The expansion plan of MINISO is outdated?

NYSE most recently saw the participant of MINISO

The New York Stock Exchange lately welcomed new Chinese face – MINISO (NYSE: MNSO), a household item retailer that has reached notoriety for copying the style of Japan-based Muji.

Two weeks after being listed on the stock exchange, MINISO is probably frowning over its stock which dropped from $24 to $19, losing $30.4 million in company valuation.

After reaching a peak $24 on October 16, MNSO turned around to stabilise at around $19 since October 27.

MINISO pinned high expectations on its initial public offering in the US, with great ambitions to mobilise capital to maintain its pace of expansion. According to the company’s dossier sent to the US Security and Exchange Commission in early October, the retailer was targeting to draw in about $562.4 million by selling American Depositary Shares at about $16.5-18.5. The funds were to be used to increase the number of stores and extend MINISO's logistics network.

Meanwhile, in Vietnam, MINISO is struggling to overcome the damage caused by social distancing. Accordingly, its entire store chain was closed, heavily affecting sales.

Indeed, the local market has never been easy for the Chinese firm. Its plans were to launch at least 200 in Vietnam annually. However, after four years in the market, it only has 41 establishments. It even had to close five stores two years ago. Along with this, MINISO’s franchisee in Vietnam, Le Bao Minh Group, decided to sell back the store chain to the parent company due to its weak performance. Similar to other markets, all of the local stores were generating losses.

With this poor performance, MINISO’s intentions seem difficult to realise. Regarding this, a media contact at MINISO told VIR that the company was still in the "calm before the storm”, before truly taking off.

Obsolete brick-and-mortar business

The rise of online shopping sites or e-commerce platforms has put physical establishments in difficulties, even pushing many of them into bankruptcy enhanced by COVID-19. This makes MINISO's expansion plans difficult.

Facing the health crisis, dozens of retailers across the world collapsed. Most of these are store chains such as Japan-backed Muji USA, and US-headquartered brands NPC, Century 21, and Brook Brothers, among others.

Discount retailer Century 21 on September 21 officially filed for bankruptcy and closed all 13 stores across the US. The once-iconic brand blamed the failure on its insurers for failing to pay $175 million (an annual insurance package for the interruption in business). According to its managing director Raymond Gindi, without the sum, it could not meet the overheads of its establishments and 1,400 employees.

“We had to struggle with insurance companies after paying huge fees for them for years,” said Gindi.

Similarly, New York & Company parent company Retail Winds (RTW) in July was also forced to file for bankruptcy and shut nearly 400 stores across 32 states. As part of the crash, RTW sold its e-commerce business and intellectual property to Saadia Group. Its failure was foreshadowed by stay-at-home orders, forcing it to furlough workers and temporarily close stores.

NPC International, the largest franchisee of Pizza Hut, also said goodbye to the US market in July despite the soaring demand for pizza during the pandemic. NPC, the operator of over 1,200 Pizza Hut and nearly 400 Wendy’s establishments, has been in financial trouble since last year with arrears of nearly $1 billion, as well as growing expenses for food and employees. Finally, crumbling under the impact of COVID-19, the company officially withdrew from the market. It expects to sell Wendy's business for $400-725 million and Pizza Hut for about $325 million.

Richard Burrage, managing partner at local market research company Cimigo, told VIR that the COVID-19 lockdown has altered consumer behaviour, forcing them to transfer to online shopping. “Life will not return to normal, and a new normal will evolve with new habits and rituals. Consumer mindsets and behaviours have changed. Some of these changes will be temporary but others will stick,” he said.

“Shopping behaviour at malls will have shifted to online shopping, and trips will become less frequent for most shoppers. Malls will need to ramp up consumer experiences even more in order to bring footfall back. Many consumers will have experienced the convenience of online shopping and have built trust in the channel, accelerating the growth of online platforms,” Burrage said.

A big challenge for MINISO

Facing this situation, MINISO’s expansion plan seems risky, especially as it has yet to earn profit over the past seven years, according to company chairman Guofu Ye.

The deficit of the fiscal year ended in June 2020 curtailed by 12 per cent to $37 million against the same period last year. The pandemic has also worsened it significantly, with a drop of 4.4 per cent to $1.3 billion in sales as of June. Nikkei Asia Review quoted Chinese security companies as saying that MINISO’s gross margin is much lower than competitors.

According to Ye, a rapid extension has reduced MINISO’s gross profit margin for years. Nevertheless, the company is targeting to launch hundreds of stores over the next decade.

To maintain the expansion, MINISO has received investment from China-based Tencent and is now on the US stock exchange. Since 2018, the technology conglomerate invested about ¥1 billion ($149.2 million) in Miniso to own 4.8 per cent of the shares.

However, as operating costs have constantly grown, it raised doubts whether the capital mobilised from the stock exchange is enough to cover 4,200 establishments across 80 countries.

Additionally, the low-priced retailer is facing cutthroat competition with e-commerce platforms where all items are on sale.

In mainland China, the e-commerce giant Alibaba most recently launched Taobao Deals – a new platform specialised in selling goods for only one yuan.

To deal with this situation, MINISO said that it is attempting to diversify supply sources mainly based in China to maintain its low-cost strategy. However, it did not disclose how they would do this.