Aiming for 20,000 stores, GUOQUAN is transforming from a "grocery supermarket" into a "community central kitchen"

Guoquan (2517.HK) is still exploring more possibilities for "eating at home."

In April a year ago, Guoquan announced its new strategic positioning as a "community central kitchen," making a high-profile bet on prepared dishes.

The product range has extended from hot pot to barbecue, attempting to cover three meals a day, collaborating with Yili for cold drinks, creating a membership program, and leveraging third-party platforms like Douyin to sell ingredient packages.

On one hand, it is integrating the supply chain upstream.

In 2024, Guoquan will add three new ingredient production factories through self-construction and acquisitions, focusing on the production and processing of freshwater products, shrimp paste, and sour soup products.

On the retail side, it is promoting store type transformations: including "Guoquan Yao Yao Ling Xian" aimed at farmers' markets, new town stores, and supporting 24-hour self-service and home delivery takeout stores.

In 2024, Guoquan's overall performance rebounded, with revenue increasing by 6.2% year-on-year to 6.47 billion yuan.

A significant change came from the "99 yuan beef tripe free hot pot package" sold on the Douyin platform.

Driven by the cost-effective package, Guoquan's performance accelerated significantly in the second half of the year, with half-year revenue of 3.805 billion yuan, a year-on-year increase of 14.15% and a quarter-on-quarter increase of 42.77%.

For the whole year, Guoquan's gross margin declined by 0.3 percentage points to 21.9% due to its strategy of exchanging price for volume.

As the group increased brand building and invested in channels such as Douyin, live streaming sales, and new store types, Guoquan's annual sales and distribution expenses rose by 14.8% year-on-year; the core operating profit margin was 4.8%, a slight decrease of 0.1 percentage points year-on-year.

Regarding the potential profit impact of low-priced packages, Guoquan Chairman Yang Mingchao stated in communication with Xinfeng that once the marginal cost of the platform model exceeds the breakeven point, most of the gross profit will convert into net profit. "The gross margin may remain unchanged or even decline, but net profit can still grow significantly."

"'99 yuan beef tripe free' is just the first step; there will be further improvements in the future. Quality will rise, gross profit will rise, and average transaction value will rise, but it will not affect the cost-effectiveness of the package," Yang Mingchao said.

In this process, whether it can release the sales potential of single stores through product structure adjustments and membership operations, and whether it can continue to promote store expansion in lower-tier markets are key.

Between 2020 and 2022, Guoquan rapidly expanded using a light asset model without franchise fees, opening nearly 8,000 stores in three years.

However, as the special period's dividends faded and consumption recovery fell short of expectations, Guoquan soon began to face dual pressures of declining consumption frequency and decreasing average transaction value.

In 2023, Guoquan added over 1,000 new stores, surpassing the 10,000-store threshold, but revenue fell by about 15% year-on-year to 6.094 billion yuan. In 2024, the net number of stores decreased by 157 to 10,150.

However, Guoquan is about to embark on a new round of expansion.

In the next five years, Guoquan will target the lower-tier markets in counties and districts to add 10,000 new stores. The newly optimized store types for rural markets will become the main force of expansion.

In 2024, the net increase of transformed new town stores will be 287, accounting for about 3% of Guoquan's total store count.

Guoquan's overseas expansion will also see new progress in 2025, with the first batch of stores landing in Southeast Asia.

Regarding Guoquan's future development plans, Wall Street Journal · Xinfeng had a conversation with Guoquan Chairman Yang Mingchao. The following is a transcript of the dialogue (with edits): Wall Street Journal: What new development plans does GUOQUAN have for 2025? How is it different from the past two years?

Yang Mingchao: Before going public, we seized the opportunity for rapid development based on existing infrastructure. We secured the necessary financing, opened the required stores, and franchisees made profits during this phase.

In 2023, we expected consumption to recover quickly, but after May Day, we found that was not the case. GUOQUAN quickly made adjustments and adopted a conservative development strategy, with the tone set for the next two years being no new store openings, focusing on frequency and repurchase.

At the same time, we are deepening store operations, trying to invest in traffic, enhance services, and standardize levels. GUOQUAN itself has also made many innovations in supply chain, digitalization, and AI smart retail.

This is our overall tone for 2023 and 2024, called the "Seedling Plan," ensuring small growth.

The tone for 2025 is stable and rapid development, with plans for 10,000 new stores in the next five years, mainly in county and township markets.

Since last year, we have been building our own membership operation system to increase store visit frequency and average transaction value. The average transaction value of GUOQUAN's members far exceeds the average transaction value, and in terms of consumption frequency, high-recharge members are twice that of low-recharge members.

The membership project is a key project this year. GUOQUAN has established a dedicated professional department this year to connect online operations with traffic and membership.

On the brand level, there are also downward movements, shifting from previously high-profile brand awareness to operating deeply within community ecosystems to enhance penetration and reputation.

Township stores are the foundation for GUOQUAN's future expansion, and the next phase will correspondingly increase density. At the same time, we will continue to invest in unmanned retail, extending operating hours for over 3,000 stores in provincial capital cities, increasing the late-night attributes of hot pot and barbecue.

In terms of products, this year we will introduce ice products, beverages, and desserts as companions to hot pot and barbecue. We will focus on healthier soup bases for seasonings, which can extend to Chinese cooking and rice noodle preparation, further expanding the product categories.

