On November 22, a rumor circulated in the industry. According to the STAR Market Daily, there were reports that Hema Fresh and Auchan Retail would be sold to China Resources. People close to Hema Fresh and Auchan Retail both said the news "doesn't look reliable," as both Hema and Auchan are in better operational shape than China Resources. However, this absurd rumor still triggered panic in the capital market, and by the close, Auchan Retail hit the limit-down, closing at HKD 1.80 per share. Looking at the overall trend, this was a significant shock. Over a longer period, Auchan Retail has been on a continuous decline in the secondary market over the past two years. The last peak was HKD 13.27 per share on July 2, 2020, but now the stock price is only 10% of that. The rumor of a potential sale has undoubtedly drawn more attention to Auchan Retail. Since Alibaba invested RMB 28 billion to gain full control of Auchan Retail, the market has been watching the results of their integration. After all, this is a typical case of a traditional supermarket joining forces with an e-commerce giant, a sample of rescuing traditional supermarkets and achieving successful transformation. Across the industry, in an exceptionally harsh winter, Auchan Retail is just one participant; in the biting cold, a large number of once-glorious legacy chain supermarkets are experiencing "growing pains."
Revenue Decline and First Loss On the evening of November 15, Auchan Retail released its interim results for the six months ended September 30, 2022. The financial report shows that online orders and business share increased year-on-year, but revenue, same-store sales, rental income, and gross margin all declined. During the reporting period, revenue was RMB 40.611 billion, down 2.22% year-on-year; net profit attributable to shareholders of the listed company was -RMB 69 million, a significant drop of 159% compared to the net profit of RMB 117 million in the same period last year. In the chain supermarket industry, Auchan Retail's hypermarket brand RT-Mart has consistently ranked among the top in market share. Even when the industry as a whole suffered losses, Auchan Retail remained resilient, with annual net profit reaching RMB 2 billion at its peak. This interim net loss is the first since listing. In the capital market, Auchan Retail's situation is even more awkward. As of the close on November 22, its market value was only HKD 17.27 billion, with nearly 500 stores and annual revenue close to RMB 100 billion, yet its market value is even lower than that of a new consumer brand's milk tea shop, bakery, or hotpot restaurant. The main reason it is not favored by capital is that the traditional supermarket format is a product of the previous era; and it is not recognized by consumers because its product selection and operational logic can no longer meet the demands of experiential and spiritual consumption. Of course, RT-Mart is not an isolated case; the hypermarket model represented by RT-Mart has been impacted to varying degrees. Data from the China Chain Store & Franchise Association shows that from 2019 to 2021, the sales scale of the top 100 supermarkets in China grew by 4.1%, 4.4%, and -2.6% year-on-year, respectively, indicating an overall pessimistic growth trend. In comparison, Auchan Retail is still a first-tier player among supermarket companies, and its first loss may largely be due to shortcomings in its fresh food supply chain. Historically, Auchan Retail has mostly adopted a joint venture operation model. The financial report reveals that over the past six months, the focus has been on infrastructure building and organizational capability development. Currently, more than 200 stores have completed supply chain switching, and the company will extend infrastructure building to other regions, transitioning from a joint venture model to a self-operated model. Investors quoted CEO Lin Xiaohai as saying that this process will involve temporary pain, but by the next fiscal year, Auchan Retail's fresh food supply chain should be on par with the industry's first tier. Furthermore, looking at the revenue composition, Auchan Retail's revenue comes from two sources: one is the sale of goods, and the other is rental income. In the interim report, revenue from the sale of goods was RMB 39.084 billion, a decrease of RMB 677 million from RMB 39.761 billion in the same period of 2021, a decline of 1.7%. Rental income was RMB 1.527 billion, a decrease of RMB 246 million from RMB 1.773 billion in the same period of 2021, a decline of 13.9%. Auchan Retail stated that offline sales were adversely affected by the resurgence of the pandemic and related prevention and quarantine measures, but the company's online channel for end consumers and its community group buying supply business for Alibaba achieved significant growth, offsetting the decline in offline sales. The decline in operating revenue is an overall industry trend, directly indicating that offline foot traffic is declining. If this continues, hypermarkets will lose the "rent-to-sustain" profit model. In the past, hypermarkets reduced their own expenses by collecting rent, and subletting brought in good cash flow. If foot traffic declines, hypermarkets will lose their appeal to individual tenants, leading to higher vacancy rates, further impacting rental income and directly affecting profits. It is reported that during the reporting period, Auchan Retail's gross profit was RMB 10.112 billion, a decrease of 7.5% from RMB 10.933 billion in the same period last year; the gross margin was 24.9%, down 1.4 percentage points from 26.3% in the same period last year. For the second half of the year, Auchan Retail stated that it hopes to achieve a balance between revenue and expenditure in net profit, but considering the uncertainty of the pandemic, especially with repeated outbreaks across the country in the second half, even supermarket formats that ensure people's livelihoods cannot escape. Therefore, it maintains that it can achieve a balance before impairment.
