Image source @ Visual China
Text | Business Data School, author | Zhang Yi
The pain of sinking markets: low gross profit, low viscosity
"Vast countryside, great achievements."
The retail revolution continues to escalate, and when large factories are still fighting in front-line supermarkets and other fields, some people have "taken the sword" and run out based on million-level township husband and wife stores.
On January 9, Huitongda passed the hearing of the Hong Kong Stock Exchange and plans to raise US$500 million to US$1 billion, which may become the first large IPO in 2022.
Although it is called "rural version of Taobao", in fact, Huitongda is mainly a B2B model, which is essentially a transaction service platform. The role in the closed loop of the platform mainly includes the "buyer" who is mainly based on the husband and wife shop in the following sinking market, and the "seller" who is mainly based on suppliers. In addition, it is worth mentioning that Huitongda also has the shadow of JD.com - self-operated goods are also a major highlight.
According to the statistics of the Ministry of Commerce, from January to August 2021, the retail sales of consumer goods in rural areas were 3,679.8 billion yuan, an increase of 17.2%. As of 2020, the growth rate of retail sales of consumer goods in rural areas has been faster than that in cities and towns for 8 consecutive years.
On the other hand, however, China's sinking market retail industry is subject to complex transaction levels in the industrial chain, lengthy transaction processes, and the low level of digitalization of the overall industry, especially in the township market.
For scattered and marginal township mom-and-pop stores, it is difficult to directly access richer brand manufacturer resources in commodity channels; in commodity circulation, the traditional multi-level distribution system is overly dispersed and inefficient, while the transportation and logistics infrastructure is underdeveloped, the delivery cost is high and often delayed, and the last-mile distribution is still a huge challenge.
Township mom-and-pop shops need a more abundant and convenient "wholesale purchase platform".
JD.com launched the Haibo system, Ali released the Aoxiang open platform, and the giant also smelled the opportunity of digitalization of the retail sinking market. However, compared with the large and complete of large factories, Huitongda cuts from the one-stop supply chain and tries to go deep into the service rear of the vast sinking market.
"Our platform offers a wide range of merchandise and flexible delivery options to meet the diverse needs of the sinking retail market. We have assembled a highly localized team of account managers with in-depth understanding of the sinking market to provide offline training and marketing services to member retail store owners. The prospectus explains.
It turns out that the entry point of the township mom-and-pop shop is ingenious and has endless potential.
From 2018 to the first three quarters of 2021, Huitongda's operating income was 29.802 billion yuan, 43.633 billion yuan, 49.629 billion yuan and 46.496 billion yuan, respectively, achieving sustained revenue growth and verifying the potential value of the market segment.
However, it is worth mentioning that the high revenue did not bring positive profitability to Huitongda, and its net losses recorded in the same period were 276 million yuan, 305 million yuan, 280 million yuan and 158 million yuan, respectively.
With rapid revenue growth but accompanied by continuous losses, what kind of problems has Huitongda encountered on the sinking road? From an e-commerce supply chain platform to a SaaS service provider, does this path work in the township mom-and-pop shop market?
Often the blue ocean new continent means that crisis and opportunity coexist, and so does the sinking market: on the one hand, it is a future potential with great value, and on the other hand, it must also be a groundbreaking force.
Although Huitongda does not define itself as an e-commerce platform, from the perspective of its revenue structure and business model, the main revenue logic and e-commerce have similarities. Its revenue mainly comes from two aspects: trading business and service business, the former accounted for more than 99% of the long term. The income generated by the transaction business mainly includes sales income under the proprietary business model and commission income and service fees charged under the online matching business model.
Overall, Huitongda's model has something in common with JD.com: its core trading business is mainly self-operated business. Huitongda purchases products (including household appliances, consumer electronics, agricultural production materials, transportation, home building materials and alcoholic beverages) from suppliers and distributes them mainly to channel partner customers and member retail stores through the self-operated Huitongda Mall website.
Judging from the gross profit margin of Huitongda, it is not outstanding. From 2018 to 2020, its overall gross profit margin was 3.4%, 3% and 2.8%, respectively, compared with 2.7% in the first three quarters of 2021. Not only is the overall trend decreasing, but the gross profit margin is at a very low level in the retail e-commerce industry.
