Where to Go at the Crossroads?

Recently in the retail market circle, the heat is rising and major events are happening continuously.

First, Miniso invested 6.2 billion yuan to take over Yonghui Supermarket, and the latter "claimed compensation" of over 3.8 billion yuan from Dalian Yujin; then, RT-Mart's parent company, Gome Retail, suddenly suspended trading and was speculated to be "waiting to be married". Could it be that even a strong company like Alibaba has to "admit defeat" in the new retail and cannot escape the "seven-year itch"?

On September 27, Gome Retail announced that it had temporarily stopped trading on the Hong Kong Stock Exchange at 9:39 a.m., pending the issuance of an announcement containing inside information of the company according to the Takeovers Code.

The implication is that the company is "brewing" an acquisition case, and the speculation of "being sold" has once again become rampant. It should be noted that since 2023, there have been continuous rumors of Alibaba selling Gome Retail, although both parties have repeatedly denied and refuted these rumors, the market naturally cannot remain calm when the suspension of trading news is released at the current juncture. According to the e-commerce report, the current market rumors about the potential buyers include COFCO, Hillhouse Capital, Ruentex, KKR Group, etc.

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Among them, Hillhouse Capital is the most popular, and it is considered by some public opinions to be the most likely potential buyer at present, and may join hands with Ruentex for this acquisition...

As of October 14, Gome Retail has been suspended for more than half a month, and the protagonists in the rumors have not provided any definite news. What can be affirmed is that no matter who ends up acquiring it, Gome Retail must seek change and refinement. How to save this once legendary retail company will be a daunting challenge.

01. Over 7 Years of "Union", the Decline Has Intensified

Looking back at the beginning of Gome Retail and Alibaba, it can be said to be a mutual redemption.

Public information shows that RT-Mart is a large chain warehouse supermarket in Taiwan, China, founded by Ruentex Group President Yin Yanliang. In April 1997, it entered the Chinese mainland market and established warehouse stores in key cities in the East China, North China, and Northeast regions.In 1999, RT-Mart achieved a revenue of 24 billion yuan. In 2001, the Ruentex Group formed a joint venture with the French Auchan Group, which had 40 years of retail experience, to introduce a more internationally oriented operational management model and promote the internationalization of the chain business. The Ruentex Group released 67% of RT-Mart's equity, turning it into a foreign joint venture company. At the same time, a holding company, Sun Art Retail, was established in Hong Kong to promote the development of the mainland store business with the two major brands "Auchan" and "RT-Mart".

On July 27, 2011, Sun Art Retail went public on the Hong Kong Stock Exchange. In the year of listing, the company's turnover was 68.084 billion yuan, a year-on-year increase of 21.2%, and the net profit attributable to the mother company was 1.6 billion yuan, a year-on-year increase of 55.2%. For a while, it was hailed as the "most profitable supermarket".

However, behind the glory, there are often hidden worries. Xinhua News Agency and Xinhua Finance once cited data from the China Internet Network Information Center, stating that in 2011, the scale of China's Internet users reached 194 million. Among them, the scale of group buying users was 64.65 million, and the usage rate of online shopping increased to 37.8%, with a year-on-year growth rate of 20.8%. China's online retail market transaction scale broke through the 800 billion yuan mark, reaching 801.9 billion yuan, a year-on-year increase of 56%, and in 2012 it increased to 1320.5 billion yuan, a year-on-year increase of 64.7%.

In contrast, traditional retail, according to data from the top 100 chain enterprises in China, the sales of the top 100 chain enterprises in 2012 accounted for 9.3% of the total retail sales of social consumer goods, lower than the 11% level in 2011, and also the first time the proportion has decreased since 2003.

The increase and decrease reflect the changes in the retail industry, and the aggressive e-commerce has formed a squeeze on traditional retail. Over time, this trend has become more and more obvious. In 2016, China's online retail market scale reached 5,328.8 billion yuan, a year-on-year increase of 39.1%.

