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Zebra Consumer Model

There is a fruit garden near my company. I pass by its door every day. The store is always full of fruits, but it is rare to see a large number of customers. I have never been there.

Recently, I passed by again and found that it had closed down. The Baiguoyuan sign was still there, but there was a small advertisement on the door saying "Shop for Sale".

This is just a simple description of what I saw and felt at a fruit orchard near me, which doesn't mean much.

However, the warning of a sharp drop in half-year performance disclosed by Bairuoyuan Group contained a lot of information.

On the other hand, the company's record-low stock price is a clear reflection of investors' attitude towards China's largest fruit retail distributor.

Stock price hits new low

In China, selling fruit is a good business, but also a difficult business.

The good thing is that there is a rigid demand and the market is large enough; the difficulty lies in the fact that fruit products are easily perishable and at the same time, they face fierce competition in the industry.

In order to transform the fruit business, many entrepreneurs have come forward one after another, and there are countless casualties on the race track.

Yu Huiyong, a former researcher at the Jiangxi Academy of Agricultural Sciences, has made Baiguoyuan the best in China with the traditional chain model after more than 20 years of persistence. On January 16, 2023, the gongs rang simultaneously in Shenzhen and Hong Kong, and Baiguoyuan Group (02411.HK) was officially listed on the main board of the Hong Kong Stock Exchange. The company's market value once exceeded 10 billion.

Throughout 2023, Bairuoyuan's performance in the Hong Kong stock market has experienced ups and downs, with both the disappointment of breaking the issue price and the glory of soaring, but the fluctuations have all been within an acceptable range.

However, on the first anniversary of its listing, the market dealt a heavy blow to Pagoda. On January 16 this year, the company's stock price suddenly crashed, plummeting 30.33% that day to close at HK$4.180 per share. After that, it never recovered.

The company seemed to have anticipated this sharp drop, and a few days in advance, it launched a repurchase plan of no more than 634 million yuan, but in the end it was of no avail.

In April this year, the company's founder and chairman Yu Huiyong and other shareholders voluntarily extended the share lock-up period by one year to demonstrate their recognition of the company's long-term value and confidence in its development strategy.

However, Pagoda's investors did not seem to buy into this, and the share price continued to fall. Last Friday, it hit a record low of HK$1.680 per share.

The market's attention to this fruit retail giant is also decreasing, and daily transaction volumes in the secondary market of hundreds of thousands or even millions have become the norm.

Yesterday, Pagoda Group closed at HK$1.720 per share, with a total market value of only HK$2.732 billion. Since the beginning of the year, the market value has evaporated by more than 70%.

Performance dropped by 70%

Currently, Pagoda has more than 6,000 stores nationwide, and the company's annual revenue exceeds 10 billion yuan, but its market share is only about 1%. This shows how fragmented the fruit retail market is.

After revenue exceeded 10 billion yuan in 2021, Baiguoyuan's growth rate slowed down sharply. In 2023, it achieved operating income of 11.39 billion yuan, which was almost stagnant.

Franchise stores are the core of Baiguoyuan’s revenue. The number of stores continues to increase, but it has not brought about sustained positive growth in revenue.

In 2023, the number of franchise stores managed by the company increased from 4,577 in the previous year to 4,818, a net increase of 241. At the same time, the revenue from this business dropped from 8.85 billion yuan to 8.495 billion yuan. This means that the average revenue of Pagoda franchise stores has declined significantly during this period.

The only purpose for franchisees to choose a brand is to make money. Otherwise, they will turn around and leave without mercy.

Users complain that the fruit at Baiguoyuan is "expensive", which can be reflected in the financial level. The company's profit level is really not high. In the past three years, the gross profit margin has remained at 11%+. Through the compression of various expenses, the net profit margin has improved to a certain extent, but it has never exceeded 3%.

This year, the operating conditions of Baiguoyuan Group have taken a sharp turn for the worse.

Not long ago, the company disclosed a semi-annual performance warning, predicting that operating income will drop by no more than 20% from 6.294 billion yuan in the same period last year; net profit attributable to shareholders of the parent company will drop by no more than 70% from 261 million yuan in the same period last year.

The company attributed the sharp drop in performance to the following reasons:

1. To implement the new strategy of "high-quality fruit expert and leader" formulated at the beginning of the year, the expenditure on store renovation and marketing promotion increased. On June 10 this year, Yang Mi was officially announced as the ambassador of Baiguoyuan's good life, which is estimated to be a considerable expense;

2. Consumption power is weak and store sales are on a downward trend;

3. The comparable base in the same period last year was relatively high.

At the 2023 annual performance meeting held in March this year, Yu Huiyong admitted, "To be honest, I have never been satisfied with Baiguoyuan's performance. Because logically speaking, it shouldn't be like this."

He admitted that there was a lack of communication between Pagoda and its customers in terms of marketing, "forcing us to choose between delicious food and cheap price, which had a significant impact."

With the new strategic positioning for 2024, Baiguoyuan is determined to focus on high quality.

However, during the 315 period this year, a Baiguoyuan store in Wuhan was exposed by the media for using rotten fruits to make high-priced fruit slices; refrigerating overnight fruits and selling them as fresh fruits; and selling 2J cherries as 4J cherries.

Although Baiguoyuan took immediate action to deal with the problematic store, the negative public opinion once again tarnished the brand's "high quality" image.

The "high price" label that cannot be removed

Baiguoyuan was able to break out from the crowded fruit retail market by relying on its quality and service.

I have a close friend who used to be a loyal fan of Baiguoyuan. She first went to Baiguoyuan because it has fruits that cannot be bought in other fruit stores.

What surprised her even more was the service provided by Baiguoyuan. “After I bought the fruit, they actually helped me wash and cut it.”

One incident left a deep impression on her. Once, she bought a box of fruit at Baiguoyuan, and found that some of the fruit was not fresh after she got home. She just had a brief conversation with the store manager on WeChat, and the manager immediately gave her another box of the same fruit.

As time goes by, there are more and more fruit stores around us, and the products and services are becoming more and more homogeneous. Instant retail and community group purchases continue to penetrate, and it is more convenient and faster to place an order and have it delivered to your door without leaving home.

In the end, she was kept out by the prices at Baiguoyuan. The Baiguoyuan she used to frequent was later turned into a barbecue restaurant.

Expensive seems to have become a label that cannot be removed from Baiguoyuan. In Baiguoyuan, any fruit you choose will cost you more than 100 yuan.

"With a monthly salary of 20,000, I can't afford to eat at Baiguoyuan." This hot topic on Weibo is both a joke and a reality.

Especially nowadays, users are increasingly pursuing cost-effectiveness, and their sensitivity to the prices of consumer goods has reached an unprecedented level.

How to find a balance between quality and price is an issue that Baiguoyuan urgently needs to break through.

Otherwise, the 10,000-store plan and the 100 billion-yuan target will only be castles in the air.