Source: Caijing Eleven (ID: caijingEleven) Author: Wu Qiong Yonghui Superstores, in urgent need of turning around, has made a 180-degree shift in its business format direction. After abandoning the high-end new retail route represented by 'Super Species,' Yonghui has opened warehouse stores featuring affordability and accessibility. From the first store in Fuzhou, within just five months, Yonghui has opened over 50 warehouse stores nationwide, covering more than 10 provinces and regions. At the same time, Super Species, which once received substantial resources, has been seeing store closures. On April 20, a person in charge at Yonghui Superstores (601933.SH) told the media that Super Species is no longer the group's core business. As a benchmark format for Yonghui's new retail trial, Super Species pushed Yonghui's stock price to a historical high of 12.12 yuan in early 2018. However, the huge investment in Super Species did not bring corresponding performance growth. At the end of 2018, due to continuous losses in new retail formats including Super Species, Yonghui divested Yonghui Cloud Creation, the unit responsible for new retail business, from the listed company system. After shedding the new retail halo, Yonghui's market value kept falling. As of September 17, Yonghui's stock price was only 3.91 yuan. Affected by the rise of community group buying and the normalization of the pandemic, Yonghui Superstores experienced its first loss since listing in the first half of 2021. With innovation failures and poor performance, Yonghui urgently needs to find a new growth point. (Data source: Wind) Super Species and Yonghui warehouse stores are two completely different formats. The former focuses on a 'retail + dining' model, with locations mainly in office-dense areas, high-end residential areas, and shopping malls, targeting mid-to-high-end consumers. The latter is transformed from traditional Yonghui hypermarkets, focusing on affordability and people's livelihood. Neither a traditional hypermarket nor a mainstream membership warehouse supermarket, Yonghui has taken a middle path between the two. Compared with traditional hypermarkets, Yonghui warehouse stores are closer to the warehouse model in terms of store environment and packaging, and emphasize the concept of affordability. Compared with mainstream membership warehouse supermarkets like Sam's Club, which target the middle class, Yonghui warehouse stores are more focused on people's livelihood and do not charge membership fees. In the generally sluggish environment of domestic supermarket hypermarkets, Yonghui warehouse stores hope to differentiate themselves from traditional hypermarkets while also reaching a broader consumer base. The 'Yonghui Characteristics' of Warehouse Stores "Don't ask how many days the promotion lasts; every day is affordable." Walking into the Yonghui warehouse store at Hongkun Plaza in Daxing District, Beijing, the store's broadcast repeatedly reminds consumers. This warehouse store was converted from an original Yonghui supermarket. Due to the store's ceiling height, compared with membership warehouse supermarkets like Sam's Club and Costco, Yonghui warehouse stores have lower shelves, and at first glance, they don't look much different from ordinary supermarket hypermarkets. However, upon closer inspection, most non-fresh products in Yonghui warehouse stores retain the cardboard packaging for transport, and instead of using shelves, they are stacked directly on the floor. The aisles are wider, and the shopping environment is more spacious. On August 27, 2019, Costco, a membership warehouse supermarket from the United States, entered the Chinese mainland market. On its opening day, it had to limit customer flow due to the overwhelming number of shoppers, even trending on social media. After Costco's instant success, domestic membership warehouse supermarkets saw a wave of openings. Costco's old rival, Walmart's Sam's Club, changed its previously slow expansion approach. Sam's Club entered the Chinese market in 1996, and by the time Costco opened in Shanghai in 2019, it had only opened 26 stores in 23 years. But after Costco entered the Chinese market, Sam's Club added seven new stores in three years, and it is expected to have 40 to 45 open or under-construction stores by the end of 2022. In addition, chain supermarkets such as Metro, Carrefour, and Hema have successively entered the market, opening membership warehouse formats, and new brands like Fudi Membership Store have also joined. When news of the first Yonghui warehouse store opening in May this year broke, industry insiders assumed that Yonghui would follow competitors like Hema and do membership warehouse stores similar to Sam's Club and Costco. But in reality, Yonghui's route is different from all the above membership warehouse stores. First, the positioning is different: Yonghui warehouse stores focus on 'everyday affordability' for the mass consumer, while most warehouse stores promote high-quality products for middle-class consumers. Second, the location selection is different: most domestic warehouse stores are mainly located away from city centers to facilitate weekend bulk shopping by car for middle-class families, while Yonghui warehouse stores are mostly in core business districts and residential areas, closer to consumers and more convenient. In addition, there is a big difference in consumer entry barriers. At Sam's Club and Costco-style warehouse stores, consumers need to pay a certain membership fee before entering. Yonghui warehouse stores do not charge membership fees and have no entry barriers. This also makes Yonghui warehouse stores more universal and down-to-earth in product selection. Currently, the 6,000 SKUs (single items) in Yonghui warehouse stores are mainly livelihood traffic products, which are easier to achieve high sales volumes. A Yonghui representative told Caijing reporters that the traditional