Incubation in vitro, mergers and acquisitions, is the choice of many physical enterprises in the rapid expansion of the game.

The most successful example is Eyre ophthalmology. In the past ten years, Ayre Ophthalmology has adopted the methods of in vitro incubation, mergers and acquisitions, which has led to a rapid growth in the number and revenue of its hospitals, which has achieved a ten-fold market legend in ten years.

KK Group, which is preparing to list in Hong Kong recently, seems to let the market see the next "Ayre Ophthalmology". KK Group is a trend retailer. Although it is different from the track of Ayre Ophthalmology, the strategy of KK Group is similar to that of Eye Ophthalmology.

For example, Ayre ophthalmology is to set up a private equity M & A fund, and then invest in related hospitals through M & A funds. Once the invested hospitals are profitable, they will acquire more shares and merge them into the group statements.

KK Group's expansion strategy is similar to that of Ayre Ophthalmology. First set up a joint venture with the franchisee (a small portion of which is contributed by the KK Group), and then merge it into the group statement by way of share buyback after the franchisee has made a profit.

The biggest advantage of this in vitro incubation model is that it can weaken the impact of franchisee performance on group statements to a certain extent. To put it bluntly, the franchisee has lost money, and only a small part of it is reflected in the financial report, while when the franchisee makes money, he can "buy" it and incorporate it into the group statement.

Thanks to this, KK Group promotes the high-speed expansion of stores while realizing positive operating profits from negative ones. According to the data, the income of KK Group increased from 155 million yuan to 1.64 billion yuan from 2018 to 2020, and the number of stores also increased from 80 to 556. The operating profit of KK Group in the first half of 2021 was 25.75 million yuan, and the adjusted EBITDA was 216.4 million yuan.

Like Ayre Ophthalmology, KK seems to have found a business model that can expand rapidly without bearing large losses. So, will KK Group become the "Earl Ophthalmology" in retail?

/ 01 /

There is no "following the old path of our predecessors".

Liquor racetrack, pharmaceutical racetrack, semiconductor racetrack and so on, these industries sought after by investors all have great room for development, but the retail racetrack is often ignored.

In fact, the retail track is still a track with great potential, especially fashion retail. By the end of 2020, according to Frost Sullivan, the retail market was 39.2 trillion. Among them, the size of the trend retail market is 195.2 billion yuan, with a compound growth rate of 10.7% in the first five years of 2020 and 19.5% in the five years after 2020.

In addition, MINISO Group, a trendy retail track TOP1, accounts for only 7.7 per cent of the market based on 2020 sales data, while none of the other companies has a market share of more than 5 per cent.

With low concentration and high potential growth, the trendy retail market can be said to be a proper golden track.

In 2015, a post-80s young man named Wu Yuening, who keenly sensed the business opportunities, established the trendy retail company KK Group, and then rose rapidly in the industry.

KK Group's business model is not complicated. To put it simply, it is to rent space in the core area of the city, and then create "stores" with related themes, and then put the products that young people like on the shelves one by one and sell them.

At present, KK Group mainly operates four different retail brands: KK mini-store, KKV, which focuses on lifestyle collection, THE COLORIST toner, and X11, which is a brand of beauty and makeup collection stores. KKV and THE COLORIST are its core revenue businesses, accounting for 62.3% and 27.4% of revenue in the first half of 2021, respectively.

From a revenue point of view, KK Group is also growing rapidly. From 2018 to 2020, KK Group's revenue increased 9.6 times from 155 million yuan to 1.64 billion yuan, and the number of stores increased from 80 to 556. In the first half of 2021, revenue increased again by 235.3% to 1.68 billion yuan, and the number of stores expanded to 640.

Based on the sales data in 2020, KK Group is already one of the top three trend retailers in China and the fastest growing trend retailer among the top 10 market participants.

This growth rate alone is crazy enough, but it is not the biggest bright spot of the KK Group.

Generally speaking, after the standardization of offline retail enterprises, it is easy to quickly form a scale, but the initial cost of the establishment of stores is large, and high-speed expansion will lead to uneven operation quality of new stores. Therefore, the period of rapid expansion of such enterprises is often accompanied by the expansion of losses, not to mention the explosive growth of KK Group.

For example, Haidilao International Holding, who has just announced the closure of 300 stores, is due to the rapid expansion in the past few years, and the operating performance of some stores fell short of expectations, resulting in a continuous increase in the share of costs, eventually dragging down the company's performance. Even MINISO Group, a trendy retailer who has achieved stable operation and whose scale is no longer growing, has lost money on his total operating profit over the past three years.

However, from the data of KK Group, it is inconceivable that the operating profit in the first half of 2021 was 25.75 million yuan, and the adjusted EBITDA was 216.4 million yuan.

From this point of view, KK Group, which has squeezed into the trendy retail industry TOP3 in just five years, seems to have its own unique advantages over its predecessors.

/ 02 /

Out of a different path.

In other words, in the context of the widespread rapid expansion of offline retailers accompanied by sustained losses, KK Group can still achieve positive operating profits in its ultra-rapid expansion. How on earth did it?

The answer is that KK Group has come out of a business model that is different from other offline retailers.

