Fat Donglai, who was once praised by Lei Jun as “the magic presence of China's retail industry,” has been a bit busy lately.

Following the launch of targeted support for*ST Bugao (002251.SZ) in December of last year, Fat Donglai recently took another step to help Yonghui Supermarket (601933.SZ), a leading fresh food supermarket.

As soon as news broke that the founder of Fat Donglai visited Yonghui Supermarket's Zhengzhou store on May 8, Yonghui Supermarket immediately reaped a rise and fall, increasing its market value by 2.2 billion yuan.

However, in reality, Fat Donglai, who set off the secondary market, is only a regional retailer in one corner of Henan. Revenue just broke 10 billion dollars in 2023; Yonghui Supermarket is the top two leader in the industry, and still has a revenue volume of nearly 80 billion dollars in 2023.

Previously, Fat Donglai had remarkable effects on the renovation of the*ST Bugao store in Changsha. The average daily sales rose from around 150,000 to 1.5 million, and even reached a high of 2.4 million yuan during the May 1st holiday, a full 16 times increase.

The secondary market's expectations for Yonghui Supermarket are not only to catch the heavy traffic from Fat Dong, but also to use the opportunity of transformation to get out of the quagmire of declining performance over the years and “replicate” Fat Dong Lai in more stores.

But it's not easy.

On the one hand, in recent years, the competitors of Yonghui supermarkets have not decreased but increased, and channels such as e-commerce channels, fresh e-commerce, community group purchases, and offline discount stores have all continued to squeeze the living space of traditional KA.

On the other hand, Fat Donglai, known as the “Haidilao in the retail industry,” only has more than 10 stores and all of them are located in Xuchang and Xinxiang in Henan Province. Yonghui supermarket stores in different regions may mean that experience is not being reused, as well as completely different procurement, operation, and management problems.

At the end of the day, just like Haidilao “won't learn” from his peers, a similar situation may be repeated on Fat Donglai.

Yonghui's efforts

Since 2012, the almost limitless shelves of online channels have brought offline hypermarkets to “708”, and the community group buying that emerged after the pandemic caught Yonghui supermarket, which mainly sells fresh food, by surprise.

From 2021 to 2023, Yonghui Supermarket's performance declined three times in a row. Revenue shrunk from 91,062 billion yuan to 78.642 billion yuan, and net profit lost 90 small targets over three years.

Before Yonghui Supermarket sought help from Fat Dong, it also launched a series of self-help measures. Judging from the results alone, Yonghui's efforts have had little effect.

In 2017, taking advantage of the trend of consumption upgrades, Hema, which is backed by Ali, broke into the hinterland of Yonghui Supermarket and sold king crab and polon.

Since then, Yonghui Supermarket has begun to catch up with “new retail”, following the trend of Hema.

In the same year that Hema appeared, Yonghui attracted a 4.6 billion yuan battle investment from Tencent, launched 26 “super species” against Hema, and called out the slogan of opening 100 stores a year.

However, the reality was very cruel. The reality of a total loss of 1.2 billion dollars from 2017 to 2018 finally calmed it down, and the superspecies was phased out at the end of 2018.

In 2021, Super Species began to close stores intensively. Zhang Xuansong, chairman of Yonghui Supermarket, explained that “Yonghui will return to the origin of Minsheng Supermarket.”

According to data from Narrow Gate Means, Super Species currently only has a total of 7 stores in Shanghai and Fujian.

In June 2019, the first Hema mini store located in the suburbs and towns opened in Shanghai. In the same year, Yonghui also began to lay out the Yonghui Mini store, which is a community store.

At the shareholders' exchange meeting that year, Zhang Xuansong set an aggressive goal of opening 1,000 Yonghui mini stores throughout the year, but in the end, only 573 stores were opened.

Under the pressure of the epidemic, the number of Yonghui Mini stores gradually did not increase but decreased. By the end of 2021, Yonghui Mini had only 70 stores left, and it is now close to “no such person found”.

Since then, in 2021 and 2023, the immortal Yonghui supermarket has successively tested business formats such as warehousing member stores and discount stores, but after full operation, it still lost 2 billion dollars in deducted non-net profit in 2023. There was still no improvement in the first quarter of 2024, and both revenue and net profit declined year-on-year.

You can't blame Yonghui for not working hard; after all, “new retail” or “old retail” is declining.

While Cai Chongxin clearly stated that “it is reasonable for Ali to withdraw from the traditional physical retail business,” news spread that he is peddling Hema and Da Runfa's parent company Gaoxin Retail (6808.HK); JD, which has invested in Yonghui for 9 years, has also begun to reduce its holdings.

Cats and dogs are leaving offline retail or are aiming to focus on core e-commerce businesses to compete with Pinduoduo and Douyin.

The Yonghui people who were left behind looked around and set their sights on the current retail “influencer” Fat Donglai.

Influencer Fat Donglai

In 2017, when Hema was in the limelight, Lei Jun made a special trip to Fangdonglai Times Square in Xuchang to “study”, praising that Fat Donglai “exists like the Chinese retail industry.”

In 1995, Yu Donglai used 10,000 yuan borrowed and 4 other employees to set up the “Wangyuelou Fat Shop” to sell tobacco, alcohol, and food. He only entered the supermarket business in 2002. He opened the 23,000-square-meter Fat Donglai Living Plaza in Xuchang, which quickly became the largest comprehensive supermarket in Xuchang at the time.

Up to now, Fat Donglai has 13 stores and 2 logistics industrial parks in Xuchang and Xinxiang.

The outside world's most intuitive feeling about Fat Donglai is that the service is good, and they even call it “Haidilao in the retail industry.”

Good service is not only reflected in the fact that you can return half of the melon you bought at Fat Donglai and get half of the ticket price refunded if you are not satisfied after watching the movie; it is also reflected in the fact that it even provides different toilets for children of all ages.

