Is Youbao, a listed company, the survivor of unmanned retail?

A Hong Kong-listed company has finally emerged in the unmanned retail track, which was once highly sought after but quickly abandoned by capital.

On November 3rd, Youbao Online (2429.HK) successfully debuted on the Hong Kong Stock Exchange, with a 40.87% increase on the first day, closing at HKD 14.58 per share, with a total market value exceeding HKD 10 billion.

In this IPO, Youbao Online received a total subscription of HKD 116 million from four cornerstone investors, including Naixue's Tea (2150.HK), Sensetime (0020.HK), Wei Jinbing, and Shenzhen Malacca Network Technology Co., Ltd. Among them, Naixue's Tea subscribed for as much as HKD 61.91 million.

In addition, Youbao Online has a luxurious lineup of shareholders. Ant Group is the largest institutional shareholder, holding a pre-listing stake of 16.68%. Other institutional shareholders include Chunhua Capital, Jiayin International, and CICC Qiyuan.

Youbao Online's founder, Wang Bin, has held positions such as Senior Vice President of Sina.com (China) and Partner of Yunfeng Fund. It was not until 2012 that Wang Bin saw the opportunity brought by the expansion of mobile internet to the unmanned retail industry and founded Youbao Online.

According to Frost & Sullivan, by 2022, Youbao Online has become the largest unmanned retail operator in China, with sales of over 2 billion yuan, accounting for 7.4% of the market share.

However, Youbao Online is still struggling to break even.

From 2020 to 2022, Youbao Online accumulated a total loss of 1.643 billion yuan. In the first half of this year, despite a significant rebound in offline customer traffic, Youbao Online still incurred a net loss of 153 million yuan.

In its prospectus, Youbao Online stated that it expects to continue to incur losses until 2023 and turn losses into profits by 2025.

While many retail brands are building their own unmanned retail devices, Youbao Online will also face the challenge of competing with giants and the difficulty of scaling up quickly. Scale may be the key to its profitability recovery.

Hot money catalyzes listing

At the end of 2016, Jack Ma first proposed the concept of "New Retail" at the Yunqi Conference. Alibaba subsequently invested in and acquired offline retail formats such as Intime Retail, Lianhua Supermarket, and Gaoxin Retail (6808.HK). At the same time, Amazon's unmanned retail store was also launched, attracting capital's attention to offline unmanned retail formats.

Public information shows that in 2017 alone, companies in the unmanned retail track, such as Guoxiaomei and Meiri Youxian Convenience Store, received financing. Meiri Youxian Convenience Store raised as much as $144 million in July of that year.

Youbao Online, also seen as an offline traffic entrance, also received multiple rounds of hot money.

In 2017, Youbao Online introduced Haier Capital, Carlyle Capital, CICC Capital, and Haiyi Investment through targeted issuance, raising over 3 billion yuan in financing through three rounds of issuance. In November 2018, Youbao Online received another strategic financing of 1.2 billion yuan from Ant Group, with a valuation of 7.19 billion yuan at that time.

However, the process of Youbao Online's listing on the main board has not been smooth. Since its listing on the New Third Board in 2016, Youbao Online has been seeking a listing on the main board. In 2017, it planned to land on the A-share market through a reverse merger with Xinhua Bookstore (002264.SZ), but the deal fell through due to the inability of shareholders to reach a consensus on the transaction price. Until May last year, Youbao Online launched an attack on the Hong Kong stock market. After two failures, it finally passed the hearing of the Hong Kong Stock Exchange in September this year and once again became the "first stock of unmanned retail".

However, Youbao Online's shareholders are not so patient.

In 2017, Carlyle, who invested in the company, transferred its shares to Chunhua Capital for a profit of 100 million yuan two years later. In the same year, when Youbao Online was delisted from the National Equities Exchange and Quotations, Haier gradually transferred its approximately 60 million shares and is no longer a shareholder of Youbao Online.

