This is an English adaptation of a FoodBud historical article originally published on August 17, 2022.
On August 11, Babi Food released its 2022 interim report. In the first half of 2022, revenue reached RMB 685 million, up 15.19% year on year. Net profit was RMB 118 million, down 44.18%, mainly because fair-value gains from the company’s holding in Eastroc Beverage declined.
Adjusted net profit excluding non-recurring items was RMB 93.068 million, up 61.23%. The company attributed the increase to revenue growth, lower raw-material costs and improved gross margin.
By the end of the reporting period, Babi Food had 4,251 franchised chain stores. The company completed the acquisition of Central China regional brands Haolike and Zaoyidian in March 2022, advancing its Central China rollout. By period-end, Central China had 67 franchised stores.
The company opened more than 900 stores in 2021. In the first half of 2022, despite store-opening disruption during COVID restrictions, it still opened more than 400 stores and said its full-year opening target remained on track to exceed the previous year’s additions.
Management later disclosed regional first-half net additions as South China 44, East China 62 and Central China 679, including 280 Babi stores. It said the full-year store-opening target was unchanged, though first-half progress was 50-100 stores behind the prior-year pace. In the second half, the company planned to adjust its East China strategy, especially in Shanghai, to meet its beginning-of-year target.
Food products remained the core business, with revenue up 13.6% year on year and accounting for 91.7% of total revenue. Within this:
These products are mainly self-produced. Among the three categories, only flour-based products recorded year-on-year revenue growth.
As of June 30, 2022, Babi Food had factories in Shanghai, Guangzhou, Tianjin and Wuhan. A Nanjing plant was under construction and expected to start production in the second half of 2022. Construction of the Wuhan intelligent manufacturing center was also progressing. The company’s operating footprint covered the Yangtze River Delta, Pearl River Delta, Beijing-Tianjin-Hebei economic circle and Central China.
Management said the Nanjing factory was expected to start around China’s National Day holiday. It had originally been planned for year-end, but the company accelerated construction after COVID disruption in April and May. The plant is intended to expand the store service radius into areas such as northern Jiangsu, while also supporting group-mealservice customers and improving capacity utilization after launch.
Babi Food said it focused on two main lines in the first half: store operations and large group-mealservice customers. During COVID restrictions, it implemented prevention measures to keep production and operations running. Group mealservice grew 108%, while the store business remained stable and still achieved year-on-year growth.
Management said group mealservice grew 60% in the first quarter and continued to grow unusually fast in the second quarter, partly helped by temporary supply-guarantee orders during the pandemic. Lockdowns in April and May slowed new customer and new product development, which the company identified as a second-half priority.
For the full year, Babi Food expected group mealservice to rise from 15% of revenue in 2021 to 20% in 2022. It did not give a precise three-year mix target, but said it hoped group mealservice could become similar in scale to the store business within three to five years, creating a two-engine model.
The Central China acquisition was intended to secure brand channels and accelerate Babi’s development in the region. Management said Central China Babi stores rose from 174 at the end of 2021 to 280 by mid-2022, a net increase of 106 in six months. As store density increases, the company is also working to lift average daily ordering value per store.
Central China revenue was expected to account for 3%-5% of consolidated revenue in 2022. The acquired Central China project contributed RMB 20 million in consolidated revenue from April 1, including RMB 18 million from store operations and about RMB 2 million from capacity supplied to East China during the pandemic.
The company said acquired stores had lower sales levels than Shanghai stores, and many acquired-brand stores were supply-chain-led rather than full Babi-format stores. In Wuhan, non-Babi store revenue was about half that of Babi stores. The company planned to select higher-revenue stores for conversion into Babi stores and tighten purchasing-channel control.
Management described the Central China acquisition as strategically successful because it allowed Babi to enter the market quickly and become a local leading brand in a short period. It also said the purchase price was economical, with a price-to-sales ratio below 0.5, and that the deal had implications for future M&A.
East China stores were hit hard in the second quarter, with more than 1,000 Shanghai stores closed. In April, about 50% of stores maintained operations through online channels and community group-buying. In May and June, almost all stores resumed operations.
After July, Babi Food provided fee reductions and support to existing franchisees, increased support from its e-commerce enablement team, guided franchisees into centrally managed delivery activities, and launched new products to lift store revenue. Management said store closures were better than expected and operating performance showed resilience.
Same-store recovery differed by region. Central China, South China and North China returned to normal by the end of June. East China was close to normal by the end of July, though Shanghai still had a gap while Jiangsu and Zhejiang had recovered.
Babi Food had estimated a full-year gross margin of 28% at the beginning of the year. First-half gross margin reached 28.5%, ahead of expectations. Management said the first quarter is usually the lowest-margin period and the fourth quarter the highest, because first-quarter revenue is lowest and absorbs more fixed cost.
