Click to read the original article for details Source: Yuanchen Research Institute (ID: caijingyanjiu)
In the past 18 months, most Chinese people have experienced "bitter first, sweet later"—first enduring the pandemic's trials, then enjoying the victory over the epidemic.
But a large number of companies have had the opposite experience—they rose against the trend during the pandemic, only to fall into trouble after it ended. It's a case of "joy first, sorrow later."
Take SF Express, for example. During the pandemic, a large number of commercial flights were grounded, and SF Express, with its fleet of 75 cargo planes, stood proudly in the express delivery industry. Its operating revenue in the first half of 2020 surged by 42% against the trend.
But after the pandemic, SF Express, which voluntarily entered a price war, reported huge losses, shocking many.
The education industry is a more typical example. During the pandemic, online classes became widespread, and countless online education companies enjoyed the "stay-at-home" dividend, with stock prices often multiplying several times.
But shortly after the pandemic, the entire education and training industry faced policy adjustments, and former super bull stocks struggled on the brink of collapse.
These collapses were dramatic and glorious, often grabbing headlines, but there are also companies we are familiar with that are quietly sliding into the abyss.
For instance, the "RT-Mart" supermarkets that once dotted cities large and small were still ranked second on the list of China's top 100 supermarkets in 2019.
But its parent company, Hong Kong-listed Sun Art Retail Group, saw its stock price briefly approach historical highs during the pandemic before falling steadily, with its market value shrinking by 62% from its peak.
Yonghui Superstores, ranked third on the list of China's top 100 supermarkets, basically replicated Sun Art's trajectory.
After its market value peaked in April 2020, its stock price also headed south, declining steadily. Its market value, once over 100 billion yuan, has now shrunk to around 40 billion.
The rise of large supermarkets in the early pandemic period is understandable. In the first half of 2020, as the pandemic raged, wet markets and farmers' markets were closed.
But large retail supermarkets, tasked with stabilizing food supply and ensuring social stability, had limited store closures, and some even saw better business.
However, after the pandemic stabilized, the business of these two companies took a sharp downturn. In April this year, Yonghui Superstores released its first-quarter report, showing a net profit decline of 98.51% year-on-year, leaving the market stunned.
Three months later, Yonghui's board secretary Zhang Jingyi, in a few hundred words on his WeChat Moments, media searched for keywords:
We are going down the mountain.
If a company walks down the mountain, then the institutions holding its shares will definitely paraglide down.
Both Sun Art and Yonghui became targets for institutional selling. Even Xingquan's veteran Dong Chengfei had one of his two funds almost completely liquidated, and the other reduced by 42.7%, admitting he "misjudged."
In contrast, overseas supermarket giants Walmart and Costco have been on a tear in the US stock market, hitting new highs. The former has a market value of $400 billion, not far behind Alibaba's size.
The latter's market value is approaching $200 billion, nearly twice that of JD.com or Pinduoduo.
Why are the fates of supermarket giants in China and the US so different? What exactly happened to Yonghui and RT-Mart over the past year or so?
Why did they withstand years of e-commerce onslaught, even hitting new highs in the early pandemic, only to collapse continuously in the following year?
This article will use Yonghui Superstores as the main thread to try to answer these questions.
Fresh Produce: A Hard Bone to Chew
Regarding supermarkets, there are two relatively obscure facts.
First, supermarkets are a low-margin or even razor-thin profit business. Walmart's gross margin hovers around 25%, with a net margin of about 5%, and this is already the industry's top level.
Generally, supermarkets have gross margins of only 10%-15% and net margins of just 2%-3%.
In other words, supermarkets are a typical business that relies on scale. In the US, the top three supermarket brands, including Walmart, hold nearly 80% of the market share, successfully turning supermarkets into a "tax-collecting" business.
Costco deliberately keeps its gross margin low at 10%, but with substantial membership fee income, its profits are astronomical.
In China, with its vast territory and large population, supermarkets are a typical "big market, small companies" business. The top three together hold less than 10% of the market share, likely qualifying for exemption from the National Anti-Monopoly Bureau's scrutiny.
Another obscure fact is that fresh produce, Yonghui's main business, is a tough and tiring job.
