Source: Market Value List
- Why is Yonghui Superstores suffering huge losses?
- Is the transformation an attempt to imitate Sam's Club?
- What difficulties does Yonghui Superstores face?
Last year's fierce community group buying battle hit Yonghui Superstores' territory first.
Over the past decade or so, Yonghui Superstores built high barriers in fresh food retail through low prices. During the pandemic, online grocery shopping became normalized, and coupled with price wars in community group buying, Yonghui's offline fresh food business lost its unique competitiveness.
In the fourth quarter of 2020, Yonghui Superstores' non-GAAP net profit attributable to shareholders was a loss of 940 million yuan. This was just the beginning. Entering 2021, except for the first quarter, Yonghui Superstores' non-GAAP net profit attributable to shareholders saw large losses in both the second and third quarters.
As a former benchmark in offline retail and a white horse stock favored by the market, it now faces not only a significant shrinkage in market value and institutional investors fleeing, but also the question of how to survive.
To save itself, Yonghui Superstores began a major transformation into warehouse-style supermarkets in 2021. Will this be a lifeline for Yonghui Superstores?
Competitors Attack the Home Base
In 2020, community group buying burned into Yonghui Superstores' home base, and within a few months, it destroyed the core advantages that Yonghui had built over more than a decade.
Why is community group buying so lethal? The answer is low prices.
As a traditional retail supermarket, Yonghui Superstores took over a decade to build its fresh food retail barrier with low-price advantages.
In the 1990s, with the rapid development of China's economy, foreign large chain supermarkets such as Metro and Walmart entered China one after another. In 1998, riding the wave of the initial stage of supermarket hypermarkets, the first supermarket named "Yonghui" opened at Fuzhou Railway Station.
In 2001, Yonghui Superstores seized the policy opportunity of "agricultural market to supermarket" (converting wet markets into supermarkets). The first Yonghui supermarket with fresh food products, Pingxi Store, opened with support from local government departments.
In December of that year, senior officials visited Yonghui Superstores and praised it as one of the few enterprises in the country that successfully introduced fresh products into supermarkets, proposing the "Yonghui Model." The following year, a joint inspection team from seven ministries and commissions of the State Council visited Yonghui Superstores and advocated promoting the "Yonghui Model" nationwide.
In addition to catching the policy express, Yonghui Superstores also actively cultivated and built its own agricultural product procurement team. On one hand, it used a centralized procurement model to gain bargaining power; on the other hand, it bound upstream suppliers through joint ventures and equity participation to stabilize the supply chain. It also built its own logistics and distribution centers to control logistics costs and established a B2B fresh food processing plant to process and sell fresh products with poor appearance to B-end merchants, further reducing loss costs.
This extreme cost compression built Yonghui Superstores' competitive barrier in the fresh food sector.
In China, fresh food as a consumer product has the characteristics of rigid demand and high frequency. Yonghui Superstores made its fresh food business highly price-competitive, which brought a large and stable customer flow to the supermarket. At the same time, consumers shopping in the supermarket often buy other items while purchasing cheap fresh food.
Data since Yonghui Superstores' listing shows that fresh food and processing income accounts for 45% of main business revenue, but gross profit accounts for less than 30% of total gross profit.
Aggregating historical data, the gross margin for fresh food is only about 13.2%, while the overall gross margin for all products is about 20.2%. Excluding the impact of losses in the first half of 2021, the net margin is about 1.9%. If simply estimated, categories with gross margins below (20.2% - 1.9%) = 18.3% are likely unprofitable.
It is not difficult to see that Yonghui's strategy is to use fresh food at a loss to attract customers, using "small quantity + high frequency + low gross margin" fresh food to drive "large quantity + low frequency + high gross margin" other products.
Relying on the fresh food differentiation strategy, Yonghui Superstores was able to expand rapidly in a short period, going beyond Fujian. Even under the impact of e-commerce, when other supermarkets' performance declined, Yonghui was still able to maintain sales growth of around 20%. Even when various fresh food e-commerce companies were fighting fiercely, Yonghui Superstores could still cope with its fresh food price advantage.
However, this approach was defenseless against community group buying.
Community group buying can be cheaper than Yonghui Superstores, not only because of the burning of subsidies by internet giants, but also because the business model bypasses most of the pain points of fresh food retail: no need to build physical stores, no delivery, no inventory stocking. And the "group leader" role they invented, because they are familiar with the community and have a trust foundation with residents, also minimized the cost of customer acquisition and promotion.
Community group buying developed rapidly through a pre-sale and next-day self-pickup model, directly attacking Yonghui Superstores' home base.
