2411.HK
Pagoda’s ten-year plan

China’s leading fruit seller has announced a plan to become king of the global fruit industry over the next decade

Key Takeaways:

  • Pagoda has unveiled an ambitious plan to boost its annual GMV to more than 100 billion yuan by 2034
  • The fruit retailer is speeding up store openings, aiming for 10,000 outlets in 10 years, compared with 6,000 last June

  

By Lau Chi Hang

Targets are easy to seed, but making them bear fruit is often much harder.

Last week, China’s largest fruit retailer, Shenzhen Pagoda Industrial (Group) Corp. Ltd. (2411.HK), planted such seeds for aggressive growth, releasing a plan it hopes will transform it into a top global agricultural and technology-based company over the next decade. The plan includes an expansion to more than 10,000 stores over that time, and total gross merchandise volume (GMV) of more than 100 billion yuan ($14 billion) through its network of fruit stores.

Chairman Yu Huiyong unveiled the ambitious plan at a recent conference, saying it would attain the growth gradually through a series of smaller three-year plans. As veteran of China’s planned economy, many Chinese companies – both public and private – often create such multi-year development plans that mimic Beijing’s bigger national Five-Year Plans.

The first of Pagoda’s three-year plans will focus on making it the preferred choice among retailers and consumers in terms of quality by further increasing its store footprint, its retail sales and its loyalty club members. The second plan aims to take the company overseas by replicating its domestic model of supplying fruit to franchisees. The third and final plan will see Pagoda “promote development of its fruity ecosystem to solidify its status as a leader in the global fruit industry.” 

Fruit king of world

Through his ambitious plan, Yu has clearly articulated his vision to become not only the fruit king of China, but also the world.

A 1991 graduate of the horticulture department at Jiangxi Agricultural University, Yu spent his higher education focusing on vegetables. He began his agricultural career doing research and development for edible fungi at the Jiangxi Academy of Agricultural Sciences. 

After moving to the southern boomtown of Shenzhen and working in a vegetable company for half a year in 1995, Yu joined Aidi, a major local agricultural group, as a marketing manager. After years in the industry, he came to realize that China’s growing taste for high-quality fruit from its growing middle class represented a major opportunity. Seeking to tap that demand, he established Pagoda in 2001 and opened his first retail store the following year.

With his sharp business acumen and good market sense, the self-taught entrepreneur made a name for himself, earning investment from private equity firms like Tiantu, SCGC and CoStone Capital along the way. In the more than two decades since its founding, Pagoda has grown from a small 50-square-meter (538 square feet) store to nearly 6,000 outlets in more than 140 cities in China by the middle of last year.

The company listed in Hong Kong early last year, and recorded revenue of 6.29 billion yuan ($886 million) in the first six months of last year, up 6.4% year-on-year. Its profit rose by an even higher 34.1% to 260 million yuan for the period, at which time it had 79.3 million members and 35 brands sold under its own label.

Targets unmet

There’s no doubt that Yu is quite capable, as reflected by Pagoda’s rise to become China’s leading fruit seller in a relatively short time. But his latest plan could meet greater headwinds due to a wide range of variables, including problems for the company’s domestic operations and fierce competition it would likely encounter abroad. 

This isn’t the first time Yu has set such heady targets. As early as 2015, he boldly proclaimed his goal of expanding to 10,000 stores by 2020, with annual sales of 40 billion yuan. But he’s still well short of those targets some eight years later, perhaps partly due to the pandemic.

Pagoda uses a franchise model that can help it to rapidly increase its footprint in a relatively short time. But managing such franchisees can be difficult, especially in an industry selling highly perishable products like fruit. 

Consumers often complain about buying spoiled fruit and substandard products from Pagoda, reflected by unhappy remarks on the Black Cat Complaint platform about things like “cheap watermelon that isn’t at all sweet.” Others complain of things like being unable to return goods, lengthy delivery times or no delivery at all, and poor service. Some such complaints are to be expected, but the large volume could also reflect headquarters’ failure to adequately guide its franchisees.

Food safety is another key issue. While Pagoda often boasts of its high quality, last year one of its companies was fined by a market regulator in Shanghai’s Qingpu district for exceeding pesticide residue limits. Videos have also appeared exposing Pagoda’s use of damaged product to make cut fruit, attracting consumer ire. And last year, another market regulator in South China’s Hainan province announced that some of the company’s fruit stores did not meet safety standards.

Such incidents should be expected from time to time, given Pagoda’s huge sales volume and the difficulty in preserving freshness. But rapid growth like it envisions in its latest 10-year plan, not to mention its aim of taking its franchising model global, could just exacerbate such problems.

Questionable corporate governance

Pagoda’s corporate governance has also come under scrutiny after the company was placed on an “abnormality” list by the market regulator in Shenzhen’s Yantian district late last year for failing to publish its 2022 report on time. It explained the delay was caused by a system issue, but the fact that such a low-level error could occur at such an ambitious company raises questions about its governance standards.

What’s more, last August Pagoda disclosed that Yu and his wife had pledged 3.71% of the company’s shares they owned as collateral for a 380 million yuan bank loan, but failed to explain the purpose of the loan. Such share pledges are relatively common in China, but still raise questions over the motivation for such loans and what impact the company could bear if the loans go unpaid.

From an investor perspective, one of Pagoda’s drawbacks has always been its low gross margin, which was only 11.3% in the first half of last year, producing a net profit margin of just 4%. By comparison, rival Chongqing Hongjiu Fruit (6689.HK) has a fatter gross margin of 15.4% and net margin of 9.4%. That would seem to show that Hongjiu is better run, though its forward price-to-earnings (P/E) ratio is just 4 times, well behind Pagoda’s nearly 21 times. 

Perhaps investors like Pagoda for its size and big ambitions, especially with bold targets like those in its latest 10-year plan. But all that could quickly spoil and die on the vine if the company fails to reach those targets, which could well happen if it can’t solve the many smaller problems dogging it at home even as it looks to go global. 

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