On October 16, the first session of the Lianshang Donglai President Class officially commenced in Xuchang. CEOs and general managers from 100 retail enterprises across the country and overseas gathered in Xuchang to deeply study Pangdonglai’s business philosophy and management philosophy. Led by Donglai Ge, they aim to promote benevolence in business and pursue a better path.
On the afternoon of the 16th, the President Class participants visited Pangdonglai’s headquarters, Employee Home, Angel City, and the Industrial Logistics Park. Donglai Ge led the team and provided comprehensive explanations throughout the visit, ensuring that participants could thoroughly understand and learn. Notably, this was the first time the Pangdonglai Industrial Logistics Park and its Central Kitchen, which began operations in June, were open for public tours.
The Pangdonglai Industrial Logistics Park is located at the south section of Xuzhou Road and the intersection of Xuyou East Road in Xuchang, covering an area of 150 acres with a total construction area of approximately 160,000 square meters. With a planned total investment of about 1.5 billion yuan, it officially began operations in October 2022.
The project integrates a logistics center, central kitchen, comprehensive office, product research and development, talent cultivation, employee entertainment and leisure, and the processing and distribution of retail end products. It aims to create an intelligent park of international first-class standards and quality. Currently, the logistics center and central kitchen are operational, while the employee leisure center building is still under construction.
The logistics center’s ambient temperature warehouse is an impressive steel jungle. It handles the receipt, storage, distribution, and delivery of daily necessities, beauty and personal care products, clothing, footwear, home appliances, and groceries. Supported by an intelligent management system and specialized handling equipment, the operations are orderly, smart, and efficient.
In the cold chain warehouse, all refrigeration equipment comes from top domestic and international brands, providing a safer storage environment for fresh and cold chain products. The freezing, refrigerated, and dry cold storage areas are set to different temperatures to protect various products such as vegetables, fruits, dried fruits, and wine. From the receiving dock to the shipping dock, cold chain products are kept at a constant temperature, ensuring reliable safety for customers.
The entire logistics center floor is made of highly dense diamond sand, providing excellent strength and stability. Additionally, the conspicuous yellow Konecranes elastic collision protection columns can absorb 80% of impact force, carefully protecting every corner of the warehouse.
In June 2023, the Central Kitchen of Pangdonglai Industrial Logistics Park officially began operations. The Central Kitchen has a total construction area of 34,000 square meters, divided into three floors, including a raw material receiving platform, finished product temporary storage, freezing and refrigeration storage, cold chain shipping platform, cooked food workshop, tofu workshop, bread workshop, cake workshop, frying workshop, Chinese pastry workshop, cold food workshop, food testing center, R&D center, and a comprehensive office area. It is equipped with leading international and domestic equipment and processes, creating a modern central kitchen focused on safety, health, quality, and professionalism.
Detailed information about the functions and features of various equipment, as well as the detailed process flows of various products, are posted along the corridors of each workshop, making everything clear and easy to understand.
The comprehensive office area includes a food testing center, product R&D center, talent training center, employee activity center, scenario display area, and DIY experience area. With top-notch hardware facilities, spacious and bright spaces, clean and tidy environments, orderly layouts, and attention to detail reflecting respect and care for employees, even the parking lot entrance for the logistics park features showers for truck drivers, embodying Pangdonglai’s “great love” cultural philosophy.
Donglai Ge stated, “We strive to make the Industrial Logistics Park a high-quality, high-tech, intelligent, and systematic model retail enterprise and commercial benchmark for everyone to learn from and reference. This will promote the development of the retail industry and other industries towards a better direction, making cities, society, and the world a better place!”
Freedom of Durian, Freedom of Cherries, Freedom of Mangosteen…
Every season, the wish for fruits floods social media. From another perspective, people are becoming more meticulous about fruit consumption.
According to the “China Agricultural Outlook Report (2020-2029),” China is the world’s largest fruit producer and consumer market, accounting for about one-third of the global fruit production. Frost & Sullivan predicts that the market will exceed 1.7 trillion yuan by 2026.