Fat Donglai's other label is all products.

Currently, Fat Donglai's SKU is between 10,000 and 15,000, which is slightly less than the 20,000 in traditional supermarkets Yonghui, but far more than 4,000 in warehousing member stores.

According to public reports, Fat Donglai offers customers as many as 30 toothpaste brands to choose from, and each brand has many different series.

If consumers find what they want, they can fill out a “out of stock registration form” to request that it be purchased. Yu Donglai once even did not hesitate to air transport it for a single item.

Under this “favorite fan,” the average gross margin of the Fat Donglai supermarket can still reach 30%.

As a comparison, Yonghui supermarket's gross margin was 21.24% in 2023, and member warehouse supermarket market openers (COSTCO.NASDAQ) were less than 13%.

The secret of Fat Donglai's profits was written long before the first Fat Donglai supermarket opened.

In 2001, on the eve of the opening of Fangdonglai Life Plaza in Xuchang, Yu Donglai formed an alliance with three other local retail companies in Henan to reach a “quadripartite joint procurement” agreement, meaning that four single small-scale retailers formed a scale effect through joint procurement to reduce prices with upstream suppliers. As a result, the purchase price of some products from Fangdonglai was reduced by 30%-50%.

The products are complete and the service is good. Fat Donglai has even become a travel destination for outsiders, and is even dubbed Henan's “6A Scenic Area”.

According to Henan Radio, the average daily passenger traffic on the Zheng Xu Line is around 80,000, and more than 85% of the passenger destinations are Fangdonglai. During the New Year's Day holiday, the 7 Fangdonglai stores in Xuchang received a total of 318,000 visitors, with visitors from abroad accounting for 75%.

Locals say Xuchang only has no traffic jams on Tuesdays, “because Fat Donglai didn't do business that day.”

In the end, Fat Donglai, who has become a top influencer, tearfully earned 140 million yuan while earning over 10 billion yuan last year, a seven-fold increase over the expected profit target of 20 million yuan.

In a situation where Hema himself was difficult to protect, it is not difficult to understand that Yonghui pinned his hopes on Fat Donglai, but “Haidilao in the retail world” is probably not that easy to replicate.

Copy Fat Dong Lai

Before Yonghui, Fat Donglai's last support target was ST Bugao, a leading supermarket chain in Hunan.

In April of this year, Fat Donglai began helping *ST Bugao. Prior to that, Wang Jianzan, chairman of *ST Bugao, visited Henan before inviting Donglai to get out of the mountains.

As a result, Yu Donglai began an experiment to replicate Fat Donglai in Hunan.

Take the BBK Meixi supermarket, which was selected to be renovated. First, the most intuitive change was the management of Biaopang Donglai — shortened business hours, employee pay increased, and after the salary increase, the salary of the BBK store's employees was 30% to 60% higher than the local average.

Second, remove products from third- and fourth-tier brands that have high gross profit but are difficult to drive sales, and instead put up more first-tier brands and cost-effective products.

In the end, Fat Donglai personally went to the market and sold influencer products such as the “influencer” mooncake and Fat Donglai Jiang rice dumplings in the Backgammon store.

After some operation, Fat Donglai's transformation of the Backgammon store was remarkable. The average daily sales rose from around 150,000 to 1.5 million, and even reached a high of 2.4 million yuan during the May 1st holiday, a full 16 times increase.

It seems that Yu Donglai's process of replicating Fat Donglai's process outside the province is relatively easy. The path to achieving a sharp rise in customer traffic and sales in one store is another matter.

The challenge begins with supply chain procurement.

Yonghui's strength lies in the fresh food category. According to data from Dongwu Securities analyst Wu Jingcao Research Report, Yonghui is pressuring large-scale direct mining at the source at low cost, and the direct mining ratio is around 70%. Fat Donglai is no different.

However, in the field of standard products such as Japanese chemicals, there is a significant difference in the operation methods of traditional KA such as Fat Donglai and Yonghui.

Traditional KA generally relies on collecting bar code fees, entrance fees, etc. from suppliers; while Fat Donglai learned the essence of warehousing member stores such as Kaiser. Most of the products are private brands, and the retailer controls the pricing power. Therefore, the gross margin of such products is generally higher, and they can also make more concessions to consumers, forming a cost performance ratio.

According to media quoting employees in the Fat Donglai supermarket, most of Fat Donglai's products are self-harvested, and the proportion is about 80%.

As a comparison, Yonghui Supermarket's own brand achieved sales of 3.54 billion yuan in 2023, accounting for only 5% of revenue.

Since Yonghui Fresh's gross margin in 2023 was only 13.16%, all relied on revenue from services such as standard products with a gross margin of 18.89% and warehousing service fees with a gross margin of over 90% (accounting for about 6.3% of revenue in 23), driving the overall gross margin to 21.24%.

In other words, the main source that makes money for Yonghui is not fresh food, which has a high percentage of its own harvest, but its own products account for only 5% of the standard products.

Judging from the product structure goal of the Bugao store in Changsha after being helped, if Fat Donglai's shelves were completely replicated one by one, it would probably be difficult for Yonghui, which accounts for less self-produced products, to achieve the former's high profit margin of up to 30%.

Yu Donglai also said bluntly at the Backgao Reform Mobilization Conference: “(Help the store) guarantee no loss for at least half a year; it may be profitable in the second half of the year; it will take at least three years to mature.”

The question, however, is whether Yonghui, whose balance ratio is rising to 90% year by year and losing money for three years, still has the patience to wait for the three-year “maturity period” of its nearly 1,000 stores, and can the support of Fat Donglai's traffic be a reason for consumers to return to offline?

It all depends on reality to verify it.