Miniso: Has Shein lost its appeal? The offline Shein for daily necessities is thriving

Miniso: Has Shein lost its charm? The "daily necessities version" of offline Shein is thriving

In the previous article Miniso: The origin of the "10 yuan store," the endgame of IP retail blockbusters?, we discussed Miniso's domestic business model and its core "supply chain integration" capability, and delved into one of Miniso's two key strategies—IP co-branded retail. In this article, we will focus on Miniso's other major strategy—going overseas—and attempt to answer: $Miniso(MNSO.US)$MNSO(09896.HK)

What is different about Miniso's business logic for going overseas?

How do we view Miniso's current space?

The following is the detailed content:

1. What is different about the overseas story?

1. From "Made in China" to "Brand from China"

If IP retail is an industry dividend, then Miniso's other major strategy—going overseas—is more of an exploration of a new model. After all, the previous paradigm for most Chinese companies going overseas was to rely on domestic cheap labor to focus on the midstream of the "smile curve," producing cost-advantaged products through OEM manufacturing to sell worldwide, while the truly high value-added segments remained overseas.

Although Miniso's overseas expansion also largely relies on China's supply chain manufacturing capabilities, the difference lies in Miniso's attempt to focus on both ends of the "smile curve," taking control of the upstream design phase and the downstream brand value, becoming the dominant player in the value chain.

Before diving deeper, let's take a brief look at the basic situation of Miniso's overseas expansion:

Miniso began testing the waters overseas in 2015, opening its first store in Singapore to enter the Southeast Asian market. After two years of exploration, in 2017, founder Ye Guofu proposed the goal of "hundreds of countries and thousands of stores" and began accelerating expansion, gradually extending its footprint to the Americas, Europe, and other regions.

As of Q3 2024, Miniso's number of overseas stores reached 2,936, accounting for about 40% of the total, with revenue contribution exceeding 35%. It has firmly become the group's "second growth curve," and according to the company's development plan shared at the investor communication meeting, it aims to open an average of 900-1,100 new stores each year over the next five years, with 60% of the stores located overseas, and overall overseas revenue is expected to quadruple, corresponding to a CAGR of about 30%-40%. From the above figures, it is clear that the overseas market is the core incremental growth area for Miniso in the next five years.

Source: GF Securities, Dolphin Research

From a regional perspective, Asia and Latin America, as the earliest markets for Miniso's entry, account for the highest proportion, with a combined GMV exceeding 70%. These regions are also the most mature markets for the company. In contrast, Europe and North America are in a rapid growth phase and are key areas for the company's future expansion, with a combined GMV share of nearly 20%.

Store location selection is similar to that in China, primarily focusing on major cities' core business districts and iconic locations to build brand awareness and influence. It is worth mentioning that Miniso has become the first Chinese retail company to enter Times Square in New York and the Champs-Élysées in Paris, marking an important step from "Made in China" to "Brand in China." Below, we will analyze in depth the specific business model of Miniso overseas and how it differs from that in China:

2. Primarily Agency, Supplemented by Direct Sales

In terms of business model, Miniso's overseas operations are divided into direct sales and agency markets. The agency market is further divided into agency models and partner models, with the partner model being essentially the same as in China (franchisees only invest money without contributing effort, with Miniso responsible for the specific operations). Currently, only Indonesia adopts this model (Miniso entered early, has a significant Chinese population, and is familiar with the local business environment).

The agency model is relatively unique, with two important differences compared to the partner model:

1. Weakened Store Operations: Specific operations are managed by local agents, with Miniso playing a more supportive role (helping agents assess order rationality, product selection advice, etc.) and an evaluative role (sales performance, market development, store operations), with actual participation being relatively low.

2. Transferred Product Inventory Risk: In the partner model, product inventory belongs to Miniso, and franchisees only participate in revenue sharing after selling products. In the agency model, a buyout system for goods is adopted, meaning Miniso first packages and wholesales products to agents, who then distribute them independently (agents must pay 20%-100% of the goods in advance) For Miniso, due to the different business environments in various countries, the agency model can help Miniso expand rapidly with minimal risk (agents are more familiar with the local market environment, operating risks are lower, and the gross profit margin is nearly 50%, leading to a higher willingness to open stores). Currently, nearly 80% of Miniso's overseas stores operate under the agency model (in Latin America, Europe, and some Asian countries).