At the same time, the pandemic gave rise to a large demand for "fresh food to home," and fresh food e-commerce business data soared. As the pandemic became normalized, online grocery shopping also became normalized, causing Yonghui's offline fresh food business to lose its unique competitiveness.
Starting from the fourth quarter of 2020, Yonghui Superstores experienced large-scale losses. In its 2020 annual report, Yonghui Superstores mentioned that the national offline retail industry saw declines in store traffic and sales, and customers' shopping methods and channels underwent significant changes.
Self-Rescue: Why Warehouse Stores?
Facing this day, Yonghui was not unprepared, but the road has not been smooth.
Whether it was the Super Species in 2017 benchmarking Hema Fresh, or the mini stores in 2018 benchmarking community fresh food stores, these were active attempts by Yonghui Superstores, but both had to shrink business and close stores due to poor management.
In the summer of 2021, Yonghui Superstores converted some hypermarket stores into warehouse stores and reopened them, changing the original back warehouse into a sales floor, expanding the business area, and improving the shopping experience.
Why did Yonghui transform into the warehouse store model?
First, the macro environment has changed, and chain hypermarkets are all facing transformation.
Since its development in 1994, the number of chain supermarkets in China has surged, gradually becoming the mainstream retail format. However, in recent years, with the development of e-commerce and the impact of the pandemic, both online shopping and online grocery shopping have become normalized.
According to data from China Industry Information Network, since 2017, the number of chain supermarket stores, employees, and commodity sales have declined year by year.
In addition, the performance growth of major chain supermarkets is shrinking. Although Yonghui Superstores' growth rate has remained high compared to the industry due to its fresh food advantages, the downward trend in growth rate is already very obvious.
Second, the model has been validated, and competitors have entered the game.
In August 2019, the first Costco warehouse membership store in China opened in Shanghai, and it was packed on the opening day. Costco's more than two years of operation in China have been generally smooth, which proves the feasibility of the warehouse membership store model in China.
At the same time, Sam's Club China accelerated its expansion, Metro revived its membership system, and companies such as Hema, Carrefour, and Hualian entered the game one after another.
Considering its own situation, Yonghui Superstores made bold changes to the warehouse membership store model.
Compared to other warehouse membership stores, Yonghui's warehouse stores are actually a type of warehouse supermarket without membership thresholds. Anyone can enter the store, and there is no bulk packaging or wholesale-style selling. Customers can buy single items or whole pieces, operating both wholesale and retail, and ensuring "one piece is also wholesale price."
Unlike other warehouse membership stores where most products are private label, thereby compressing costs and increasing gross profit, Yonghui's warehouse stores still use original suppliers and products, but with streamlined SKUs. The streamlined products are mainly people's livelihood traffic products, which can create larger volumes on a single SKU, enhance bargaining power with original suppliers, and further compress costs.
In terms of location, most of Yonghui's warehouse stores are converted from previous hypermarkets, positioned as "warehouse stores at your doorstep."
Yonghui Superstores wants to use this down-to-earth, no membership fee, low-price strategy to win back users lost in community group buying.
At the same time, warehouse stores can also serve as "home delivery warehouses" for Yonghui's online business. This increases the SKUs for home delivery business, and the stacked display method improves picking efficiency while also reducing the out-of-stock rate for online business.
It should be noted that currently, Yonghui's online business is the most successful among all previous attempts. According to the third quarter report of 2021, Yonghui achieved online sales of 9.97 billion yuan, accounting for 13.9% of total sales.
Yonghui differs from standard membership stores like Sam's Club in form and business model, but the goal is the same: to increase profits through higher sales per square meter.
Compared to the attempts of Super Species and mini stores, the warehouse supermarket in the hypermarket format is a familiar area for Yonghui. However, it is still necessary to pay attention to the core of the warehouse membership store model, which lies in the high-quality and cost-effective supply chain capability under global procurement, as well as the development capability of private label specialty products.
Without the development of private label specialty products, if Yonghui wants to carve out a path with warehouse stores, it will be a huge test of its supply chain capability.
Is There Enough Ammunition?
Can the warehouse store model bring Yonghui back to glory? When can it reverse the loss situation?
First, the warehouse store business is a hard business of bending down to pick up coins.
Costco's gross margin does not exceed 14%, and Sam's Club's gross margin is also low, with its main profit source being membership fees. According to media reports citing Yonghui insiders, Yonghui's warehouse gross margin does not exceed 10%, which is even lower than the fresh food gross margin calculated above. Combined with no membership fees and no product differentiation, Yonghui's warehouse stores' only competitive advantage is low prices.
