Qdama Gears Up For Hong Kong IPO

China's largest community-based fresh grocer is regrouping after its aggressive expansion using a franchising model ran into headwinds Key Takeaways: Qdama operated nearly 3,000 community-based stores as of last September, as the company gears up for a Hong Kong IPO The community-based grocer incurred a net loss of nearly 290 million yuan in the first nine months of last year, though it was profitable excluding a one-time paper loss Its name may not resonate with foreigners, but Qdama is a household staple to many in China. Its catchy tag line of "no yesterday's meat" is on everyone's lips. In just 14 years, the operator of a community-based grocery chain has expanded to nearly 3,000 stores nationwide with annual revenue exceeding 10 billion yuan ($1.43 billion). Now, its parent, Qdama International Holding Ltd., is aiming to make the name a staple in the foreign investment community with its application for a Hong Kong IPO filed last week. Though its name means "Auntie Qian," the chain wasn't founded by someone of that surname, nor was it started by a woman. Founder Feng Jisheng started out as a butcher running a pork stall in 2012 in the southern city of Dongguan not far from Hong Kong. Feng was not only sharp with his butcher's knife, but also possessed an equally sharp business acumen. He recognized that increasingly affluent Chinese were demanding higher-quality meat, leading him to pioneer his concept of "no yesterday's meat" to emphasize the freshness of his products. Feng opened his first Qdama community-based store in Shenzhen in 2013, starting out in traditional wet markets before moving his shops into residential areas. He used a "Discount + Daily Clearance" model, which emphasizes freshness by progressively marking down items throughout the day, before giving away unsold goods after midnight. Mirroring many Chinese retail and food and beverage chains, Qdama leveraged its brand recognition to scale rapidly through franchising, turbocharged by multiple rounds of capital raising. That allowed it to exponentially boost its store count in relatively short order. Lackluster financials Despite its strong reputation, Qdama's financial performance is far less compelling. According to its filing, the company's revenue fell 4.2% year-on-year during the first three quarters of last year to 8.36 billion yuan. A 481 million yuan ($69 million) fair value adjustment on the company's convertible redeemable preferred shares pushed it into the red during the nine-month period, with a net loss of 288 million yuan. Excluding that item, the company would have reported a 215 million yuan profit, up 48% year-on-year. The adjusted profit growth was due in part to cost cutting in sync with its falling revenue. The company's selling and marketing expenses fell 5.3% year-on-year to 423 million yuan, while its administrative expenses dropped 17% to 272 million yuan. R&D spending fell the most, plunging 32% to 8.74 million yuan. Qdama is also sitting on some significant debt, though it's trying to get that situation under control. Its net liabilities stood at nearly 2.7 billion yuan in 2023, narrowing to 2.45 billion yuan in 2024. The figure fell another 30% to 1.73 billion yuan by the end of September last year. But the latest reduction is largely the result of converting some redeemable preferred shares into equity, effectively eliminating some debt. The company's revenue was roughly flat in 2024, rising slightly to 11.79 billion yuan from 11.74 billion yuan in 2023. Despite exceeding 10 billion yuan in revenue, its gross margins remained thin at 9.8% and 10.2%, respectively, during those two years, reflecting a reality for many grocers. That translated to net profits of just 169 million yuan in 2023 and 288 million yuan in 2024, with net margins at a meager 1.4% and 2.4% during those two years, respectively. Its gross margin improved to 11.3% in the first three quarters of this year, but still remains modest. Northern expansion stumbles The grocery business is essentially volume-driven, and that applies to Qdama as well. With just over 40 company-owned stores, a tiny fraction of its total, Qdama depends almost entirely on its franchise model for most of its business. Over 90% of its revenue comes from product sales to franchisees, with franchise fees and royalty income contributing a mere 1.4%. Feng understood that scaling franchisee numbers was key to boosting his revenue, and rapidly accelerated his expansion. The company's store count passed the 1,000 threshold in 2018, and it had launched over 100 outlets in Shanghai, China's commercial capital and one of its wealthiest cities, by 2019. As it entered Central China in 2020, its footprint surged to 2,800 stores – nearly tripling in just two years. But such breakneck expansion courted disaster, as Feng quickly discovered that regional differences were an important differentiating factor in China's vast grocery market. It learned that lesson in North China, where consumers traditionally stockpile food and place less emphasis on freshness. As a result, its winning "no yesterday's meat" strategy quickly faltered in that part of the country, which includes Beijing. Coupled with exorbitant rents in major cities, the chain struggled and ultimately retreated from the Chinese capital in 2022. Store closures and intensifying competition Beyond the defeat in the north, other cracks in the Qdama's franchise model have also emerged. Most notably, the company's rapid store surge overwhelmed its headquarters, hurting its ability to oversee and adequately support its huge base of franchisees. In early 2021, a finance program on the widely watched China Central Television (CCTV) network questioned Qdama's aggressive nightly discounting, alleging it caused many franchisees to lose money. It reported that numerous franchisee-operated stores among its network of over 350 outlets in Shanghai were unprofitable. Alarmed by the growing turmoil in its franchisee ranks, Qdama abruptly slammed on the brakes. It began mass stores closures, rarely reopening closed outlets, and adopted a more cautious approach to its expansion. That caused its store count to go into reverse, falling from a peak of over 3,700 to 2,938 by September last year. With its North China ambitions dashed, Qdama refocused on its stronghold in the south. But that focus risks oversaturation, with growing potential for stores in increasingly close proximity to cannibalize each other. And Qdama is hardly the only one trying to make grocery shopping more convenient. Beyond online grocer Dingdong (DDL.US) and JD.com's (JD.US; 9618.HK) JD Daojia grocery delivery specialist, Qdama faces a formidable challenger in Alibaba's Freshippo, which delivers to homes from its brick-and-mortar chain of hypermarkets. Both JD Daojia and Freshippo are well-funded due to their connections to China's two largest e-commerce companies, and excel in e-commerce integration. By comparison, Qdama still relies on physical community stores, which burden it with higher costs in the form of high rents. Qdama's model will hinge on its appeal to people who still like shopping at offline stores, as well as the convenience of having such stores close to home. Now, its IPO could also provide the money it needs to take another shot the massive North China market. To subscribe to Bamboo Works weekly free newsletter, click here Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.