Overall, we will enhance efficiency through unmanned retail and AI retail; embrace Douyin and Kuaishou to create explosive products, bringing growth in average transaction value for stores; enrich dining scenarios through new product launches; and improve average transaction value and frequency through membership operations.

On one hand, we will continue to transform the structure, and on the other hand, enrich the operational capabilities and efficiency tools of stores.

Wall Street Journal: Will future growth mainly come from same-store sales or new store expansion?

Yang Mingchao: Dual growth. On one hand, each store needs to achieve high-quality growth and efficiency improvements, and on the other hand, we need to continue increasing density.

The theoretical revenue ceiling for GUOQUAN's single store is quite high. Currently, about 20% of sales in the two to three million range come from barbecue, while 80% comes from hot pot, along with a portion from beverages. Revenue will increase after category expansion.

We need to ensure the reuse of what the public enjoys and the reuse of family dining tables. This is an important indicator for GUOQUAN.

New stores will no longer carry the words "ingredient supermarket," but will be renamed GUOQUAN Food Exchange. Below it will list hot pot, barbecue, Chinese cuisine, and Western cuisine, no longer focusing on ingredient elements, with a new positioning beside it—Community Central Kitchen New GUOQUAN.

This kitchen has no waiters or chefs and sells dining solutions From your perspective of fresh produce, that's a disaster. Fresh produce only has a customer unit price of 20 yuan, with a profit margin of two points.

We are a community dining retail enterprise, exactly the same as those selling hot pot and barbecue in society. However, GUOQUAN sells through offline stores to communities and purchases through third parties on the Douyin platform.

This model can only be born in China, where there is a high density of communities and population. In the future, when we go overseas, we must also go to places with a large population and many communities.

There are over 40,000 towns across the country, and GUOQUAN has only opened a few hundred town stores.

GUOQUAN has created a BC integrated model for town stores, providing a rich variety of protein ingredients and ice cream. This not only empowers small B but also delivers large-packaged ingredients to rural areas. The methodology of community group buying can be well applied in our town stores.

With the support of our brother company Huading Cold Chain's descending cold chain logistics capabilities, we have a relatively huge market space for the next few years.

Wall Street News · Xin Feng: What difficulties and challenges might you encounter when going overseas?

Yang Mingchao: Our logic for going overseas is to combine Chinese flavors with localized supply chains to meet people's pursuit of delicious and affordable food. GUOQUAN will rely on the design of its own efficiency to seek differentiated competitive advantages and scale advantages.

The difficulty lies in matching regional flavors and meal plans. When going to Vietnam, we need to study how to combine Chinese meal plans with Vietnamese meal plans. Another aspect is regional factory construction.

This year, we will also test models when opening stores overseas, as it involves human efficiency, space efficiency, sales efficiency, as well as overseas supply chain efficiency and digitalization.

Wall Street News · Xin Feng: What are the characteristics of community stores, agricultural trade stores, and town stores?

Yang Mingchao: Community stores integrate stores, warehouses, and distribution, and must form high turnover, so the SKU cannot be too many. Fast turnover, quick circulation, and rapid replenishment require strong operational capabilities for the C-end.

Agricultural trade stores have natural traffic and do not need to attract customers, but the difficulty lies in management. If not done well, it will be like fresh produce stores, with a customer unit price of only twenty or thirty.

Town stores need to be large, similar to Sam's Club in suburban America, providing surrounding village consumers with a one-stop purchase of rich protein ingredients.

Wall Street News · Xin Feng: How does GUOQUAN choose the categories for factory construction?

Yang Mingchao: Five major standards: First, there are categories without brands, like beef and steak. Second, the incremental market is not saturated, and competition is not fierce.

Third, there are advantages in raw materials and technology. Raw material advantages are like Juewei Duck Neck. Technology is like our Dai Xia Ji. This time, during the 315 incident of excessive phosphates, Dai Xia Ji had no issues at all; we developed the rolling marinating protein freshness-locking technology three years ago.

Fourth, composite products that hide gross profit. Fifth, synergy with GUOQUAN.

These five are my standards for investing in industries. The underlying logic is the structural adjustment we are making for industrial food in the next development stage to create value for GUOQUAN.

Wall Street News · Xin Feng: What market trend changes are you currently paying attention to that bring opportunities?

Yang Mingchao: The government's support for consumption is strengthening, and consumption is gradually recovering, which is a major trend JD.com entering the food delivery market has brought about a "four-country kill" in the industry. Through food delivery, we can enhance penetration and drive more traffic from GUOQUAN into communities. Several major platforms are also willing to cooperate with us, each fulfilling our own needs.

Starting this year, we will focus on AI and intelligent humanoid robots. We believe that one day, cooking at home will no longer be done by family members or nannies, but by thinking, intelligent robots.

We have electronic menus that can connect the community central kitchen through stores to smart tools for households, which is also our vision for the future.

In the past, GUOQUAN needed money for rapid development and was hesitant to take action without resources, so in 2020, we released a lot of equity. Now, the first priority is to execute buybacks well, and the second is to ensure sufficient cash flow and a relatively low debt ratio, continuously achieving performance growth.

GUOQUAN is about to enter its second phase of rapid development, and we must continuously create value for shareholders; when we make money, we need to ensure good dividends