Within the 10% gross margin, Yonghui warehouse stores also provide services such as home delivery and shuttle buses to enhance the shopping experience. This is destined to be a business that requires meticulous management to yield meager profits.
The newly opened warehouse stores performed well initially. The semi-annual report showed that sales increased by 139% year-on-year compared to the previous supermarket format, and average daily customer traffic per store increased by 136%, with average daily customer traffic also improving. However, it cannot be ruled out that consumers' curiosity about new openings played a role.
Second, when can the situation be reversed? This depends on Yonghui Superstores' current financial position and how well the warehouse supermarkets are operating.
Whether it was Super Species or mini stores, Yonghui's attempts at new retail ended hastily. It could not afford to "not count costs" like Hema, but it still paid a high price.
Even without the pandemic, community group buying, and fresh food e-commerce, Yonghui's decline was already visible at the end of 2019.
In the fourth quarter of 2019 alone, net cash flow from operating activities was -1.867 billion yuan, and net cash flow from investing activities was -1.298 billion yuan. Yonghui had to increase borrowings by 4.1 billion yuan to supplement liquidity. As a result, at the end of 2019, Yonghui Superstores' short-term borrowings reached 10.813 billion yuan, an increase of 193.05% year-on-year.
In the second and third quarters of 2020, after the initial impact of the pandemic faded, under the influence of fresh food e-commerce and community group buying, Yonghui Superstores' performance began to slump, and the fourth quarter's non-GAAP net profit directly lost 940 million yuan. All this was masked by the first quarter of 2020's performance, so the 2020 annual report still showed profitability.
It was not until Yonghui Superstores announced its semi-annual report in 2021 that public opinion was shocked, and media headlines read "first loss in 11 years since listing."
The third quarter report of 2021 showed that Yonghui Superstores' current ratio was 0.82, with monetary funds of 12.568 billion yuan on the books against current liabilities due within one year of 14.661 billion yuan, a funding gap of over 2 billion yuan, indicating significant debt repayment pressure.
So, how are the warehouse stores performing?
As of June 30, 2021, the 20 warehouse stores had been open for a total of 296 days, with total sales of 150 million yuan. One warehouse store's annual sales are approximately 185 million yuan. Assuming a net margin of 1.9% (possibly lower because selling prices are lower), without considering value-added tax, a rough estimate of a single warehouse store's annual net profit is about 3.5 million yuan.
Based on the first half of 2021 data, including warehouse stores, Yonghui Superstores had a total of 1,026 stores, with non-GAAP net profit attributable to shareholders of -925 million yuan. Considering that warehouse stores and new stores have minimal impact on overall data, and other businesses account for a low proportion of main business, without considering the impact of new stores operating for less than half a year, warehouse store profitability, and other business income data, currently Yonghui Superstores' single-store semi-annual loss is about 900,000 yuan.
Based on the estimated warehouse store profit and supermarket store loss, when about 350 original supermarkets are converted to warehouse stores, Yonghui Superstores will turn losses into profits.
Yonghui Superstores opened 20 warehouse stores in May and June 2021, and converted 35 stores in the third quarter. Assuming 20 conversions per month, it would take nearly a year and a half.
Conclusion
Reviewing Yonghui Superstores is like experiencing a midlife crisis: working diligently and achieving some success, constantly learning new skills to maintain current dignity, but unable to match the energy and vitality of the young, ultimately left behind by the times.
However, the confidence built over half a lifetime of hard work remains, and there is still the courage and strength to save oneself.
Yonghui Superstores has always been vigilant in times of peace, attempting transformation since 2016, whether it was Super Species or mini stores.
But the traditional low-margin large supermarket retail industry, supported by economies of scale, has a blood-making capacity that cannot keep up with the speed of blood loss caused by continuous experimentation. Until the emergence of community group buying and the rise of fresh food e-commerce, it finally dealt a fatal blow to Yonghui Superstores, which had not yet recovered from the tuition fees of new retail.
As a self-rescue measure, the warehouse model also leverages the original supply chain advantages and tests the waters with minimal cost. However, this is still a difficult road.
Will competitors leave opportunities? Can the model work? Can cash flow hold up?
These are all questions Yonghui Superstores must face.
References: [1] "The Quiet Dusk of Supermarkets," Yuanchuan Research Institute [2] "Yonghui Superstores: Why It Has Been Neglected for Six Consecutive Quarters," Shijie [3] "Analysis of China's Chain Supermarket Development Status and Market Competition Pattern in 2020" [4] "Yonghui Warehouse Stores: An Unintentional Move," Third Eye on Retail
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