In 1995, a Fujian man named Zhang Xuansong opened a small supermarket called "Gule Weili" in Fuzhou. While others sold towels for 3 yuan, he sold them for only 2.3 yuan.
Relying on this "low-profit" feature, three years later, Zhang Xuansong opened the first supermarket named "Yonghui" near Fuzhou Railway Station.
At that time, Metro and Walmart had just entered, and the local leader Xinhua Du was making a big splash. Zhang Xuansong, newly a capitalist, was anxious and visited various supermarkets to investigate, discovering two important things:
First, the biggest difference between foreign and domestic supermarkets is that foreign ones sell fresh produce; second, although foreign supermarkets sell fresh produce, Fuzhou residents still went to wet markets to buy groceries.
The reason people preferred wet markets was simple: East Asians' pursuit of "freshness" in food is unmatched globally. Fish must be live, chickens must be freshly slaughtered, from the strict requirements for ingredients in sushi to the "pig intestine sashimi" that crosstalk artist Yu Qian's father eats daily.
Foreign supermarkets new to China mostly sold frozen meat, and vegetables were mostly root vegetables with longer shelf life. In Chinese eyes, no matter how cheap, they couldn't compare to the live fish and shrimp at the wet market.
In July 2000, Zhang Xuansong opened Fuzhou's first specialized fresh produce supermarket—Yonghui Pingxi Fresh Supermarket.
Fresh produce accounted for 50%-70% of the total operating area. To accommodate Fuzhou residents' shopping habits, Zhang Xuansong specifically moved the opening time to 6:30 AM.
The absence of fresh produce in supermarkets was partly due to foreigners' lack of understanding of Chinese conditions, but more importantly, for supermarkets, fresh produce is often a chicken-rib business—tasteless to eat but a pity to discard.
First, the spoilage rate of fresh produce is very high.
Compared to daily necessities, fresh produce has a very short shelf life. Most leafy vegetables can only be sold for one to two days after being put on the shelves, otherwise they wilt. Meat has a slightly longer shelf life, but once not fresh, it's hard to sell. Controlling the spoilage rate is a hellish challenge.
Second, the logistics cost of fresh produce is high.
Fresh produce transportation often requires a full cold chain. Nowadays, Taobao sellers can ship nationwide from Yiwu or Wenzhou for as little as 1 yuan in logistics costs. But for fresh produce, even using foam boxes, dry ice, or ice packs for temperature control, the minimum cost is around 6 yuan.
Finally, supply chain management is extremely difficult.
Different types of fresh produce require different temperatures and humidity:
For example, bananas stored below 12°C tend to turn black and rot; fresh lychees easily change flavor at 0°C; tomatoes, cucumbers, and bell peppers need 10°C; cabbage, celery, apples, and peaches are suitable at 0°C; leafy vegetables need 95%-100% humidity, fruit vegetables 90%-95%, and root vegetables 70%-80%...
Every one of these variables is a management cost. Poor supply chain management can affect cost control at best, and at worst, endanger brand reputation:
In June this year, a Yonghui supermarket in Jiaozuo, Henan, actually put dead fish on the shelves, selling them under the name "backstroke fish."
(Yonghui Superstore's "backstroke fish," 2021)
The result of these factors is that fresh produce has small profit margins and is extremely difficult to standardize.
Take fruit, for example. Even if produced in the same region, due to different farmers and whether grown on the shady or sunny side of the mountain, fruit size, sweetness, water content, and gloss all differ.
Even if a brand can be established, given the extreme price sensitivity of fresh produce consumers, it's hard to achieve brand premium.
Despite these drawbacks, fresh produce has one advantage that many consumer categories can't match: rigid demand + high frequency.
In China, cooking at home is a deep-rooted obsession.
For a country with over one-third of its population in agriculture, every aspect of fresh produce is closely tied to people's livelihoods, so it's inevitable that this industry won't lack central guidance, policy support, and leaders' earnest care.
This guidance, support, and care came in the second year after Yonghui started selling fresh produce.
Rise: A Supply Chain Miracle
In December 2001, then Vice Premier Li Lanqing visited Yonghui Superstores, praising it as one of the few enterprises in the country that successfully introduced fresh produce into supermarkets, and coined a new term: the Yonghui Model.
