Is Pang Donglai the standard answer to China’s retail industry?

In the landscape of China's retail industry, Pang Donglai has become a striking case with its unique business model and efficient supply chain management. Its name is not only a household name in Henan, but also has attracted the attention of the national retail industry. This article will explore Pang Donglai's business philosophy and whether it can become the standard answer for China's retail industry.

"It's okay if you don't understand it. If you can understand it, I'm wrong."

Recently, retail is just as confusing as the stock market. At the end of September, MINISO acquired Yonghui Superstores shares held by Dairy Farm and JD.com for RMB 6.27 billion, accounting for a combined 29.4% of the company’s shares. After the acquisition, MINISO will become the largest shareholder of Yonghui Superstores.

On the evening of the day of the acquisition, MINISO held an investor meeting to discuss the acquisition. At the meeting, MINISO CEO Ye Guofu expressed his overwhelming praise for Pang Donglai and Yonghui Supermarket, which accepted Pang Donglai's "rectification". In summary, there are two main points:

First, Pang Donglai is awesome. Second, the remodeled Yonghui is also awesome, and I think it’s worth buying.

Regardless of the stock price performance of the two companies after the acquisition, and just looking at the transaction itself, one conclusion that can be drawn is that Pang Donglai may be becoming the standard answer to the transformation of the domestic retail industry.

Over the past few decades, the retail industry in Europe and the United States has taken a more advanced path, while Sam's Club and Costco have been running wild in China; while domestic retail giants have ceased operations after experiencing setbacks in the new retail industry and have fallen into a quagmire of losses.

Only Pang Donglai has demonstrated a standard answer to China's retail to its peers with its incredible efficiency per square meter and profitability. Domestic retail players have also recognized Pang Donglai as their teacher and are learning from him and making adjustments.

However, after 30 years of establishment, Pangdonglai has only expanded to 14 stores, which is no match for Yonghui Supermarket, which has thousands of stores, and has not even expanded beyond Henan.

So the question is, is Pang Donglai the standard answer to China’s retail industry?

1. Pang Donglai, the balance between idealism and realism

Retail is an old and slow-growing industry. In the past few decades, most of the traditional retail industry in China has been based on the KA model, which essentially "rents" a site to suppliers to sell goods and then charges channel fees and brand fees. According to industry insiders, in the procurement process, the first-tier supplier's quotation for many commodities may only account for 50-60% of the final retail price.

However, the essence of the evolution of the retail industry is to improve efficiency. New formats will enter the market with low gross profit, low cost and low price. The KA store model just limits the channel discourse power of supermarkets. Hou Yi, the founder of Hema, once said that the interest mechanism of the KA procurement system has kidnapped the management and operation rights of supermarkets, and the supermarkets' own management capabilities are aging, the products are highly homogenized and the prices are extremely high.

At this level, Pangdonglai's approach is similar to that of its American counterparts.

The first step is to establish a coordinated procurement system to reduce procurement costs. In 2001, Pangdonglai joined other regional retailers in Henan, including Luoyang Dazhang, Xinyang Xiya and Nanyang Wandelong, to spontaneously conduct joint procurement and form a four-party joint procurement model. Under the joint procurement model, members share high-quality supply chains, expand procurement scale and reduce costs. In 2006, the four-party joint procurement joined the International Independent Retailers Alliance (IGA, established in 1926 under the laws of Delaware, USA, and is the world's largest and earliest voluntary chain system).

The second is to lay a complete logistics foundation. As early as 1999, Pangdonglai established a distribution center to achieve accurate and timely delivery of direct-purchased goods to stores. By October 2022, Pangdonglai Industrial Logistics Park will be put into operation, covering an area of ​​150 acres with a total investment of about 1.5 billion yuan, covering logistics, central kitchen, office, R&D and retail industry terminal product processing and distribution functions.

Finally, create your own brand. Pangdonglai will provide local specialty foods in its stores, such as stewed noodles, farmer's baked buns, etc. It has also incubated a number of its own brands including the baking brand Delicosi, the catering brand DL Teppanyaki, and DL Hunan Restaurant. In June 23, the central kitchen of Pangdonglai Industrial Logistics Park was officially put into production.

