Finally, in the wave of offline catering recovery, HELENS (9869.HK) achieved a turnaround in the first half of this year.
In 2021, HELENS went public with the halo of being the &#34;first stock of small taverns&#34;. At that time, it was already profitable, in stark contrast to the new consumer companies that went public at the same time and were bleeding. Prior to its listing, HELENS also received a financing of $33 million from Black Ant Capital and CICC.
During the epidemic, founder Xu Bingzhong made a similar misjudgment to Zhang Yong of Haidilao, underestimating the impact of the epidemic on offline catering and aggressively expanding store openings. As a result, HELENS experienced two consecutive years of decline in 2021 and 2022, almost losing the net profit of the three years before listing, just like the new consumer companies.
HELENS also followed a similar stock price trajectory, reaching its peak at the time of listing. As of July 26, HELENS' market value has fallen by 60% compared to its initial listing, with a nearly 50% decline in the year, and its market value is now less than HK$10 billion.
In the first half of this year, HELENS showed signs of a turnaround in performance. It released a profit forecast for the first half of 2023, expecting revenue of 700 to 720 million yuan, a year-on-year decrease of 19.9% to 17.6%; and a net profit of 155 to 160 million yuan, achieving a turnaround from losses.
However, the decline in HELENS' revenue indicates that the first half of the year was not easy. According to Guojin Securities research report, as of the end of June this year, HELENS has reduced its net number of stores by 91 compared to the end of last year, and another 196 stores have temporarily suspended operations. This means that it relies more on cost reduction measures such as closing stores to achieve profitability.
In other words, its replicable single-store profit model may be failing. After HELENS reopened its franchise model and attempted to transition to a light-asset operation model, the most urgent task is to present a profitable single-store model to convince franchisees and leverage operational leverage to restore growth.
<h2>Cost-effective tavern</h2>
HELENS' core moat lies in its supply chain.
Running a small tavern is not easy. Due to the wide age distribution of the drinking population, from 18 years old to no upper limit, different consumer groups have different demands for drinking venues. KTVs, nightclubs, and even street stalls can serve as alternatives to small taverns in drinking and socializing scenes.
And due to the non-standard nature of the service, the competition within the tavern industry is extremely fragmented. According to Frost Sullivan, the CR5 of China's tavern industry is only 2.2%, and HELENS, ranking first, has a market share of 1.1%.
He Yu, founder and managing partner of Black Ant Capital, once praised HELENS as a &#34;representative of extreme efficiency&#34;. And this &#34;efficiency&#34; comes from the extreme cost-effectiveness brought by HELENS' extremely low operating costs.
As we all know, rent, raw materials, and labor are the three major cost factors in the catering industry, and in HELENS' business strategy, everything that can be saved is saved.
In terms of store location, HELENS adopts the principle of &#34;non-core location in core areas&#34; to obtain traffic in prime locations at a very low cost. Compared to street-level stores on the first floor, it prefers floors 2 and above. From 2018 to 2022, the proportion of rent to income has always been around 15%.
And in terms of labor costs, due to the streamlining of HELENS product SKUs and the short opening hours of the taverns, they have hired a large number of outsourced employees. From 2018 to 2022, HELENS' labor costs accounted for less than 27% of their revenue, which is lower than other catering enterprises such as Haidilao and Nayuki.
Furthermore, thanks to the economies of scale generated by the nearly 800 HELENS stores, they have some bargaining power when it comes to raw material procurement. Beers that would normally cost tens of yuan elsewhere are priced at only 10 yuan at HELENS, providing &#34;alcohol freedom&#34; for cash-strapped students.
HELENS' product structure mainly consists of proprietary products and third-party branded alcoholic beverages. The proprietary products include HELENS beer, alcoholic beverages, and snacks, which are mainly produced by contract manufacturers.
The gross profit margin of proprietary products is as high as 75.9%, accounting for 76.5% of the revenue. Among them, alcoholic beverages account for 37.2% of the revenue, and HELENS mainly relies on proprietary brand products to increase profits.
Third-party branded alcoholic beverages mainly come from brands such as Budweiser, with a gross profit margin of 50.1% and a revenue share of 20%, which is lower than that of proprietary products.