The market is vast, but the fruit business remains challenging. The highly fragmented market, regional and seasonal product differences, and varying consumer habits hinder large-scale expansion of fruit chain enterprises. High transportation and storage difficulties, short selling periods, and challenging cold chain logistics drive up costs. Additionally, the small-scale farming typical of the fruit industry makes standardization difficult, complicating supply chain quality improvements. Experience, cost, and scale form the “impossible triangle.”
The fresh fruit market has a saying: “Southern Pagoda, Northern Xianfeng, and Western Hongjiu.” As industry leaders listed on the stock market, examining the cold stock prices and profitability bottlenecks of Pagoda and Hongjiu Fruits reveals their pain points.
01
Net Profit Soars, Stock Price Stagnates
High Sales Costs, “Inflated” Skepticism
As of October 17, Pagoda’s closing price was 6.04 HKD, nearly 10% up from 5.56 HKD on September 29 before the holiday, but it remains stagnant compared to the IPO price of 5.6 HKD at the beginning of the year. Does it match the halo of being the “first fruit retail stock”? What is the market waiting for?
The mid-2023 report shows Pagoda’s revenue at 6.294 billion yuan, up 6.4% year-on-year, with net profit attributable to the parent company increasing by 34.1% to 260 million yuan.
While both revenue and profit increased, the gross profit margin decreased. The gross profit margin and net profit margin were 11.32% and 3.98%, respectively, a decrease of 0.3 percentage points and an increase of 0.77 percentage points from the previous year.
Why did the gross profit margin decrease while the net profit margin increased?
A closer look at the financial report shows cost-cutting measures. In the first half of 2023, sales expenses decreased by about 1.7% to 242 million yuan, management expenses decreased by about 6.6% to 147 million yuan, and R&D expenses decreased by 14.1% to 74.1 million yuan.
It is worth noting that the reduction in these expenses was partly due to a decrease in staff in the respective departments. It raises the question of how much of the net profit and net profit margin growth came from internal cost-cutting. How much has core profitability improved?
In terms of overall size, even with a 34.1% increase in net profit far exceeding the revenue growth rate, the 260 million yuan profit still seems weak compared to the 6.2 billion yuan revenue.
In fact, during the IPO, the issue of high revenue and low profit was a focus of public opinion. According to data from East Money, from 2019 to 2022, the company’s gross profit margins were 9.76%, 9.12%, 11.24%, and 11.62%, while net profit margins were 2.77%, 0.52%, 2.19%, and 2.71%, respectively.
The contrast lies in the fact that Pagoda is also known for high-end, high-priced fruits. Since opening its first store in 2002, Pagoda has been perceived as “tasty but expensive.” Social media is filled with complaints about the high prices, like “23.5 yuan for an apple” and “90 yuan for a watermelon.”
So why is it not making more money?
The industry’s objective factors mentioned at the beginning of the article exist. According to a research report by Anxin Securities, the gross profit margin ceiling for the fresh e-commerce industry is 30%, with the industry average at around 15%. Under low-profit conditions, many companies struggle to break even.
The prospectus admits that high procurement costs directly impact Pagoda’s profit margins. From 2020 to 2022, Pagoda’s sales costs accounted for 90.9%, 88.8%, and 88.4% of total revenue.
Even so, Pagoda’s gross profit margin performance still lags behind industry levels. Why doesn’t it show the scale effect and profitability expected of a leading company?
Pagoda’s business model isn’t selling fruits but franchising. Yuhui Yong, a Jiangxi Agricultural University alumnus, founded Pagoda by pioneering the introduction of the “chain” concept into the low-standardized fruit industry.
From 2001 to 2008, Pagoda expanded through franchising but suffered continuous losses. From 2008 to 2015, Pagoda repurchased franchise stores and converted them to self-operated stores. From 2018, it adopted a franchise business model again.
As of June 30, 2023, Pagoda had 5,958 offline stores, a net increase of 507 from the same period in 2022. Among them, 5,945 were franchise stores, and 13 were self-operated stores, with self-operated stores accounting for only 0.2%.
