• Savings Directions
• December 3, 2024

Metro’s Supply Chain and Wumart’s Capital Dynamics

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In a significant move in the retail landscape, Metro China Supply Chain recently refiled its application for an IPO with the Hong Kong Stock Exchange, sparking interest among investors and analysts alikeThis comes after a series of strategic maneuvers, including not only acquisitions but also sales and restructures that have reshaped its business model.

The backdrop of these developments dates back to 2020 when Wumart Holdings made headlines by acquiring 100% of Metro China's operationsThe deal, valued at approximately 47.11 billion RMB and 1.593 billion euros—a staggering 167.33 billion RMB based on a current exchange rate—was a watershed moment for both companiesSubsequently, the original holding entity of Metro reacquired a 20.04% equity stake in Wumart Holdings for about 19.97 billion RMB, further entrenching the intricate relationship between these retail giants.

Fast forward to 2023, and we see Metro’s original holding company selling back that 20.04% stake at a price of 20.03 billion RMB—a clear illustration of the shifting dynamics of ownership and control within the sector.

In its latest documentation, Metro Supply Chain cited an earlier attempt to go public in March 2021, which was ultimately called off due to unfavorable market conditions

However, following a comprehensive business reorganization—most notably the divestment of its retail operations to its parent company, Wumart—Metro Supply Chain is poised to relaunch its public offering by the end of 2024.

The current focus of Metro Supply Chain revolves around managing the fast-moving consumer goods (FMCG) supply chain specifically for Wumart and Metro brandsIts services cater to corporate and institutional clientele, offering food service, delivery, employee welfare gifts, and wholesale goodsMoreover, it extends its logistics solutions to independent retailers, aiming to streamline their operations.

Analyzing the revenue streams of Metro Supply Chain reveals that the bulk of its income is derived from retail delivery solutions, food service and delivery, welfare gift options, and wholesale productsIn the first seven months before 2024, retail delivery solutions accounted for 59.58% of its revenue

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Yet, despite this dominance, the past two years have seen a slight decline in the income share of retail delivery, contrasted by a consistent rise in welfare gift solutions, closely aligned with the company’s strategic pivot toward expanding this higher-margin segment.

It is noteworthy that this pivot toward welfare gifts is telling—while the gross margin for retail delivery hovers around a mere 3.8%, the welfare gifts segment boasts a robust 16.3%. This shift reflects both market trends and a strategic reevaluation of profitability within Metro Supply Chain.

The company’s revenue has experienced decline over the past three years, a situation they attribute largely to decreased sales at Wumart, as the latter streamlines its store presenceInterestingly, adjusted net profits have seen an uptick, rising from 0.39% in 2021 to 1.73% in 2022, derived from a combination of higher contribution from welfare gifts and reduction in other costs

Yet, in a concerning twist, the adjusted net profit for the first seven months of 2024 fell dramatically to merely 5.9 million RMB compared to 159 million RMB in the preceding period, sharply juxtaposed by a 20.48% increase in financial expenses.

Turning to the potential risks and opportunities that lie ahead, Metro Supply Chain faces several hurdlesOne significant challenge is the slowing consumption growth amidst fierce industry competitionThe company must solidify and expand its competitive foothold in an fragmented market that necessitates substantial investment in infrastructure—everything from supply chain capabilities to digitalization and fresh produce handling facilitiesThis downturn may adversely ripple through to Metro’s short-term performance as their downstream clients feel the pinch of sluggish consumer spending.

Adding another layer of complexity is the high client concentration; due to its extensive relationship with Wumart, which has provided up to 62.3% of Metro Supply Chain’s revenue over multiple years, any decline in Wumart's retail competitiveness could lead to significant repercussions for Metro's financial health.

However, it would be remiss to ignore the potential opportunities that lie ahead

Starting in 2024, Metro Supply Chain has begun extending its retail delivery solutions to independent third-party retailers in Hunan and HubeiThis move represents a strategic endeavor to diversify its client base and reduce dependency on Wumart, with the aim of enhancing overall profit margins.

Additionally, Metro stands to benefit from a rebound in consumer spending in China as the economy begins to recover from various pandemic-induced setbacksThis economic environment might provide the catalyst needed for Metro Supply Chain to revitalize its growth trajectory.

Meanwhile, Wumart Holdings has captivated the investment community with its complex yet ambitious capital narrativeLaunched in December 1994, the first Wumart store set the stage for an expansive retail empireInitially focused on point-of-sale innovations, it quickly transitioned to a cooperative model with state-owned enterprises, turning a single store into a vast network that included supermarkets and convenience stores—all within a few short years.

By 2003, Wumart listed on the Hong Kong Stock Exchange, and subsequent acquisitions solidified its market position, despite facing challenges related to rising operational costs and marketing expenditures that squeezed profitability

This led to a controversial but strategic decision to delist and privatize Wumart in 2016, giving it the flexibility to pursue new growth avenues.

Post-privatization, Wumart's aggressive expansion continued unabated, striking deals and acquiring stakes across the retail landscape, including high-profile purchases like Metro China in 2020, which significantly reshaped the competitive dynamics in the industry.

As for Metro Supply Chain, the documents reveal that DrZhang Wenzhong, Wumart's founder, holds a substantial 73.31% interest in the companyThey have also attracted significant investments from several reputable institutional investors, including the likes of Tencent, Abu Dhabi Investment Authority, and various financial behemothsThese moves signify confidence in Metro’s market potential and the unique ability of Wumart to navigate complex financial landscapes.

Ultimately, the rationale behind Metro Supply Chain's IPO is clear: to raise capital for enhancing supply chain capabilities, launching new brands, expanding client bases, advancing digitization efforts, and serving operational needs