Image source @ Visual China
Article | Retail Business Finance, author | Mr. Dongpo, Editor | Crane Xiang
The more confused the retail industry is, the more it needs the guidance of good role models, and those companies in the industry that can cross the cycle and achieve longevity are the beacons that indicate the future direction of development.
01, China's supermarket retail lost two years
2020-2021 is undoubtedly the "lost two years" of Chinese supermarket retail. Not only are a large number of traditional retail companies in a slump, but almost all innovations in new retail models have also failed.
Offline retail in a complete rout
On the one hand, offline retail is full of mourning. As a veteran supermarket, Yonghui Supermarket was established in Fujian in 1998, with more than 400 stores nationwide and an operating income of more than 50 billion yuan. At its peak, it achieved a valuation of 117.9 billion yuan and can be described as a leading enterprise in China's retail industry. As the industry's leading big brother, in 2021, hundreds of stores of Yonghui Supermarket have closed down one after another, the market value has evaporated by 84 billion, and the annual loss is expected to be 3.93 billion.
Another leading big brother, Gaoxin Retail (the parent company of RT-Mart), is also having a hard time, with a peak market value of more than 100 billion yuan, and the current market value is only about 20 billion.
Once founded in Shenzhen, the bridgehead of China's reform and opening up, Renrenle was once ST, the current market value is only about 3 billion, and the company expects that the net profit attributable to shareholders of listed companies in 2021 will be -880 million to -830 million, a year-on-year change of -2587.08% to -2445.77%.
From the K-line chart of the leading retail enterprises falling and falling, we can glimpse the tragic situation of China's offline retail.
Failed retail innovation
On the other hand, retail innovation has collapsed on a large scale.
The community group purchase model of "pre-sale + next-day delivery + group leader" is in a mess, the Tongcheng life of "3 years and 8 rounds of financing" has officially declared bankruptcy, dominoes have since collapsed, food sharing will go to the empty building, orange heart preferred to be exposed and shut down, Jingxi spelling out the whole line of layoffs, Meituan preferred big adjustment... Powerful Internet giants quickly entered the game and quickly exited.
The front warehouse mode of "60 minutes delivery" is also a chicken feather, the head player dingdong to buy vegetables, the daily excellent fresh "bleeding" listing, not only the market value plummeted, but also began a sharp layoff. Coincidentally, a large number of new retail models have also lost their former aura, and after burning money madly, they have neither gained the market nor precipitated down loyal users.
China's entire supermarket retail industry seems to be facing an unprecedented difficult situation. The impact of the epidemic, the impact of e-commerce, the downturn in consumption, the intensification of competition, the peaking of penetration... One seemingly valid reason after another seems to have become an excuse for force majeure.
However, another set of data has turned the above excuse into "the emperor's new clothes". In 2021, the total retail sales of consumer goods in China will exceed 44 trillion yuan, an increase of 10.7% over the previous year. So, the question is, the entire industry is still developing at a high speed, why is it getting harder and harder for supermarkets to retail? Since the "external causes" have been ruled out, the problem must be the "internal causes": or our own enterprise internal strength has not been cultivated well.
In the face of change, our retail enterprises have never been "lying flat", whether it is a traditional retail giant, or a new Internet platform, are actively transforming, digital retail, smart retail, O2O, supermarket to home, community group buying, front warehouse, etc., various model innovations emerge in an endless stream, but have not produced sustained results.
Many attempts can also be seen in the confusion of Chinese supermarket retail enterprises, and the entire industry may need to find a beacon to point the way.
02, looking for the industry's lighthouse enterprises
It is the stone of the mountain and can attack jade. The lighthouse enterprises of the industry are undoubtedly those enterprises that can cross the cycle and have a long-term foundation.
In the same year, even in the European and American markets, where the epidemic is more severe and the penetration rate is more peaked, some American retail companies can be found. They have not only maintained steady growth, but also achieved an increase in market value, whether in terms of operating performance or in the capital market, they have achieved excellent results, which is the model we learn from and the beacon of the industry. Among them, the most noteworthy is Costco (Costco).
Through the cycle, sustained growth and longevity have been achieved
Costco is currently the world's third-largest retailer and the largest membership-based warehouse retailer in the United States, with 14 times revenue and 21 times performance in the past 30 years.
As the pioneer of the membership-based warehouse supermarket chain, the company's total revenue increased from $14.1 billion to $195.9 billion in the fiscal years 1992-2021, a compound increase of about 9.5%. Membership fee revenue grew 14-fold from $280 million to $3.88 billion, representing a compound growth rate of approximately 9.5 percent. The company's net profit also increased from $242 million to $5 billion, an increase of nearly 21 times, a compound growth rate of about 11%.
