Can Yonghui’s hot tech CEO turn the supermarket chain around?

June 30, 2023 All No Comments

That’s the problem facing Yonghui Superstores 永辉超市, one of the earliest homegrown Chinese supermarket companies. Established in 2001, the company rapidly became a retail giant and nationwide brand, with nearly 1,500 supermarkets across China as of 2019. But in recent years, it’s been struggling to compete with the country’s extraordinary ecommerce operators, and from 2020 to 2022, its brick-and-mortar stores were often empty because of COVID lockdowns.

Which is why the company hired Lǐ Sōngfēng 李松峰 as CEO in 2021, initially as chief technology officer (CTO), and from September that year, as CEO. Li had previously worked for 10 years at JD.com, China’s second-biggest ecommerce firm. Li’s task was to transform the company. As he put it in an internal letter to employees on his first day as CEO, the company’s strategic vision was to be a “fresh-food-based customer-focused omni-channel digital retail platform.”

The two core elements of the digital transformation are the supply chains and omni-channel sales, because as Li put it at a shareholders meeting in May this year, “only companies that can do well online and offline will survive in the future.”

Yonghui’s latest financial report seems to point to early positive results: In the first quarter of 2023, Yonghui reported revenue of 23.80 billion yuan ($3.34 billion), an increase of 24.07% from the fourth quarter of 2022, and net profit of 704 million yuan ($99.07 million), a year-on-year increase of 40.24%.

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From relentless rise to existential crisis

In the early 1990s, Fuzhou native and current chairman Zhāng Xuānsōng 张轩松 dropped out of high school and started a beer delivery business that quickly became successful. On the back of it, he launched a low-cost supermarket in 1995, which became Yonghui in 2001 when he hit on the idea of transforming a farmers’ market in Fuzhou into a modern supermarket. This became the key to Yonghui’s success, as it was one of the first companies in China to sell fresh agricultural products in a modern supermarket format.

Gradually expanding within Fujian Province, the company started to establish the kind of complicated supply chain networks needed for fresh food, including high-quality direct procurement and cold chains. Yonghui’s fresh-food business has consistently accounted for 40–50% of total revenue, which is significantly higher than that of other supermarket chains.

In 2004, Yonghui expanded to Chongqing, and then in 2009, to several other major cities. In December 2010, the company was listed on the Shanghai Stock Exchange. At the time, Yonghui had about 180 supermarkets, but after its IPO, the company expanded rapidly. By 2019, Yonghui was operating 1,440 supermarkets and a nationwide logistics network, including 19 normal warehouses and 11 cold chain warehouses. In 2019, the company also formed a partnership with JD.com for home delivery.

From 2010 to 2019, Yonghui’s revenue expanded by a compound annual growth rate of 23.92% to reach a level of almost 85 billion yuan ($12.16 billion) in 2019. By 2020, the company’s market capitalization had breached 100 billion yuan ($15.32 billion).

At this time, the company gave an impression of vitality. As Mark Tanner, the managing director of China Skinny, a China-based marketing research firm, told The China Project, based on a 2019 in-depth study into the company, “What struck me was their structural setup, where sales groups were divided into small teams and incentivized to compete with one another. It was an interesting approach, and the staff we talked to seemed engaged with it and hungry to succeed. I got the impression that they had that classic Chinese business of being highly data-focused and adaptable.”

But suddenly, the good times were over for Yonghui. Annual revenue peaked at 92.97 billion yuan ($13.07 billion) in 2020, and then started declining: In 2021 and 2022, the company reported massive annual net losses of 3.94 billion yuan ($618.94 million) and 2.76 billion yuan ($391.09 million), respectively.

By the end of 2022, Yonghui’s market capitalization had dropped below 30 billion yuan ($4.24 billion), meaning that 70 billion yuan ($9.90 billion) had been wiped out from 2020; also, the total number of supermarkets was down to about 1,000, meaning that 350 stores were closed down in two years.

The COVID effect and the rise of the ecommerce players

What happened to Yonghui from 2020 to 2022? In short: The COVID pandemic and its lockdowns irrevocably changed China’s retail landscape.

Already before 2020, Yonghui was facing an ever-increasing range of competitors for fresh food retail: In 2016, Alibaba launched Hema Xiansheng 盒马鲜生, a warehouse-style supermarket chain, and in the following three years, Meituan opened a chain of fresh-food supermarkets called Zhangyu 掌鱼生鲜, as did JD.com (7Fresh) and white goods retailer Suning.com (Su Fresh 苏鲜生).

In 2015, PDD Holdings (Pinduoduo), an ecommerce platform focused on agricultural products and low-end goods, was founded, and its rise since then has been relentless. The platform pioneered a rural ecommerce model featuring community buying, and established a cold chain transportation route and a direct connection between the place of origin of agricultural products and their final consumption.

New players entered the market, including online supermarkets like Dingdong Maicai 叮咚买菜and Pupumall 朴朴 — which can deliver groceries within 30 minutes to your door and at lower cost than brick-and-mortar supermarkets. Suddenly, Yonghui’s supermarkets looked old-fashioned and out of touch with the new retail realities.

By August 2021, when Yonghui announced a net loss for the first half of the year of over a billion yuan ($166.92 million), compared with a net profit of 1.85 billion yuan ($267,63 million) a year previously, the writing was on the wall. And it was then that Li Songfeng stepped into the position of CEO, after serving as CTO from January 2021.

The man with the digital plan

Li — with an annual salary of almost 4 million yuan ($618,956), much higher than the company’s other executives — was the man with a plan to turn Yonghui’s fortunes around, and his plan was to undertake a comprehensive digital transformation. In essence, Li’s plan was to maintain Yonghui’s focus on fresh food, but to vastly expand online sales channels.

The first thing Li did after becoming CEO was to restructure, replacing the company’s original seven-region management system with one directly managed by headquarters. He also digitized Yonghui’s supply chains, including the use of artificial intelligence (AI) to select products and forecast demand.

In 2022, Yonghui launched the self-developed YHDOS digital retail system to manage omni-channel sales, integrating offline and online sales channels as well as employment, ordering, memberships, and contracts into a single platform.

So far, Li’s reforms seem to be working, as indicated by the rise in revenue and profit in the first quarter of 2023. And there are also other encouraging signs: As of April 2023, Yonghui had opened 966 ecommerce warehouses, which are closely integrated with the network of supermarkets. One of the effects is that total inventory dropped by 34.95% from the beginning of 2022 to the end of the first quarter of 2023, ensuring steady growth of the company’s operating cash flow.

The real challenge for Yonghui, however, will be to achieve profitability for the whole of 2023.

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