Therefore, HELENS has seized the price anchor in the tavern industry and turned non-standard tavern businesses into replicable standard businesses. In theory, the more stores HELENS opens, the higher the profit should be, which is what investors initially expected. However, the rhythm was disrupted by an epidemic.
<h2>Open Franchise to Get Rid of Burdens</h2>
During the epidemic, HELENS opened stores against the trend and incurred a huge loss of 1.83 billion yuan in 2021 and 2022, which is more than the sum of net profits in the three years from 2018 to 2020.
During this period, opening more stores did not bring corresponding returns.
In 2021, HELENS opened a net of 431 new stores, reaching a total of 781 stores.
In 2022, they opened 179 new stores, of which 133 were opened in the first half of the year. They also closed a total of 194 stores, of which 125 were closed in the second half of the year. By the end of 2022, there was a net closure of 15 stores.
The opening and closing of a large number of stores means that sunk costs such as rent and decoration cannot be recovered.
According to the financial report, in 2022, HELENS incurred 850 million yuan in expenses due to store closures, mainly including impairment losses of 713 million yuan on factory equipment and usage rights assets, losses of 142 million yuan from the sale of factory buildings and equipment, and expected credit losses from leasing of 17.44 million yuan, partially offset by 19.3 million yuan in income from terminated leases.
In the first half of this year, HELENS continued to close stores. According to Guojin Securities research report, as of the end of June this year, HELENS had a net reduction of 91 stores compared to the end of last year, and another 196 stores were temporarily suspended. The number of operating stores was reduced to only 481.
During the performance briefing, HELENS executives stated that they have identified over 400 loss-making stores, and nearly 70% of them were opened after 2020.
In a series of store closures and the recovery of offline dining consumption, HELENS is finally expected to achieve a net profit of 155 to 160 million yuan in the first half of this year, reversing the loss compared to the same period last year.
The capital market's expectations for a company go beyond just turning losses around. In June of this year, HELENS announced the &#34;HELENS Hi-Beer Partner Program,&#34; choosing to leverage franchise partnerships. This is also a common choice made by Heytea, which used to insist on direct operations.
However, before this, HELENS needs to prove to franchisees that opening small pubs can really be profitable.
The primary challenge facing HELENS in expanding through franchising is that there are not many locations that meet the principle of &#34;non-core locations in core areas,&#34; especially in the vast sinking market.
According to a research report from Zheshang Securities, because lower-tier cities do not have as many universities and have not formed the effect of university clusters, HELENS currently focuses on opening stores around commercial districts in cities below the third tier, with commercial district stores accounting for 97.92%.
So far, HELENS has not been able to prove the profitability of opening stores in commercial districts in the sinking market. In the past three years, the average daily sales of HELENS stores have continued to decline, reaching 10,900 yuan, 9,200 yuan, and 7,000 yuan, respectively. Among them, sales in second-tier cities have dropped from 114,000 yuan to 6,600 yuan, and sales in third-tier and lower-tier cities have dropped from 10,900 yuan to 7,400 yuan.
According to calculations by Guojin Securities, with an average daily sales of 9,000 yuan, franchisees can recoup their investment in one year; with an average daily sales of 6,686 yuan, it would take 1.5 years.
A private equity investor in East China expressed to Xin Feng (ID: TradeWind01) that since HELENS' main consumer group is low-spending individuals such as students, the revenue ceiling for a single store is relatively low, which inevitably leads to a long payback period for franchisees.
In addition, compared to hot pot, milk tea, and other catering industries, the pub industry has shorter operating hours, usually from 6 pm to 2 am the next day, with a daily operating time of about 8 hours, which is lower than other catering industries. Moreover, the table turnover rate is low. In 2022, HELENS' table turnover rate is 2.3 times per day, while Tai'er Suan Cai Yu and Haidilao have table turnover rates of 3.8 times per day and 3.5 times per day, respectively.
This characteristic also poses obstacles for franchisees in lower-tier cities when choosing HELENS, as everyone pays similar rents for core locations, but the revenue can vary significantly.
As of the end of 2022, HELENS has a total of 126 franchised pubs, contributing revenue of 11.32 million yuan, accounting for 0.7% of total revenue.

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