Reduce costs and increase efficiency, continuously improve efficiency, and achieve profitability in the rapid growth of KK Group

  "Benefiting from a number of policy supports in expanding domestic demand and promoting consumption, the consumer market continues to improve." Recently, media reported that 21 brokerages are optimistic about big consumption. Not long ago, Industrial Securities overseas consumer industry research analysts released an industry tracking report "KK Group: A Trend Retail Group Winning with Products + Stores + Digitalization", which has attracted much attention from the market. Data show that since KK Group submitted its prospectus, many brokerages have released industry research reports. 

  The above report believes that China’s trend retail market will grow at a compound growth rate of 19.5% from 2020 to 2025, and the market size is expected to reach 475 billion yuan in 2025. With its advanced digital information technology system, KK Group has effectively realized the improvement of operational efficiency by optimizing location selection, product selection, logistics chain management, inventory management and other supply chain links, thus driving the steady growth of the company’s performance. 

  The report shows that the compound annual growth rate of GMV of KK Group in 2018-2020 is 246.2%, and the GMV of its main brand KKV in the first half of 2019, 2020 and 2021 is 97 million yuan, 1.156 billion yuan and 1.367 billion yuan respectively. 

  Trend retail, as a popular track of new retail, has been favored by capital in recent years, but the industry is facing challenges under the influence of the epidemic, and some companies have lowered their performance expectations. Can KK Group withstand the test of the epidemic and achieve steady improvement in performance in the face of adversity? Under the test of the epidemic, KK Group, which has impacted the "trendy retail leading" of Hong Kong stocks, has conveyed to the market and investors what kind of efficiency improvement methods? 

  Optimize the supply chain to continuously reduce costs and achieve "zero supply and consumption" three wins 

  Trend retail refers to a new retail model characterized by the unique concept and style of products, creative and fashionable entertainment functions in design, and immersive shopping experience. 

  As a representative of the rapid rise of the industry, KK Group has created the ultimate aesthetic space design with the insight of the current Generation Z consumer’s main force on the appearance and social needs, opened up the self-communication of KK Group’s brands on social media, and "open source" for the company’s performance growth. At the same time, KK Group also achieved effective "throttling" by effectively managing the supply chain system. According to public data, KK Group’s management fees continued to decline from 2018 to 2020, reaching 29.9%, 24.2%, and 17.1% respectively. In the first half of 2021, the management fee was only 8.4%, a year-on-year decrease of 13.1 percentage points. 

  KK Group said in the prospectus that the company has simplified the layers of the supply chain through a supply chain management system and manufactured its own-brand goods by sourcing directly from third-party brand partners or hiring OEM and ODM contractors to reduce supply-side costs. 

  From the prospectus data, KK Group’s own brand products have seen significant growth in recent years. The proportion of the company’s revenue from purchasing its own brand products from OEM and ODM contractors has increased from 1.4% in 2018 to 13.4% in 2021. 

  On the other hand, KK Group’s control of supply-side costs includes innovative mechanisms such as "buyout system, 0 mid-platform fees, and shortening account period". 

  The "buyout system" refers to the direct purchase of products from brand suppliers by way of buyout for a certain product. For KK Group, this move can not only ensure the supply of products, but also reduce the operating costs of suppliers stably, allowing consumers to buy high-quality and cheap products. 

  The "0 mid-platform fee" means that in the process of product selection, listing, and sales, suppliers do not need to pay entry fees, stacking fees, listing fees, promotion fees, and new product fees to KK Group, which allows suppliers to have more security in terms of capital flow, better investment in new product research and development, and effectively guarantees the SKU update frequency of KK Group. 

  In addition, unlike the long account period of traditional supermarkets, the buyout system adopted by KK Group is mainly based on monthly accounts and has a short account period, which further relieves the financial pressure on suppliers. The results show that this new "zero supply" relationship can motivate suppliers to cooperate more actively with KK Group and provide more advantageous cooperation conditions. In addition, due to the joint efforts of KKV, THE COLORIST colorist, and X11 brands under KK Group, more and more brands are willing to launch new products, limited editions, or joint models in KK Group’s stores, which also attracts more brand loyalists and young consumers to pay, thus forming a virtuous circle in the new retail era. 

  Industry insiders believe that KK Group’s optimization of supply chain management is a "win-win" model for the company itself and its suppliers, and this "win-win" zero-supply relationship will ultimately benefit consumers, truly achieving a "zero-supply-consumption" three-win. 