The direct sales model is concentrated in strategic markets with large populations, strong purchasing power, and high growth potential, such as the United States and Canada. Miniso will establish a holding subsidiary (consolidated) locally and open direct stores as pilot projects to build brand image. Once the single-store model stabilizes, it will expand later through a partner model.

Overall, compared to the partner model, the direct sales model does not require sharing profits with partners, while compared to the agency model, the markup rate on goods sold to agents is generally lower than that under the partner mechanism for terminal stores. Therefore, as seen in the chart below, direct stores have the strongest profitability, with a gross profit margin about 20% higher than that of the agency market (the gross profit margin in the overseas agency market is basically consistent with that in the domestic market). Additionally, in terms of growth rate, due to Miniso's accelerated expansion in North America, the growth rate of the direct sales market far exceeds that of the agency market, boosting Miniso's overall profitability.

3. "Light Luxury" Positioning, Differentiated Pricing

Before analyzing Miniso's pricing logic overseas, it is important to establish a common understanding that Miniso follows a "light luxury" route in most overseas regions, which is of a higher brand tone than in the domestic market: taking the Southeast Asian market as an example, excluding the impact of exchange rates, Miniso's pricing in the local market is still over 20% higher than in the domestic market.

In previous analyses of Pop Mart, it was mentioned that the IP consumption in Southeast Asia has just awakened, and there is a high degree of acceptance and tolerance for foreign cultures, making it easy to create a "celebrity effect" to promote products. Additionally, China's cultural output to Southeast Asian youth has been strong in recent years, making it relatively easy for Miniso to establish a "light luxury" image in Southeast Asia.

As for the European and American markets, although Miniso's brand recognition was not very high initially, in recent years, Miniso has opened stores in core business districts such as Times Square in New York, Oxford Street, and the Champs-Élysées, adjacent to world-class brands like LV and Hermès, and has continuously increased the proportion of international co-branded IP products to bridge the gap with European and American consumers (the proportion of co-branded IP products in Europe and America has reached over 60%). A series of operations clearly indicate that Miniso is also attempting to position itself as a "light luxury" brand in Europe and America Let's return to the pricing of Miniso overseas. The pricing logic for Miniso's products in overseas markets is as follows:

If the headquarters' shipping price is X, the final selling price will be X * markup rate * adjustment rate * exchange rate,

where the markup rate mainly depends on the local economic development stage and consumer spending levels, while the adjustment rate depends on the prices of local competitors and the company's operational rhythm adjustments. If the pricing of competitors in the same category is lower than Miniso's or if the SKU performance is poor, the company will actively clear inventory by lowering the adjustment rate for that SKU to respond flexibly.

Overall, as shown in the chart below, Miniso's overall pricing in developed countries is much higher than in developing countries (where local consumption levels are high, exchange rates are high, and there are fewer competitors). Therefore, it is not difficult to understand why Miniso considers Europe and the United States as key regions for future expansion.

Source: Miniso's official websites in various countries, Guangfa (compared to domestic pricing multiples)

In addition to differences in operational models, pricing, and domestic strategies, the other tactics are basically consistent with those in the domestic market, with the core still relying on its supply chain advantages for overseas arbitrage.

II. How to view Miniso's current investment value?

In the previous section, we analyzed the similarities and differences between Miniso's overseas business model and the domestic one. So, how should we view Miniso's investment value at this moment? We first need to clarify the future growth potential of Miniso.

1. How much room is there for store openings and same-store growth?

We will discuss this in two parts: overseas and domestic.

Overseas: Due to the varying consumption levels, population density, age structure, and channel structure in different countries and regions overseas, and the involvement of many variables, it is relatively complex to consider all these factors in the specific calculation process, and the results may not be precise. Here, Dolphin provides a relatively simple approach for reference:

The core of the calculation lies in the store location strategy for Miniso overseas, which is similar to that in the domestic market, relying on shopping centers in various regions. Therefore, we can roughly estimate the number of stores in each region by multiplying the number of shopping centers in each region by the future penetration rate of shopping centers. The estimation of the number of stores translates into a judgment on the penetration rate of shopping centers in different regions.

