According to the Securities Times APP, Sinolink Securities released a research report stating that in recent years, warehouse membership stores represented by Costco have been popular, and local supermarkets like Pinduoduo have also become "internet celebrity brands". China's leading supermarket Yonghui Superstores (601933.SH) has embarked on transformation, joining hands with Pinduoduo to transform its stores towards "quality retail". Leading retailer Miniso is also bullish on its future development, making a major acquisition of nearly 30% stake in the supermarket industry. Deconstructing the successful model of the global warehouse membership store leader Costco, known for its high-quality products and services, can provide insights for the reform of China's supermarket industry. At the same time, Yonghui Superstores and Pinduoduo have embarked on a reform, with impressive performance in store operations, potentially indicating a rebalancing of online and offline retail channels.

Sinolink Securities' main points are as follows:

Costco: The leading warehouse membership store in the USA, creating a retail myth.

Costco was founded in 1980, adhering to the long-standing concept of "continuously providing quality, low-price products and services for members". Its net profit attributable to the mother in the 05-24 fiscal year has grown 6 times, with an annual growth rate of 10.7%, where profits come from membership fees and revenue from product sales. As of the 24 fiscal year, there are 890 stores worldwide/0.076 billion paid members, mainly in the USA/Canada and expanding globally.

Deconstruction of the model: Based on a paid membership system, curated products and strong operations create cost-effectiveness.

Costco's success lies in reshaping the industry chain to achieve a win-win situation with "members at the center", where members/selection of products/operations are the three key elements.

①Membership: Transforming the profit model, membership fees contribute to revenue to front load earnings, turning the company into a procurement service provider, locking in profits in advance to achieve low gross margin + focus on selective product operation.

②Product Selection: Streamline the number of SKUs, focus on high-quality products, attract customers with ultimate value for money, and expand the scale to create a flywheel effect to reduce costs.

③Operation: Emphasize turnover efficiency, strive for excellence in details such as store operations and customer service.

Future Outlook: Embarking on global expansion to drive retail industry transformation.

The company's brand is recognized by global consumers, and future growth lies in the international market.

①North America: North America is the company's main battlefield, accounting for 86% of revenue in the fiscal year 24. We estimate that the penetration rate of U.S. warehousing membership stores has reached 4.0%, with a market growth rate of approximately 3.3% from 19-23; the company's market share in 23 is about 63%, with limited room for improvement.

②International: Compound annual revenue growth rate of 12.4% in fiscal years 20-24, accelerating expansion pace, and individual store performance also has room for improvement. Entered the Chinese mainland market in 19, with mainland China stores growing to 7 in fiscal years 20-24.

Comparison between China and overseas: A major transformation in the Chinese retail industry, with Yonghui Superstores leading the change.

In May 2024, Yonghui Superstores partnered with Pangdonglai to launch store adjustments, focusing on: ① upgrading products; ② improving the shopping experience; ③ employee incentives, with a focus on enhancing consumer experience and product quality. The first adjusted store saw a strong performance with sales increasing 13.9 times on the first day of operation. By the end of November, Yonghui had 17 adjusted stores nationwide, planning to reach 40-50 by the Chinese New Year in 2025 and over 100 adjustments throughout the year.

① Optimizing the product structure to increase turnover efficiency. Costco/Yonghui Superstores' annual total asset turnover ratios were 3.4/1.6 respectively, with inventory turnover days around 30 days/50 days. With Yonghui Superstores introducing high-quality products such as DL brands, own brands, and Miniso cooperative products, sales efficiency is expected to significantly improve.

② Positioning as high-quality and low-price to increase profit margins. Costco adopts a paid membership model to lock in profits through membership fees, maintaining gross margin at a relatively low level. In recent years, Yonghui Superstores' gross margins have not significantly exceeded Costco's due to industry price competition, averaging 11.0%/15.7% respectively. In addition, Yonghui Superstores' expense ratios are higher than Costco's, with an average of about 19.8% over the years. With a shift in Yonghui Superstores' operational strategy towards quality products, profit margin levels may enter an upward trend.

Investment recommendation: Chinese supermarkets are undergoing transformation, Yonghui Superstores partnering with Pangdonglai to initiate reforms, with impressive performance in adjusted store operations. This may indicate a rebalancing of online and offline retail channels.

Costco's success lies in its unique membership-based business model, 'attracting traffic with cost-effective products and using membership fees as profits.' The company adheres to a strategy of low prices + high-quality products & services, significantly improving turnover efficiency through operating techniques such as streamlined SKU offerings, bulk packaging, and shelf displays. Yonghui Superstores' reform this time positions as 'quality retail,' aligning with Costco in product optimization and service upgrades, with data proving consumer acceptance of this model.

Future points to watch: ① Improvements in turnover efficiency & profit margins, ② Progress of store adjustments.

If progress goes smoothly, Yonghui Superstores may usher in a new round of simultaneous increase in quantity and price, worth continuous attention.

Risk Warning: Data statistical errors; intensified market competition; store adjustments falling short of expectations; market volatility risks.