As the industry leader, Sun Art Retail knows the bitterness and sweetness, and the growth rate of performance has begun to slow down.

From 2012 to 2016, the revenue was 77.85 billion yuan, 86.2 billion yuan, 91.85 billion yuan, 96.41 billion yuan, and 100.4 billion yuan, with corresponding growth rates of 14.35%, 10.72%, 6.57%, 4.96%, and 4.18%. The net profit attributable to the mother company was 2.409 billion yuan, 2.775 billion yuan, 2.908 billion yuan, 2.443 billion yuan, and 2.571 billion yuan, with corresponding growth rates of 50.6%, 15.2%, 4.8%, -15.7%, and 5.2%.

The industry pattern has been disrupted, and it is necessary to change. On November 20, 2017, Alibaba announced a new retail strategic cooperation with Auchan Retail S.A. and the Ruentex Group. The former invested about 22.4 billion Hong Kong dollars in Sun Art Retail, holding 36.16% of Sun Art Retail's shares directly and indirectly. In 2020, Alibaba increased its holdings by 28 billion Hong Kong dollars, with a shareholding ratio of 72%, becoming the actual controller.

For this acquisition case, both parties are full of expectations. According to Phoenix Network and环球网, Yuan Bin, the then COO of RT-Mart, said: "Alibaba and its Hema have finished all the trials and errors. Now the highway is paved, and RT-Mart can run directly." Zhang Yong, the then CEO of Alibaba, also praised that the strategic cooperation has been reached, which means that the retail industry will realize the leap from the IT era represented by barcode scanning to the DT era represented by big data and the integration of online and offline, "which has a milestone significance in the history of global commerce."

Carefully weighing every word, the ideal is full enough, but reality is always thin.From 2017 to 2020, Sun Art Retail's revenue was 102.3 billion yuan, 99.36 billion yuan, 95.36 billion yuan, and 95.49 billion yuan, respectively. In the fiscal years 2022 (changed from April 30, 2021, to March 31, 2022, to align with Alibaba's fiscal year) to 2024, the revenue was 88.13 billion yuan, 83.66 billion yuan, 72.57 billion yuan, with corresponding growth rates of 1.87%, -2.89%, -4.03%, 0.14%, -7.7%, -5.07%, -13.26%; the net profit attributable to the parent company was 2.793 billion yuan, 2.478 billion yuan, 2.834 billion yuan, 2.872 billion yuan, -0.739 billion yuan, 0.109 billion yuan, -1.605 billion yuan, with corresponding growth rates of 8.63%, -11.28%, 14.37%, 1.34%, -125.73%, 114.75%, -1572.48%.

Revenue shrank and net profit turned to loss, making the fiscal year 2022 a watershed. Obviously, after more than 7 years of "marriage", Alibaba's takeover did not turn stones into gold, but instead exacerbated the decline in growth.

In the secondary market, at the time of the suspension, Sun Art Retail's share price was 1.79 Hong Kong dollars, a cumulative decline of 76.35% compared to 7.57 Hong Kong dollars at the end of 2017, and a cumulative decline of 86.4% compared to the high of 13.16 Hong Kong dollars on June 30, 2020. The double kill of stock performance naturally fueled market speculation about Alibaba's "abandonment" and exit.

2. Reform continues, store quantity shrinks, when will the "new retail" road be cleared?

Objectively speaking, as a financial backer, Alibaba has not lacked multi-dimensional empowerment for Sun Art Retail. According to "Qi Lu Viewpoint", in 2017, RT-Mart began a comprehensive new retail transformation under Alibaba's reform, including digitalization of stores, data-driven management of procurement, and supply chain upgrades. Less than half a year later, it announced the completion of the upgrade, with 100 stores adopting Hema's overhead conveyor system, integrating Hema's logistics order-taking capabilities, using a digital store operation and management system, and providing home delivery services for users within a 3-kilometer radius of the store, which can be said to perfectly replicate Hema.