Specifically, the expansion path of KK Group has two ways: direct operation and joining, which is also the common mode of offline retail expansion, which does not seem to have anything unique.

Don't worry, look further down. In the past few years, the store expansion of KK Group is mainly to join. For example, the number of franchise stores in the Group increased from 53 in 2018 to 424 in 2020, accounting for 76.2% of the total number of stores in the Group.

The franchise store of KK Group adopts two ways: joining with equity investment and joining without equity investment, but mainly with equity. The so-called equity franchisee is that the KK Group and the franchisee set up a joint venture, but the KK Group is only a minority shareholder, and the franchisee is a major shareholder.

The number of such owned franchise stores has grown from one in 2018 to 338 in 2020, accounting for 60.8 per cent of the total number of KK stores and has been at the heart of the group's soaring revenue over the past few years.

What does this have to do with the positive operating profit of KK Group? is it a little confused? Don't worry, read Jun and explain it to everyone.

Two years before the opening of the group's stores, it requires a lot of investment, so it is difficult for the stores to balance their income and expenditure. On the other hand, if the franchise store expands in the way of franchise store, the performance of the franchise store in the early stage is good or bad, and it will only calculate its own profit and loss according to the percentage of profit and loss. To put it bluntly, the KK Group has a small stake in the franchisee company, and even if the franchisee has a huge loss, only a small part of it is reflected in the statement of the KK Group.

In addition, the biggest "coquettish operation" of the KK Group is that it can buy back shares in the franchisee's hands after signing a contract with the franchisee to make a steady profit in the franchisee within three years.

This is similar to the in vitro incubation model of Ayre Ophthalmology. First, the franchise store model is used to achieve expansion, and then it is installed into the group after achieving stable profits, which can effectively control the large investment in the initial stage of opening the store, as well as the risk brought by poor management.

Therefore, this is also the core reason why KK Group is in the process of rapid expansion, but also achieve operating profits.

/ 03 /

KK Group has found a new model?

You come to open a shop, lose it and make a steady profit. I'll buy you again. Does it feel cheap to let the KK Group make a profit?

Actually this is not so. Most of the franchise stores of KK Group are mainly large stores, and almost all the investments start with millions of dollars, which alone will stop most potential franchisees, let alone achieve rapid expansion in the form of franchise stores.

And KK Group can achieve explosive expansion in the way of franchise stores, the core is because the franchisee's money to open stores, mainly contributed by the group. Specifically, franchisees do not have the money to open stores, and the group wants to achieve high-speed expansion through franchise stores, so the group promotes the high-speed expansion of franchisees by lending money to franchisees.

According to the data, KK Group provided a total of 560 million yuan in loans to franchise stores from 2018 to the first half of 2021. According to the calculation of 352 franchise stores in 2021, the loan to a single franchisee store is as high as 1.59 million yuan.

On the surface, this model of promoting the expansion of loans to franchisees will enable KK Group to achieve positive operating profits while expanding at a high speed, but there are also two potential risks:

One is that the franchisee takes the money borrowed from KK Group to open a store. Once the management is not good, there is also the possibility of bad debts. Think about it, franchisees do not have the money to open stores, so they borrow money from KK Group to open stores. Once the stores cannot make a profit smoothly, how can franchisees repay the money of KK Group?

Second, from the perspective of cash flow, as the capital to join the store comes from the KK Group, there will be some pressure on the capital chain. According to the prospectus, the net cash flow generated by operating activities of KK Group in 2019, 2020 and the first half of this year was-381 million yuan,-314 million yuan and-356 million yuan respectively.

From the data, it can be found that although the KK Group has achieved positive operating profits, the operating cash flow shows a continuous outflow, indicating that the KK Group as a whole has not yet achieved a break-even and needs to rely on external financing for blood transfusion.

KK Group is also aware of the problems, and it is mentioned in the prospectus that the future franchisees of the group should cooperate with strong merchants. In other words, the group will no longer borrow money from franchisees to open stores, but will have to open stores at their own expense.

The logic behind it is not difficult to understand, after all, offline retail is a very heavy business, the expansion phase of the KK Group can lend money to franchisees to run the scale quickly. But in fact, the situation of KK Group at this stage is not optimistic and needs to be controlled.

On the one hand, it is mentioned earlier that the operating cash flow shows a continuous net outflow state, and there is a certain pressure on the capital chain; on the other hand, the external competition is intensifying day by day. The core business KKV will face competition from companies such as MINISO Group.

In addition, the perfect diary, Hua Xizi and other new forces of beauty makeup are also accelerating the layout of the offline market, which is also a way of creating "online celebrity scenes" for customers to get customers, which will also have a certain impact on the second largest business, THE COLORIST.

Standing at the moment, KK's rapid expansion is a means, not a result. Reviewing the rise of Ayre Ophthalmology, we can find that Ayre Ophthalmology has a large amount of hospital resources through in vitro incubation, and then make use of the advantage of hospital resources to establish a hierarchical chain model, so as to build its own moat.

From this point of view, KK Group needs to go through a longer test if it wants to become the "Ayre ophthalmology" of the retail industry.