Since September 24, Yonghui Supermarket has astonishingly adopted the "volatile stock" mode, witnessing an impressive surge of 180% in its stock price, which translates to a market capitalization increase of over 36 billion yuanThis dramatic shift has been characterized by episodes of trading halts, both upward and downward, yet the overall trajectory has been a significant upward trend that has bewildered the capital market.

What catalyzed this meteoric rise in stock prices for Yonghui Supermarket? Is it a genuine turnaround in fundamental expectations or simply the result of a massive influx of speculative capital?

The Mystery Behind the Stock Price Surge

Prior to this recent stock price surge, Yonghui Supermarket's market valuation hovered around 20 billion yuan—a staggering drop from its historical peak of 100 billion, marking a loss of 80 billion yuan and setting the company at its lowest level since listing in 2010. Such poor market performance led the strategic major shareholders, namely the dairy company and JD.com, to lose patience with Yonghui and actively seek new buyers.

On September 23, Yonghui Supermarket officially announced that Jun Cai International, which is controlled by Miniso, would invest approximately 6.27 billion yuan to acquire 21.08% and 8.32% of Yonghui's shares from the dairy company and JD.com respectively

This acquisition would grant Jun Cai International a 29.4% stake, making it the largest shareholder of Yonghui Supermarket.

The market initially reacted negatively to the deal, leading to a significant drop of nearly 40% in Yonghui's share price on September 24, closing down by 24%. However, for Yonghui, this acquisition was seen as a positive development since it heralded a change in major shareholders, and the market naturally expected new leadership to bring about transformation.

Consequently, Yonghui Supermarket entered a phase of explosive stock performances, continuously hitting trading limitsIf this price resurgence was solely due to a change in ownership, one might expect the stock to stabilize quicklyHowever, it coincided with a momentous rally in the A-share market.

During this period, the People's Bank of China and the Ministry of Finance rolled out several stimulating policies that sent the market into a frenzy, resulting in a valuation repair across the Shanghai and Shenzhen stock exchanges.

In an effort to stabilize economic growth, there was a pronounced push to stimulate domestic demand as infrastructure and real estate were deemed currently incapable of shouldering the burden

As a result, enhancing consumer spending became a top priority.

This was evident on December 9 when officials explicitly mentioned the need to "vigorous elevate consumption, enhance investment effectiveness, and comprehensively expand domestic demand."

This prelude to extensive policy-driven market activity led to a significant surge in retail sectors related to consumer spending, including supermarket chains and daily consumer goodsAmidst this, Yonghui Supermarket and Yiming Foods surfaced as representative entities in the A-share market, while Blue Moon and Miniso represented their Hong Kong counterpart.

Thus, it becomes clear that the substantial rise in Yonghui Supermarket's stocks can largely be attributed to rampant capital inflow and speculative trading in the recovering A-share market.

The Crisis Facing Traditional Retail Models

Yonghui Supermarket's woes are symptomatic of broader trends in traditional retail

In 2021, the company reported revenues of 91.06 billion yuan—a 2.29% decline year-on-year—and a staggering net loss of 3.944 billion yuan, marking the first incident of negative revenue growth and profit losses since its financial data was first disclosed in 2007.

Since hitting this operational tipping point, Yonghui's revenues have continued to declineOver three years, net profits have amassed losses exceeding 8 billion yuan, signaling a dire state for the supermarket chain.

This situation is not unique to Yonghui; national statistics unveil a concerning trend, with the retail revenue of supermarket formats in China experiencing an unprecedented decline year-on-year for the first time in 2023. In the semi-annual reports of 12 listed supermarket enterprises this year, seven conclusively exhibited revenue drops.

This begs the question: What has driven the decline of the supermarket industry in China?

Retailing within supermarkets fundamentally revolves around leveraging offline traffic flows

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This involves procuring goods from suppliers and selling them to consumers via the supermarket platform to secure intermediary profitsWhen offline traffic, on which supermarkets heavily depend, is compromised, operational strains are inevitable.

The online retail sector has expanded exponentially in China, to an extent that it has become critical in jeopardizing the supermarket industry's operational viabilityIn 2007, online retail constituted only 0.6% of the total social retail figure—significantly under the 11.2% of top 100 retail chainsBy 2023, however, online retail's share surged to 32.7%—a notable increase of 9.1% since 2018—while the latter plummeted to 4.3%.

Moreover, competition for offline customer footfall has intensified, with convenience stores and snack chains diverting potential supermarket patronsFor instance, Hongqi Chain, predominantly a convenience store operation, is expanding aggressively and is projected to reach 3,655 stores by mid-2024. This chain has noted sustained growth in revenue, with net profit margins exceeding 5%, the highest within the A-share supermarket segment

The operational success of Hongqi Chain has undoubtedly put pressure on major supermarket players like Yonghui.