Sun Art Retail also lived up to expectations for a while. When Alibaba increased its capital in 2020, it stated that all the initial ideas for cooperation with Sun Art Retail had become a reality: 484 stores of RT-Mart and Auchan supermarkets had fully achieved online operations and integrated with Ele.me, Tmall Fresh, and Tmall Supermarket to share inventory business. All stores provide 1-hour delivery within a 5-kilometer radius of the store, with 180 stores supporting half-day delivery within a 20-kilometer radius.

In July of that year, Xiao Runfa, positioned as a new retail community fresh supermarket, opened its first store, and by the end of that year, the number of stores reached 24, expanding at an average rate of one store per week; in September of the same year, RT-Mart Super, positioned as a medium-sized supermarket, made its debut, and RT-Mart referred to this format as Zhong Runfa, and listed it together with Xiao Runfa on the official website as "new retail innovation business".

In May 2021, Lin Xiaohai, the general manager of Alibaba's retail business, was appointed as the CEO of Sun Art Retail. As soon as he took office, he carried out another round of major reforms for Sun Art Retail, such as the new retail transformation of offline RT-Mart stores, while also laying out small and medium formats, and the integration with Alibaba continued to deepen. He also adopted a combination of online and offline strategies, based on the "offline experience center" strategic direction, and vigorously promoted the promotion of the 2.0 model of store restructuring. In the fiscal year 2023, RT-Mart completed the 2.0 version upgrade of more than 80 stores nationwide, and further optimized the tenant mix of the shopping street, effectively reducing the number of vacant stores.

Regrettably, after wave after wave of reforms, Sun Art Retail failed to achieve a fundamental transformation. According to the company's financial report for the fiscal year 2022 (from April 2021 to March 2022), 5 RT-Mart, 3 Zhong Runfa, and 73 Xiao Runfa stores were opened that year. By the end of March 2022, the number of Xiao Runfa stores reached 103, and in the fiscal year 2023, the number of Xiao Runfa stores began to shrink, with a total of 84 stores, including 21 newly opened stores and 40 closed stores. The financial report for the fiscal year 2024 no longer discloses the dynamics of Xiao Runfa's store openings and closures.

On June 3, 2024, in response to the news of Xiao Runfa's suspension of operations, Sun Art Retail stated, "We are currently in the adjustment stage, and the specific plan has not yet been finally determined"; although Zhong Runfa increased from 9 stores as of the end of March 2022 to 32 stores as of the end of March 2024, the number of large supermarkets decreased from 490 to 18, and the total number of stores decreased by 95 to 507.In the fiscal year of 2024, Sun Art Retail closed 20 hypermarkets, among which four stores in the East China region will be transformed into membership stores. Two membership stores have already opened, and the remaining two have not yet opened. The other 16 stores were closed. The revenue from the sale of goods for the whole fiscal year was 69.431 billion yuan, accounting for 95.69% of the total revenue, a decrease of 11.104 billion yuan compared to the same period last year. The gross profit decreased from 20.581 billion yuan to 17.958 billion yuan, a decrease of 12.7%.

At the performance meeting, the management stated that the online performance showed a low single-digit growth, while the offline performance, although the passenger flow has recovered, the decline in the order amount led to a high single-digit decline in the overall offline revenue. The main reason for the decrease in gross profit is the decline of offline business and the contraction of supply chain business, including the company's increased investment in price and marketing resources in the first half of the fiscal year.

Looking at the final results, after seven years of reform and transformation, Sun Art Retail and Alibaba seem to have failed to open the "new retail" road between online and offline.

3. Painful aspects, where is the card exactly?

The poor performance is also closely related to the changes in the economic environment.