Take the 2019 data as an example: Alibaba is about 45%, Pinduoduo is about 79%, and JD.com is 14.6%. NetEase E-commerce has set a new low of 4.5% gross profit margin, sounding the alarm line.
In contrast, Huitongda does not seem to be a good business. Under the self-operated model, it not only faces high procurement costs, but also logistics costs and other follow-up service costs.
(Gross profit margin of proprietary business)
In fact, Huitongda's role in the retail format is similar to that of a large platform dealer - the logic of earning the difference, and the revenue mainly comes from self-procurement and self-sales. However, from the perspective of several major categories of products on its platform, the gross profit margin of each category is not high.
Changes in the category mix caused changes in overall gross margins. For example, home appliances are a category with higher gross profit margins, and they are also a relatively high proportion of Huitongda's total commodity volume, but with changes in demand, the proportion of consumer electronics with faster iteration but lower gross profit has increased, resulting in a gradual decrease in the overall gross profit margin.
However, for the Internet platform, the gross profit is low but the profit is small and high,000, and "qualitative change causes quantitative change" is also one of the methodologies for getting rich, but Huitongda has not yet reached this "golden inflection point".
For the sinking market that pays attention to cost performance and is price sensitive, it is difficult for the platform to expand the profit margin from a single order, and small profits and high sales are the only way.
Therefore, the market strategy mentioned by Huitongda in the prospectus is to "continue to expand the number of member stores and increase the penetration rate of the sinking market business".
According to the data, it has connected more than 160,000 member retail stores, 10,000 suppliers and 20,000 channel cooperative customers and has a retail ecosystem of more than 175,000 SKUs.
Prospectus data shows that in 2020, 84.1% of the registered addresses of active member retail stores were located in the sinking market. From 2018 to the first three quarters of 2021, the average revenue contribution of active member store customers under Huitongda's self-operated model was 400,000 yuan, 500,000 yuan, 600,000 yuan and 300,000 yuan, respectively.
According to the data of the prospectus, in 2020, Jiangsu is the province with the largest number of Huitongda member stores, of which the number of sinking market stores is 6108, contributing 2.2 billion yuan, and the average revenue of each store is about 360,000.
In the process of market customer expansion, Huitongda does not rely entirely on small customers, and the development of channel cooperation customers will lay the foundation for it to further expand the scope of retail ecology in the sinking market. From the perspective of revenue contribution structure, the proportion of member retail stores has decreased year by year, and the share of channel cooperative customers has increased. In 2018, the former was 48.6% and the latter was 49.5%,; in 2020, the former was 27.1% and the latter was 70.6%.
However, customer expansion has also brought a lot of profit pressure to Huitongda. For example, in recent years, the gross profit margin of channel customers has continued to decline, and it has fallen below 2%. This may be the platform's concessional behavior in order to attract more channel cooperation customers.
On the one hand, it is a non-stop siege of the city, but on the other hand, the problem of customer loss is prominent.
In 2020, the loss of its customers is more serious, and channel customers are particularly prominent. According to Huitongda, on the one hand, the impact of the epidemic, on the other hand, the wholesale industry is facing fierce competition, and the concentration of the industry is constantly increasing, resulting in industry integration among channel cooperation customers. According to the Frost & Sullivan Report, the number of market participants in the wholesale industry as a whole decreased by about 20% in 2020.
In fact, looking at the data of the past three years as a whole, the churn rate of Huitongda is not optimistic.
From 2018 to the first three quarters of 2021, the churn rate of its active member retail stores was 49.1%, 44.7%, 50.3%, 54.8% and 50.6%, respectively. According to the Frost & Sullivan Report, in 2020, the industry data is about 50%. The churn rate of its active channel partner customers was 78.0%, 71.2%, 67.3%, 70.5% and 70.3% respectively. In 2020, the industry data is about 50%.
Obviously, huitongda's customer group stickiness is not high, especially in terms of channel cooperation customers, and there is a lack of long-term partners.
In terms of customer cooperation time, the data shows that in 2020, the proportion of long-term partners with more than five years of Huitong is relatively low, accounting for only 0.08%, and the proportion of customers below three years is 95%. This means that Huitongda may face long-term market expansion pressure, and unstable passenger flow will also affect the ultimate goal progress of its retail ecology.
