Fresh food operations have always been a major challenge in the supermarket industry, as it is difficult to profit from fresh food without a well-established supply chain. The categories are complex, suppliers are small and scattered, management is difficult, per-customer gross margins are low, and loss rates are high... Fresh food operations have many pain points.

For this reason, many supermarkets either outsource their fresh food operations or keep only a small fresh food section to attract customers.

How does Yonghui achieve a fresh food loss rate of 3%?

Yonghui Superstores, hailed as the 'King of Fresh Food,' is clearly an exception. Yonghui not only started with fresh food but also used it to expand from Fujian to the whole country, becoming one of the top three supermarket chains in China. The continuously strengthened supply chain is one of the core competencies supporting Yonghui's rapid rise.

After more than a decade of cultivation, Yonghui's supply chain now covers the entire country, reaching down to sixth-tier cities. By integrating high-quality upstream procurement, a powerful logistics system for rapid distribution, cold chain preservation, store-to-home delivery, and a strong intelligent middle platform, Yonghui has built an efficient supply chain system, continuously establishing and strengthening competitive advantages that are difficult for peers to replicate. It can be called the 'supply chain pragmatist' of China's supermarket industry.

Southwest Securities noted in a research report that the loss rate in the fresh food industry is about 20% to 30%, while Yonghui's fresh food loss rate is only 3% to 4%, which is quite telling.

2020 marks the 20th year of Yonghui's rapid growth, and the supply chain has played an indispensable role. So, what has Yonghui done in supply chain construction? And what has the supply chain brought to Yonghui?

-01- Lock in Freshness with 'Source Procurement'

From industry patterns, when the number of stores and business volume grow to a certain scale, supermarket companies must further strengthen their supply chain capabilities to maintain efficient operations and achieve efficient, precise matching of massive volumes of goods between supply and demand. This is especially true for Yonghui, which focuses on fresh food.

Compared to peers, Yonghui's fresh food supply chain is characterized by source procurement. Following the three core principles of 'quality, brand, and source,' it has built a triple model of 'source direct procurement + regional direct procurement + private label,' establishing a national unified procurement system for fresh agricultural products and a regional direct procurement system, reducing the lengthy circulation links of the traditional model.

As is well known, for fresh food categories, consumers care most about freshness. With the source procurement model, Yonghui can better understand the characteristics of source products, strictly implement key links such as product preservation, storage conditions, and shelf life, and effectively 'lock in' freshness through 'fresh food product expert' management.

It is reported that Yonghui's thousand-person supply chain direct procurement team starts from different categories, goes deep into product sources, and directly connects with farmers or rural cooperatives to accurately grasp product prices and quality. The team knows the specialties of various regions well, precisely corresponds to the transformation of production areas according to seasonal changes, and better matches end-consumer preferences by sorting out the selling points and features of each production area. This means that every single product has a roadmap in the mind of every Yonghui purchaser, truly achieving 'buyers must understand selling, and sellers must understand buying.'

Take lychees as an example: lychees are highly seasonal, have a short product cycle, and are difficult to preserve, requiring extremely high supply chain and product management standards. The 'lychee season' runs from June to August each year, with production areas moving from south to north, from Hainan to Guangxi, Guangdong, and then Fujian. There are many varieties, with up to 20 varieties circulating in the market, each with a market cycle of only one week to half a month.

Different varieties also have significant price differences; for example, 'Feizixiao' can be priced above 30 yuan per unit when it first hits the market. In terms of preservation, differences in pit size, flesh thickness, grain thickness, harvesting methods, preservation methods, and temperature control all matter.

To this end, Yonghui's procurement team formulates and strictly implements every standard, using a better and more efficient supply chain configuration to ensure that consumers nationwide can enjoy seasonal fresh lychees at an excellent price-performance ratio.

-02- Save Every Penny for Customers

From the consumer's perspective, besides fresh products, the most attractive thing about entering a supermarket is high cost-performance products. To offer products with a price advantage, supermarket companies must first gain a cost advantage. Through supply chain construction, Yonghui has established cost and bargaining advantages in upstream procurement, warehousing, and logistics, allowing it to win consumers' hearts with fair prices.

First and foremost is the procurement end. Yonghui's origin-based procurement model makes it more sensitive to market conditions at the source, reduces intermediate markup links, and ensures continuous supply of goods. At the same time, through various source procurement methods, it minimizes the intermediate links in the fresh food industry chain from 'origin to store to consumer,' reducing logistics, warehousing, and loss costs, while maintaining the color, aroma, and taste of fresh products and ensuring cost advantages.

Additionally, Yonghui launched its private label 'Yonghui Preferred' at the end of 2018, which is a manifestation of Yonghui's cooperation with high-quality upstream suppliers through order-based production, strengthening supply chain capabilities, and building differentiated advantages and competitiveness.