Of course, these are only part of the story. Another thing that the industry is talking about is the service of Pang Donglai. In addition to the urban legend-level employee benefits of "working 7 hours a day, having two days off a month, enjoying normal five insurances and one housing fund and 30 days of annual leave" and the hot search terms such as "rewarding complainants with 100,000 yuan" and "compensating customers with 8.83 million yuan", Pang Donglai will drive the sales of other products through low-profit products. Even for its own brands, Pang Donglai will make its profits transparent to gain the trust of consumers.

Unlike Sam's Club, Pang Donglai has no membership threshold and its products are not sold in double family sizes, which clearly makes it more suitable for the consumption habits of Chinese families.

The birth of an industry benchmark is bound to be at a balance point. Behind a retail story where suppliers make money, employees are well paid, and consumers are satisfied, is the fact that Pang Donglai adheres to idealism while not fighting against gravity.

According to the "2023 China Supermarket TOP100" data released by the China Chain Store & Franchise Association (CCFA), Pang Donglai's 12 stores contributed 4.6 billion yuan in revenue, with a single store output of 383 million yuan. In the entire list, the only store that ranks higher than Pang Donglai is Costco China, which comes from across the ocean.

In the words of Yu Donglai, the founder of Pang Donglai, "Pang Donglai originally planned to earn 20 million last year, but unexpectedly earned 140 million by the end of the year."

2. Diminishing scale effect

There are some imitators of Pang Donglai. On the contrary, the drastic reform of Pang Donglai has become the biggest news in the retail industry in the past. Judging from the results of the reform, Pang Donglai, which has not been able to go beyond Henan, is now appearing in areas outside Henan with a new look.

According to Yonghui's disclosure, the transformation of Pangdonglai mainly involves product structure, traffic flow layout, equipment and facilities, professional capabilities, and employee benefits. For example, the product structure after the restructuring reached more than 90% of Pangdonglai's product structure, a new daily cold chain was added, the original equipment was fully maintained and updated, and all employees received salary increases.

The first-day performance and average daily customer flow of Yonghui Zhengzhou store after the renovation were 14 times and 5.3 times higher than before the renovation, respectively. The situation of Xi'an store and Fuzhou store was similar.

Although Miniso said in the conference call, "We admit that only six stores have been adjusted so far, and there is still uncertainty as to whether it can be expanded to 1,000 stores in the future. But from the team's perspective, we are confident in the replicability of this investment." However, the successful adjustment of some stores at Yonghui does not easily prove that this model can be replicated nationwide.

On the one hand, the retail industry emphasizes cost reduction and efficiency improvement of the supply chain and refined management and operation of stores, so there is often a diminishing marginal effect of scale.

As a representative of regional retail, Yu Donglai once explained why he did not open a store in Zhengzhou, because compared with Xuchang, Zhengzhou's store costs, employee benefits and other comprehensive costs are much higher. In fact, Xuchang's attractive salary and benefits may be greatly reduced in first- and second-tier cities.

The low prices, low gross margins and low costs are largely due to supply chain optimization and vertical integration. The stores that participated in the adjustment benefited to a large extent from the reputation of Pang Donglai rather than the actual supply chain iteration.

The bigger the scale, the more difficult it is to build a supply chain. Although Pangdonglai's practice of not setting a membership threshold caters to domestic consumption habits, it also increases the difficulty of building a supply chain. Without targeting a specific group of people, it is relatively easy to create a SKU that is popular in one region, but it is extremely difficult to create a SKU that is popular across the country.

On the other hand, with oversupply, consumer demand is increasingly differentiated. E-commerce has a natural advantage in efficiency. In first- and second-tier cities, the rapid development of instant retail has greatly compressed the survival space of offline stores.

The existence of Pangdonglai is a milestone in the domestic retail industry, but it may not be a standard answer that applies everywhere.