The same investment but with a more "long-term" return
Helen Company (9869.HK), which aims to become a platform company, is still in the throes of transformation.
On March 28, Helen Company released its 2023 financial report, with annual revenue of 1.209 billion yuan, a year-on-year decrease of 22.09%; achieving a net profit of 181 million yuan, turning losses around year-on-year; and adjusted net profit of 280 million yuan, with an adjusted net profit margin of 23.16%, a decrease of 1.8 percentage points compared to the previous period.
In the second half of 2023, Helen Company only achieved revenue of 499 million yuan, a significant decrease of 27.15% year-on-year.
This performance is significantly below the expectations of the secondary market. Since the beginning of this year, Helen Company's stock price has been continuously adjusting, with a decline of over 15% year-to-date. As of the close on March 28, Helen Company's market value has evaporated by over 80% compared to when it first went public in September 2021, leaving only 4 billion Hong Kong dollars.
Over the past year, Helen Company has been making continuous adjustments.
First, it opened up franchising in an attempt to leverage this lever to return to growth. Then it actively initiated a price war, further reducing the price of beer from Monday to Thursday from 9.9 yuan per bottle to 6.99 yuan per bottle.
At that time, Helen Company's management bluntly stated, "Even if it is reduced to 9.9, it is difficult for other friendly competitors to follow suit. We believe that many friendly competitors are facing a serious survival crisis, and we have the ability and willingness to further consolidate our position in the industry."
However, things did not go as planned, as the speed of Helen Company's store closures far exceeded the speed of franchisees opening stores.
The management of Helen Company admitted that in the current consumption environment, "it is not as good as it used to be in the past."
"Perhaps now everyone has less available funds, going out two or three times a week has become once, but it is still an indispensable nightlife demand."
The above-mentioned management of Helen Company stated, "We are in this for the long term."
To boost investor confidence, the board of directors of Helen Company proposed a dividend of 0.32 yuan per share, totaling approximately 405 million yuan, with a dividend payout ratio exceeding 200%.
The immediate priority for Helen Company is to create a growth story and attract more franchisees to join this business.
Reducing Costs Amid Contraction
Helen Company, which is closing stores faster than opening them, seems to have missed out on last year's offline dining consumption recovery boom.
In 2023, Helen Company's same-store sales (stores open for more than 200 days in the year) decreased by 8.5% year-on-year to 3.1048 million yuan per day; while same-store daily sales per store decreased by 8.8% year-on-year to 9,300 yuan.
CITIC Securities analyst Liu Yuenan pointed out that Helen Company actively adjusted its direct-operated store network and vigorously developed partner store networks, leading to a decrease in revenue year-on-year, with weaker same-store recovery in the second half of the year.
Behind the weak performance of same-store sales is Helen Company's strong initiative to close stores.
In 2023, Helen Company's net store count decreased by 288 to 479. In Helen Company's light asset transformation, direct-operated stores have become assets to be abandoned, with a net decrease of 398 stores for the whole year. In comparison, in 2022, there was only a net decrease of 15 stores Helen's net number of franchise stores decreased by 22 to 92, transitioning from direct-operated stores.
As a result, Helen's total net store closures exceeded 400. Last year, Helen only opened 132 franchise stores under the "Hi Beer Partner" model, far behind the pace of store closures.
In terms of cities, Helen's store closure progress is not limited by city level. Whether it's first-tier, second-tier, or third-tier cities, all are experiencing an indiscriminate contraction trend.
This has also continued Helen's weak growth trend from the previous year, with revenue declining by 22.09% year-on-year.
The reason Helen turned losses around in 2023 is simple: with fewer stores, corresponding expenses have also decreased.
In 2023, Helen's employee benefits and human services expenses decreased from 1.004 billion to 0.299 billion, a significant 70.2% reduction year-on-year; the depreciation of right-of-use assets decreased from 0.316 billion to 0.11 billion, a 65.1% decrease year-on-year; and fixed assets such as property and factories decreased from 200 million to 89.4 million, a 55.3% decrease year-on-year...
Regarding cost reduction measures, Helen's management stated at the performance briefing that over the past year, they have been "desperately improving labor efficiency," reducing the average number of employees per store while increasing the proportion of part-time workers, trying to avoid ineffective promotional activities.
TradeWind01 also learned from sources close to Helen that the ratio of manpower between partner stores and direct-operated stores decreased from 20% to 15% last year, through the introduction of part-time workers and adjustment of wage structures. Headquarters staff were also streamlined, reducing the expense budget from 10 million to below 10 million.
Compared to cost reduction, what is more important for Helen now is the expansion plan to rebuild scale.
At the performance briefing, Helen's management stated that they expect to open 400 stores in 2024, with 50-60 already opened.