Tianqu's Wuchang rice, a private label product, is one of Yonghui's earlier 'order agriculture' items. Starting in 2016, Yonghui successively cooperated with Heilongjiang Beidahuang Rice Industry Group and Wuchang Qiaofu Dayuan Agriculture Co., Ltd., establishing a Yonghui 'Wuchang Rice' planting base of over 15,000 mu in the core production area of Wuchang through land transfer.

Through the model of order agriculture and agricultural product branding, it avoids intermediate markup, improves product cost-performance, and controls food safety from the source. In addition to the star product Tianqu 'Wuchang Rice,' Yonghui has also launched a series of 'order agriculture' items such as pumpkin, golden diamond pineapple, and Fuping dried persimmons.

In addition to source direct procurement, self-operated supply chain, and order-based agriculture, Yonghui also cooperates with strategic partners such as Zhongbai Group and Hongqi Chain for joint procurement to obtain favorable prices for bulk origin direct procurement. Moreover, Yonghui has tied up with specialty agriculture, acquiring, joint venturing, introducing, or taking stakes in a series of upstream companies based on existing businesses, successively taking stakes in Xingyuan Agriculture, Guolian Aquatic Products, Minwei Industry, Xiangcun Shares, etc., through integrated layout, enhancing bargaining power and further strengthening Yonghui's advantages in supply chain procurement.

While ensuring high cost-performance supply of source products, Yonghui further optimizes procurement efficiency and reduces losses through 'procurement based on sales, and coordination between procurement and sales.' In practice, platform procurement and war zone procurement cooperate, and procurement and operations interact in real time. The platform is mainly responsible for long-radius, remote procurement, such as core single products from core production areas, produced seasonally and sold throughout the year; while provincial war zone procurement focuses on short-radius, localized procurement, such as local vegetables with regional characteristics that are not easy to preserve, to improve flexibility.

Reducing procurement costs is only the first step. For retail chain enterprises, one of the purposes of supply chain management is to select good products at relatively low costs and deliver them to target consumers as quickly as possible.

To form advantages in the upstream and downstream of the industry chain, it is necessary to connect procurement, warehousing, and logistics to form advantages, creating a controllable supply chain system. A low-cost, efficient logistics system is particularly important.

-03- Self-built Logistics: Reduce Costs, Increase Efficiency, and Ensure Freshness

In addition to ensuring product freshness, another important purpose of investing in warehousing and logistics is to reduce costs and increase efficiency. When dealing with products, besides controlling the source, it is also necessary to reduce losses during transportation.

Compared to third-party logistics, self-built warehousing and logistics have significant advantages in cost control, service level, and service responsiveness. Through the continuous improvement of the self-built warehousing and logistics system, Yonghui has improved service complexity, transportation flexibility, and logistics response speed to a certain extent.

The initial cost of self-built warehousing and logistics is high, but once built, it raises the industry entry barrier, and the benefits are more sustainable. Whether it is procurement costs or further reductions in logistics and warehousing costs, they will ultimately be passed on to consumers, meeting their demand for high-quality, high cost-performance products and services.

It is reported that Yonghui began building its warehousing and logistics system early on, using self-built warehousing and logistics for transportation and distribution to ensure product freshness and improve transportation efficiency. In particular, the construction of the cold chain system has effectively extended product shelf life and increased the transportation radius of fresh products.

According to Yonghui's financial reports, as of the end of 2019, Yonghui's logistics center distribution network covered 28 provinces nationwide, with 19常温仓 (ambient temperature warehouses) and 11 cold chain warehouses, with a total operating area of 600,000 square meters and a total operating volume of 52.24 billion yuan.

With logistics centers covering the country and an increasingly dense logistics network, Yonghui has built highways for product circulation, ensuring transportation efficiency and freshness, significantly reducing logistics costs and product loss rates, and enhancing its competitiveness.

-04- Supply Chain Management Embraces Digitalization and Intelligence

As the company scale expands and order volumes increase, the process from procurement to sales becomes increasingly complex, posing greater challenges to operational capabilities. According to Yonghui's official website, as of August 2020, its supermarket business covers 29 provinces, 553 cities (districts, counties), and 943 stores.

The huge national order volume means Yonghui needs to use digital means to break information silos, achieve seamless connection between planning, procurement, delivery, and marketing in all supply chain links, improve coordination, shorten supply chain response time, and ensure service quality and customer shopping experience.

To build a powerful intelligent middle platform, Yonghui has continuously invested, using consumer scenarios, big data, and AI technology to link upstream and downstream, connecting ordering, procurement, warehousing, and stores, achieving store digitalization and intelligence, thereby improving overall company efficiency.