In the past 30 years of development, Costco has successfully resisted the impact of the industry cycle and e-commerce, maintained steady growth in revenue and performance, achieved Davis double-click market value, double increased valuation and profitability, and the company's market value also successfully increased to 251.7 billion US dollars (more than one trillion yuan), and the market value exceeded the sum of domestic listed retail companies.
For 30 years, revenue growth has almost never stopped. At the same time, in the past 10 years, profits have also achieved leapfrog growth. Judging from the growth situation, it has all the characteristics of a bull and bear enterprise: steady growth, no big ups and downs.
Not only is the performance good, but the stock price is also a testament to the evergreen foundation of the company, and the stock price has grown by more than 20% almost every year.
Chart / Costco share price
At the same time, what is even more surprising is that as a retail company, the price-to-earnings ratio is close to 50 times, which is the PE multiple of a technology company. It makes domestic retail listed enterprises, Such as Yonghui PE-16, Renrenle PE-10, Gaoxin Retail PE 7.5 and so on, unattainable.
Membership: the most valuable asset of the enterprise
Of course, the mention of Costco has to mention its members, which are said to be the most loyal consumers in the world.
In the past decade, the number of paid members in different economic environments has maintained positive growth, with a growth rate of more than 5% in most years. Even during the financial crisis, paid membership grew by 7.5 percent.
By the end of 2021, the number of global members will reach 112 million, of which 61.7 million are paid members, of which 36.1 million are basic members and 25.6 million are executive members. The share of executive members in the number of paid members is increasing, reaching 41.5% by 2021. Executive members have stronger spending power, with executive members accounting for 42.7% of the total number of paid members by Q2 2022, while sales reach 70.9% of total sales.
What's even more surprising is that the membership renewal rate can continue to be as high as 90% for many years and increase year by year. Internet platforms often say that user retention is simply weak compared to it.
From 2013 to 2021, the overall global membership renewal rate increased from 86.3% to 88.7%, and the membership renewal rate in the United States and Canada continued to increase to 91.3% at a high base of 90%. As of the second quarter of 2022, the global renewal rate continued to rise to 89.6%, compared with 92.0% in the US and Canada.
Moreover, membership fees continue to rise. According to historical data, the annual fee for Costco membership has increased 4 times for individual and corporate members over more than 30 years, about once every five years, and the basic Venus membership has increased by $5 each time, and the executive members have increased by $10 each time.
The last time the company raised prices was in 2017, so the next price increase is getting closer and closer. Based on the number of members at the end of 2021, the price increase will bring the company an additional $440 million in annual EBIT, equivalent to 6.5% of EBIT in 2021.
This is a group of cute and loyal users, spending money on membership cards every year, membership cards are getting more and more expensive, and the more expensive they are, the more they renew. Many people say that it is a retail company that makes money by membership fees, not exaggerated at all, from the corporate financial report we can see that its net profit margin between 2-3%, and the general retail enterprises are no different.
At the same time, we will find that the membership fee and revenue account for about 2%, which is almost equal to the net profit margin. In other words, if there is no membership fee, the net profit margin is equal to 0, and it is completely unprofitable!
There have been many articles interpreting the Costco model, and we want to think more from the perspective of members, why they are willing to pay membership fees. Internet companies often mention user experience, in fact, Costco is the company that understands user experience the most, which can be seen from the membership renewal rate.
The company that understands the user experience best
We try to think from the perspective of membership: Why do users pay membership fees and continue to pay?
First of all, its goods are extremely cost-effective.
Regardless of the economic situation, consumers' constant pursuit is "good quality and low price", and this seemingly contradictory demand can be well realized in Costco. Commodity sales follow the principle of low gross profit, and the overall gross profit margin is maintained at about 13% all year round, which is far lower than the gross profit margin level of 20% to 30% of other retailers. Among them, the gross profit margin of the commodity sales business was 11%, the expense ratio was 9.5%, and the profit margin of the commodity sales business after deduction was less than 2%.
In fact, Costco is cheaper than Amazon. It believes that consumers' pursuit of "high-quality and inexpensive" cost-effective goods is unchanged for a long time.
Therefore, Costco tried to suppress the price of goods to the extreme, and even Wal-Mart, the "price butcher" of "low prices every day", could not reach the dust. In enterprises, there is a regulation that if the gross profit margin of a commodity pricing is more than 14%, it needs to be signed by the chairman of the board of directors.