  Technology deeply empowers and improves operational efficiency 

  In order to further enhance operational efficiency, KK Group has also integrated technology and digitalization into the optimization and upgrade of the company’s supply chain management system. 

  Since its establishment, KK Group has attached great importance to the bottom-level driving role of technology. Whether it is KK Pavilion, KKV, THE COLORIST colorist or X11, since the establishment of these brands, the company has made a strategic layout with technology to meet the trendy retail needs of young people "love beauty, love play and love life". 

  In the supply chain system, KK Group has independently developed a number of new "sharp tools" that empower retail consumption by technology, such as the KPOS system that provides services for every key scene of store operation, the KVCM system that visualizes shelf display management, and the WMS system that provides warehouse operation management. Leading technology not only supports the company to analyze a large amount of product sales data, but also effectively assists it to effectively apply digital and intelligent methods in daily operations, thus effectively enhancing every operation link. 

  At the product selection end, KK Group adheres to the "digital product selection mechanism", that is, the listing and removal of products are determined by big data, and the technical team behind it provides all-round support and guarantee for each single product, avoiding human intervention caused by subjective preferences and interests that may occur in the procurement process. On this basis, KK Group is able to achieve accurate selection and efficient update iteration of high-quality products. 

  It is understood that KK Group adopts the "last elimination system" for its products, and the product update rate is as high as 30% -50%. The limited physical space continues to generate infinite vitality, and consumers can also have a better shopping experience, which brings about higher conversions. It is not difficult to see that KK Group’s early strategic investment in IT systems has begun to bear fruit, and the scale effect of KK Group is gradually emerging. 

  With cost reduction and efficiency increase, the company’s profitability continues to improve 

  For retail companies, maintaining optimum inventory levels is crucial to company stability, and KK Group cannot escape this. Thanks to the efficient supply chain system and logistics system, KK Group’s inventory turnover days have been significantly optimized. 

  According to the data disclosed in the prospectus, as of June 30, 2021, the total inventory of KK Group reached 985 million yuan. This seemingly huge number is expected to be turned around in a few months through the company’s efficient supply chain system. 

  At present, the company’s inventory turnover days have dropped from 301 days in 2019 to 150 days in the first half of 2021. At the same time, the proportion of the company’s inventory to the total value of current assets has also dropped from 52.0% in 2019 to 34.6% in the first half of 2021. Among them, the increase in supply chain cost reduction has brought about an improvement in inventory turnover. 

  It is worth mentioning that some people in the consumer retail industry believe that, in light of KK Group’s emphasis on product display and space aesthetics, the company’s large inventory may be scattered among major stores, rather than centralized storage in warehouses. 

  As of the end of October 2021, KK Group has 680 stores. According to this simple calculation, the inventory value scattered in each store is less than 1.50 million yuan, which is normal for offline stores with more than 20,000 SKUs. 

  In fact, the benefits of an optimized supply chain management system are obvious to all. 

  Its prospectus shows that in 2018-2020, KK Group’s GMV was 188 million yuan, 652 million yuan, 2.254 billion yuan, and the growth trend was obvious, while the GMV in the first half of 2021 almost caught up with the whole year of 2020, achieving 2.213 billion yuan; in addition, in 2020, KK Group adjusted ebitda to positive, achieving 68 million yuan in 2020 and 216 million yuan in the first half of 2021. 

  It is worth noting that KK Group’s gross profit margin has also improved significantly, from 27.1% in 2019 to 30.4% in 2020, and further to 35.9% in the first half of 2021. 

  In terms of sub-brands, since the successful incubation of KKV and THE COLORIST colorists in 2019, the operating profit and EBITDA have always been positive. Among them, KKV has performed well. In the first half of 2021, KKV achieved an operating profit of 140 million yuan, EBITDA reached 235.70 million yuan, and the EBITDA rate rose to 22.5% from 18.2% in the same period last year. These are mainly due to KK’s continuous optimization of the procurement process. Some third-party institutions believe that the GMV of KK Group is expected to reach 4.50 billion in 2021. 

  In the opinion of industry experts, after the overall expansion of KK Group in recent years, its performance has not been dragged down, but has instead shown a healthy development trend. Regarding the IPO progress that the media has paid more attention to, Hong Kong capital markets professionals believe that due to the current semi-annual report data statistics node, the update of KK Group’s prospectus has been delayed. However, on the basis of the company’s stable performance growth, the continued optimism of the large consumer track, and the gradual recovery of the Hong Kong stock market in the second half of this year, I believe that KK Group will update the prospectus as soon as possible and continue its journey to listing.