membership warehouse model is more suitable for North America and Europe, where the population is sparse, and people are used to driving to hypermarkets and stocking up in storage rooms. In developed cities in Asia, including first- and second-tier cities in China, high housing prices and fast-paced lifestyles make the market environment quite different from North America and Europe. The completely different approach from traditional membership warehouse stores allows Yonghui warehouse stores to replicate quickly. In just five months since launching warehouse stores, Yonghui has reached over 50 stores. Sam's Club has only 33 stores after 25 years in the Chinese market, and Costco has only opened one store in two years in China. This is because they have higher requirements for customer quality and property conditions, and there are relatively limited cities that meet the criteria, and developers are less willing to build warehouse properties. "This is a dilemma faced by all membership warehouse supermarkets," Wang Guoping, senior advisor at Lianshang.com, told Caijing reporters. Such membership stores require a very large footprint, target customers are families with cars, and need huge parking lots to solve parking issues. These two conditions have already filtered out many potential areas. In contrast, Yonghui warehouse stores are mostly converted from existing Yonghui supermarket stores, with fewer requirements for ceiling height, area, and parking, so new stores can be opened very quickly. Abandoning High-End Positioning, Switching to a People-Friendly Route Yonghui warehouse stores not only take a different path from traditional warehouse stores, but their approach of serving mass consumers also runs counter to Yonghui's past strategy of high-end formats like the green-label store 'Bravo YH' and Super Species. The first 'Bravo YH' store opened in Chongqing in 2010. Yonghui's previous store decoration and signage were mainly red, but 'Bravo YH' uses green and gray, hence the name green-label store. The green-label store is positioned as a 'premium supermarket,' with high-end product structure and services, mainly in first- and second-tier cities. The process of Yonghui transforming from traditional red-label stores to green-label stores is called 'red-to-green.' A person close to Yonghui Superstores told Caijing reporters that from the results, Yonghui's red-to-green transformation was not 'thorough.' Even now, if you visit green-label stores in some cities, most consumers are still middle-aged and elderly, while the original intention of the green-label store was to create a format more in line with young people's consumption habits. Super Species was also an attempt by Yonghui to attack the high-end market. In 2017, Yonghui opened its first Super Species store in downtown Fuzhou, adopting the concept of 'retail + dining,' with upscale store decoration and featuring expensive ingredients like salmon and Boston lobster. In 2017, when the new retail concept swept the capital market, Super Species pushed Yonghui's stock price from 4.76 yuan at the beginning of 2017 to a high of 12.12 yuan in January 2018. The market value tripled, and Yonghui Superstores became one of the phenomenal stocks of that year. However, Super Species was loss-making from the start and never improved over the years. Financial data shows that Yonghui Cloud Creation, which mainly operated Super Species, lost 267 million yuan in 2017 and 617 million yuan in the first three quarters of 2018, and was divested from the listed company system at the end of 2018. In the first half of 2021, news of Super Species store closures kept coming, until it was removed from Yonghui's 'core business' list. The high-end route never allowed Yonghui to find a second growth curve beyond its traditional hypermarket business, and warehouse stores were born as Super Species gradually exited the stage. A Yonghui representative summarized the operation model of Yonghui warehouse stores in an interview with Caijing reporters: Warehouse stores streamline SKUs and combine wholesale and retail to increase the volume of single products, reduce procurement costs, and then pass on the savings to consumers, allowing stores to attract more consumers with price advantages. This creates a model of leveraging cost-effectiveness to gather large traffic and then profiting from small margins on high volume. The launch of warehouse stores means Yonghui has returned from the high-end route to the people's livelihood route that this retail enterprise has been more adept at in its past development. On May 21, 2021, Yonghui Superstores Chairman Zhang Xuan Song responded to investors at the annual shareholders' meeting, saying that Yonghui would 'return to the origin of a people's livelihood supermarket.' In response to this major shift in innovation direction, a Yonghui representative told Caijing reporters that Yonghui's business formats are adjusted based on user needs, market demand, and future development strategy, and there is no distinction between high-end and low-end. Yonghui's warehouse stores adhere to the original business philosophy of Yonghui, namely 'People's Livelihood Supermarket, Yonghui for the People,' hoping to increase customer value through quality and affordable products and warm shopping services, and bring customers back to offline consumption. Through digitalization and process reengineering across operations, procurement, and logistics, Yonghui aims to improve operational efficiency and reduce the difficulty of opening stores, thereby achieving economies of scale and profiting from volume. Proactive Attack or Desperate Remedy? At the Yonghui warehouse store at Hongkun Plaza in Daxing District, Beijing, Caijing reporters observed that the consumers in the store are mainly middle-aged and elderly. Compared with the previous Yonghui supermarket, the customer base of the affordable Yonghui warehouse store has not changed