Consumer Staples Author: Yue Liu, Linyan Feng Editor: Luke Sheehan Oct 31, 2020 09:30 PM (GMT+8)

What's behind the firm's 'low-priced but high-quality product' strategy?

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► Miniso is poised to benefit from customers' rising brand awareness, product design, and value for money through the C2M model.
► Miniso's inventory turnover was 78 days in 2020, indicating a good inventory management capacity among its peers.
► Alibaba's 'one yuan store' is not likely to threaten the position of Miniso in the ST, as Miniso is a preeminent kind of integrator that can build its moat by delivering superior quality in the niche, pursuing brand premium. While Alibaba serves more like an aggregator, these two companies will operate orthogonally. 

Online surveys conducted by Chinese media showed that Chinese consumers have tended to constrain their consumption after COVID-19, but this situation is improving and official data show direct evidence. In August, the nominal social consumption growth returned to positive for the first time in the year, to 0.5% vs. -1.1% last month. The real growth adjusted after inflation shows a negative 1.1% growth that is recovering compared with negative 2.7% last month.

Traditional retail also continues to improve. As for offline stores, from January to August, the growth rate of supermarket retail sales increased by 0.9 percentage points compared with the number from January to July. The decline in retail sales of department stores and specialty stores narrowed by 2.7 and 2.9 percentage points, respectively.

Positioned offline and founded in 2013, Miniso is a low-cost retailer offering various design-led products, including cosmetics, stationery, toys and kitchenware. As of June 30, 2020, the company established 4,200 Miniso stores, of which 129 are directly operated. Among all stores, 40% are located in China, and 60% is across 80 countries and regions. 

Imitate Costco's supply chain?

In the retail industry, how to manage the supply chain is critical. Miniso adopts a C2M model that allows the firm to be solely responsible for the design while production is handed over to the foundry. It is hard to balance between benefiting consumers, supply chain management, and corporate interests. Thus, it is hard to build out the business from scratch, but it makes competitors harder to imitate, given the amount of capital and time the business inputted. The player needs to be proficient in the detailed process such as product selection, design, inventory, billing period, store decoration, a display shopping guide and after-sales service.

It sources products from over 600 suppliers and has established nine warehouses in China. Suppliers are generally responsible for delivering products to warehouses either by themselves or through third-party logistics service providers, attracting more OEM manufacturers to cooperate with the firm coupled with a large amount of Miniso purchases, quick cash return, and effortless design. 

However, compared with Costco, the forerunner of the C2M model, Miniso is not mature enough. Costco has only 3700 SKUs with an accumulation of many high-quality supplier resources and strong independent design capabilities. In contrast, Miniso has nearly 8000 SKUs, which makes it more challenging to operate. And, enhancing the stickiness of current suppliers also requires continuous, high-quality operation and enough attractiveness.

Can the 'value for money products' strategy be sustainable?

Miniso products' core appeal is in their pleasing design, quality and affordability, and more than 95% of the products are priced below CNY 50. The main target customers are young people, especially female consumers. 

Each Miniso store's SKUs are controlled at around 3000, and on average, new products are launched every seven days. An average of 600 new SKUs is launched every month. The problem is that the speed of new product design is challenging to keep up – so the company might easily fall into the embarrassment of plagiarism and infringement.

One of Miniso's solutions is to cooperate with well-known IPs. The company has established co-branding relationships with 17 IP licensors as of June 30, 2020, who own popular brands such as Marvel, Disney and Hello Kitty. 2300 of the 8000+ core SKUs are from joint products. However, Miniso is poised to keep benefiting from customers' rising brand awareness and product design, and cooperating with IP may suppress the growth of Miniso's brand value. 

Product quality is also the key to the pursuit of cost-effectiveness. In September 2020, the nail polish products of Miniso has exposed to that carcinogens are more than 1,400 times higher than the national limit. Although Miniso shifts the responsibility to the supplier, the company's product quality control was not strict enough. To continue improving brand value and increasing consumer stickiness, the company needs to work harder in product quality.

Miniso will not be threatened by Alibaba's 'one yuan store'

Alibaba launched its first 'one yuan store' in Shanghai in October 2020 to fight Miniso. And it plans to open at least 1,000 stores nationwide in the next three years. But in fact, this move will not threaten the position of Miniso. 

In our view, Miniso is a preeminent kind of integrator that can build its moat by delivering superior quality in the niche, pursuing brand premium. Alibaba, however, serves more like an aggregator, and these two companies will operate orthogonally. Miniso's product design efforts, unified offline store decoration, and co-branding collaborations will continue to increase its mindshare, something Alibaba' one yuan store doesn't aim for. It will further allow Miniso to capture more and more margin from its differentiated branded products and increase the amount of money it can earn per customer. 

Key financials

Miniso generates revenue from sales of lifestyle products, license fees and others, accounting for 89.7%, 6.5%, 3.7%, respectively, in 2020. And 67.3% of revenues are from China. 

As of June 30, 2020, total revenue decreased to CNY 8.98 billion, a year-on-year decrease of 4.4%. The main reason for weak performance is that the epidemic has negatively affected offline stores' operation as almost all of Miniso's stores are in popular business districts. Besides, more than 20% of overseas stores were closed.

This article is part I of our analysis on Miniso. Please continue to part II.