JIUMAOJIU, the reverse tenfold stock, the more it falls, the more expensive it gets

On July 22, JIUMAOJIU disclosed the latest operating situation in the second quarter, recording its worst performance since the end of the mask era, with the average customer spending at Tai Er Sour Fish dropping back to the level of 7 years ago.

Since the beginning of the year, JIUMAOJIU has fallen by over 55%. If calculated from the historical high point, it has dropped by 92% in just three years, completing an exaggerated decline of ten times in reverse. However, in a twist of fate, after halving within the year, the market predicts a profit of 200 million this year for JIUMAOJIU, which is still close to a PE ratio of nearly 20 times. It is possible that it will become more expensive as it continues to fall.

Standardized catering not only suffers during the consumption downturn cycle, but consumers are also strongly resisting the over-prepared food in the catering industry.

I. Subverting the pricing strategy of catering in the downturn cycle

JIUMAOJIU disclosed a profit warning, expecting revenue in the first half of this year to be 3.064 billion yuan, a 6.4% increase from the same period last year's 2.879 billion. However, net profit is expected to be no less than 67 million yuan, a drop of nearly 70% from the 222 million yuan in the same period last year.

The average customer spending at Tai Er on the mainland dropped from 75 yuan in 2022 to 64 yuan in the second quarter, while the average customer spending at Song Huo Guo dropped from 128 yuan in 2022 to 104 yuan in the second quarter.

The management provided four reasons for the decline in profits: 1. The same period in 23H1 after the end of the mask era had a high base, and the company received government subsidies; 2. Consumer habits have been changed by the overall environment, leading to a decrease in average customer spending and turnover rate; 3. Operating expenses of the company decreased lagging behind the decline in revenue of individual restaurants; 4. Impairment in 24H1 is not less than 40 million yuan.

Changes planned by the management next: 1. Introducing new business models, such as franchise and cooperation models, as well as takeaway satellite store models; 2. Optimizing menu structure and food prices, i.e., reducing prices; 3. Optimizing employee incentive mechanisms; 4. Strengthening cost control measures;

This profit warning can be seen as another blow to catering stocks. Those who want to buy consumer stocks in the downturn cycle may not realize that the left side after halving is still a long way off, as JIUMAOJIU fell another 20% last week.

JIUMAOJIU's management also came out to communicate and appease investors' emotions. The general statement is that previous strategies were wrong, costs were controlled within the year, capital expenditures were focused on Tai'er Suancai Yu and hot pot, and newly expanded brands have been sold off, resulting in an impairment of around 40 million.

Although the management admitted their mistakes with a good attitude, they were still criticized by investors.

Here is a summary from a Snowball investor on several turning points for JIUMAOJIU: After switching to breeding bass themselves, they were criticized by consumers for not being tasty, and the management stubbornly refuted consumers. In September 2022, they planned to use half of their cash flow at the time to buy an office building, causing the stock price to plummet by 20% on the same day. Later, the management came out to say that they would use their own money to buy it, not the company's.

In the past two years, the company's operations have been deteriorating, and every time they come out to communicate, it's either being stubborn with investors or admitting mistakes. The management seems to lack enthusiasm, which has also led many people to avoid dealing with this company.

After the end of the mask era, most people did not anticipate that the catering industry would worsen, shattering the expansion strategies of most restaurants. For example, in the past two years, JIUMAOJIU launched a new brand called "Soul Hot Pot." Initially, the expansion of stores went smoothly, with several stores opened in first-tier cities, receiving good feedback and gaining popularity on social media for a while.

As of the second quarter of this year, Soul Hot Pot has a total of 73 stores.

Some friends may not be very familiar with Soul Hot Pot. It can be understood as a version of Haidilao with enhanced service attitude, mainly targeting young people. It emphasizes a very social service attitude that makes consumers feel a bit socially anxious.

For example, during meals, the waiters will perform singing and dancing or other talents at fixed times to make consumers happy, or celebrate consumers' birthdays like Haidilao does. Most young people who go to this restaurant will take photos and share them on social media. Some even say that young people go to Soul Hot Pot for birthday celebrations, which brought Soul Hot Pot into the limelight for a while. During that time, there was a 1-2 hour wait at Soul Hot Pot.

