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After a round of store closures, the maternal and infant channel has seen the light of hope. Data released at the 2024 CBME Maternity, Infant and Child Industry Summit held recently showed that although the number of maternity, infant and child stores in China has dropped to around 180,000 after a round of turmoil, the situation this year is better than market expectations, with 65% of the stores surveyed saying that sales were flat or growing. In the industry's view, this year's industry recovery is also related to internal elimination and integration, but simple scale mergers cannot solve the current difficulties faced by the maternal and infant industry, and the elimination will continue.

Long-awaited warming

"It's not a recovery in the first half of the year, but it's finally stopped declining." Zhang Chen, who runs a small maternal and child chain in Weihai, Shandong, told China Business News that with the continued decline in the number of births since 2022, the number of people entering stores has decreased year by year, and store revenue has shrunk by about 30% for two consecutive years. It was not until this year that it finally felt like it had "bottomed out."

Zhang Chen's feeling is not an isolated case. In previous market visits, many maternal and infant channel merchants told the First Financial reporter that the domestic maternal and infant market has improved this year. In addition, the first quarter performance of the two major domestic maternal and infant channel companies, Aiyishi (603214.SH) and Kids King (301078.SZ), has rebounded to varying degrees. Kids King recently released a performance forecast, predicting that the operating income in the first half of the year will be between 4.45 billion yuan and 4.8 billion yuan, a year-on-year increase of 7% to 15.4%, and the net profit attributable to shareholders of listed companies is expected to be 77 million to 83 million yuan, a year-on-year increase of 10.7% to 19.3%, which is an overall improvement over the same period last year.

This trend was further confirmed at the 2024 CBME Maternity & Baby Industry Summit. The 2024 China Maternity & Baby Retail Market Report shows that after years of in-depth adjustments in the industry, the sales revenue and gross profit of domestic maternity & baby stores have rebounded since the beginning of this year. Among them, 33% of the stores surveyed believe that sales have continued to grow since the beginning of this year, 32% believe that revenue has remained the same, and 35% of the stores believe that sales revenue is declining, which is 8 percentage points lower than 43% in 2023. At the same time, 62% of the stores surveyed this year believe that business gross profit is recovering, an increase of 13 percentage points over the same period in 2023. In addition, 51% of maternity & baby stores in the first- and second-tier markets have increased or maintained the same number of customers entering the store, and the problem of declining customer flow in county and township stores has also been alleviated.

Gu Xiaoyuan, general manager of Informa markets China (Hangzhou), said that although the average transaction price of store goods is still declining, the business of maternity and baby stores has generally recovered, and the recovery in profits is better than sales.

In the industry's view, the recovery of the maternal and infant channel benefited from the release of some fertility demands that had been delayed in the past three years. It was also related to the rapid elimination and proactive adjustments within maternity and baby stores.

In the past, the revenue of maternity and infant stores mainly depended on the sales of infant formula milk powder, which accounted for more than 50% of the store's revenue. At the same time, milk powder also played a role in attracting customers to the store and boosting the sales of other maternal and infant products. However, the fierce milk powder price war in recent years has squeezed the profits of stores. At the same time, after the epidemic, consumers turned to online sales, and the role of milk powder in attracting customers was weakened. The number of people entering the store was also affected, making it difficult for maternity and infant stores to survive. This also caused a large number of stores that could not adapt to the environment to gradually withdraw from the market.

Shen Zhiqiang, general manager of Guangdong Lvchen Trading Co., Ltd., a major milk powder merchant, revealed at the forum that in 2019, there were nearly 5,000 maternity and baby stores distributed in Guangdong Province, and this number will be reduced to more than 3,000 by the end of 2023. At its peak, there were 300,000 maternity and baby stores in the maternal and infant industry. According to information revealed at the summit, the number of maternity and baby stores in China currently remains at around 180,000.

At the same time, maternity and baby stores have also accelerated their self-rescue efforts and adjusted their business structures.

The report shows that since 2023, more and more maternal and child store operators have begun to try to acquire customers through social groups, mini programs, near-field e-commerce, etc. In 2024, the average non-store sales of maternal and child stores reached 22.9%, and the boundaries between online and offline have become more blurred. At the same time, the products sold by maternal and child stores have also become diversified, with nutritional supplements and maternal and child products becoming the categories with the fastest sales growth.