According to the research report jointly released by Bain & Company and the China Chain Store and Franchise Association, since 2020, China's retail supermarket industry has faced continuous pressure, and many enterprises have felt difficulties in operation: the total revenue of the main listed supermarket enterprises has shown a downward trend year by year, and since 2021, the average net profit margin has turned from profit to loss. From 2022 to 2022, the total revenue of China's main listed supermarket enterprises was 297.8 billion yuan, 284.5 billion yuan, and 272.9 billion yuan.

According to the incomplete statistics of Interface News · Entertainment Capital Theory, in 2023, Yonghui Supermarket, BBK, Zhongbai Group, and other 13 traditional supermarket giants had a total loss of 4.921 billion yuan.

Taking Yonghui Supermarket, which is also in the first echelon and bears the heavy responsibility of upgrading, as an example, it was acquired by JD.com in 2016 and underwent a major transformation into a new retail. In recent years, the basic situation is also not optimistic: in the first half of 2024, the revenue decreased by 10.11% year-on-year, and the net profit of 275 million yuan decreased by 26.34% year-on-year. From 2021 to 2023, the revenue was 91.062 billion yuan, 90.091 billion yuan, and 78.642 billion yuan. In the same period, the net profit was -3.944 billion yuan, -2.763 billion yuan, and -1.329 billion yuan, with a total loss of 8.036 billion yuan in three years.

Against this background, on the evening of September 23, 2024, Miniso announced that it would acquire 29.4% of Yonghui Supermarket's shares at a price of 6.3 billion yuan. After the transaction is completed, the former is expected to become the largest shareholder of Yonghui Supermarket. Milk Company and Suqian Hanbang will no longer hold any shares of Yonghui Supermarket, and JD World Trade's shareholding ratio will be reduced to 2.94%. Various signs seem to indicate that JD has the intention to completely withdraw from the investment in Yonghui Supermarket. The outside world generally believes that poor performance is the fundamental reason for JD's "sale" of Yonghui.

Where is the card exactly? High operating costs are a major consideration.Taking Xiao Runfa as an example, its store opening appeal lies in the dense regional store layout and strengthening the supply chain. To achieve an effective connection between the supply chain of community fresh food stores and front-end sales, Xiao Runfa once established a fresh food warehouse in Nantong City, where the first store was located, with an area of about 10,000 square meters, which can meet the supply needs of about 200 stores.

Yuan Bin, the then General Manager of Xiao Runfa, stated that there must be more than 100 stores in an area covered by a fresh food warehouse to allow community fresh food stores to enter a virtuous cycle. That is, whether it is the upstream supply chain, the processing scale of the warehouse, or the local consumer cognition, all aspects will form a regional profit line. In short, economies of scale help to reduce marginal costs, and only when a fresh food warehouse serves 100 stores can it achieve overall profitability.

Industry analyst Wang Tingyan said that the Internet economy is in full swing and has become the trend. Ultimately, Gao Xin Retail is still a member of traditional retail and cannot completely avoid the impact of the industry, with common costs such as rent, labor, water and electricity, etc. On the other hand, because it has Internet attributes, it also needs to pay additional costs for online business, including system development, logistics distribution, and purchasing traffic, etc. The superimposition of dual factors makes the company's expenditure high, thereby eroding profits, affecting product price advantages, and the play of scale effects. How to improve cost-effectiveness and improve operational efficiency and effectiveness is a core issue.

It is not an exaggeration to say. According to Choice data, from the fiscal year of 2022 to 2024, Gao Xin Retail's sales and marketing expenses were 20.353 billion yuan, 18.51 billion yuan, and 18.178 billion yuan, respectively, accounting for 23.09%, 22.12%, and 25.05% of revenue, and administrative expenses were 2.551 billion yuan, 2.369 billion yuan, and 2.251 billion yuan, with a proportion of 2.89%, 2.83%, and 3.1%.

On the one hand, there is a huge expenditure of funds, and on the other hand, the number of stores is shrinking, and the scale effect that needs to be waited for is vividly written on paper.