RT-Mart's Exploration Path In the financial report, a bright spot is that online sales accounted for nearly 35% of total sales. Due to upgrades in service and product strategy, RT-Mart's online average order value has gradually increased, driving online business growth of 14.3%, with hourly delivery business achieving double-digit growth. This achievement is not only the result of online transformation but also "riding the tailwind of the pandemic." From the early self-operated e-commerce platform Feiniu.com to later leveraging Alibaba for digitalization, RT-Mart's determination to transform into new retail has not changed. Facts have proven that Huang Mingduan's judgment about the future of retail was correct. After deep cooperation with Alibaba, Auchan Retail indeed accelerated its digitalization process, making all stores online. However, in the eyes of outsiders, the deep cooperation between Auchan Retail and Alibaba based on business logic has not achieved the expected results. Simply sharing inventory with Alibaba's Ele.me, Taoxianda, and Tmall Supermarket has already consumed a lot of energy. But this story excited the secondary market. In the four months after being "taken over" by Alibaba, Auchan Retail's stock price rose overall, from HKD 7 per share in early November 2017 to HKD 10 per share in early March, with a market value exceeding HKD 30 billion. Three years later, to strengthen the alliance, Alibaba invested another HKD 28 billion. At that time, Auchan Retail's demand from Alibaba was to benefit from Alibaba's electronic ecosystem, bring more traffic, synchronize inventory management, and enhance delivery capabilities. But unexpectedly, since then, Auchan Retail's stock price has continued to weaken. On October 19, 2020, on the day Alibaba increased its stake, Auchan Retail's stock price rose 19.17%, closing at HKD 9.2 per share. Since then, the stock price has generally declined, and now it is less than HKD 2. Logically, with Alibaba's support, Auchan Retail's offline hypermarket traffic advantage could be transferred online, opening up the home delivery market. If Auchan Retail could master both online and offline traffic, it would likely secure the top position in hypermarkets. But reality is harsh, and Auchan Retail's stock price continues to fall. The main reason may be capital market concerns about its business. To adapt to new development trends, RT-Mart has undergone drastic reforms in the past two years, including developing small-format stores (Xiaorunfa), jointly launching "Hema Xiaoma" with Hema, handing over leadership to Lin Xiaohai, promoting store renovation 2.0, and transforming into membership stores. However, turning an elephant around is never easy. RT-Mart began laying out small community supermarkets (Xiaorunfa) in 2019, hoping to follow this trend, but it failed to succeed. In the latest financial report, Xiaorunfa's store count shrank from 103 in March 2022 to 99, and there are no plans for expansion. Yuan Bin, the founder of Xiaorunfa, has been transferred to lead the membership store project. RT-Mart has ridden the wave of various retail formats, making non-business model reforms, but none have shown significant results. In the retail industry, such practices are common because people firmly believe that only by exploring new formats, such as community stores and membership stores, can they achieve long-term growth and advancement. But the difficulty is enormous; each format transformation requires rethinking products, supply chains, and even talent. Blindly applying past successes may become an obstacle.
Difficult Turnaround From another perspective, if chain supermarkets lack the ability to reform non-business models, it might be better to focus on the most fundamental efficiency improvements, including streamlining SKUs, clearing slow-moving inventory, strengthening private labels, and accelerating digital management, which can marginally improve performance. In RT-Mart's financial report, it states that positive adjustments have been made in people, goods, and places. This year, Auchan Retail proposed de-homogenization, increasing category richness, upgrading brands, and building differentiation capabilities in its overall product strategy. At the same time, it reduced SKUs by over 20%, expanded categories such as flowers, coffee, pets, and salmon, and carried out product upgrades and differentiation to drive average order value growth, expecting to contribute over 1.5% to RT-Mart's overall performance within six months. In the past, the profit model of hypermarkets was relatively traditional and single, mostly using fresh food as a traffic driver, then relying on backend fees and subletting store space to individual tenants selling accessories, catering, clothing, etc., acting as a secondary landlord. The retail business itself has very thin profits, and even with rental income, net profit margins are only around 3%. This profit model led to the core traditional skills of hypermarket operations being not product selection, development, and operations, but rather negotiation with property owners, brand attraction capabilities, and entry fees. This not only involves complex supplier relationships but also brings a lot of internal friction. More importantly, for brands, they no longer rely on traditional supermarket channels. In the past, hypermarkets had two meanings: spreading brand awareness and serving as promotion channels. The industry chain's bargaining power was in the hands of hypermarkets, and brands had to bear entry fees, shelf fees, and a series of marketing costs. With the rise of e-commerce, brands shifted from mainly offline channels to relying on online traffic to gain momentum, and only after reaching a certain scale did they enter offline channels. At that time, offline supermarket pricing was even higher than online, so naturally, they were "ignored." In this transformation, the hypermarket model represented by RT-Mart has undoubtedly been hit the hardest. As a traditional format born in the previous era, the downward trend of supermarkets is difficult to reverse in the short term. As "the retail market has entered a stage of stock competition," competing with foreign capital, internet giants, and other capital, they find their living space increasingly cramped, and even the "leading" retail enterprises cannot remain immune. As for whether RT-Mart might be sold, compared to being "sold cheaply" to other companies, the possibility of privatization cannot be ruled out. On the one hand, Auchan Retail's price is at a low point, and any movement in the capital market causes significant shocks; the stock price has been depressed for a long time, and the market value cannot be reversed. On the other hand, for Alibaba, after privatization, there would be no performance pressure from the listed company, allowing more efficient implementation of RT-Mart's transformation plan. But from another perspective, RT-Mart is fortunate because it has the "advantageous card" of being favored by giants multiple times. Nowadays, many more traditional supermarkets are still struggling to survive in the corner.