However, in reality, if we consider street stores, community stores, and other models in the sinking market, as well as the future incremental number of shopping centers in each region, the actual store opening space will be even larger. Thus, this calculation model is more about considering Miniso's store opening space with a "bottom-line thinking" approach, with the assumptions and analysis of penetration rates as follows:

North America & Europe: As of Q3 2024, Miniso has 294 stores in North America, with a penetration rate in shopping centers of only 7.9%, indicating it is in the early stages of development. From the perspective of industry benchmarking, many viewpoints in the market compare Miniso with mature retailers in North America, commonly referencing discount retailers like Dollar General and Dollar Tree, and extrapolating Miniso's store opening space linearly based on their thousands of stores in North America is seen as "the stars and the sea." However, Dolphin believes that both in terms of brand tone and category positioning, there are significant differences between the two and Miniso (Dollar General, Dollar Tree are positioned as discount retailers, primarily targeting the sinking market to meet the daily needs of price-sensitive consumers, without involving emotional value), so the conclusion drawn is somewhat overly aggressive.

Dolphin believes that if a benchmark is to be set, the most similar positioning is the trendy IP toy collection store Five Below, which has a similar approach to Miniso, with stores located in shopping centers, satisfying consumers' emotional value through collaborations with trendy IPs like Squishmallows and Barbie. However, the difference from Miniso is that Five Below's target audience is mainly teenagers, with prices generally under $5, while Miniso primarily targets young white-collar women aged 18-35, with price ranges of $10-15. Therefore, Dolphin tends to believe that Miniso and Five Below are likely to achieve differentiated development in the IP retail track.

As of 2024, Five Below has nearly 1,600 stores in North America, and as a follower, Miniso is expected to align its store count with Five Below in the medium to long term.

From another perspective, California is the earliest region for Miniso's entry into North America (the first store opened in 2017), and it currently has 55 stores, with the penetration rate in shopping centers breaking through 30% first. Therefore, from a conservative standpoint, we assume that the future penetration rate in other states in North America will align with California, reaching 30%, corresponding to 1,100 stores, slightly lower than Five Below's store count in North America. The consumer demographics and economic development levels in Europe and North America are similar, so we assume that the penetration rate in Europe will be consistent with that in North America.

Asia: As Miniso's first overseas stop, Asia has a long operational history, and currently, Miniso has opened 1,572 stores in the region, with a penetration rate of 46%. According to research information, Miniso has already entered the majority of shopping centers in Southeast Asia, and future expansion will focus on street stores and community stores;

In South Asia, represented by India, although the population is large and the urbanization rate is rapidly increasing, the overall income level of residents is currently low, which means that Miniso in South Asia is still primarily focused on community stores. Therefore, overall, Miniso's penetration rate in Asian shopping centers has limited room for improvement, and we assume that the penetration rate in Asia will increase to 60%.

Latin America: Latin America is also an area where Miniso has made early inroads. In 2016, Miniso opened its first store in Mexico, and currently, Miniso has 598 stores in Latin America, with a penetration rate of 26%.

Due to the uneven economic development levels in Latin America and significant differences in the business environment across regions, Miniso's expansion in Latin America has been extremely uneven. Currently, the penetration rate of Miniso in shopping centers in countries like Mexico and Colombia has reached as high as 80%, but in countries like Bolivia and Venezuela, the penetration rate is less than 10%. Overall, we believe that the future penetration rate of shopping centers in Latin America will also have limited room for improvement, assuming a slight increase in the penetration rate to 40%

Source: Ming Chuang Performance Exchange Meeting, Dolphin

Source: Geodatindustry, HTI (Number of shopping malls in various states of the United States)

Based on the above assumptions, in a conservative scenario, we can estimate that the opening space for overseas Ming Chuang is 5,365 stores (excluding street stores, community stores, and other sinking store types). This represents nearly double the current number of overseas Ming Chuang stores, which is basically consistent with the company's outlook for the next five years presented at the investor communication meeting. (Opening 450-550 stores overseas each year corresponds to 4,500-5,063 stores by 2028)

In terms of profit forecast, store opening pace: based on the calculations above, we assume that the store opening speed in Asia and Latin America will gradually slow down, while North America and Europe are still in a rapid penetration phase, and the store opening speed will basically remain unchanged. Single store GMV growth rate: we assume that with the increase in the number of stores, the growth rate of single store GMV will gradually slow down, especially since the future expansion in Asia and Latin America is expected to focus on street and community stores, leading to a faster slowdown in single store GMV. Specific forecast data can be seen in the following images.