The reason behind the shareholders cashing out and leaving is that the unmanned retail track suddenly "stalled". In 2018, well-known companies in the primary market such as Guoxiaomei, Xingbianli, and Qizhikao were rumored to have layoffs, closures, and store closures.

In August last year, Meiriyouxian Convenience Store was acquired for only 30 million yuan. It is worth noting that its two rounds of financing totaled more than 1 billion yuan.

In comparison, being backed by Ant Group, Youbao Online eventually landed on the Hong Kong Stock Exchange and became a rare "lucky one" in the track. On November 3rd, the first day of Youbao Online's listing, the stock price rose by as much as 40.87%, closing at HK$14.58 per share, with a total market value of HK$11.3 billion. According to Wind data, as of November 6th, Youbao Online's first-day gain ranked third among Hong Kong-listed companies this year.

A private equity person from the primary market in East China said to Xinfeng (ID: TradeWind01) that the reason why the unmanned retail track rose in 2017 and was quickly abandoned by capital in 2018 is only one-"not making money".

Why is it difficult to make a profit

Today, as the industry leader, Youbao Online is also facing the issue of "difficult profitability" and has not fared better as a survivor in the industry.

Affected by the epidemic, offline customer flow has sharply decreased. From 2020 to 2022, Youbao Online achieved revenues of 1.902 billion yuan, 2.676 billion yuan, and 2.519 billion yuan respectively, with a total net loss of 1.643 billion yuan over the three years.

Youbao Online's main business is selling goods through vending machines, referred to as "smart retail business" in the prospectus, accounting for more than 70% of revenue.

However, in fact, this business is not as "smart" as it seems. Unmanned vending machines can only replace simple processes such as cashiers and still rely on a large amount of manpower to replenish them in a timely manner. They cannot bypass labor costs, and in order to ensure that they are available 24 hours a day, they also need to pay maintenance costs for the machines. In terms of financial reports, Youbao Online's sales cost accounts for nearly 60% of total revenue, but in the profitable year of 2017, the net profit margin was only 1.45%.

Therefore, since 2020, Youbao Online has hoped to reduce costs and achieve asset-light expansion through the "location partner" model. Under this model, partners assist in laying out locations, bear the development costs, site usage fees, water and electricity fees, and other expenses, and receive 20%-30% of the revenue from vending machine transactions, while Youbao Online is responsible for location operations. From 2020 to 2022, the retail business under the partnership model contributed 762 million yuan, 1.479 billion yuan, and 1.612 billion yuan respectively, accounting for over 80% of the unmanned retail business.

However, the essence of this asset-light expansion model is the competition for core locations. Customer traffic determines the sales volume of unmanned vending machines. This is also the fundamental reason why major soft drink giants are investing in channel freezers. Brand owners will not hand over downstream channels to others.

For example, in May last year, the one-stop intelligent retail service brand "Yuanqi Forest GO" under Yuanqi Forest launched a new retail terminal, the "M1 Smart Cabinet," to further expand its presence in the unmanned retail terminal business. China Resources has also made a big push by placing unmanned vending machines in subway stations and other transportation hubs.

In addition, SF Express, which has advantages in supply chain transportation, is also trying to get a piece of the pie. It has incubated the "Feng E Zu" food brand, providing urban white-collar workers with rich breakfast, afternoon tea, snacks, beverages, and other product sales services.

According to Frost & Sullivan, in 2022, in terms of total sales, Youbao Online's market share reached 7.4%, with Nongfu Spring and SF Holdings ranking second and third, with market shares of 3.3% and 3% respectively.

A first-tier private equity investor in East China, Xin Feng (ID: TradeWind01), said that China's labor costs and delivery costs are relatively low compared to the global average. The rise of unmanned retail overseas in 2017 was due to the high labor costs and underdeveloped delivery services. This is not a problem in the short term in China, which is one of the reasons why this track was quickly abandoned in the early years.

Therefore, it seems that Youbao Online, facing the dual pressures of cost and expansion, still has a long way to go in the undifferentiated unmanned retail market.