"Redistribution" with Franchisees
Since 2022, Helen has been significantly closing newly opened self-operated stores while exploring "platformization," attempting e-commerce and large food stall formats.
However, faced with a net loss of 1.8 billion in 2021 and 2022, Helen, after facing reality, found that running pubs and selling alcohol is more profitable.
Therefore, since 2022, Helen has decided to use franchisees as leverage for expansion—attempting to transfer self-operated stores to franchisees as franchised stores, and announcing the slogan of opening 1,000 franchise stores by 2024.
In June 2023, Helen launched "Hi Beer Partner," completely relaxing the franchise threshold.
By the end of 2023, Helen had opened a total of 92 franchised stores and 132 partner stores, accounting for 46.76% of the total number of stores.
A person related to Helen once told TradeWind01 that partner stores are mainly located in lower-tier cities, which is related to the lower rent in these cities. Higher-tier cities are difficult to meet Helen's cost requirements for the store model However, the revenue contribution from franchisees is still small. In 2023, the franchise fee income from franchisees is approximately 71.11 million and 34.21 million, accounting for only 5.9% and 2.8% respectively, which does not match the nearly half of the total number of stores.
The reason is that Helen Company conducted a "redistribution" of interests with franchisees to attract them.
When the "Hi Beer Partners" plan was first launched, Helen Company divided stores by area: boutique stores of 80-120 square meters, premium stores of 180-200 square meters, and premium stores of 240-260 square meters.
Different store types correspond to different franchise policies.
Taking the premium store with an area of 180-200 square meters as an example, dealers need to pay 600,000 for decoration fees, starting from 200,000 for equipment and furniture fees, 150,000 for brand cooperation fees, and a deposit of 50,000 when joining, totaling 1 million.
Helen Company takes a percentage based on the monthly gross profit data of each store. For example, if the monthly gross profit of a premium store is below 60,000, Helen Company does not take a percentage; for the portion with a monthly gross profit of 60,000 to 100,000, the headquarters may take a 10% cut; for the portion of 100,000 to 150,000, a 25% cut is taken; for the portion exceeding 150,000, a 40% cut is taken.
This model relatively ensures the interests of franchisees and sets a higher guaranteed income threshold.
According to information obtained from sources close to Helen Company by TradeWind01, Helen Company adjusted the above franchise policy at the end of last year, keeping the brand cooperation fee charged to franchisees unchanged and adding an annual 12,000 franchise service fee.
More importantly, Helen Company no longer takes a percentage from the store's gross profit but instead adds a markup to raw materials, beverages, etc., sold to dealers to generate revenue. This markup rate is about 25% of the supply chain cost.
As a result, Helen Company is operating more like a Heytea.
The way it earns from franchisees has changed from a "high guaranteed income, low profit sharing" model to Helen Company's "guaranteed income in all circumstances." With the expansion of stores and increased demand for beverages, its revenue naturally increases.
In 2023, despite still being in a contraction phase, Helen Company's management confidently launched a "price war," further reducing the price of beer from 9.9 yuan per bottle to 6.99 yuan.
At that time, in Helen Company's view, it was unable to follow the price war of its competitors and intended to consolidate its position through lower prices.
However, as the process of open franchising progresses, the low-priced beer that can kill competitors is also a kind of "betrayal" to franchisees: in a low-price competition, the turnover rate of taverns, which already has a low average customer spending, will decrease, inevitably lengthening the franchisees' payback period.
TradeWind01 also learned from relevant sources at Helen Company that the pricing of Helen Company's stores is centrally managed by the headquarters, and franchisees only have a "right to suggest."
According to TradeWind01, the payback period for Helen Company's franchise stores is 18 months.
In comparison, according to Fangzheng Securities' Li Zhenyi, the payback periods for Haidilao and Tai'er are 13 months and 7 months respectively, with the latter's total investment amounting to about 2.5 million, equivalent to opening a Helen Company store, but requiring less than half the time to break even compared to Helen Company This means that Helen's attractiveness to potential franchisees may not be high.
At the performance briefing, Helen's management once again explained the price war, stating that the 6.99 yuan beer is used as a means of attracting customers, lowering the psychological threshold of consumers, and thus enabling them to consume high-margin products in the store.
"Because for a pub, the most important core is popularity."
It is worth noting that in the catering industry in 2023, the repeatedly verified experience is: people are coming back, but the consumption is not.
In the current environment where consumers are more cautious about spending money, Helen can still open up franchise leverage to expand the scale of stores while launching a price war based on the scale advantage to create competitive barriers.
However, as an important part of building a scale advantage, the interests of franchisees seem to contradict low-price competition.
How Helen balances scale and franchisee interests is also a dilemma that occurs in the tea and coffee industry