Fruit Chains Rise Rapidly, Rapid Expansion Needs to Break Through Standardization Bottleneck
China's fruit chain industry has experienced many kinds of model innovation, but few have gained real momentum. Now, however, the chain fruit store Pagoda has secured the largest investment in the fruit chain retail industry to date. Recently, Shenzhen Pagoda Industrial Development Co., Ltd. completed a 400 million yuan Series A financing round, with Tiantu Capital leading with 350 million yuan and institutions such as GF Xinde participating.
On September 22, Pagoda Chairman Yu Huiyong said in an exclusive interview with a China Business Journal reporter that Pagoda currently has more than 1,200 stores and will add a net 600 chain stores next year, after which annual net additions will be no less than 1,000. Undoubtedly, the entry of capital will accelerate the pace of expansion, but what exactly has enabled this company to reach its current position?
Fruit Chains Rise Frenziedly
Yu Huiyong told this newspaper's reporter that compared with the south, the northern market has fewer fruit chain stores, while market demand is especially large. Beijing is the biggest testing ground for domestic fruit retail model innovation; not only are offline fruit specialty stores developing rapidly, but fruit e-commerce and O2O are also flourishing, making Beijing a must-win battleground for fruit retail brands seeking to understand industry changes and validate business models.
Regarding the problems currently facing the fruit chain store industry, relevant industry insiders said that, unlike the traditional fast-moving consumer goods industry, fruit chain stores have five formats: one is street-side stalls; the second is farmers' markets; the third is convenience stores; the fourth is supermarkets; and the fifth is the fruit chain stores that have become popular in recent years. Due to relatively fierce competition and a lack of standards, fruit chain stores face expansion bottlenecks and mainly sell within regions. At present, the better-known fruit chain stores include Guoduomei in Beijing, Xianfeng Fruit and Brother Fruit Industry in Hangzhou, Luye Fruit in Changsha, and Guopopo in Jilin, among many other brands. In the capital market, apart from Jiuding's investment in Xianfeng, few other investment cases have entered public view.
Industry insiders believe that the biggest problem regional brands face during expansion is the lack of unified standards, because the fruit in one place differs from the fruit in another, and expansion in the local market will lead to a situation of not adapting to local conditions.
It is worth noting that the fruit chain stores Brother Fruit Industry and Xianfeng Fruit have accelerated their pace of expansion into markets outside Hangzhou since last year, because the Hangzhou fruit market is already saturated. Although stores are still increasing, the speed is slowing. In the future, Brother Fruit Industry's focus will be Liaoning; Xianfeng Fruit had previously set the goal of exceeding 320 chain stores by 2015, with areas outside Hangzhou becoming their new base for expansion. At present, Xianfeng has opened 34 stores in Huzhou, Shaoxing, Lishui, Jinhua and Shanghai; in the Beijing market, the largest fruit chain store is Guoduomei. Pagoda's entry will bring it into direct competition with these brands.
In response, Yu Huiyong said that Pagoda and companies such as Guoduomei have different positioning, and there are many differences in their business formats. Guoduomei mainly opens in bustling areas with relatively large customer flow, with store areas above 300 to 400 sq m, while Pagoda mainly opens in communities, with store areas of 40 to 50 sq m, mainly targeting community residents, and opening stores faster.
Rapid Expansion Needs to Break Through the Standards Bottleneck
Regarding the industry's development, Yu Huiyong believes that the lack of standards is the main bottleneck to the rapid replication and development of fruit chain stores. At present, Pagoda has already solved this problem, yet it took nearly ten years.
He believes that the hardest part of running a chain is building a set of benign operating systems that can be replicated quickly. Once this system is established, rapid expansion has a foundation. However, fruit is different from other industries; there are no standards to draw on, and everything depends on exploration.
At present, Pagoda has its own corporate standards system to ensure fruit quality, classifying fruit into A, B and C grades, and then classifying by large, medium and small. In this way there are 9 standards, and there are also more than a dozen specific classification methods. Every purchaser must be relatively familiar with purchasing standards to ensure that the best fruit can be purchased. For example, one Red Fuji apple has 16 grades at Pagoda, with the highest costing 18 yuan and the lowest only 3.9 yuan.
Yu Huiyong believes that loss control is also an important part of standardization in the management system, and is one of the most important technologies in fruit retail. Loss control involves many links across the entire industry chain. From the moment of picking and post-harvest handling, it has already affected the final loss rate. There are no fewer than a dozen control nodes in between, and loss control directly reflects the comprehensive management level of a fresh food enterprise.
At present, the loss rate of the entire fruit industry is about 10%. Pagoda's loss rate has gradually dropped from 10% at the beginning to within 5%, and the goal is to reduce it to within 3%. In fact, many fruit chain stores appear to be doing good business, but their profitability is very poor, and the main reason they cannot even sustain themselves and close down is an excessively high loss rate.
Yu Huiyong said that, in addition to standards, the shortage of talent in the fruit industry is also a key factor restricting the development of the entire industry. It is easy to recruit people who understand IT and technology in the market, but it is especially difficult to recruit someone who understands fruit.
Testing the Waters of E-commerce Faces Challenges
China's fruit retail industry has experienced many kinds of model innovation, but few survivors. Pagoda launched in 2008 and tried selling fruit through its website, but the scale was small and it was difficult to make money. Later, it precisely targeted consumer groups by visiting office buildings. However, although coverage was high, the cost of delivering packaged fruit to customers in office buildings was very high, and it was still difficult to become profitable. Afterward, it also tried models such as directly connecting with major clients and buying gifts on behalf of customers, but all of them failed one after another.
Regarding the e-commerce model, Yu Huiyong revealed that from order taking to delivery, the cost of fruit is as high as 40 yuan per order. Even calculated at a high gross margin of 25%, it would need a price of 160 yuan per order to cover it, but this exceeds the usual amount ordinary consumers spend on fruit.
The reporter learned that at present, the online fruit seller Tianguo Orchard, in addition to selling fruit, has also added special sales of fresh aquatic products, while mooncakes for Mid-Autumn Festival gifts are also sold online. A person familiar with the matter said that relying only on online fruit sales is actually very difficult to make profitable, and many enterprises that do purely online fruit stores are struggling, so transforming or adding sales categories is truly a last resort.
At present, although many merchants' online marketing is hot, they lack offline supply chain support. In the future, Pagoda will consider connecting with online platforms, with the other party responsible for directing traffic to stores, while Pagoda provides products and supply chain support.
Yu Huiyong said that part of the funds raised this time will be used for e-commerce development, and will comprehensively upgrade the application of information technology to integrate online and offline and compete with the current O2O. This year's strategy is to open the offline platform and cooperate comprehensively with all excellent online operators and excellent O2O operators. At present, Pagoda has already cooperated with O2O platforms such as JD Daojia and Xiaomi Life, and will increase promotion efforts in the future.
However, industry insiders believe that although Pagoda can leverage advantages such as more than a thousand offline chain stores in the e-commerce field, 99% of fresh food e-commerce is still losing money. Difficulty in making a profit and heavy cash burn are already hurdles many e-commerce companies face, and the market cultivation period is relatively long. How to break this deadlock in the future still faces many challenges.