Is high integration the ultimate solution?

In the industry's view, the recovery of maternity and infant stores is also related to the large-scale integration of domestic maternal and infant channels. Since 2023, mergers and acquisitions and alliances within the maternal and infant channel have begun to increase rapidly, and have shown the characteristics of integration from regional markets to the whole country, cross-provincial integration, and provincial integration. For example, Kidsland acquired Leyou, a major maternal and infant chain in the north, Aiyishi acquired Beibeixiong, and Maternity and Infant World integrated multiple chain brands in Sichuan, Chongqing, and Yun. This integration trend is still accelerating in 2024.

Compared with the 80% market concentration achieved by the top ten milk powder companies, the maternal and infant channels have always been small and scattered. However, in many maternal and infant industry forums held recently, the most discussed topic was industry integration.

Yunnan maternal and infant chain Dengkang Baby is one of the representative enterprises of regional integration. In 2023, Dengkang Baby founded Yinglianhui Supply Chain Management Co., Ltd. and began to integrate maternal and infant chains in eight provinces including Yunnan, Hubei, and Sichuan. Small and medium-sized regional maternal and infant chains such as Hubei Ke'en Baby, Nanchong Lebeijia, and Dazhou Pregnancy and Infant Plan have joined its system. Public data shows that the number of its stores has grown to more than 3,000.

However, in the opinion of Luo Nengcai, chairman of Yunnan Dengkang Baby Business Service Co., Ltd., the integration of maternal and infant channels is driven by market pressure. Due to the lack of scale advantages, the gross profit margins of small and medium-sized maternal and infant chains are generally lower than those of large chains. The purpose of the integration is not to obtain a larger scale of revenue, but to reduce costs and increase gross profits in order to survive during the industry's deep adjustment period.

The reporter learned that after the integration, large maternal and infant chain brands will have greater brand and scale advantages, and their voice in the face of upstream maternal and infant production companies will also increase. At the same time, large chain brands can also further plan and create their own brand products through customization and channel development, such as channel customization of infant formula milk powder, etc., thereby alleviating the problem of continued decline in milk powder business profits. In addition, the standardized management and operation capabilities of large chain brands can also improve the efficiency of small and medium-sized maternal and infant chain brands.

However, in the industry's view, this round of industry integration cannot completely solve the current difficulties of the maternal and infant channel, and the elimination round will continue.

Xu Weihong, co-founder and CEO of Kidswant and chairman of Leyou, believes that from the perspective of the stage of industry development, higher concentration is definitely a trend, but in the downward period of the industry, how to achieve consumer purchases is the key. The recent hot word in the retail industry is "explosive reform". Behind this is the fact that the existing product portfolio and user communication methods can no longer meet the needs of current consumers. This is not a problem that can be solved by adding scale.

"The current industry situation does not allow you to survive by relying on others or having a few products." Luo Nengcai also believes that after integrating the supply chain, it is still necessary to manage individual stores based on customer needs in order to avoid being eliminated.

Gu Xiaoyuan said that the maternal and infant channel will not move towards absolute centralization. The current market is showing a differentiation between large chains and small and beautiful stores. Integrated stores may obtain more resources and platform development, while small stores also have their survival space through more differentiated operations and services. Taking the pharmacy system as an example, the integration of pharmacies is earlier than that of the infant and child industry. At this stage, the chain rate has reached 57%, but there are still nearly 230,000 single stores.

Independent dairy analyst Song Liang told China Business News that the demographic dividend and the high-end upgrade of infant formula have brought considerable incremental market space, allowing the maternal and infant channel to enjoy a good life for nearly 20 years. Now the industry has reached a crossroads of differentiation, and the number of maternity and infant stores will further decrease in the future. In recent years, the industry ecology is evolving rapidly. In addition to integration, a number of boutique maternity and infant stores targeting the mid-to-high-end market and conditioning stores with professional services have also appeared in the market. Due to the lag in demographic impact, the maternal and infant market will remain in a chaotic state in the next two years, but there is not much time left for channel selection and adjustment. (Zhang Chen is a pseudonym in the article)