China is not short of "models," such as the "Xiaogang Model" in history textbooks, or the controversial "Sanming Model" and "Suqian Model" in the new healthcare reform.
But models are usually named after places, rarely after people, and even more rarely after brand names.
The Yonghui Model was born out of the "agriculture-to-supermarket" (nong gai chao) project promoted around 2001: at that time, the impact of simple facilities and crude management in wet markets was becoming apparent, and food safety incidents like "black-hearted rice," "lean meat powder," and "water-injected meat" were frequent at the turn of the century, causing concern among decision-makers.
Since vendors and wet markets only have a leasing relationship, wet markets lack the motivation and ability to regulate themselves. But supermarkets, as brands and large companies, generally have stronger self-discipline. For consumers, while they don't like expensive things, they fear unknown origins even more.
With leaders' care, Yonghui Superstores instantly became a model, hailed by seven national ministries as the pioneer of China's "agriculture-to-supermarket" reform, and began undertaking the renovation of wet markets in Fujian.
Three years after the reform began, Yonghui had 50 stores, with group turnover reaching 2 billion yuan, leaping to become the leader in Fujian.
In December 2010, Yonghui Superstores listed on the A-share market, dubbed the "first fresh produce supermarket stock," and its growth quickly took off like a rocket.
But during the same period, the "agriculture-to-supermarket" movement faced difficulties. Amid various controversies, policy gradually shifted to encourage the transitional "agriculture-plus-supermarket" model.
The fundamental reason is that Chinese people's habit of buying groceries at wet markets is often "small quantity + high frequency," but most supermarkets converted from wet markets were designed for "large quantity + low frequency."
On the other hand, the more fresh produce categories managed, the harder it is to control spoilage, leading to a lack of price advantage for fresh produce supermarkets.
Yonghui's secret to persistence lies in: first, letting consumers buy high-margin items while buying low-margin fresh produce; second, doing everything possible to lower upstream supply chain costs for fresh produce.
Yonghui's fresh produce gross margin is only 14%, but its overall gross margin has long been maintained above 20%. Clearly, higher-margin products are raising the overall gross margin.
Using rigid-demand, low-margin fresh produce to attract traffic, then using high-margin products to boost revenue—this is a complete internet playbook.
But this clichéd approach is still insufficient for Yonghui, where fresh produce accounts for up to 50% of revenue (Sun Art: 19%, Walmart: 25%).
Profits still need to be squeezed from the supply chain. In fact, whether supermarkets or wet markets, behind them is a fresh produce supply chain system established by the "Vegetable Basket Project":
Farmer - Cooperative/Base - Primary Wholesaler - Agricultural Wholesale Market - Secondary Wholesaler - Retail - Consumer.
Anxin Securities once conducted a survey: Shaanxi apples selling for 9.8 yuan/jin in the Shanghai market were sold by local farmers for only 3.65 yuan/jin. The difference was pocketed by wholesalers and warehousing logistics.
In the eyes of policymakers, this is a chain that sustains employment and livelihoods; in the eyes of consumers, it's room for price markups; in the eyes of Yonghui, it's all compressible costs.
Like supermarkets' "big market, small companies" characteristic, China's agricultural upstream is also "big market, small production." In front of buyers/wholesalers, highly dispersed farmers and supermarkets have almost no bargaining power—it's like retail investors versus market makers.
As the most downstream supermarket, Yonghui once used its scale advantage to bypass wholesalers and wholesale markets, using a "drug centralized procurement" approach to seize bargaining power, but this method's flaw is that it's easily imitated.
So from 2014, Yonghui began to bind upstream suppliers through joint ventures and equity stakes, locking in interests with the upstream—since we're going to be the banker, why not do it together?
In the midstream, where transportation and storage add the most cost, Yonghui built its own logistics distribution centers. The downside is huge upfront investment:
For example, the Chengdu logistics center cost a total of 120 million yuan; but the benefit is that supplying one store costs 120 million, and supplying ten stores also costs 120 million.
As long as the center's maximum capacity isn't exceeded, each additional store supplied is pure profit.
In the downstream, where spoilage is most severe at the sales end, Yonghui internally incubated the food supply chain brand "Caishixian" in 2015.
