In addition to the X11 hip-hop brand, KK Group also has KKV, THE COLORIST and KK Pavilion, which not only cover more than 190 cities in 31 provinces nationwide, but KK will also set foot abroad in Indonesia in 2020 with 12 offline stores. KK can be said to be growing fast with the aesthetic trend of Generation Z, so can it actually go global?
Rapid Expansion Struggles to Achieve Cost Reduction and Efficiency Improvement
Rapid expansion to occupy the market has always been the foundation of retail companies, but this strategy is based on capital on one side and the ability to open stores on the other. Since its founding in 2015, KK has experienced seven rounds of financing, with a cumulative total of nearly 5 billion CNY, and the second handing of KK to the Hong Kong Stock Exchange at the beginning of this year has set off a new wave of public opinion. According to the prospectus data, from 2019 to 2021, KK's GMV has a compound annual growth rate of 163%, far ahead of the whole market, but behind the high growth in the number of stores and growth rate is a continuous loss; in 2019, 2020, 2021 and as of October 31, 2022, KK's operating income (CNY) will achieve 464 million, 1.646 billion, 3.524 billion and 3.067 billion respectively, while net profit (CNY) for the same period is -515 million, -20.17 billion, -5.681 billion and 189 million respectively.
In addition, in terms of the average monthly GMV of a single store, it also declined by 8.36% from 588,600 CNY in 2021 to 539,400 CNY in October 2022 year-on-year. However, by this year, according to the latest monthly report published on KK's official website, the average store GMV of KKV, THE COLORIST and X11 all rose to varying degrees after May 1. Despite the improvement in the first ten months of 2022, the situation is still not optimistic compared to the huge losses and more recent data are yet to be disclosed.
For KK, which was established nearly nine years ago, it is hard to say whether it is still in the early investment stage or whether the profitability of the business model is limited.
In terms of franchise mechanism, according to the disclosed data, in the first 10 months of 2022, KK franchise gross margin is only 21.6%, while the gross margin of self-owned stores is as high as 49.2%. KK has chosen a more controllable direct mode, and in the past two years, it has even transferred franchise stores to its own stores in bulk by closing franchise stores and acquiring equity, while suspending prepayments to franchise stores. These initiatives have increased store revenue and some receivables, but also increased the cost of the company's inherent assets, the market is also a lot of confusion. Take MINISO (09896.HK), which is also an offline lifestyle retailer, 99% of which are franchised stores. Compared to the "asset-light" model, KK has taken on heavier pressures, such as survival, cash flow and rental costs.
Looks-oriented Differentiation Cannot be Empty Hype
Placement and vicinity has always been an essential competitiveness and differentiation of offline retail. Currently, most of KK's stores are located in mid- to high-end shopping malls in first- and second-tier cities in China, with store areas usually ranging from 800 square meters to 2,000 square meters. It is worth mentioning that KK's "exceptional appearance" has become the key to attracting the younger generation, whether it is the warehouse-style design of KKV, the beauty wall of THE COLORIST, the handicraft wall and technology tunnel of X11 or the "theme store" in Indonesia. These have all become "social media hotspots" for consumers to experience and visit offline. On the one hand, this has brought traffic to the stores and increased customer dwell time, but the cost of store rent and inventory has also increased.
On the product selection side, KK Group's "digital selection mechanism" and "last elimination system" have resulted in a product renewal rate of 30%-50%. On the operational side, KK reduces costs through the DTC (Direct to Consumer) model of direct brand supply and de-BA (BeautyAdivisor). Distinguishing itself from the private label brands of Famous Brands, KK Group has partnered with 1,472 third-party brand owners as of the end of October 2022, while engaging OEM and ODM contractors to manufacture private label goods. The brand matrix built earlier has also gradually formed a synergy, with more and more brands willing to debut new, limited edition or co-branded models in KK Group's stores, which has brought about a virtuous circle to a certain extent, although the low gross margin of the three-party brands has also become a major problem for KK's revenue.
Fierce Global Competition, Elusive Industry Moats
According to Deloitte Global's 2023 Global Retail Power Annual Report, the top 250 retailers achieved a total consolidated retail growth rate of 8.5% in fiscal year 2021 (*fiscal year between July 1, 2021 and June 30, 2022), with 61.6% of them having overseas operations and the share of the top 250's total retail revenue coming from overseas operations accounting for 23.4% of the total revenue of the top 250 retailers came from overseas. This indicates that globalization of the retail industry has now become a major trend.