Domestic: We discuss the domestic business in terms of the Ming Chuang and Top Toy brands:

Ming Chuang: First, in terms of number of stores, according to research information, Ming Chuang has currently passed the stage of extensive store openings (previously, to seize commercial locations, store opening standards were lowered). The penetration rate in core business districts in first and second-tier cities has exceeded 50%, and future audits for new stores will significantly increase. Although there is still room for improvement in the penetration rate of business districts in third-tier and sinking markets, considering the consumption capacity and market demand in sinking markets, Dolphin maintains a cautious attitude. Overall, we expect Ming Chuang to open an average of 150-200 stores per year over the next five years On the growth rate of single-store GMV, influenced by factors such as the diversion from new store openings and a sluggish macro environment, the overall single-store GMV of Miniso in China has seen a mid-single-digit decline over the past two years. Among them, the decline of old stores is more pronounced, while new stores, supported by company policies and better site selection, have offset the decline of old stores. Overall, we assume that with the increase in the proportion of IP products and the upgrade from small stores to larger ones driving up the average transaction value, the decline rate of single-store GMV will slow down in the next five years, averaging a decline of 1%-2%.

Based on the above assumptions, we estimate that Miniso's revenue CAGR in China will be approximately 4%-5% over the next five years.

Top Toy: As another brand under Miniso, Top Toy was established in 2020, targeting the trendy toy market, focusing on core categories such as blind boxes, puzzles, and figurines. Its strategy is largely consistent with Miniso's, and it can share resources such as customers, channels, and supply chains with Miniso, resulting in strong synergy. Overall, considering the numerous players in the trendy toy market and that Top Toy entered the market in 2020 as a follower without the first-mover advantage like Miniso, we believe Top Toy is more likely to enjoy the β dividends of the trendy toy market.

In terms of performance forecasts, regarding the number of stores, according to the company's public communications, Top Toy's single-store model has basically been validated, and it has achieved profitability for two consecutive quarters. The willingness of franchisees to join has significantly increased. Therefore, in a conservative scenario, we assume that the store opening speed will remain unchanged over the next five years, with an average of 80-100 new stores opened each year (100 new stores in 2024). Regarding the growth rate of single-store GMV, considering that Top Toy has just started to be profitable and is still in the early stages of development, we assume that it will still achieve low single-digit growth over the next five years. Based on the above assumptions, we estimate that Top Toy's revenue CAGR in China will be approximately 30%-35% over the next five years.

On the profit side: Regarding gross margin, with the increase in the proportion of Miniso's IP products and the focus on IP categories, we assume that Miniso's gross margin will slightly improve, increasing from 42% to around 45% over the next five years. Regarding expense ratio, with the gradual enhancement of Miniso's brand strength and the optimization of internal operational efficiency, we assume that there is still room for further reduction in rent and labor costs, leading to a slight decrease in the expense ratio. Based on the above assumptions, we conclude that Miniso's revenue and profit CAGR over the next five years will be approximately 15% and 22%, respectively

2. How to view the valuation of Miniso?

From the perspective of relative valuation, we compare Pop Mart and FIVE BELOW, which have similar business operations and are both in the IP sector. From the PEG perspective, it can be seen that FIVE BELOW and Pop Mart are significantly higher than Miniso, which means that without considering the impact of performance growth on valuation, the market gives Pop Mart and FIVE BELOW a higher valuation premium.

Dolphin believes that the main reason lies in the different business models of the three. Firstly, compared to Miniso, both FIVE BELOW and Pop Mart operate under a direct sales model, which can better maintain brand value consistency compared to the agency model. On the other hand, Dolphin believes that Pop Mart, as a relatively scarce player in the full IP industry chain (compared to Miniso, it has the upstream IP design link), is also granted a higher valuation premium.

Finally, from the perspective of absolute valuation, with a WACC of 9.6% and a perpetual growth rate of 3%, we can estimate that Miniso's stock price is $30.1, indicating a 21% upside potential compared to the current stock price.

Summary: Overall, although Miniso cannot match Pop Mart's "magical" explosive growth overseas, it performs exceptionally well as a leading player in the IP retail industry. In the current environment where most consumer goods industries in China are struggling, Miniso has found its unique track by combining excellent supply chain management with IP and retail, as well as expanding overseas. In Dolphin's view, it is more like the offline version of SHEIN for daily necessities, but unlike SHEIN, which focuses purely on online business, Miniso has a first-mover advantage (limited good store locations), giving it a higher moat.

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Miniso: The origin of the "10 yuan store," the endgame of IP retail hot products?