This business can be understood as a B2B fresh produce processing plant. For the company's procurement team, based on product quality, good-looking fresh produce can be placed in the high-end Super Species and Yonghui Green Label stores, average-looking ones in Red Label stores, and poor-looking ones sent to Caishixian for processing and sold to B-end merchants.
(Yonghui Superstore "Green Label Store")
From upstream procurement, to midstream transportation and warehousing, to downstream classified sales, the extreme compression of supply chain costs is reflected at the terminal by selling fresh produce at prices lower than wet markets.
And by expanding user scale through low prices, it further drives down upstream costs, allowing for steady store expansion.
If all went smoothly, a Chinese version of Walmart seemed to be rising.
However, an unexpected pandemic rewrote the script.
Dismemberment: Carving Up the Existing Market
In the past few years, the biggest advantage fresh produce supermarkets had in surviving and even thriving amid e-commerce's impact was that fresh produce is a category difficult to move online.
Even SF Express, as strong as it is, only figured out how to deliver a cherry after 24 years of establishment.
Fresh produce's perishable, high-spoilage nature, combined with the extreme complexity of the supply chain, plus the costs of instant delivery, meant that fresh produce e-commerce, despite burning money for years, could only capture 3% of the market share.
No matter how many advantages, for the "real China" of 610 million people, the experience of fresh produce e-commerce is far less impressive than the shock of Pinduoduo's emergence.
Xu Zheng, founder of Miss Fresh, was quite pragmatic in his assessment of the fresh produce e-commerce industry: bending over to pick up steel coins.
And the "store-warehouse integration" model represented by Hema Fresh also struggles to solve supply chain complexity and delivery costs. Many provincial capitals with housing prices of 30,000-40,000 yuan per square meter can only support one or two stores with their consumption capacity.
In an era when internet companies in other fields are aggressively going down-market, Hema's speed and convenience seem unable to move consumers in third- and fourth-tier cities who have ample time, are price-sensitive, and are used to strolling through wet markets as a pastime.
The real threat to fresh produce supermarkets, delivering a dimensionality reduction strike, is the "community chain fresh produce stores."
One type is represented by Qian Dama, which has "No Overnight Meat" written on its storefront. On one hand, they focus on single products, greatly improving standardization and exponentially reducing supply chain management difficulty.
On the other hand, with store areas similar to Heytea's, compared to fresh produce supermarkets with hundreds of employees, they expand very quickly.
(Qian Dama's store)
The other type is regional powers, represented by Fresh Legend, which dominates Anhui. In Hefei alone, Fresh Legend has 100 stores, while other "friendly competitors" have fewer than 80 combined, making it the Chayan Yuese of the fresh produce sector.
Due to the high density of stores, besides being closer to consumers, more importantly, the supply chain is shortened. Whether it's a local version of "fresh produce centralized procurement" or shortened transportation distances, both lead to an exponential reduction in supply chain management difficulty.
At its core, fresh produce is more like a business of "finding growth within existing markets": in China, rather than the fantasy of steadily expanding to become an oligopoly, a more practical approach is often to find ways to optimize supply chain structure and increase gross margins within existing markets.
The above competitors each have their strengths, but Yonghui and others could still cope. The fatal blow to Yonghui came from community group buying, which rose against the trend during the pandemic.
With restaurants, wet markets, and farmers' markets closed due to the pandemic, fresh produce supermarkets became one of the few options for residents' daily meals.
But more importantly, the pandemic was a large-scale education campaign for "buying groceries online." Fresh produce e-commerce companies saw GMV surge during the pandemic, finally catalyzing a model with great advantages—the "Xingsheng version" of community group buying.
Before entering community group buying, Xingsheng Youxuan was already a local retail giant in Changsha, with a network of convenience stores—Furong Xingsheng. Most of its stores were converted from mom-and-pop shops, 30-80 square meters, where owners worked from dawn to dusk for a meager income.
Xingsheng built on its existing network rather than opening new stores for community group buying, so costs were naturally very low.
The first step for Xingsheng in community group buying was to turn these traditional retail store "store managers" into "group leaders" in the community group buying scenario.
They leveraged their familiarity with the community to recruit nearby residents for "group purchases," selling categories not available in retail stores through a "pre-sale + self-pickup" model, while Xingsheng provided all the supply chain and technology infrastructure behind the scenes.