This franchise ratio is reminiscent of Mixue Ice Cream & Tea. Both rely on franchising for scale expansion but do not profit from franchise fees. Instead, they earn revenue by selling fruits and other products to franchise stores.
In the first half of 2023, Pagoda’s fruit and other food sales revenue was 6.117 billion yuan, up 6.7% year-on-year, accounting for 97.2% of the group’s total revenue. Revenue from franchise fees, membership income, and other sources accounted for less than 3%.
However, unlike Mixue Ice Cream & Tea, which sells raw materials to franchisees with ease, Pagoda’s fruit business must overcome various industry characteristics, leading to a high-price but low-profit predicament.
02
Billion-Dollar Dreams and Quality Control Headaches
It is worth mentioning that Pagoda pioneered the “refund policy for unsatisfactory fruits.” In other words, the high product prices include the cost of the company’s selection process.
However, in practice, Pagoda’s quality experience still needs improvement. Past quality control issues have repeatedly put the company in the spotlight.
In June 2023, a user posted a video on Douyin complaining about being treated differently when using a group purchase coupon at Pagoda. After buying an unsweet watermelon and providing feedback to the store clerk, the response was, “Because you got it cheap, the watermelon is not sweet.”
This incident quickly trended on social media, leading to numerous complaints such as “Pagoda is expensive, paying a lot to be mistreated” and “Asking a few more questions at Pagoda gets no answers, the staff just walks away arrogantly.”
In response, Pagoda apologized, citing a misunderstanding, and stated they would further strengthen employee management training.
In May 2022, a well-known blogger exposed that Pagoda was making fruit cuts from spoiled fruits, ignoring moldy apples, and continuing to sell them, despite company policies prohibiting the sale of overnight fruits.
At that time, Pagoda was in the sensitive IPO period, and the news quickly sparked public outcry. It was even criticized by the Shanghai Consumer Protection Committee, which stated that brands cannot blindly pursue expansion speed at the expense of franchise store management and supervision.
Pagoda quickly apologized and implemented the following corrective measures: re-inspection of all stores’ operations and quality management, requiring the involved stores to suspend operations for rectification, disciplinary action against regional managers, strengthening SOP training for stores, and increasing supervision, inspection, and mystery shopper visits to ensure fresh fruit quality.
While the attitude and actions are commendable, browsing Black Cat Complaints raises questions about the effectiveness. As of October 17, 2023, Pagoda had 2,300 accumulated complaints. Reviewing recent complaints, there are still issues with “spoiled fruit gift boxes,” “unfresh fruit,” “bad fruit,” and “moldy fruit.”
This raises the question: how much has Pagoda’s quality control improved since going public? How well have high standards been met?
There may be urgency and helplessness. Public information shows that Pagoda’s store count exceeded 2,800 in 2017 and over 5,600 by the end of 2022, doubling in five years.
However, this speed still falls short of founder Yuhui Yong’s vision. In 2016, he proposed the goal of “10,000 stores and 40 billion yuan in annual sales by 2020.” By the end of 2020, only 4,757 stores had been achieved, less than half of the target.
At the earnings release on August 22, 2023, Yuhui Yong reiterated the 10,000-store plan, aiming for 10,000 stores by 2027 and 30,000 by 2042.
Is this ambition too aggressive? China Food Industry Analyst Zhu Danpeng stated, “Frequent food safety and service issues in franchise stores highlight deficiencies in Pagoda’s management system, corporate culture, and store supervision.”
This hits the mark. Looking at the above performance and user complaints, being large does not mean strong, and fast does not mean excellent. Besides scale effects, there is a need to beware of scale traps. Store expansion requires robust supply chain management, professional team capability, and comprehensive management skills. If the operating radius is exceeded, chaos can arise, posing risks. Especially post-IPO, external expectations for quality control are more stringent. Balancing growth and stability is a pressing question for Pagoda.
Warning signs have already appeared: In the first half of 2022, Pagoda’s single-store product sales revenue for franchise stores was 846,900 yuan, dropping to 796,000 yuan in the first half of 2023.
