Today, rumors are making rounds about JD.com's interest in acquiring Yonghui Superstores in full, an assertion that both JD.com and Yonghui vehemently denied when reached out for comment. Even when we approached Yonghui for verification, we received a similar reply: "No such matter exists."
Generally, when it comes to mergers and acquisitions involving publicly traded companies, denials are often the official response, especially during the early stages of the event and prior to any official announcement, even if the rumors are true.
The potential acquisition of Yonghui by JD.com does seem logical in some respects. However, claiming it's unreasonable wouldn't be accurate either. This issue is complex, involving factors such as stock prices, profit distribution, industry synergy, and shareholder interests.
Some market insiders insist that JD.com's supposed intent to acquire Yonghui is a "false rumor". However, others suggest that the two companies must have had talks regarding a merger and acquisition, whether formal or informal, intensive or casual.
"Why wouldn't a major shareholder (JD.com) owning more than 13% of the shares be in contact with Yonghui several times a year?"
Pricing
The feasibility and authenticity of JD.com acquiring Yonghui are primarily influenced by the pricing factor, which can directly impact the progress of the event.
Some market insiders expressing skepticism about the acquisition say: "Why would Yonghui, with its current market value of 32.9 billion, sell? Would its major shareholders even be willing to sell? The idea of acquiring Yonghui at its current market value is wishful thinking."
Others, who believe JD.com and Yonghui have had negotiations, argue: "In my personal opinion, it's unlikely that any equity transactions will be agreed upon at Yonghui's current price, unless JD.com directly purchases Yonghui shares in the secondary market."
Currently, Yonghui's market value is relatively low. When JD.com invested in Yonghui in 2015 and when Tencent invested in 2018, the share prices were around 5 and 8, respectively. However, Yonghui's current share price is only slightly over 3.6. Hence, it's unlikely that Yonghui's shareholders would sell at this price. From JD.com's perspective, however, the current share price of Yonghui is a fairly good deal, regardless of how you look at it.
According to Yonghui's 2023 Q1 report, the shareholder structure is: Milk Company (a subsidiary of Hong Kong's Yihai) holds 21.08% of Yonghui shares, the founding Zhang brothers (Zhang Xuansong and Zhang Xuanning) collectively own 16.92%, JD.com holds 13.38%, and Tencent holds 5.27%.
If JD.com were to acquire a controlling stake in Yonghui from the secondary market, the Milk Company's decision would be crucial. Some insiders mention: "The Milk Company wouldn't side with JD.com, which only holds slightly over 13% of Yonghui shares, still a considerable distance from the Milk Company's 21.08% stake."
Demand
To judge the authenticity and feasibility of "JD.com's intent to acquire Yonghui", it's also necessary to consider whether the buyer and seller in these rumors have the demand to buy or sell.
The majority of market insiders interviewed believe that the Zhang brothers, Yonghui's founders, are unlikely to sell their shares at least at this stage.
From a business development perspective, Yonghui is currently focusing on developing its front-end warehouse-to-home service and digitizing its operations, which require significant investment and considerable traffic, including costs for front-end warehouse network, customer acquisition, and digital infrastructure.
Yonghui's strength lies in its approximately 1,000 stores and strong store-opening capability. It has substantial market coverage in cities like Fuzhou and Chongqing. Therefore, Yonghui's scale advantage can facilitate faster replication of its front-end warehouse and digital transformations at relatively lower costs.
Given the city of Fuzhou - home to Yonghui's headquarters and a pilot city for its front-end warehouse transformation - some insiders estimate the loss from the development of the front-end warehouse-to-home service (with 47 standard large front-end warehouses opened in Fuzhou) to exceed 100 million in Q2 2023. The cost to replicate this nationwide would be substantial if the aim is to roll it out quickly.
"In Q2, Yonghui set up over 100 large front-end warehouses, leading to an expansion of online losses (with a net loss of 517 million after non-recurring items in Q2). The performance of these 160 warehouses in the peak seasons of Q3 and Q4 could determine Yonghui's future. Currently, very few players are still in the front-end warehouse game."
