Financial Services Association, May 27 (Reporters Liu Yue and Li Yongjun) At a time when the traditional retail market is undergoing drastic changes, Lianhua Supermarket (00980.HK) recently announced that it has signed a share subscription agreement with the majority shareholder Bailian Group. The latter has conditionally agreed to subscribe for 360 million new domestic shares. Why is the majority shareholder making a premium capital increase at this time? Where will the funds received be used? Facing the industry situation, why is Lianhua supermarket promoting strengths and avoiding shortfalls and transformation and upgrading?

Recently, a Financial Services Association reporter interviewed Chong Xiaobing, general manager of Lianhua Supermarket Co., Ltd. (hereinafter referred to as Lianhua Supermarket). Chong Xiaobing responded to the above issues one by one, saying that the majority shareholder, Bailian Group is still optimistic about the commercial sector, and Lianhua Supermarket is also actively seeking transformation and upgrading. It has begun to show results in business format adjustment, supply chain upgrading, and digital transformation. The average daily traffic of physical stores is nearly 700,000.

The majority shareholders increased capital at a premium of 360 million yuan

Regarding the majority shareholders' premium increase, Chong Xiaobing said that since the 14th Five-Year Plan, Bailian Group has basically built a new “one core, three pillars” industrial system with “commercial retail as the core, commercial finance, commercial assets, and commercial investment as the pillars.” Lianhua supermarket is an important component of the commercial retail sector of the Bailian Group. The group attaches great importance to the sustainable and stable development of Lianhua.

Second, Bailian Group has confidence in Lianhua's current operations and future development, so it is willing to increase capital and provide financial support. This is expected to drive Lianhua's future operations, as well as improving store efficiency and supply chain improvement. The capital raised this time of 360 million yuan is intended to transform the business format and increase the company's general working capital.

Of course, as stated in the announcement, Bailian Group's current subscription is for new domestic shares. According to relevant laws and regulations, the subscription price for domestic stocks cannot be less than one dollar. The subscription price of Bailian Group is RMB 1.00 per share for legal compliance reasons, but the Group is willing to increase its holdings at this time, mainly based on optimism about the future of commercial retail and confidence in the development of Lianhua Supermarket.

The layout focuses on the optimization of stores in Shanghai and Zhejiang, and focuses on floor efficiency

How can traditional retail supermarkets break through? According to Lianhua Supermarket, in terms of business format innovation and store layout optimization, the company has taken a number of measures, such as continuing to pay attention to the development of key cities in the Yangtze River Delta region, especially Shanghai and Zhejiang, and filling gaps in advantageous cities through cryptographically advantageous regional outlets to achieve efficient market coverage.

The Yangtze River Delta region has always been the core market for Lianhua supermarkets. According to the annual report, the Lianhua supermarket opened 337 new stores in 2023, of which 247 new stores were opened in the Yangtze River Delta region, accounting for 73%. By the end of 2023, Lianhua supermarket had 3,356 stores, 84.06% of which were located in East China. The annual report also shows that among the newly opened stores, there are 2 large general supermarkets, 299 supermarkets (93 directly managed, 206 franchised), and 36 convenience stores (12 directly managed and 24 franchised).

Chong Xiaobing said that Lianhua supermarkets are continuously adjusting and improving their business layout, and each region has its own focus. For example, the Zhejiang region is deeply cultivating stores and improving the business format; in addition to stores, the Shanghai region is also focusing on developing a standard-surpassed business format, as well as complementing the online and offline O2O business formats.

In terms of the store business format, Lianhua Supermarket has launched an annual store renewal project. With the keywords of fresh and convenient food, neighborhood centers, healthy living, and low-carbon environmental protection, it is built around a “one-quarter hour life circle” to improve the efficiency of single store operation and meet the characteristics and needs of the community/business district.

Specifically, there are three directions for the transformation of the Lianhua supermarket business format, namely the miniaturization of stores, the combination of stores and shopping streets to form small community living centers, and community shopping centers.