Low costs (no burden of self-built physical stores + self-pickup reduces logistics costs), low spoilage (pre-sale model reduces inventory pressure), low traffic costs (group leaders recruit customers offline), convenient to use (WeChat mini-program), and good profit distribution (significantly increases group leaders' income).
Most importantly, community group buying's scheduled delivery solves the biggest headache for fresh produce e-commerce—the high cost of instant delivery.
Subsequently, community group buying grew like wildfire and quickly attracted many internet companies to "copy the homework."
Once internet giants entered with large amounts of capital, the smell of gunpowder in this war suddenly intensified. The giants, following Xingsheng's model, scrambled to grab group leaders everywhere while using poverty-alleviation prices to attract traffic.
For example, Chinese cabbage at 0.01 yuan/jin, enoki mushrooms at 0.5 yuan per bundle, eggs at 0.99 yuan per box, oranges at 3 yuan for 10 jin, quickly gained a large number of users.
For this community group buying business, consumers see eggs at 1 yuan a box, while giants see bypassing intermediate links and restructuring commodity distribution channels.
Selling vegetables is just a traffic driver for community group buying: Xingsheng Youxuan initially used fresh produce bestsellers to attract traffic, then gradually introduced beverages, alcohol, maternal and baby products, and general merchandise to boost profits.
As product categories increase, the platform will also fully grasp the discourse power in the value chain.
In other words: what is a matter of life and death for Yonghui is just a traffic entry point for the giants.
Ye Guofu, founder of Miniso, once pointed out this cruelty: "If community group buying continues for another year or two, supermarkets over 500 square meters will basically have no future."
They might as well have directly named China Resources Vanguard, RT-Mart, and Yonghui Superstores.
Mire: Hesitant Counterattack
Yonghui has not been without responses to these threats and concerns.
Its Super Species, benchmarked against Alibaba's Hema Fresh, was once highly anticipated by the industry. In 2017, Tencent invested generously, taking a 15% stake, hoping to support it against Alibaba, and set a goal of opening 100 stores.
But the actual number of stores kept decreasing: 46 in 2018, 15 in 2019. In February 2021, according to multiple media reports, Super Species would close all stores except those in Fuzhou.
Yonghui Life, with a convenience store format, once touted the slogan "Yonghui Supermarket at Your Doorstep," but also experienced a parabola of high-profile launch, significant expansion, and store closures.
Additionally, Yonghui mini, which tested the medium-sized supermarket business, still couldn't escape the fate of large-scale store closures.
(Yonghui Superstore mini store)
Among the series of innovative businesses, the only relatively successful one was the home delivery business benchmarked against fresh produce e-commerce: in 2020, home delivery achieved sales of 5.91 billion yuan, a year-on-year increase of 147%.
During the same period, Miss Fresh and Dingdong Maicai had revenues of 6.1 billion yuan and 11.3 billion yuan, respectively. It seemed home delivery could compete with new players.
But in reality, Yonghui's home delivery faces more complex business integration.
Compared to the "front warehouse delivery" model of fresh produce e-commerce, Yonghui's home delivery ships from more complex locations—including supermarket stores, mini stores, and independent "front warehouses."
This plan looks good—it can speed up store inventory turnover and avoid the huge losses of the front warehouse model.
But in actual operation, offline fresh produce is sold in bulk, and when moved online, it needs to be weighed and repackaged, often resulting in difficulty balancing online and offline during peak grocery shopping times.
When integrating offline store POS systems and inventory management systems into home delivery, online and warehouse inventory must also be synchronized with the e-commerce transaction system. Its head once said in an interview:
It's very difficult to manage both online operations and store operations. It's even harder to take care of both online business and delivery business.
Another widely circulated example in the industry: Yonghui once found the back warehouse sorting too slow, so it wanted to copy Hema's "store-warehouse integration" model.
But after measurements, they found that most of their stores didn't have enough ceiling height to install hanging chains, so they had to give up.
Additionally, Hema's back warehouse accounts for one-third of the total store area, while traditional supermarkets' back warehouses only account for one-tenth.
If Yonghui wanted to renovate existing stores to expand back warehouse space, it would shrink the front store area, inevitably affecting existing supermarket business.