The first-half outperformance was mainly due to locked-in pork prices below the prior-year level and higher unit prices on some large customer orders in the second quarter. The company said its pork usage and prices for the year had been fixed, so current pork-price fluctuations had no impact on gross margin. It added that, over the long term, higher pork or fresh-ingredient costs could push up store-level and factory-gate prices.
In April 2022, the company raised prices by double digits because COVID disruption sharply increased costs. After restrictions ended, prices partially came down, leaving finished-product prices up 7%-8%. Filling products were not raised.
Management said third-quarter gross margin could be affected by a different sales mix from the second quarter. In the second quarter, finished products dominated sales and their gross margin was lower than fillings, but price increases helped. In the second half, higher-margin fillings were expected to represent a larger share.
Management expense ratio was close to 8% in the first half, compared with nearly 7% in the prior year, mainly due to higher management headcount and salary costs, and the launch of phase two of the Songjiang factory. The company expected the full-year management expense ratio to stabilize around 7%.
The second-quarter sales expense ratio was basically flat year on year. Franchisee subsidies were mainly management-fee reductions, which reduce operating revenue and affect gross margin. Sales expenses mainly include the cost of staff serving large customers, e-commerce and marketing. The company expected the full-year sales expense ratio to remain around 5%-6%.
Babi Food was expanding centrally managed delivery across all four major regions. Coverage of centrally managed delivery stores was relatively high, but average delivery penetration across stores was only around 10%, leaving room to improve. In Shanghai, Ele.me covered 60% of stores and Meituan 50%; after weighting and removing overlap, dual-platform coverage was around 70%.
New products, including lunch and dinner items, accounted for only about 5% of store sales. Because lunch and dinner are often sold in set-meal form, they can also drive bun sales. Management said top delivery stores had close to 60% penetration, while the average store might only have around 10% delivery penetration.
Lunch and dinner products were being rolled out nationally through centrally managed delivery, but East China benefited more because the team was based in Shanghai. Growth was fast in all four regions, though from a small base. Management said that if stores eventually became all-day stores, lunch and dinner could account for more than 60%-70% of sales.
Most franchisees supported lunch and dinner launches because finished products do not require in-store wrapping, and centrally managed delivery already accounted for about 70% and continued to rise. Stores that join centrally managed delivery must follow company requirements.
For store-channel procurement, finished products, fillings and purchased food each accounted for about one-third. The finished-product share was rising and the filling share declining. More than 80% of stores bought fillings to wrap buns in-store, while also buying ready-finished bun products.
For group mealservice, new products are customized and iterate quickly. For stores, the company focuses on common products and stable single-item quality. Product ideation for group mealservice comes from both active internal development and customer requests, with internal development the main source.
The company said it would remain focused on East China, South China, North China and Central China for the next two to three years. These four regions still had white-space markets and room to improve.
East China new signing accelerated, especially in Shanghai, but management noted a roughly two-month lag from signing to opening.
North China’s group mealservice business was progressing strongly. The region had the highest overall growth rate, with weaker store performance but strong group mealservice. Products were placed in North China through East China-led national cooperation with fresh-retail platforms, including leading platforms such as Hema and Meituan. In the second quarter, North China added only five stores, but revenue grew nearly 50%, mainly due to group mealservice.
Group mealservice was still highly concentrated in East China, which management said may account for more than 90% of the business.
On store distribution, management cited about 4,000 stores overall, including 3,000 in East China, roughly 1,000 each across Jiangsu, Zhejiang and Shanghai, with Shanghai at 1,300. North China had 100 stores, all in Beijing.
Factory utilization outside Shanghai was highest in Wuhan, close to full capacity. South China utilization was about 70%, and North China around 50%.
Babi Food said the Wuhan region has two investment entities: Wuhan Zhongyin and Zhongyin Wuhan. The RMB 750 million intelligent manufacturing center investment in Zhongyin Wuhan reflected confidence in Central China. Its capacity was far above current demand from the several hundred non-Babi stores in the region.
Management said the current environment was favorable for M&A, mainly because pork prices were rising and the consumer economy was weak. It also said leading brands can gain more market share through scale advantages, and that the industry may be in a good window for consolidation.
Babi Food described its model as using strong bun products to secure franchisee supply rights, then generating net profit through wholesale supply. In Wuhan, the company said it believed it could apply a similar approach with Haolike because it has brand strength, can expand Haolike stores and build a leading-brand effect similar to East China, and has years of production experience in flour-based products, giving it confidence in product quality and cost control.
Historical note: all forward targets, margin expectations, store-opening plans, investment figures and IPO/shareholding-related fair-value figures reflect management communication and reported data from August 2022.