For example, MINISO officially laid out overseas as early as 2015, and has been present in 105 countries and regions around the world so far, and overseas revenue in the first quarter of this year even reached 800 million CNY, an increase of 55% year-on-year, and the single-store GMV level reached 1.5 times that of the same period in 2019. In addition, just in the Southeast Asian market, a similar number of brands from China such as Mumuso, Yoyoso, MINIGOOD and XIMISO have entered the market.
As of now, KK's 12 overseas offline stores in Indonesia only account for less than 4.5% of total revenue, but due to policy reasons, KK transferred 80% of its originally indirectly owned overseas subsidiary PT KKV Retail Indonesia to an independent third party established in Indonesia, so it can be said that KK's overseas expansion path has yet to clear the fog. However, on the bright side, earlier this year, KK's tide game brand X11, in conjunction with Chinese fan armor anime brand MOTOR NUCLEAR, pushed Chinese fan armor tide games to the Japanese market and opened a small number of placement sales, which were wildly sought after by many fans.
Despite being in the popular trendy retail track, the industry is competitive at the global level in no way, and cost efficiency and digitalization no longer have a moat effect. Just from the analysis of the better results of the trendy retail field, KK's X11 in 2020 and 2021 gross margin of 40.4% and 43.4%, while the same period POP MART (but reached 63.42% and 61.43%. In addition, cosmetic brands such as Perfect Diary and Florasis have gone overseas in recent years, and the old chain stores Watsons and Sephora, a global beauty shopping platform positioned at the top end, remain strong within the beauty trend retail track, while the brand awareness and product power of KK Group's THE COLORIST still needs to be improved.
Although KK has been actively looking for the second curve of growth - laying out the brand matrix in advance and trying to go abroad. Obviously, the degree of attention and awareness in going abroad is still far from enough, and there will be a lot of price to pay in globalization later.
From Startup to Top Player: Where Does KK Team's Glass Ceiling Lie?
Live great live without boundaries-this is the company mission of KK Group currently displayed in its official website. It is hard to imagine that the founder behind such an attractive business that relies on trends, youth and creative aesthetics is a post-80s hipster IT man. Wu Yuening has moved from product manager, community retail store, to the shopping center to KK Group, which is approaching listing today, in a sense he is successful.
As a coveted player in the capital market, after star institutions such as Deep Ventures, Matrix Partners China, Hongtai Fund, Wuyue Capital and JD, have come down to invest, the group's founder, Wu Yuening, has always kept control firmly in his own hands. According to the prospectus, Wu Yuening holds about 24% through MOGR and co-founder Guo Huibo holds about 4.38% through Starlight, which is the single largest shareholder group of the Group.
With a total of more than 6,000 employees nationwide, KK has become a major challenge to manage efficiently. "Traditional retail is highly dependent on people - store managers and regional leaders - and changes in personnel can affect the performance of a single store or even a region, but KK's structure is system-driven and highly standardized, and the 4C point system is used to manage employees, mitigating labor costs," Wu Yuening said in a previous interview.
It is worth noting that the information disclosed by KK to the public shows that as of the last round of financing, KK's valuation is close to 20 billion CNY. while the total debt of the group is as high as 13.8 billion CNY as of October 31, 2022, and the cumulative total revenue of KK from the beginning of 2019 to October 31, 2022 is only 8.7 billion CNY. behind these figures, there are external questions about KK and even offline retail.
According to the Deloitte report, under the huge market of global retail, traditional retailers Walmart, Amazon, and Kaishikai still occupy the main market. For lifestyle products, retail giants such as Dollar General, Dollar Tree and Five Below in the U.S., as well as the aforementioned slew of Chinese outbound retail brands, also continue to intensify competition. In addition, the online plus offline model has become a must-have retail option. Alibaba (NYSE:BABA) and JD (NASDAQ:JD) are also surging ahead with their domestic supply chain and e-commerce advantages, and MINISO, which focuses on the young market, is also performing well in terms of its overseas share.
Therefore, KK's global retail dream may not be OK if it only relies on its appearance to attract the younger generation under the dual pressure of joining mechanism and its own profitability.