Many times reforms fail for one reason: you have to take care of the old while developing the new—even immortals can't do it, let alone us mere mortals.
More importantly, fresh produce, as a "high-frequency + rigid demand" consumer product, is destined to have an audience extremely sensitive to price.
This also means that even if a fresh produce brand is formed, there is almost no product or functional premium. Customers defect too easily, making it hard to form true brand effects.
The thin or even razor-thin profit margins meant Yonghui relied on over a decade of scale advantages and meticulous operations to achieve a 1%-3% profit margin.
Facing internet giants willing to bet tens or even hundreds of billions in losses on community group buying, Yonghui's problem is far from just "how to transform."
In 2007, the Coen brothers' film "No Country for Old Men" was released. In it, the killer Anton, wielding a captive bolt pistol, has a line:
If the rule you followed brought you to this, of what use was the rule?
Epilogue
Speaking of "No Country for Old Men," there's also a memorable minor character—the old sheriff Ed.
In the film, Ed talks about the "harmonious capitalist society" of his father's generation, where neighbors got along well, police didn't need to carry guns, and even criminals had their code.
But now times have changed, with young people dyeing their hair, getting piercings, smoking marijuana, and committing crimes for all sorts of bizarre motives.
At the end, with the line "I woke up," Ed finally realizes he can no longer adapt to this world.
How to adapt to the new business rules shaped by wealthy internet giants, how to face a business world defined by burning money, "optimization," and involution—this seems to be a problem faced by a large number of entrepreneurs who rose in the 1980s and 1990s.
Whether they are gentle or arrogant, their living space in the involuted business world is being gradually compressed.
These entrepreneurs can roughly be divided into two categories. One can be called "those who retire after success":
For example, Chen Tianqiao, who left Shanda when Tencent and Alibaba's strategies began to show, moved to the US to invest in life sciences research. Or Duan Yongping, who retired early to focus on investing, living a carefree life.
The other category is "those unwilling to leave the table," like Suning's Zhang Jindong. There's also a ready example in the supermarket industry:
In 2013, RT-Mart launched the e-commerce platform Feiniu.com. Chairman Huang Mingduan boasted, "If we're going to play, play big." How many people have even heard of this website now?
Of course, the more ironic part is the ending of "No Country for Old Men":
The rule-breaking killer Anton, driving a car, obediently waits at a red light. When it turns green, Anton drives steadily through the intersection, only to be hit by a car running a red light, bleeding profusely—those who rise by breaking rules will inevitably face another game that ignores rules.
For Yonghui and its peers, their lifeblood has become someone else's traffic entry point, and years of accumulation have been destroyed.
And for those companies that "dimensionality reduction attack" Yonghui, when their businesses are also incorporated into a larger macro narrative, being erased doesn't require a complicated process.
In every corner of business, dawn is always quiet, and dusk is also always quiet.
PS: From September 23-25, 2021, the 2021 (4th) China FMCG Conference, hosted by New Distribution, will open in Shanghai. Focusing on industry trends + practical cases + growth connections as the core, 3,000 FMCG practitioners will gather for the event.
10 themed forums cover new retail O2O, community group buying, short video live e-commerce, distributor transformation, rise of new consumer brands, new alcoholic beverage interpretation, distribution B2B supply chain, omnichannel marketing, B2B2C new technology applications, etc., with operators from various segments bringing the latest case studies.
Some of the confirmed heavyweight guests so far include: 1. Tao Shiquan, founder of Jiangxiaobai; 2. Yao Xuhong, general manager of Meiyijia Holdings; 3. Lu Xiuqiong, global expert partner at Bain & Company and former vice president of marketing for Coca-Cola China; 4. Chen Xiaodong, senior vice president of Nestlé Greater China; 5. Zhang Fujun, president of Lee Kum Kee Sauce Group China; 6. Bi Chaojiao, general manager of China Resources Snow Breweries (China) Marketing Center; 7. Yang Hongbin, vice president of Junlebao Dairy Group; 8. Yang Shun, COO of Lipton Greater China; 9. Zhang Yipeng, general manager of Kuaishou E-commerce SKA Brand Operations Center; 10. Li De, e-commerce general manager of Gold Hong Ye Paper Group...
A grand gathering for FMCG professionals—you must be there!
Are you "watching" me?