Although the price is cheap, the quality of the goods is not discounted at all, and the quality of service is also very high-quality. Because of the importance of consumer experience, customer satisfaction ranks first for many years according to the ACSI satisfaction score.
Costco offers an unsatisfactory unconditional return policy, a 90-day return policy for certain electronics, and free technical support services as well as an extended warranty. At the same time, the company provides a number of services including gasoline, pharmacy, glasses, food court, hearing aids and tire installation, business center, tourism, etc. near the store.
Moreover, members can get a 2% rebate bonus on sales and preferential policies for other products. The maximum rebate is $1,000/year, and the bonus amount can be redeemed for Costco shopping to encourage members to spend more.
Taking 2021 as an example, the average net sales of goods contributed by each paid member is $3112, and an average of $62 rebate can be obtained according to a 2% rebate, which is equivalent to offsetting half of the membership fee, and the membership fee of the executive member after the offset is basically the same as the ordinary membership fee.
It can be said that Costco offers the price of Pinduoduo, the quality of JD.com, and the service of the boutique supermarket Ole. As a member, low-cost goods, quality services, and the annual membership fee is not high, in fact, the income brought by a card for a year is far more than the membership fee, such a membership card, who is not willing to do, unwilling to renew it?
03, Costco, why can't you learn?
There are not a few people in the industry who imitate and learn Costco, and there are also believers who draw scoops according to the gourd. However, there are few successful people. We can't help but ask, why is the ending "those who learn from me are born, and those who are like me die"?
The main reason is that everyone is learning its business model, but not really learning its core competitiveness. Everyone is studying its membership system, private label building, streamlining SKUs, and warehouse-style stores. However, when the elements such as membership, warehousing, streamlined SKUs, and private labels are available, it is found that it is still impossible to play. In fact, this kind of learning is to buy the pearl and give up the book to the end, and it has entered the misunderstanding. The business model is only the skin, and the core competitiveness is the bone.
Myth 1: Profitability depends on membership fees
It is precisely because Costco membership management is too good, but also the key to profitability, so everyone is learning the membership system, but it is going astray.
Membership is its characteristic, but it is not its core competitiveness.
We think about the problem that Costco's gross profit margin is more than 10% lower than other supermarkets, while the membership fee only brings 2% of the revenue, and the remaining 8% is the key. That is to say, on the basis of lower pricing than other competitors, to ensure profitability, in addition to membership fee income, it is more important to be more outstanding, lower cost, and higher efficiency, which is its profit logic.
Membership fees are only necessary, but not sufficient, to make a profit. That is to say, if there is no excellent operation management to support and reduce operating costs and expenses, 2% of the membership fee income can not completely cover the reduced gross profit margin, profitability will also be the air loft, the business model is naturally difficult to last.
Myth 2: Streamlining SKUs, reducing procurement costs, and improving gross profit margins
In terms of procurement, we will streamline the SKU, expand the scale of single products, and improve the right of brand negotiation and price. Costco adopts a selection model, the number of SKUs of the company is low, the sales contributed by a single SKU far exceed those of its peers, and due to the company's implementation of the sales strategy of large single products, it has strong bargaining power over the upstream. There are less than 4,000 offline and about 9,000-11,000 SKUs online, far below the industry average.
Generally speaking, the number of SKUs in supermarkets is about 40,000, and the number of SKUs in shopping malls is 100,000. Costco contributed $1.9 billion in sales to 4,000 SKUs, averaging $48 million per SKU, giving it a low price for purchases based on scale.
While it is true that streamlining SKUs can reduce the cost of purchasing goods, it is easy to ignore a problem and confuse costs and expenses.
Costco's principle is to keep the gross margin low, and if you get a lower purchase price, you will reduce the pricing at the same time. In this way, consumers can be provided with more cost-effective goods, but without reducing the expense rate, because the procurement cost is not an expense. It can be said that it tries every means to reduce the cost of procurement, not to obtain higher gross profits, but only for the welfare of consumers.
Many imitators reduce procurement costs and increase gross margins by streamlining SKUs, but the purpose is to obtain more profits, which is contrary to the original intention of Costco.com. Therefore, if the procurement cost is reduced, it is to improve the gross profit margin, and it has also entered the misunderstanding of learning.
Myth three: build your own brand and increase gross profit margin
Costco owns its own brand Kirkland, which was founded as an opportunity to develop its own brand due to the rising price of brand-name goods, and so far Kirkland has covered 14 major categories of goods, such as clothing and luggage, sundries, housewares, etc.