4. Once again at the crossroads

Change is the only constant. Undoubtedly, the downward trend of traditional chain supermarkets is becoming more and more obvious. Including Walmart, Carrefour, Yonghui Supermarket, and others, practitioners are actively looking for coping strategies, self-innovation in the hope of keeping pace with the times.

For example, Yonghui and BBK have sought help from Fat Donglai. Focusing on Gao Xin Retail, backed by a gold owner, it still chooses to reduce costs and increase efficiency first. From the fiscal year of 2023 to 2024, the corresponding growth rate of sales and marketing is -9.06% and -1.79%, and the growth rate of administrative expenses is -7.13% and -4.98%.

In March 2024, Lin Xiaohai resigned as the CEO of Gao Xin Retail and was replaced by Shen Hui, who once served as the operating general manager of Auchan China and is a veteran figure of Gao Xin Retail. Faced with various challenges, he has a clear understanding. After taking office, he emphasized: "The company is rapidly adjusting its strategy, returning to the core value of the retail industry, and regaining the original intention and foundation when RT-Mart was established. We will rebuild price competitiveness and strive to return to the positive track of revenue growth." The company's chairman, Huang Mingduan, also clearly pointed out: "Increasing revenue and reducing costs are the top priorities at present, and achieving a turnaround from loss to profit is the company's urgent task."

Regarding the situation of RT-Mart, Shen Hui said: "We experienced some difficulties last year, and this year we want to increase revenue, and the fiscal year target is to turn losses into profits." He also revealed that the customer flow of RT-Mart has been stable, and profits have been made every month from April to July. Gao Xin Retail is cultivating two new growth points, one of which is RT-Mart Super, which is currently perfecting its business model. If it goes smoothly, the model will be completed this year; the other growth point is the M membership store.By the end of March 2024, RT-Mart had opened three membership stores in Yangzhou, Nanjing, and Changzhou; additionally, four more membership store projects had been initiated. Within the financial year, the paid membership count for the first M Membership Store exceeded 60,000, with the total membership surpassing 110,000. Membership recruitment has also been launched in Changshu and Jiaxing. Over the financial year, the cumulative number of paid members approached 140,000, with the total membership nearing 240,000.

On August 31, 2024, the M Membership Store's branch in Jiaxing grandly opened, bringing the total number of stores nationwide to 5, and marking the first branch in Zhejiang Province.

Regarding hypermarkets, Huang Mingduan stated in the annual report that the new management team would focus on product quality, pricing, service, and efficiency. From the customer's perspective, they would evaluate products, quality, pricing, display, standards, and eliminate anomalies. Shen Hui also pointed out that the focus would be on the comparable store performance improvement rate, the growth of offline customer traffic, maximizing revenue, and minimizing costs, expressing confidence in achieving omni-channel profitability in the fiscal year of 2025.

With a proactive attitude and practical operations, RT-Mart still holds promise. However, it must act more quickly and accurately. Only in the fiscal year of 2023 did RT-Mart turn a profit from a loss, and in the fiscal year of 2024, it turned a profit into a loss again, marking the largest loss since its listing. RT-Mart has once again reached a crossroads, and the new leader Shen Hui bears a heavy responsibility. At the latest performance briefing, the management of RT-Mart also indicated that this year, RT-Mart is still on the path of returning, but the adjustment process will not be achieved in one step.

Choosing words carefully, although new people bring new atmospheres, adjustments rarely happen overnight. RT-Mart, eager for transformation, still has a long journey ahead. The current suspension has raised doubts among outsiders about whether it will be sold, and whether a new owner's entry will affect Shen Hui and change the current strategic plan. Will it turn into gold or fall again?

Looking back, RT-Mart, which has always been on the path of change, is not lacking in innovative actions but in pleasing results. Will this time be different? Can the fiscal year of 2025 bring a profit turnaround?