The second half of the "middle-aged" supermarket: open small stores, rush online. On April 29, Yonghui Superstores released its 2019 annual report and Q1 2020 report. The financials show that Yonghui's 2019 full-year revenue was 84.877 billion yuan, up 20.36% year-on-year; net profit attributable to shareholders was 1.564 billion yuan, up 5.63%, compared with a decline of 18.52% the previous year. Upon the announcement, the capital market voted with its feet, evaporating 6.5 billion yuan, with a current market value of 100.6 billion yuan. But two days earlier, Yonghui had hit a new two-month high. Expansion and store openings have always been Yonghui's theme. As of the end of 2019, Yonghui had a total of 911 stores, with 205 new stores opened. In terms of the number of stores opened, Yonghui can be considered a top student. Notably, since 2019, Mini stores have become a key format promoted by Yonghui, with 573 new stores opened in one year. Mini stores focus on fresh products, are mainly located in communities, and typically have a business area of 300-600 square meters. Correspondingly, Yonghui standard stores range from 3,000 to 13,000 square meters, mostly in commercial complexes, and are divided into red-label and green-label stores, distinguished mainly by logo color; the latter is positioned as mid-to-high-end and is also called Bravo. Yonghui red-label store (top) Yonghui green-label store (bottom) "The development of the Mini format is mainly to supplement large stores, and its positioning and original intention of serving users are similar to those of entrepreneurial community fresh food stores; the competition lies in supply chain strength and refined operation capabilities," Yonghui Superstores President Li Guo explained in an interview about the reasons for increasing Mini stores. Building a food supply chain based on an intelligent middle platform is becoming Yonghui's core competitiveness. Now, Yonghui needs to export this advantage to more stores. Fresh products have always been a major selling point for Yonghui; in its revenue structure, fresh products account for about 50%, which is also the reason why Yonghui can enter the second half while many hypermarket-type supermarkets are retreating. Fresh e-commerce has been the hottest track in the past two years. The "godfathers" Tencent and JD.com have both made ultra-high returns on their investment in Yonghui Superstores. Based on Yonghui's closing price of 10.47 yuan per share on April 16, JD.com alone has a floating profit of nearly 6.6 billion yuan from its investment in Yonghui. During the pandemic, home isolation made fresh food delivery a "lifeline." In Q1 2020, Yonghui's home delivery business sales reached 2.09 billion yuan, up 2.3 times year-on-year. In this quarter, Yonghui's total revenue was 29.256 billion yuan, up 31.57% year-on-year; net profit was 1.568 billion yuan, up 39.47% year-on-year, a figure higher than the full-year net profit for 2019. But Yonghui needs to address issues such as over-reliance on offline business, the split and rivalry between the founder brothers as an unstable factor, and the fact that consumer perception remains stuck on traditional supermarkets, with less buzz than the new retail benchmark Hema Fresh that has risen in recent years, and less fame than traditional large supermarkets like RT-Mart, Walmart, and Carrefour. Currently, the combination of large stores + small stores and online + offline has become Yonghui's main driver. While continuing to do well as an offline fresh-enhanced supermarket, how to better integrate online and achieve home delivery has become a key proposition. -01- Yonghui's Transformation For a long time, Yonghui Superstores kept the number of annual store closures within 10. This Fujian supermarket brand, founded in 2001, was jointly raised by brothers Zhang Xuansong and Zhang Xuanning. Whether it was the three important expansions from Fujian to Chongqing and then to Beijing, or the A-share listing in 2010, Yonghui has always moved forward steadily, with the brothers working closely together. Until December 2018, Yonghui Superstores announced that the Yunchuang segment would be divested from the listed company. After the split, younger brother Zhang Xuansong took charge of Yonghui Superstores, while elder brother Zhang Xuanning took charge of Yonghui Yunchuang, and Yunchuang's business would no longer be included in the listed company's financial reports. In terms of store formats, Yonghui Superstores includes red-label stores, green-label stores (Bravo), and Mini stores; Yunchuang mainly includes Super Species (benchmarked against Hema Fresh), Yonghui Life stores (fresh + convenience store model), and Yonghui Life·Home Delivery Satellite Warehouse (front-warehouse model). Super Species store In the eyes of outsiders, elder brother Zhang Xuanning is a radical, suitable for innovative businesses; younger brother Zhang Xuansong is relatively conservative, suitable for guarding the foundation. And for Yonghui, Yunchuang means exploring new retail and being the first echelon to charge forward. Interestingly, after leaving the radical elder brother, Zhang Xuansong led Yonghui Superstores onto a seemingly impulsive path. In the past 2019, Yonghui opened 573 Mini stores in one year, and by Q1 2020, 118 had been closed. At a shareholder meeting in May last year, Zhang Xuansong stated that Mini stores would become an important module of Yonghui Superstores, with