However, this year, Soul Hot Pot is not as crowded. One reason is the high average consumption per person, and the other is that the hot pot is average, and the service experience is not as exciting after the first time. This is part of the reason for JIUMAOJIU's sharp decline.

In fact, the average consumption per person at Soul Hot Pot is not low. In 2022, the average consumption per person was 128 yuan, reduced to 113 yuan in 2023, and further decreased to 104 yuan per person in the second quarter of this year. After the end of the mask era, the average consumption per person actually decreased by nearly 20% compared to 2022.

The average customer spending at Sōng Hotpot is significantly higher than that of Haidilao. In 2022, the average spending at Haidilao in first-tier cities was 114 yuan; in 2023, it was 105.7 yuan. When comparing the overall data, the difference is even greater. In 2022, the average spending at Haidilao restaurants in mainland China was 103.2 yuan, and in 2023, it was 97.3 yuan.

Therefore, when the average spending per customer at Sōng Hotpot decreases, the original model of Sōng Hotpot is likely to no longer be sustainable.

Why is that? Based on the service model described above, consumers spend more time dining at Sōng Hotpot compared to other hotpot restaurants. This is because consumers have more interactions with the staff.

For example, there is a staff dance performance every hour in the evening, which extends the dining time for consumers. There is a limit to the turnover rate, which places a high demand on the average spending per customer. If consumers spend more time dining, leading to a continuous decrease in spending per table, it disrupts Sōng Hotpot's model of selling services for higher prices.

According to JIUMAOJIU, the turnover rate at Sōng Hotpot was 3.6 times per day in 2022, 3.8 times per day in 2023, and dropped to 2.8 times per day in the second quarter of this year. Haidilao had a turnover rate of 3 times per day in 2022 and 3.8 times per day in 2023.

Of course, this is only one of the reasons. In times of economic prosperity, this impact may not be significant. However, in a period of declining average dining consumption per person, this can have a significant impact. It can be said that the reduction in average spending will disrupt the operation models of many restaurants.

Especially for standardized franchised restaurants, when the entire brand is in a mode that is not conducive to survival in the current environment, the loss effect of continuing to expand stores is also very frightening. Just like Sōng Hotpot, which plans to open 25 more stores this year, when the existing model is disrupted by the decrease in average spending per customer, opening more stores cannot solve the problem of an inadequate model.

The solution, as mentioned by the management, is to lower menu prices to attract consumers to continue dining and increase turnover rate. However, if the turnover rate cannot return to around 3.8 times per day like the same period last year, considering the reduced menu prices and average spending per customer, the restaurant model will still not be sustainable. Therefore, this is a difficult balance point.

In the end, the most direct solution is to increase the turnover rate. However, Sōng Hotpot's model is difficult to make customers eat quickly and leave, and the dishes are average. After experiencing this kind of service once or twice, customers are not attracted to come back for more, so the turnover rate has decreased from 3.8 times per day last year to 2.6 times per day in the second quarter of this year, gradually becoming a restaurant where young people only go for birthdays or gatherings 2. When both the macro environment and management are not good

In a downturn cycle, the test of management capabilities in the catering industry is becoming increasingly challenging. Just as mentioned above, in prosperous times, the requirements for management capabilities are not high. However, in adversity, the ability to make adjustments is what truly tests the level of competence. Currently, JIUMAOJIU is at a point where changes need to be made.

Apart from the issue with Sōng Huǒguō (怂火锅), the table turnover rate of Tài'èr Suancai Fish (太二酸菜鱼) has dropped from 4.1 times per day last year to 3.6 times per day in the second quarter, and in 2022, the turnover rate for Tài'èr has dropped to only 3.5 times per day. This indicates that the business of Tài'èr is approaching a stage where travel inconvenience due to the epidemic is affecting it.

Why has it declined to this extent? It is not only due to the impact of the macro economy, but also the worsening market competition landscape, coupled with the inflexibility of the management.