Additionally, the rapid rise of snack chains in recent years, which surpassed 22,000 stores by 2023, has capitalized on consumer demands for variety, speed, and value, thereby effectively bypassing layers of middlemen by connecting directly with manufacturers to offer prices that are 20% to 40% lower than those found in traditional supermarkets, effectively siphoning off a significant share of the supermarket customer base.

The dual pressures from the robust growth of online commerce and the emergence of innovative offline business models have dealt a severe blow to the traditional supermarket model that primarily functions as the "middleman."

In fact, leading retail enterprises with a significant offline presence started their decline back in 2018, entering a downward cycle that has culminated in negative growth by 2023. The onset of losses in profits began even earlier, identified in the third quarter of 2017, with ongoing fluctuations leading to continuous losses from mid-2022 onwards.

It is evident that Yonghui Supermarket's traditional reliance on offline traffic for revenue generation has evolved into an unsustainable model, rendering its ability to pivot effectively quite limited.

The Challenge of Replicating Successful Models

Amidst the challenges engulfing the traditional retail sector, a few companies like Pang Donglai have notably thrived despite the adverse trends

Pang Donglai serves as a prime example of a supermarket entity not only surviving but flourishing in this unfortunate climate.

The China Chain Store Association's "2023 China Chain Top 100" report places Pang Donglai in the 46th spot, with sales amounting to 10.7 billion yuan from 13 stores and a net profit of 140 million yuanBy November 26 of this year, Pang Donglai had achieved cumulative sales of 14.638 billion yuan, with individual store profitability exceeding that of all listed supermarket companies.

As a notable commendation from the vice mayor of Xuchang City, Zhang Qingyi, stated, Pang Donglai has evolved from a modest street-side smoke shop over two decades ago into a leading powerhouse within the supermarket sector in China.

The remarkable achievements of Pang Donglai, coupled with its frequent media attention, have drawn the interest of Yonghui Supermarket

Since May of this year, Yonghui has intended to adapt Pang Donglai’s operational model for its stores, aspiring to increase its portfolio to 40 or 50 such locationsThe flagship store in Beijing's Shijingshan district recently reopened on October 19, achieving sales of 1.7 million yuan on its first day—a staggering sixfold increase compared to its average pre-reform daily sales.

Reports suggest that Yonghui has aimed to augment its ready-to-eat food offerings from a modest 5% to an impressive 30%, maintaining a 20% focus on fresh produce while also ramping up direct salesAdditionally, reflecting Pang Donglai's model, Yonghui has initiated plans to enhance employee remuneration and benefits to encourage exceptional service.

Nevertheless, can Yonghui Supermarket successfully emulate the Pang Donglai model to regain its former glory?

Firstly, it is crucial to recognize fundamental distinctions between Pang Donglai's operating model and that of traditional supermarket setups

Pang Donglai adopts a product structure akin to membership-based retailers such as Sam’s Club, focusing extensively on self-branded products while emphasizing enhanced service quality through increased employee wagesHowever, this approach entails higher price points for quality items, limiting its customer base.

In contrast, Yonghui, as a nationwide supermarket entity, primarily targets a far broader and price-sensitive consumer demographic, where its competitive edge hinges on cost and pricing rather than service quality or proprietary products.

Furthermore, the success of Pang Donglai's model can largely be attributed to its hyper-localized strategyAs of 2023, all 13 stores are concentrated in the Henan province cities of Xuchang and Xinxiang.

Within a specified regional market, Pang Donglai effectively deepens its supply chain connections and profitability, reinvesting back into employee compensation, creating a virtuous cycle

However, scaling this model to a national level introduces complexities associated with supply chain management, making cost control and efficiency enhancements considerably more challenging.

This underscores the true fit of Pang Donglai's model for smaller, well-optimized local markets, while posing substantial hurdles for large regional players like Yonghui attempting broader implementations.

For these reasons, the news back in May concerning Pang Donglai's potential assistance to Yonghui briefly stirred excitement in the capital market but quickly subsided, as Yonghui's stock fell back into a downward trend until the substantial market rebound at the end of September initiated a resurgence.

In the long run, market sentiment may oscillate like a pendulum—often misaligned in the short termThe recent surge in Yonghui Supermarket’s stock can largely be categorized as speculative trading, showing a disconnection from any substantial shifts in fundamental business conditions, despite the changes in shareholder structure and attempts to mimic successful competitors.

Presently, Yonghui Supermarket's price-to-book (PB) valuation has reached an unprecedented 9.88 times, the highest since its listing in 2010 (with price-to-earnings (PE) ratios being non-comparable due to ongoing losses). This agitated stock performance, significantly detached from the underlying troubling circumstances, hints at considerable market speculation