Expanding front-end warehouses to first and second-tier cities across the country, including the cost of opening warehouses and customer acquisition, would require tens of billions, according to some insiders' calculations. Thus, Yonghui needs substantial traffic and funds.
Can JD.com meet Yonghui's demands?
Compared to physical retailers, JD.com has strong traffic and financial capabilities, which can meet the digital transformation needs of physical retailers to some extent. The combination of JD.com's online business and offline retail can also help explore growth and achieve better scale effects.
However, when compared to China's seven major e-commerce platforms (Alibaba, WeChat, Meituan, Pinduoduo, Douyin, Kuaishou), JD.com's performance in terms of traffic and financial capacity is average at best.
JD.com ranks at the bottom or second from the bottom among the seven major e-commerce platforms in terms of traffic. In terms of financial capacity, mainly in financing capability, JD.com (including JD.com Group, JD Logistics, and JD Health) ranks second from the bottom in market value among China's seven major e-commerce platforms.
03 Burden or Value
What is the demand of JD.com if they intend to acquire Yonghui?
The crux of this question lies in whether offline assets have value, or whether brick-and-mortar stores are a "burden" or "value".
If you determine that offline store assets are a "burden", then acquisition makes no sense. On the contrary, it could be very valuable.
From the current situation, stores still hold value, especially when the growth space for online platforms is becoming increasingly scarce and in the fresh produce market, the value of offline stores is still irreplaceable.
This is because even if consumers stay at home more, you can't prevent them from going out.
Moreover, even with a surge in order volume bringing cost and efficiency advantages to e-commerce platforms, you can't make consumers give up the love of experiencing physical goods and the "human touch".
Finally, online traffic is rapidly changing. Ten years ago, Alibaba dominated the traffic industry, and ten years later it's TikTok. However, offline stores are still relatively stable (even without going into the store, the surrounding residential and mobile population still exists).
When it comes to specific product categories, in the market for perishable, short-life, non-standard goods like fresh produce, online platforms also lack the foundation for scale introduction, including cold chain infrastructure, front-end warehouse network (transforming stores into front-end warehouses), expensive costs of acquiring new customers and fulfilling orders, as well as the necessary large-scale fresh processing, standardization input, and the huge order volume base needed to support such investments.
Therefore, in the fresh produce market, due to localized perishable consumption characteristics and the pursuit of order volume, fresh produce must be a combination of online and offline formats, a single format is difficult to dominate the market.
If JD.com wants to do fresh produce and dig for growth space in an increasingly scarce online space, it will inevitably move offline.
So, does it need Yonghui?
JD.com may need an offline store network to do home business faster (transforming existing stores into front-end warehouses, store-warehouse integration is quicker and more cost-efficient, it's hard to lay out pure front-end warehouse business in the short term), because JD.com's 7Fresh business cannot achieve this.
First, it cannot achieve nationwide coverage in the short term, including the tens of billions of investment needed to open thousands of stores, and the team training and integration required for each new store. Therefore, when acquisition becomes relatively cheaper and more time-saving, it's better to acquire than to open your own store.
Second, in the current supermarket market, if there is a lack of concentration and store layout density, survival is very difficult. "Orphan" stores in the current market environment generally face a 20%-30% drop in sales, and serious losses. Therefore, if you can't achieve dense coverage, you may also be squeezed out of the market.
JD.com may also need to continuously improve the efficiency of the fresh produce supply chain, including establishing a network of small and medium-sized merchants and realizing a scale basis.
The supplier network has always been the "core asset" of retail enterprises. Outsourcing the "merchant network" may increase competition. At the same time, who will be responsible for quality control and food safety for non-standard fresh food if small and medium-sized fresh food merchants of physical retailers "go online"?
Therefore, the so-called supply chain strategic cooperation carried out in the past is often unstable, difficult to fully trust, and those that can truly "integrate" at the supply chain level are basically achieved through acquisition.
Scale is the basis for improving supply chain efficiency, especially for the fresh processing business. Because any improvement in efficiency is inseparable from a scale basis. Without scale, even the best model may become "empty talk".