Firstly, in terms of the macro economy, the epidemic phase has led to a portion of everyone's savings being depleted, and even many people's savings have fallen below their safety line. After the epidemic, the first thing most people do is to raise their savings to the "safety line" before proceeding to consume more or invest. However, the current economy is not doing well, so the time needed to return savings to the safety line has been extended.

Furthermore, three key conditions in the catering industry have changed. Firstly, the economic growth rate has weakened, followed by weak future income expectations, and lastly, there has been a significant reduction in business banquet activities.

From the data at both ends, in January and June, Shanghai's total retail sales of consumer goods amounted to 151.3 billion RMB, a year-on-year decrease of 9.4%, marking the first decline in nearly 20 years (excluding the 22 years of mask sales). Secondly, high-end restaurants such as Michelin-starred restaurants and Black Pearl with prices above 600 RMB have collectively experienced a 30-50% decline.

Therefore, high-end restaurants have launched their own sub-brands, pushing down the average price per customer. Even Moutai (茅台) sales have been poor, reflecting that even the most resilient high-end consumption is struggling, with the historically strong consumer market in Shanghai also experiencing a decline.

So, when high-end consumption is not doing well, lower-tier consumption naturally comes under pressure. With poor demand, restaurants intensify competition by lowering prices, thereby starting to compete based on their operational capabilities.

However, when competing in operational capabilities, this happens to be the weak point of JIUMAOJIU.

Firstly, in order to control costs, JIUMAOJIU changed the sea bass of Tài'èr to their own breeding.

In fact, this operation is not a problem, just like Hǎidǐlāo (海底捞) also uses its own supply chain, which can keep costs low enough, allowing Haidilao to still make significant profits this year. However, in the catering industry, lowering costs is premised on taste. When the taste changes, subsequent consumers may reduce their consumption. After switching to their own sea bass, most consumers felt that the taste was not as good as before, leading to a decrease in dining at Tài'èr.

Another point is that Tài'èr Suancai Fish processes semi-finished products from a central kitchen to the store, but customers cannot adjust the spiciness of the dishes when ordering. In some stores, customers are even told that the default spiciness of the dishes is the best recipe and cannot be modified However, in reality, this is unacceptable to customers. Everyone knows that using pre-made dishes is one thing, but not being able to choose the spiciness level has discouraged many consumers.

Of course, in standardized catering, using pre-made or semi-finished products is a common practice. If the price is right and the food is tasty, consumers won't complain. But if the restaurant's taste declines, prices remain high, and the restaurant ignores consumer feedback, naturally fewer people will eat there. This reflects the arrogance of the management, as they are unwilling to make any changes to retain customers.

It is worth noting that this issue will be further exacerbated in a downturn. As all restaurants start lowering prices to attract customers, customer experience is the prerequisite for performance growth. Thinking beyond JIUMAOJIU, dishes that lack uniqueness are easily replicated, and other restaurants in the market can offer the same taste of hot and sour fish at a lower price than JIUMAOJIU, making JIUMAOJIU less competitive.

In fact, it is evident that JIUMAOJIU is trying to emulate the service model of Haidilao, for example, the slogans shouted by waiters when serving dishes and the dancing service at hot pot restaurants. However, the company's management is not strong enough, the dishes lack innovation, and the taste is declining, which is magnified during price wars.

III. Conclusion

As of the second quarter of this year, JIUMAOJIU has a total of 614 stores, up from 578 at the end of 23, with plans to add 80 to 100 new stores domestically within the year. They also plan to add 15 to 20 stores overseas, so by the end of this year, there will be around 680 stores, and the management still wants to expand against the trend.

But can we say that the price war in the catering industry is over now? Clearly, it is premature to say so when the macroeconomic situation has not reversed. The subsequent price war in the catering industry will continue to escalate, meaning that the industry's average customer spending will continue to decline, and JIUMAOJIU may face a situation of both a record low in average customer spending and store closures.

Looking at the current market value of 3.6 billion, assuming that the price war intensifies in the second half of the year, with a pessimistic expectation of annual profit of 150 million, corresponding to a PE ratio of 24 times, not to mention the possible scenario of record low average customer spending and store closures. Just based on this, JIUMAOJIU no longer has the conditions for a turnaround from its current predicament.