confidence to open 1,000 within the year. After Yunchuang was divested from Yonghui Superstores, Mini stores seem to have taken on a new round of store-opening KPIs; previously, it was Yonghui Life under Yunchuang that was sprinting toward the "1,000 stores a year" goal. But regardless, using hundreds or thousands of offline stores to try a brand-new format seems a bit hasty. Essentially, apart from the difference in store area, the difference between Yonghui Mini and Yonghui Life is not significant; the former is positioned more for communities and focuses on fresh products, with an area of 300-600 square meters; the latter is a "convenience store + fresh" model, suitable for both communities and CBDs, with an area of about 100 square meters. After the split, Yonghui's A-side is Yonghui Superstores, and B-side is Yunchuang. Whether they can ultimately complement each other remains a question. -02- Mini Stores: Engine or Drag? The Mini store model has become a widely recognized model in the industry. Not long ago, Hema President Hou Yi mentioned that the 2020 store-opening goal is 100 Hema Fresh large stores and 100 Hema Mini small stores. In addition, large retailers like RT-Mart and Walmart are also trying to enter small formats like Mini. In Hou Yi's view, compared with Hema Fresh large stores, Hema Mini's investment cost is only 1/10 of a large store, online orders exceed 50%, logistics and delivery costs are lower, and Hema Mini's sales per square foot exceeded that of Hema large stores within three months of opening. The ability to quickly replicate and complement large stores while sharing the supply chain is the reason the industry is keen on opening Mini stores. Mini stores are becoming an important format for rapid expansion in supermarket retail. Yonghui Superstores began betting on Mini stores in the first half of 2019, opening 573 stores in the year at an average rate of 1.5 per day, with Chongqing, Sichuan, and Fujian each having over 100 Mini stores. Yonghui Mini store However, Yonghui announced that the company will close 118 Mini stores between January 2019 and March 2020, with total losses estimated at around 77.9354 million yuan. This number exceeds one-fifth of the total new stores opened in 2019. In addition, in the first half of 2019, Yonghui disclosed in its financial report that Mini stores had total revenue of 550 million yuan, with 398 stores opened. But in the annual report, Yonghui did not disclose the operating conditions of Mini stores, only the number of stores. However, at the performance briefing, Yonghui Superstores Vice President and CFO Wu Limin mentioned that Mini stores are still in the cultivation and development period, and losses are within planned and controllable range. According to a previous forecast by CICC, Yonghui Mini stores' full-year loss in 2019 was around 200 million yuan. For Yonghui, the expansion of large stores is bound to enter a bottleneck period, and the value of Mini stores lies in further releasing the supply chain resources accumulated over 20 years. In addition, Yonghui's goal is to become a supermarket on the phone. Li Guo mentioned in an interview with Huxiu, "How to organically combine the Mini format with home delivery business is our key consideration." The Mini stores rapidly rolled out nationwide also need to achieve online-offline integration and provide home delivery services. Previously, "E-commerce Online" visited a Yonghui Mini store in Shanghai. After comprehensively comparing existing fresh food stores, vegetable markets, fruit stores, and other formats within a 3-kilometer radius, Yonghui Mini did not have unique advantages. In addition, online ordering and home delivery services were not available in all stores. In the current red ocean of fresh food retail, who reaches the user's "downstairs" first is certainly key, but if Mini stores are just scattered points for Yonghui, they might become the next divestiture target of the listed company. -03- Who Manages "Home Delivery" 2019 was a new watershed for Yonghui, which is nearly 20 years old. Foreign retail giants such as Metro and Carrefour successively withdrew from the Chinese market, with the former acquired by Wumart and the latter taken over by Suning. Having missed both opportunities, Yonghui must continue to cultivate its own territory. But this was also a year of extremely fierce competition in supermarket retail, with the fresh retail landscape formed by Hema, Miss Fresh, and Dingdong Maicai intensifying market evolution. Li Guo previously stated publicly that Yonghui's biggest competition comes from racing against time, promoting digital construction and refined operations, running through the integrated model of store and home delivery, attacking the market, and running through 70% of war zones; then Yonghui can achieve a future of 150 billion. According to the latest financial report, in 2019, Yonghui's home delivery business achieved sales of 3.51 billion yuan, up 108% year-on-year; accounting for 4.4%, up 2 percentage points year-on-year. Among them, JD Daojia connected 485 company supermarket stores, with 155 new additions. The Yonghui Life APP and mini-program provided 51.58 million online services to Yonghui users, with 5.06 million monthly active users at the end of the year. Yonghui Life APP In Q1 2020, home delivery business sales reached 2.09 billion yuan, up 2.3 times year-on-year, accounting for 7.3%, up 4.5 percentage points