Industry analyst Sun Yewen pointed out that experience, cost, and scale are the “impossible triangle” in the fruit retail industry. They complement each other, and experience is the foundation of scale. Without a solid foundation, sustainable growth is unattainable. This is the primary challenge Pagoda and Yuhui Yong must overcome before chasing their trillion-dollar dreams.
03
Accounts Receivable Exceed 10 Billion, Stock Price Slumps
Reflecting on the fruit market, the contradictions become apparent. Despite the trillion-dollar track, gold mining is not easy.
If C-end retail is tough, what about B-end wholesale and distribution?
Looking at Hongjiu Fruits, its revenue growth rates from 2020 to 2022 and the first half of 2023 were 177.78%, 78.12%, 46.70%, and 19.37%, respectively.
The slowdown is related to cost pressures. Despite being a fruit distributor with relatively simple operations, Hongjiu Fruits faces high sales costs, similar to Pagoda. In 2021 and 2022, sales costs accounted for over 80% of revenue.
On September 5, 2022, Hongjiu Fruits listed on the Hong Kong stock market before Pagoda. However, the title of “first fruit stock” did not prove lucrative. On the first day of trading, the transaction volume was only 50 million HKD, and the following two months’ trading volume was similarly bleak, leading investors to mock it as a “liquidity assassin.” Fortunately, it later experienced an upward trend, peaking at 41.8 HKD in January 2023, before declining again to a record low closing price of 4.66 HKD on September 14, with a market value of less than 6.7 billion HKD. As of October 17, the stock price was 4.90 HKD, with a market value of less than 7 billion HKD, shrinking by over 80% from the year’s high of 32 HKD.
On October 11, Hongjiu Fruits responded to media inquiries, stating, “There have been no major adverse changes in the company (Hongjiu Fruits).”
According to Chen Song, CEO of Xiangsong Capital, Hongjiu Fruits’ stock price decline is mainly due to the low profitability of the fruit trading business, limited growth potential, and significant operational risks and pressures, leading to low investor expectations and interest in the business model.
This is not an exaggeration. Delving into the fundamentals, some risks cannot be ignored.
For example, accounts receivable exceeding 10 billion. In the first half of 2023, Hongjiu Fruits’ trade and other receivables reached 10.151 billion yuan, an increase of about 12.84% from the end of last year. The turnover days of accounts receivable increased from 144.8 days at the end of 2022 to 188.5 days.
Hongjiu Fruits’ financial report explains that the payment cycle of some downstream customers, especially regional terminal wholesalers and small supermarkets, has been extended due to the impact of the pandemic and macroeconomic environment over the past three years.
Ultimately, it is still the tug-of-war between experience, cost, and scale.
Industry analyst Guo Xing stated that the fresh fruit industry can be broadly divided into upstream growers, midstream distributors, and downstream retailers. Both upstream and downstream are relatively fragmented, while the midstream involves multiple processes such as harvesting, sorting, packaging, preservation, storage, transportation, and distribution, forming a lengthy and complex value chain in the fresh fruit distribution market.
The wastage is significant. Chen Cunkun, a researcher at the National Agricultural Product Preservation Engineering Technology Research Center, stated that China’s fruit and vegetable wastage rate is still between 25% and 35%, meaning nearly one-third of the fruits are lost in the post-harvest distribution process.
Admittedly, similar to Pagoda’s downstream chain, Hongjiu Fruits’ standardized processes achieve “end-to-end” supply, integrating the lengthy midstream distribution chain, reducing wastage, and expanding profit margins.
Despite this, Hongjiu Fruits’ influence over upstream and downstream remains limited. The high accounts receivable reflect the company’s limited control over downstream product listing, circulation volume, and price changes.
The resulting derivative risks have appeared in the financial report. In the first half of 2023, Hongjiu Fruits’ provision for trade receivables credit impairment losses increased by 48.38% year-on-year to 184 million yuan. As of June 30, 2023, the company’s cash and cash equivalents at the end of the period were only 557 million yuan.