Through oem production in cooperation with suppliers around the world, once it is found that there is market space and the price is still room for decline, it is developed on its own, and the private label price is 20% to 30% lower than that of the brand substitute. The pricing of its own brand is also very conscientious, adhering to the principle of low prices, and the gross profit margin will definitely not exceed 14%.
Private label provides further strong support for the company's "high-quality and low-price" positioning, and its proportion has increased year by year since its inception, with Kirkland's self-operated business reaching $59 billion in 2021, accounting for 31% of net merchandise sales, an increase of 13.5% year-on-year. That said, a third of the products are under their own brand.
We all know that the gross profit margin of own goods is higher, and many retail companies continue to increase the proportion of their own goods, the purpose of which is to improve the gross profit margin and obtain more profit margins.
However, Costco's main goal is to provide high-quality goods with a low-price strategy, or to benefit consumers. We always need to remember that Costco's gross profit margin will be controlled at about 10%, and it does anything to reduce the cost of goods, it is to benefit consumers, not to open up profit margins. Therefore, if you create more own products, it is to improve the gross profit margin, which also enters the misunderstanding of learning.
04, the logic of profitability
From the above analysis, it can be seen that although methods such as streamlining SKUs and building private brands can improve the gross profit margin of goods, Costco has given up, and membership income obviously cannot cover the cost. So, where does the profit come from? The answer is again in terms of cost.
Over the years, Costco's expense ratio has fluctuated around 10%, compared to its peers, Walmart 20.7%, BJ Wholesale Club 15%, and Target 19.8%.
Costco's expenses are 8%-10% lower than the average of other companies, which is the root cause of the net profit margin being almost the same as other companies on the basis of more than 10% lower gross profit margin of commodities. The root cause of ensuring a low expense ratio is operational management.
Costco operation management is very excellent, its profitability logic is not large profit space, but high operational efficiency, low operating costs, the so-called "Retail is Detail", Costco's core competitiveness is to do the operation to the extreme. It really does the concept of guaranteeing low prices for members on every product. In terms of expense rate control, it is far more efficient and low-cost operation than the competitors in the same industry, including efficient distribution, reducing the cost of manpower splitting and storing inventory directly on the upper shelf in the form of large packaging, reducing tally and replenishment costs.
Operational efficiency excellence
First, Costco's single-store effect is much higher than that of its competitors.
In 2021, the ping effect was 17985 US dollars / square meter, which was much higher than the level of the same industry. Walmart $5838/sqm, Sam 9337/sqm, BJ Club $8833/sqm, and Target's $4310/sq.
The high ping effect comes from the sales strategy of large items and large packaging, and the total amount of consumer purchases is more. The company strives to limit most items to models, sizes, and colors that sell quickly, and many items are sold only in boxed, carton, or multi-pack quantities, often at a higher total price.
Second, inventory turnover is efficient, and operational efficiency exceeds the industry average.
The inventory turnover rate remains between 11 and 12x, and the turnover rate of interbank retailers is usually below 11x. Due to fast turnover, goods are usually sold before payment is made to suppliers, resulting in favorable cash flows.
Costco's inventory turnover days in the past 20 years have been stable at about 30-32 days, far below the industry average, reflecting the company's efficient inventory management and strong sales performance, as well as the efficient operation and circulation of goods around the world. Compared with its peers, Walmart 42 days, BJ Wholesale Club 35 days, Target 58 days.
Ultimate cost control
Under the extreme turnover rate, the company's expense rate control is also extremely excellent, and low operating costs penetrate all aspects of the company's operation level. The company's expense ratio has always been maintained at a lower level than the industry, which is reflected in low site selection costs, low decoration costs, low labor costs, and low transportation costs. For more than 20 years, the company SG&A has been stable at about 10%, less than half of its peers.
Costco's ultimate operating cost control has a three-plate axe.
The first is to self-sustain the property and reduce the rental cost.
Basically selected in the suburbs of the city, land prices and housing prices are relatively low. At the same time, it owns the land ownership and building ownership of most of its stores, especially in the early investment, most of the company's stores are mainly owned properties, and mainly in remote areas, on the one hand, saving land costs, but also preventing the risk of future rent increases.
For store decoration, it is basically a simple decoration display, reducing unnecessary decoration expenses and post-maintenance costs.
In addition, the company's products are in the form of large packaging, inventory is directly stored on the high shelf, reducing tally, replenishment costs, and the purchase method is self-service warehousing stores.
