"Retail service providers like Youzan, which emerged during the internet era, have mostly focused on the end-user side and lack capabilities in supply chain management," said an employee at a large retail service provider.

This statement actually pinpoints the current predicament of Youzan. Originating from the WeChat ecosystem, Youzan once thrived as a retail SaaS service provider during the heyday of WeChat business by riding the first wave of growth.

However, in today's retail landscape, online retail scenarios have shifted from the WeChat ecosystem to the short video ecosystem, leaving Youzan to navigate a new battleground. Moreover, the short video platforms' built-in e-commerce tools are sufficient for merchants, suddenly rendering Youzan's niche obsolete.

Diving deeper into retail, the tide of competition washes away the weak, and large-scale retail brands must grapple with more than just scenarios; the demands of supply chain management are far more complex.

1. Youzan's "Fall from Grace" into Penny Stock Status

As the former leader in the WeChat ecosystem, Youzan's share price once peaked at over 70 billion yuan, but now hovers around just over 2 billion yuan, making it one of the Hong Kong-listed internet companies with the most significant declines.

In particular, Youzan's current share price stands at a mere HK$0.062 per share, firmly establishing it as a penny stock.

A penny stock is a special type of security in the Hong Kong Stock Exchange market, referring to stocks trading below HK$1. It typically indicates that the company's market value is extremely low, and the market lacks confidence in its future growth potential.

Youzan's share price first fell below the HK$1 threshold on June 27, 2022, officially becoming a penny stock. Since then, its share price has lingered below HK$1 and failed to recover above this psychological threshold.

Youzan's continuous share price decline is attributed to its previously overvalued status and sluggish performance.

In the first half of this year, Youzan's performance continued to decline.

Financial reports show that Youzan Group recorded total revenue of approximately RMB 686.3 million, a year-on-year decrease of 5.2%. Gross profit also decreased, with the gross profit margin dropping from 69.2% in the same period last year to 68.4%. Additionally, the Group recorded an operating profit of RMB 2.586 million, a significant improvement from an operating loss of RMB 11.265 million in the same period last year, representing a year-on-year increase of 123%.

Regarding the decline in performance in the first half of this year, Youzan mentioned in its financial report that it was due to a decrease in revenue from subscription solutions, which fell from RMB 422.3 million in the same period last year to RMB 377.5 million, a decrease of 10.6%. In contrast, revenue from merchant solutions increased slightly, from RMB 300 million to RMB 306.6 million, an increase of 2.2%.

Youzan's business comprises two segments: subscription solutions and merchant solutions. Subscription solutions include SaaS product subscription fees and fees paid by merchants for transactions exceeding predefined thresholds using these products. Merchant solutions primarily cover transaction service fees, product distribution, and value-added services such as social media rebates.

Fluctuations in Youzan's revenue and profit in the first half of 2024 can be attributed to several factors:

Firstly, a significant decrease in revenue from subscription solutions due to a reduction in the number of paying merchants, directly leading to a decline in overall revenue.

Between 2023 and 2024, Youzan witnessed a notable decline in the number of paying merchants. As of June 30, 2024, Youzan had 59,541 paying merchants, compared to 72,621 in the same period in 2023, representing a decrease of approximately 13,080 merchants or roughly 18% over the year.

This decrease may reflect intensified market competition and customer churn.

Furthermore, the number of new paying merchants also declined in the first half of 2024, from 10,863 in 2023 to 9,116 in 2024, a decrease of approximately 16%.

Secondly, although revenue from merchant solutions increased, the growth was insufficient to fully offset the decline in the subscription business.

2. The Essence of SaaS Products Lies in Scenarios

Retail SaaS software like Youzan has failed to establish a solid barrier over the past decade.

Compared to large-scale supply chain management tools, Youzan's retail SaaS system focuses more on the end-user side rather than supply chain management, making it less preferred by retail enterprises facing increasingly complex business environments.

In contrast, Youzan's essence over the past few years has been scenarios.

Youzan was founded during the rapid development of the internet era. When Youzan was established in 2013, it coincided with the rise of mobile internet, which was fueled by the popularity of WeChat as a national software and the emergence of WeChat business as the most popular online retail activity at the time.

Youzan capitalized on this trend, with its first product being "Youzan WeMall," an e-commerce platform based on the WeChat ecosystem that helped merchants establish their online stores on WeChat and quickly gained market acceptance.

However, as WeChat business declined and various platforms and channels emerged, Youzan lost a significant number of customers to private domain management tools like Douyin E-commerce and various group buying tools.

Within the WeChat ecosystem, the platform itself lacked a dedicated order management tool, creating an opportunity for Youzan. In the context of WeChat, micro-merchants relied on Youzan for management.

The fragmented nature of the WeChat ecosystem provided room for Youzan to thrive. Later, when WeChat launched its own WeChat Store, it posed a challenge to Youzan.

Another significant event was the Youzan-Kuaishou disconnect in late 2021, which directly resulted in Youzan losing its largest source of transaction volume. In the era of short videos dominated by Kuaishou and Douyin, e-commerce became increasingly important, prompting platforms to develop their management tools, centralizing orders, and reducing merchants' reliance on external SaaS solutions.

Understanding that the essence of retail SaaS lies in scenarios helps explain why Youzan has expanded into various industries such as health, beauty, apparel, and restaurant chains.

The financial report for the first half of this year mentioned that Youzan actively sought new customer sources in the first half of 2024, attracting merchants from industries like health, beauty, apparel, and restaurant chains. In particular, Youzan prioritized the development of its beauty and restaurant sectors.

It is evident that these two industries align with scenario-based transaction management needs, especially in offline scenarios where concerns about platform and order centralization are mitigated. The more decentralized an industry, the more appealing it is to companies like Youzan, reminiscent of the era of micro-merchants.