As an example, Chong Xiaobing said that at present, there is a need to improve the efficiency of the use of large store space, personnel investment, inventory turnover, etc., to reduce the number of stores and focus on household consumption categories, mainly daily food, and other department store products as an aid, so that the efficiency of the store can be effectively exploited.

In terms of integrating stores and shopping streets, it will combine small services needed by the community, hairdressing, minor maintenance, and entertainment, fitness, and education that can have some interactive effects in the community. Also, get rid of the high-frequency, high-frequency businesses such as small restaurants, milk tea shops, etc. that interact closely with customers, and get rid of the small department store retail business that depended on visitors from central supermarkets to survive in the past.

Focusing on the construction of a quarter-hour living circle, full consideration is given to supporting convenience services for the daily needs of surrounding residents, and planning different types of stores such as restaurants, education and training, fitness, hairdressing, laundry, mobile phone repair, and clothing modification in the region according to the actual situation, and move towards an integrated transformation of “shopping, experience, service, and social networking.”

Regarding how to further improve efficiency and profit, Chong Xiaobing said that in terms of revenue, the company uses superior categories to develop fresh products to increase the number of visitors and customer orders. At the same time, cigarettes and food, oil and condiments are the dominant categories of Lianhua supermarket in the Shanghai market. The company increased sales and exposure of superior categories, thereby increasing the overall gross profit margin.

Optimizing the supply chain, the proportion of direct harvesting from vegetable and fruit commodity bases exceeds 50%

Chong Xiaobing explained that while optimizing the layout and improving floor efficiency, the company is also actively improving the level of the supply chain. This is a key part of the transformation and development of Lianhua supermarket.

Optimize the product supply chain by increasing direct procurement from the source, establish self-operated bases, reduce procurement costs, and improve procurement quality. Currently, in Shanghai and Zhejiang, the proportion of direct harvesting from vegetable production bases is close to 70%, and the proportion of direct harvesting from fruit bases is over 50%. Meat and poultry are all directly supplied by brand suppliers and base suppliers. Some also use flexible bargaining or competitive bargaining methods to guarantee the company's purchase costs and long-term stable supply support.

In addition, Lianhua supermarkets are developing large single products and popular products to promote consumers to form Lianhua's image of low prices and high quality. As an example, he said that on the fresh side, durian achieved sales of several million in a few days, an increase of more than three times over last year. Large products like this are progressing steadily with the season in Lianhua.

Products such as cereals, oils and condiments will be developed in conjunction with the manufacturer's brand and its own brand. This year, the company also launched the “Spend Less, Buy Better” Top 100 Popular Products Buyers Program to achieve year-round low prices through direct procurement from the base or development of its own brands or even joint brands.

Throughout the reform path, Lianhua Supermarket hopes to create the advantages of fresh and fresh food by leveraging product categories, prices, and freshness, further improve the efficiency of the use of the store, and enhance customer satisfaction with the store's business format through adjustment of flow lines, customer experience in the store, and related services.

Chong Xiaobing explained that in terms of digital intelligence transformation, Lianhua Supermarket has developed a digital system that matches its own characteristics. It is guided by improving the online and offline consumer experience, and is supported by iBailian Central Platform to integrate the membership system, payment, inventory, marketing, logistics and supply chain.

Currently, the average number of visitors to Lianhua's physical stores is close to 700,000 per day. Based on this large base, the company will also continue to bring in new members and convert members. Lianhua stores all go deep into the community. This year, the company also added a “enter the community, enter the enterprise” service to establish good interaction with community residents, which is also an important means of attracting new people.

At the same time, Lianhua combines many brand suppliers and tripartite platforms, such as Meituan, JD, etc., as well as the current tripartite platforms such as Douyin and Alipay, to transform them into Lianhua members through their traffic and consumer interaction, boosting the current corresponding metrics of the entire digital membership.