significantly. A person close to Yonghui Superstores commented: "Yonghui is under great performance pressure, and with sales not growing, it can't afford to attract customers with stronger purchasing power and increase the average transaction value." Another retail industry insider who has long followed the warehouse store format believes that the warehouse store format itself has limited development space in China. Whether it's Walmart, Metro, or Carrefour, warehouse stores are not their main format, and the number of stores is far smaller than traditional supermarket hypermarkets. From a consumer experience perspective, Chinese consumers have a developed e-commerce network, and the way to get discounts by buying in bulk at warehouse stores can also be achieved through online shopping. Moreover, for bulk purchases, compared with going to physical stores, online shopping with home delivery is more consumer-friendly. "Warehouse stores are unlikely to change Yonghui's current decline," he told Caijing reporters. In 2021, affected by the normalization of the pandemic and the impact of community group buying companies, the physical supermarket industry was generally sluggish. Yonghui experienced its first loss since listing in the first half of this year. Financial reports show that in the first half of 2021, Yonghui Superstores achieved operating revenue of 46.827 billion yuan, a year-on-year decrease of 7.3%, and net profit attributable to shareholders was -1.083 billion yuan, a year-on-year decrease of 158%. In the financial report, Yonghui attributed the poor performance in the first half to external factors such as the low-price expansion of community group buying and the normalization of pandemic prevention, and internal factors such as the company's proactive structural adjustments and inventory reduction. Unlike peers who mostly open new stores for warehouse formats, Yonghui warehouse stores are mainly converted from existing stores. A Yonghui representative believes that the current retail market has entered a stage dominated by stock. Yonghui's warehouse stores are an exploration and innovation to create increment from stock and further revitalize offline stores. Yonghui hopes that through the warehouse format, it can bring a wider variety of products at more favorable prices to community residents around the stores, and attract more family customers to Yonghui stores for daily necessities. "Warehouse stores are an iteration of Yonghui's business format, a proactive push on internal organizational capabilities, supply chain capabilities, and technology capabilities, and a self-innovation for Yonghui," he told Caijing reporters. Yonghui disclosed the latest operating data for warehouse stores in its 2021 semi-annual report. The report shows that in the first half of 2021, warehouse store sales reached 150 million yuan, a year-on-year increase of 139%, and average daily customer traffic per store reached 6,181 person-times, a year-on-year increase of 136%. Warehouse membership stores promoted overall sales levels in surrounding areas. Among 169 stores in Fujian, 15 are membership stores. In July, same-store sales in Fujian increased by 12% year-on-year, and customer traffic increased by 19%; in Fuzhou, same-store sales increased by 17%, and customer traffic increased by 28%; in Cangshan District, where the Aoti store is located, same-store sales increased by 29%, and customer traffic increased by 35%. But the capital market did not respond positively. Since 2021, Yonghui's stock price has been declining, from around 7 yuan at the beginning of the year to less than 4 yuan. As of September 17, Yonghui's stock price was 3.91 yuan. The aforementioned person close to Yonghui Superstores believes that it is hard to say whether the performance growth brought by warehouse stores can be sustained. "The essence of warehouse stores is to revitalize existing stores by lowering gross margins. Lowering gross margins can stimulate sales growth in the short term, but whether it can be sustained in the long term is a question. The core issue is that the customer base has not changed." In addition to business model innovation, Yonghui has placed another focus on technological innovation. On August 5, 2021, Li Songfeng, former CTO of Yonghui Superstores, took office as CEO. In the first half of 2021, Yonghui's technology spending reached nearly 300 million yuan. As of the end of June 2021, Yonghui had over 1,000 technology staff. On September 8, Li Songfeng issued his first internal letter to all employees as CEO, clarifying Yonghui's next goals and strategic positioning: a full-channel digital retail platform based on fresh produce and customer-centric. Li Songfeng's appointment as CEO elevated the status of technology in Yonghui's future development strategy to a new level. Yonghui warehouse stores also benefit from Yonghui's technological accumulation. In fact, Yonghui warehouse stores are not just a sales floor, but a combination of 'sales floor, warehouse, and home delivery warehouse' in one. The advantage of this is that Yonghui warehouse stores can effectively simplify internal operating costs, improve the product richness and picking efficiency of home delivery business, reduce out-of-stock rates, and release back-end staff to the front end, maximizing work efficiency. Facing competition from community group buying and external pessimism about hypermarkets, a Yonghui representative told Caijing reporters that community group buying will have a certain impact on traditional retailers in the short term, but community group buying and retail supermarkets are not substitutes. Returning to the essence of consumption, for most consumers, the purpose of consumption is not simply to buy cheap things, but to hope that spending one yuan can get one yuan's value. Traditional physical retail, especially supermarket companies, still has great potential in the future. Are you 'watching' me?