The recent shutdown of multiple Bach Hoa Xanh (BHX) stores has been the talk of the town for the past few weeks. What prompted the leadership of this grocery store chain to come to such a decision despite the considerable growth in total revenue? For a successful retailer like The Gioi Di Dong JSC, BXH’s predicament reveals the challenges plaguing the fresh food retail business.
Since BHX came into operation in 2015 until before the Covid-19 pandemic, the store chain surprised us with its impressive revenue growth and store expansion. The successes obscured the drawbacks to the operation of the chain. It was not until the pandemic that the issues were fully clarified. By the end of 2021, the total accumulated losses of BHX reached nearly VND5,000 billion.
Poor business performance despite growth
We can make a quick comparison between the gross profit margin of BHX and that of Walmart, the world’s leading retailer. According to statistics, the gross profit margins of these two retailers have been maintained at 25-26%. As a food retail chain, BHX has reached its optimum level of gross profit margin. Despite such a high gross profit margin, Walmart’s net profit margin is just 2.4%, a decent average number in the retail industry. Meanwhile, BHX’s net profit margin is still far from the breakeven point.
One of Walmart’s advantages is its collaboration with large farm chains worldwide. It allows them to supply huge volumes of goods with stable quality standards to its outlets. In 2021, Walmart invested around US$14 billion in developing the supply chain, automating the operations, and improving the customer experience. The synchronization of Walmart’s management system with the farms allows them to proactively maintain the supply of goods, thereby contributing to customer satisfaction.
For example, Walmart’s beef products mainly come from two of the four largest agricultural products corporations in the world that dominate 85% of the U.S. beef market. They are Tyson Foods and Cargill, the world’s largest agricultural product corporation. Thus, Walmart can maintain the high quality and stable supply of products on a large scale.
This is far from BHX’s decentralized purchasing procurement. With decentralized systems, BHX requires each store or group of stores to work with suppliers in their areas. Due to the short and unstable supplies, BHX’s stores sometimes work with different suppliers and food prep businesses to ensure a stable supply of goods.
The Gioi Di Dong JSC has challenged the stereotypes of the retail market several times and gained success in surpassing its competitors in service quality. This can be seen from the recent development of the smartphone and electronics retail chain. However, the management of food retail chains, especially fresh food retail stores, is a completely different matter.
A fatal weakness of poor linkage
It is not easy for BHX to find an adequate supply for their stores because Vietnam has yet to achieve the standardization of the agricultural industry. The country lacks large-scale farms like those in the U.S. and China with yield stability and synchronization in cultivation. That explains why these countries have achieved stability in the supply and quality of products.
Their deals to purchase and sell agricultural products with their specific product quality can be traded in the marketplace in the future.
The farms in Vietnam are on a small scale and able to supply products to just a few stores. For example, BHX had 2,100 stores in 2021, 10 times over the number in 2015. With such rapid growth, BHX could not find an adequate supplier to fulfill their demands for the products. Thus, each store of BHX needed to find at least one supplier to solve this problem. As a result, the purchase price could vary depending on suppliers while the retail price had to be the same at all the stores in the system.
As for small-scale farms without standardization in cultivation, it is tough for retailers and food prep companies to standardize their systems and upgrade themselves, leading to an inadequate supply capability. The weaknesses of the food prep companies severely affect the supermarket chain’s ability to maintain the supply of products.
Over the years, BHX has tried to differentiate itself and increase its gross profit margin by focusing on fresh products. However, BHX has to buy many fresh products such as fish directly from fishing vessels, instead of traders or agencies, to ensure the supply of the products. Buying products from the traders or agencies still cannot help them ensure the supply, let alone buying directly from fishing vessels.
Although both Winmart and BHX haven’t seen any profits recently, BHX is at a considerable disadvantage. Winmart gets strong support from WinEco, which ensures 20-25% of the supply of agricultural products for its store chain. Thanks to that, the supply of the products is standardized, which helps to lessen the pressure on the operations and inventory management.
The key to the effectiveness of the food retail business is to build a better governance system. BHX is carrying out a comprehensive restructuring project, replacing poor-selling products with fast-selling ones, improving the customer experiences, and replanning the operating personnel.
The management model of the food retail segment is far different from that of the smartphone and electronics retail business. The weaknesses in the agricultural value chain in Vietnam lead to huge challenges in the standardization of supermarket chains like BHX in the near future.
(*) CFA
