obvious, and competition among fruit retail brands increasingly fierce. Besides Hongjiu Fruit, another listed fruit company, Pagoda, is also not doing well. From 2021 to 2023, its gross margin hovered around 11%. The founder even described selling fruits as 'bending down to pick up coins,' revealing the industry's hardships. Even Hongjiu Fruit, which does B-end business, has a mediocre gross margin. The 2023 interim report shows that Hongjiu Fruit's gross margin was slightly higher than Pagoda's, but only 15.37%. In addition, due to insisting on high-quality fruits, Pagoda is frequently complained about by consumers as a 'fruit刺客' (fruit assassin, meaning overpriced). Like Hongjiu Fruit, Pagoda's stock price has also experienced severe tests. Pagoda finally went public after three IPO attempts, but its stock price plunged significantly after listing. As of the time of writing, Pagoda's latest market value is HK$4.178 billion, compared to HK$9.474 billion on the listing day, a halving of market value. What makes it worse is that with the rise of domestic fruits and changes in consumer attitudes, high-end imported fruits are no longer selling well. Imported fruits that were once popular, such as Sunshine Rose grapes, Red Face strawberries, and Peruvian blueberries, are now grown on a large scale in China, with quality not inferior to imports, but prices continue to decline. Taking durian as an example, this year domestic durian production has surged, prices have dropped significantly, and some areas even saw floor prices like '10 yuan per jin' or '5 for 100 yuan.' With more cost-effective domestic durians, consumers are no longer willing to pay high premiums for imported durians, accelerating the decline of Hongjiu Fruit, the king of imported durians. Cinda Securities pointed out that due to weak consumer spending leading to slower industry growth, companies like Pagoda and Hongjiu Fruit that insist on providing high-quality fruits may see their performance continue to be affected for a period. According to Frost & Sullivan's analysis, China's fruit retail market is still growing. It is expected that by 2026, the market size will further increase to RMB 1,775.2 billion, with a projected compound annual growth rate of 7.6% from 2021 to 2026. The giants are not sitting idly. Hongjiu Fruit and Pagoda have both embarked on transformation paths. On the one hand, they are trying to improve performance by strengthening digital platform operations and developing more sales scenarios. Pagoda has done relatively well in digital operations, not only fully deploying on mainstream online channels such as mini-programs, third-party delivery platforms, Tmall, and JD.com, but also actively embracing short-video platforms like Douyin to achieve full online channel coverage. Although Hongjiu Fruit started online operations a bit later and has not yet shown results, the direction is correct. In the Internet era, digital operations are indispensable for rapid growth in the fruit sales industry. On the other hand, they are also trying new business models. While Hongjiu Fruit is testing C-end business, Pagoda is also exploring To B business to find new growth curves. Last year, Pagoda acquired approximately 19.58% of Shenzhen Banguo for RMB 14.38 million. The latter is a platform enterprise focused on fruit and fresh food procurement and sales agency services. In addition, Pagoda has established 29 warehouses and preliminary processing and distribution centers in China, and increased its layout in fruit planting, all of which will provide strong support for its To B business. Yu Huiyong, founder and chairman of Pagoda Group, said that in the next ten years, Pagoda will strive to increase its self-operated To B business revenue to 20 billion yuan, and plans to develop diversified sales channels such as e-commerce, supermarkets, community group buying, convenience stores, and enterprise and institution canteens. At the same time, Pagoda is also focusing on overseas business. Pagoda said it will leverage its advantages in global supply chain integration to export China's high-quality fruits to the world and open global franchising at an appropriate time. Currently, Pagoda has established an overseas business committee and first focuses on the Southeast Asian market. It is expected that within the next ten years, Pagoda's overseas store count will exceed 500, initially forming an international development pattern. Ambitions are naturally big, but the fruit world is unpredictable, with deep waters and many pitfalls, and fierce competition is an indisputable fact. There is still a long way to go to become a true Fruit King. From August 20 to 22, 2024, the '2024 6th China FMCG Conference' with the theme 'Crossing the Shrinking Era' and the '3rd China FMCG Hard Discount Conference' & '3rd China FMCG Distributor Conference' will be grandly held in Shanghai. At this conference, all roles in the FMCG industry chain will gather, allowing you to grasp industry trends at a glance, understand hot track directions, penetrate industry resources, and precisely connect with leading brand owners, head retail platforms, and national excellent distributors with over 100 million in sales, providing you with precise decision-making and efficient cooperation opportunities, and on-site learning of exclusive methodologies from FMCG giants! Keynote speeches, roundtable dialogues, report interpretations, closed-door salons, and networking dinners—this thousand-person event is rich in forms, and there must be something for you! 🔺Scan code for ticket consultation🔺 Recommended Reading