In fact, from the perspective of store distribution, Huitongda is currently mainly based on the eastern coastal cities, and there is still a broad sinking space.
SaaS ignites the retail digital revolution in the sinking market
Although the trading business occupies the main position of Huitongda's revenue, in fact, the proportion is negligible, and the SaaS-based service business is the "incremental space" that it wants to expand and tell the capital market about in the next step.
In fact, the end point of Huitongda is not to become a large dealer platform, but to become a digital service provider in the retail sinking market.
According to the stage analysis of rural touch nets by Sun Chao, vice president of Huitongda, with the popularity of smart phones and the change of Pinduoduo's commodity channels in the sinking market, rural touch nets have come to the stage of industrial touch nets, that is, commercial digitalization.
"The member retail store customers we have accumulated from the transaction business can provide us with a strong customer base for the development of the store SaaS+ service business, while the continuous penetration of the service business has enhanced customer stickiness and further enhanced our trading business." The closed-loop logic is explained in the prospectus: the club store resource is the potential resource library for SaaS+ service monetization.
Its core positioning is: to take the transaction business as the main line and serve the participants in the industrial chain of the retail industry. "We hope to empower the whole industry chain of the sinking retail market through digitalization, build multi-industry, full-link, full-closed-loop transaction and service scenarios, help the industry reduce costs and increase efficiency, and further prosper our retail ecosystem."
From selling products to selling services, the role of transaction services is greater in "drainage". The high customer churn rate also shows that it is difficult for the dealer model to form a long-term and lasting core competitiveness. To improve customer stickiness, we have to mention "service".
And "service" is extremely scarce for the vast number of scattered and small township mom-and-pop shops. In the context of retail digitalization, the digital competition of large supermarkets has long become the "battle of the gods" of large manufacturers. In fact, the business model of traditional mom-and-pop shops also needs to keep pace with the times.
The digital solutions of large supermarkets are mostly customized, but this product model is difficult to implement in the field of small stores.
Sun Chao once mentioned in an interview that the sinking market has several characteristics: highly dispersed, the distance of each region is relatively far; highly differentiated, such as southern Jiangsu is not the same as northern Jiangsu, and even this village is not the same as the next village; relatively closed, there is not so much population flow, migrant workers will eventually return to their hometowns; the acquaintance effect, the villagers in the township are more willing to believe in acquaintances, low trust in strangers, and low acceptance of new things.
How can we meet the needs of township mom-and-pop shops with price sensitivity, weak IT foundation, scattered layout and single business model?
SaaS is ready to use, flexible payment, and the characteristics of fool-like use are in the middle. Building basic trust based on transactional business access can also better persuade this group to use SaaS services.
In the process of implementing SaaS services, Huitongda has also formulated a "free" strategy to attract the sinking market.
Initially, its SaaS+ business was free to maintain interaction with member retail stores. Its standard SaaS products include order acquisition, merchandising and customer relationship management, among other basic functions.
With the deep use and habitual use of store customers, it began to develop paid store SaaS+ for monetization. According to the prospectus, the price of SaaS+ in paid stores ranges from 1,999 yuan to 30,888 yuan per year.
In the first three quarters of 2018 to 2021, its revenue from SaaS+ subscriptions was $23.7 million, $49.4 million, $120 million, $93.7 million and $160 million, respectively.
However, SaaS's payment habits in China are already weak, and it is even less known about the sinking market. Therefore, in order to truly promote and improve the penetration rate, Huitongda still needs to do a lot of efforts. For example, assemble highly localized teams to provide offline training and marketing services; work with external SaaS vendors; and improve SaaS product functionality and performance.
In addition, Huitongda has launched enterprise-level SaaS services and software customization services to provide solutions for brand owners and related enterprises in home appliances, consumer electronics and other industries.
The extensive digital service of township mom-and-pop shops is the explicit potential value of Huitongda, and for a platform, a larger imagination space can also be extended to the services of the entire industrial chain.
The sinking market not only contains great value in itself, but also can be upgraded in reverse and take the road of "rural encirclement of the city". Although the big factories are also eyeing this cake, the vast scattered and small-scale market is not a good field for the big manufacturers, and the play of the sinking market has its own set of logic, which will be able to run out of "Pinduoduo".