04
Revenue Growth Without Profit Growth, High-End Dilemma
In the first half of 2023, Hongjiu Fruits experienced revenue growth without profit growth: revenue increased by 19.37% year-on-year to 8.537 billion yuan, but net profit decreased by 6.51% to 803 million yuan.
Persistently high costs are partly to blame. In the first half of 2023, sales costs increased by 24.59%, higher than the 19.37% revenue growth, causing the gross profit margin to decline by 3.55 percentage points to 15.37%.
Digging into product business, high-end fruits are Hongjiu Fruits’ winning armor. Half of the revenue comes from six fruits: durian, mangosteen, longan, dragon fruit, cherries, and grapes. Durian alone generated 4 billion yuan in 2022.
As of June 30, 2023, sales of the six core fruits contributed 4.266 billion yuan, increasing the share from 49.18% to 49.97%.
However, entering 2023, weak consumer willingness to spend has shifted focus to cost-effectiveness and value-for-money. High-priced fruits have faced consumer backlash, with topics like “Earning 10,000 yuan a month but can’t afford imported fruits” trending on social media.
In this context, the pressure on Hongjiu’s high-end business is evident. How long can it last?
At critical moments, the actions of the leaders impact both internal and external confidence.
From September 11 to 13, 2023, Hongjiu Fruits’ controlling shareholders Deng Hongjiu and Jiang Zongying reduced their holdings from 27.1% to 26.12%, cashing out about 100 million yuan.
It’s worth noting that on August 20, Deng Hongjiu and Jiang Zongying had just promised not to reduce their holdings.
Hongjiu Fruits explained that the “reduction” was due to changes in the holdings of two employee incentive platforms they control, not direct sales by the controlling shareholders.
05
Blue Ocean Transformation, Tackling the Impossible Triangle
Embracing the capital market is a crucial path for companies to grow stronger, especially for Pagoda and Hongjiu Fruits, which focus on industrial chain transformation.
However, capital is not a cure-all, and investors base their decisions on expectations. To tell a compelling value story and secure a good valuation, a solid core capability is essential.
How can they break free from high revenue and low profit? Pagoda is actively seeking solutions.
The semi-annual report shows that the company has established a four-level fruit quality classification system based on taste, rating fruits into four categories (Signature, Grade A, Grade B, and Grade C) to cater to different consumers at varying prices.
In the first half of the year, Pagoda launched four new product brands, including “Sweet Moon” and “Fresh Purple.” As of June 30, 2023, it had introduced 35 proprietary product brands to the market, accounting for 14% of the total store retail sales in the first half of the year.
Looking ahead to the second half of the year, Pagoda plans to continue penetrating lower-tier cities, further expand into existing cities and nationwide, strengthen its B2B business, and expand its export business.
Running the scale story remains the main narrative. Yuhui Yong emphasized that the long-term store expansion plan is based on the population and store density distribution in the cities they have entered: “We are confident in achieving the goal of 30,000 stores in China.”
Turning to Hongjiu Fruits, they are actively seeking change to expand their market radius towards the C-end. In March 2023, Deng Hongjiu publicly disclosed that they were negotiating cooperation with platforms such as Douyin and Kuaishou to conduct offline brand exposure activities.
The goal is to slowly form a one-stop solution for the live e-commerce fruit supply chain, establishing a strong association between “Hongjiu Fruits” and high-quality fresh fruits.
In September, Hongjiu Fruits signed a tripartite strategic cooperation memorandum with ID Capital and Frontier Digital Global Trade, opening new fields for digital innovation and cooperation in the Cambodian agricultural supply chain.
Looking at the industry track, overall consumption is recovering, and the future remains promising. According to CBNData, the domestic fresh fruit retail market reached 1.07 trillion yuan in 2021 and is expected to grow to 1.67 trillion yuan by 2026, with a compound annual growth rate of 9.2%. Future demands for quality, personalized, fresh, and nutritious consumption are still on the verge of explosion.
This means that the development dividends for Pagoda and Hongjiu Fruits remain, but the growth threshold is also rising.
How quickly can they conquer the “impossible triangle”? Time is both limited and precious for Yuhui Yong and Deng Hongjiu.