year-on-year. In March, the Yonghui Life app's share of home delivery business increased to 56.86%. Compared with the crazy expansion of offline stores, the development of home delivery business for Yonghui is experiencing a slow climb, and in Yonghui's financial reports, disclosure of home delivery business is also decreasing. In promoting online-offline integration and strengthening home delivery services, the financial report only mentions carrying out precision marketing, using big data to target potential customers, automatically inserting coupons into card wallets/jumping to the Yonghui Life mini-program after receiving them on social feeds, to activate old customers and attract new ones. At the performance communication meeting on April 29, "E-commerce Online" asked, Is Yonghui's home delivery business provided by Yunchuang? Yonghui Superstores Vice President and CFO Wu Limin answered that Yonghui Superstores' home delivery business is connected to multiple platforms, with Fuzhou mainly using Yonghui Life, and other regions also including Yonghui Maicai, JD Daojia, Meituan, Ele.me, etc. If the main battlefield of the Yonghui Life APP is only in Fuzhou, it is not difficult to see the further split between Yonghui Superstores and Yunchuang. "E-commerce Online" used a community in Fuzhou as a location, and could match nearby Yonghui Life, Yonghui Mini, Bravo, Super Species, and other different stores, and select corresponding products based on the chosen store. In fact, Yonghui has two APPs, Yonghui Life and Yonghui Maicai, with similar positioning, serving the same stores and users. The industry has always been puzzled by their coexistence. "E-commerce Online" found through APP developers that the Yonghui Life APP belongs to Yunchuang, while Yonghui Maicai belongs to Yonghui Superstores, which may explain the awkward coexistence of the two. Another detail is that the copyright time of the Yonghui Life APP is 2015-2020. After the copyright expires, whether Yonghui Superstores will directly take over the APP and reorganize its online business may be more efficient than creating another APP. When players skilled in online tactics like Hema and Dingdong Maicai are charging in, and RT-Mart also has Alibaba's digital capabilities, Yonghui needs to quickly make up for its online and home delivery business. -04- B-side Yunchuang How is the divested Yunchuang doing? In 2018, the huge losses brought by Yonghui Yunchuang were the main reason for Yonghui Superstores to divest the Yunchuang business. The financial report shows that Yonghui Superstores' net profit for 2018 was 1.48 billion yuan, down 18.52% year-on-year. The report stated that the decline in net profit was due to employee equity incentive expenses of 664 million yuan and the impact of losses in the Yunchuang segment. According to Yonghui's financial reports, since 2016, Yunchuang has been in a loss state, with losses from 2016 to 2019 of 116 million, 267 million, 945 million, and 1.288 billion yuan respectively, with losses expanding year by year. Interestingly, in 2018, Yunchuang's loss was more than three times that of the previous year, approaching 1 billion, and in the same year, Yonghui Superstores decisively divested it. And if the current loss of Mini stores is around 200 million yuan, it may be the controllable loss mentioned by Wu Limin, but if the loss further expands, will Mini stores become the next Yunchuang? In 2017, Yonghui's confidence index in Yunchuang was comparable to the current situation of Mini stores. At that time, the financial report mentioned that the self-developed Yonghui Life APP covered all formats under Yonghui, 42 cities, 559 stores, with a cumulative registered users of 2.89 million, providing online activities and product recommendations, and realizing online ordering and settlement. The Yonghui Life mini-program gained 730,000 new customers within half a year. Online transaction volume totaled 730 million yuan, three times that of 2016. For the 2018 store-opening plan, the financial report mentioned opening 1,000 Yonghui Life stores. In 2017, Capital Today invested in Yonghui Yunchuang. Xu Xin mentioned, "After we invested, Yonghui Life stores performed particularly well. The average daily sales of stores quadrupled, the number of stores quintupled, sales in 2016 were 50 million, 2017 did 600 million, this year (2019) will do 6 billion, growing tenfold." Things did not go as planned. According to the financial information of important associates disclosed in Yonghui Superstores' annual report, Yonghui Yunchuang's 2019 revenue was 2.858 billion yuan, with a loss of 1.288 billion yuan. According to Third Eye Retail News, under Yonghui Yunchuang, Yonghui Life stores in Hefei and Xiamen are clearing inventory, closing more than 40 stores in total. In Yonghui Superstores' description of its 2020 business plan, it states that it plans to open 130 stores in 2020, plans to achieve 10 billion in online sales, add 10 million new APP registered users; for the Mini store segment, achieve rapid adjustment and upgrade of old stores, and profitability for new stores. In fact, Yonghui's home delivery business only achieved sales of 3.51 billion yuan in 2019, far from the 10 billion sales target, but it should not be ignored that the Mini stores, which are expanding wildly offline, may become the main growth point for Yonghui's online business in the future. Source: E-commerce Online (ID: dianshangmj)