More importantly, the construction of the intelligent middle platform has enhanced the company's online service capabilities, helping promote the integrated development of online and offline, and creating the 'Yonghui in your phone.'

Online and offline users have different needs: in-store customers are price-sensitive, while home-delivery customers value quality and shopping experience more. This poses new requirements for Yonghui in terms of APP development, product structure, and standard product settings, such as product specifications, packaging, and fulfillment capabilities. In terms of supply chain, it is about continuously improving and optimizing online product selection, providing products that better meet home-delivery needs while maintaining higher quality.

The construction of the intelligent middle platform has significantly accelerated the development of Yonghui's home-delivery business. In the first quarter of 2020, Yonghui's home-delivery business grew 2.3 times year-on-year, accounting for 7.3% of total sales, up 4.5 percentage points year-on-year. According to Yonghui's 618 shopping festival report, with the help of Yonghui Life and platforms such as JD Daojia, Meituan, and Ele.me, on June 18, the GMV of the 'home-delivery' business grew more than 4 times compared to the same period last year, clearly becoming a new growth point.

For Yonghui, digital transformation is a new topic and a new starting point for future development. With the intelligent middle platform, Yonghui will drive operations from being people-centered in the past, to market-oriented now, and to intelligent operations in the future. For consumers and the industry, it also means new expectations and imagination space.

-05- Strengthen the Moat with Supply Chain

Since its listing in 2010, Yonghui has achieved rapid development for a decade, with nationwide layout fully expanded, opening at least 45 new stores each year, and a maximum of 332 new stores in one year. Generally, in the process of rapid expansion, companies often lower product prices to enhance competitiveness, leading to a decline in gross margins. Even international retail giant Walmart faced similar challenges during its rapid expansion.

However, during its rapid expansion, Yonghui has achieved stable growth in gross margins, low expense ratios during the period, and steady growth in ending cash balances. Rapid expansion has not reduced the company's profitability.

Huachuang Securities research believes that in the early stages of Yonghui's development, it could expand rapidly even without a supply chain, but when the number of stores grows to a certain scale, the demand for supply chain increases, and store growth will slow down significantly. Yonghui's new round of high-quality growth after 2014 is due to the effectiveness of its investment in the supply chain.

The continuously improving supply chain system escorts Yonghui's scale expansion. Expansion brings economies of scale, effectively reducing costs and improving operational efficiency, further strengthening Yonghui's 'moat.'

Through large-scale procurement, it enhances bargaining power upstream and reduces procurement costs; scale expansion brings brand effects and customer attraction, which helps obtain more rent discounts from property developers; more stores and orders can dilute warehousing and logistics costs, and large-scale transportation can improve transportation efficiency.

While reducing costs, supply chain construction also drives operational efficiency. From demand forecasting, process management, and inventory optimization to leveraging synergies across links and risk warning, a strong supply chain combined with a mature intelligent middle platform system further improves Yonghui's operational efficiency. According to the first quarter 2020 data, Yonghui's total asset turnover was 0.56 times, and inventory turnover was 2.16 times, comparable to international supermarket giant Walmart.

In recent years, Yonghui has also expanded its direct procurement sources abroad, continuously advancing its international supply chain layout. Through joint ventures, introducing investors, and external cooperation, Yonghui has successively cooperated with Dairy Farm International, Daymon Worldwide, Australia's largest supermarket chain Woolworths, and century-old American company Cargill, integrating global supply chain resources.

In 2019, Yonghui established 1233 International Supply Chain Management Co., Ltd., creating an S2B global consumer goods supply chain service platform, providing comprehensive supply chain services such as global product matching, joint procurement, warehousing and logistics, payment and finance, marketing, quality control and traceability, and data empowerment for demanders, continuously strengthening international supply chain competitiveness.

Dongxing Securities believes that as supermarket product structures become more complex and consumer demand structures transform, future consumer-centric product restructuring will drive supply chain upgrades. Competition among supermarkets is increasingly reflected in supply chain depth and efficiency, and a continuously improved and optimized supply chain is expected to become Yonghui's moat in the next decade.

The 'Yonghui model' may seem simple, but in practice, it often turns out to be 'easy to understand, but hard to execute.' This is because supply chain construction and improvement cannot be completed overnight. It requires significant capital, takes a long time to show results, and different links need continuous磨合 (running-in) and gradual accumulation of experience.

Yonghui has been laying out its supply chain for over a decade, investing huge amounts of money and effort in iterative updates, continuously strengthening its supply chain advantages. In addition to obvious first-mover advantages, what is more valuable is the experience, know-how, network resources, brand influence, and process optimization details accumulated during the continuous optimization of the supply chain, which are difficult for competitors to imitate in a short time.

Source: Lianshang.com (ID: linkshop2012), Author: Lianshang

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