80% of the property is owned, and is usually located near the highway on the outskirts of major cities, which is industrial land, the land price is cheap, and the decoration is simple (the opening price is only 7.6 million US dollars, and it can be completed in 100 days). Depreciation and amortization expense is more than 3% lower than that of other competitors.
The second is management empowerment and reduce labor costs.
There is no shopping guide in the warehouse-type store, and the loader uses forklifts to load and unload goods, saving labor costs and reducing management expenses. In terms of employee efficiency, compared with leading supermarket companies in North America, employees have the highest labor efficiency but a fairly low turnover rate (about 5%). In terms of employee treatment, it is also higher than the industry average, high salary treatment does not increase Costco labor costs, lies in the low turnover rate, reduces the cost of recruiting new people, and has a certain role in controlling the company's overall management expenses.
At the same time, because the business hours are shorter than other retailers, labor costs are lower; and goods are usually stored directly on the shelves above the goods, or directly on the floor, eliminating all unnecessary handovers and reducing tally and replenishment costs.
Lower labor costs, shorter working hours, and low employee turnover further reduce labor costs. By the end of 2021, the company employs 288,000 people worldwide. Maintain at least 50% of employees as full-time employees, employee retention rates are higher than the industry, and the proportion of employees in the U.S. region who have worked for at least one year in 2021 exceeds 90%. Labor costs are more than 4% lower than other competitors.
The third is supply chain management, reducing logistics costs.
Buy most of your merchandise directly from the manufacturer and ship them to cross-site consolidation points or directly to the warehouse. After receiving a large number of goods from the manufacturer at the cross-site consolidation point, they are quickly shipped to the warehouse. Manufacturers go to the terminal warehouse for up to two turns, reducing costs associated with traditional multi-step distribution channels, increasing freight volumes and transportation efficiency.
Adopting the cross-transfer model, 70% of the goods are sent to the regional logistics hubs and centralized operation, and 30% of the goods are sent directly to the warehousing store in order to minimize the distribution costs (additional costs of purchasing goods from distributors, the use of central warehouses, rent management fees for storing goods outside the sales premises, etc.), coupled with the deep inventory model, the company places almost all the goods in the sales area. Compared with other competitors, the total warehousing logistics transportation costs can be reduced by more than 2%.
The fourth is membership management, reducing marketing costs.
Costco's service to customers is that it takes advantage of its scale to purchase a large number of goods at low prices and then sell them to ordinary consumers at a lower price. In terms of customer acquisition, it has no advertising budget and does not send weekly flyers, but only sends targeted emails to potential members and coupons to existing members, with extremely low marketing costs. Compared to other competitors, marketing expenses can be reduced by more than 2%.
In summary, the Costco business model superimposed on the high proportion of own properties, cross-transfer and distribution, low advertising and promotion of the operation and management model makes it possible to reduce the employee, depreciation and amortization, warehousing and transportation, marketing expense rate by about 4%, 3%, 2%, 1% compared with the peers, the overall expense rate is 10% lower, and then under the very low markup rate, with accurate positioning and deep inventory to promote efficient operation.
Figure / Expense ratio of major enterprises
It can be seen that Costco has achieved the ultimate in the operation and management of retail people, goods and farms, improving efficiency and reducing costs. It is precisely because of the excellent operation management that the expense ratio is reduced, so that the company can still achieve sustained profitability on the basis of the gross profit margin of much lower than 10% of the competitors.
Costco is also great in that no matter how the economy changes, it can always maintain a 10% expense rate, stability overrides everything, and it is relatively easy to maintain an advantage in the short term, but it is more difficult to maintain the advantage for many years.
The more confused the industry is, the more it needs examples, and those enterprises in the industry that can cross the cycle and achieve a long-term foundation are the beacons that point out the direction.
Not only Costco, but also ALDI, TJ MAX, Target and other long-standing companies are all bright lights that guide us in the direction.
However, when learning the lighthouse, we need to see the essence through the phenomenon, from the business model to the core competitiveness, we must fully analyze.
Objectively speaking, retail is a "bending down to pick up steel hammer" business, busy and busy work is only 2-3% of the net profit, all profits are to be squeezed from every operation and management link. Therefore, the innovation of the model cannot become the fundamental element of the longevity of the enterprise. When learning the lighthouse, we must also peel off the cloak of the business model and look at the essence of the business in order to truly find the meaning.
We have reason to believe that the water is deep and the fish is big, and in the Chinese retail market of more than 40 trillion yuan, excellent retail enterprises will be born and become the stars of the industry.
At this moment, what we have to do is to polish our eyes, open our minds, explore the essence of retail, do difficult and correct things, and pursue long-term value.