****This article is republished with permission from AI Finance and Economics (ID: aicjnews); Author: Yuan Jingying; Editor: Chen Fang
A few days ago in the afternoon, a Lawson employee rushed to the assistant of the chairman, breathlessly saying, "Sign quickly, FamilyMart is also bidding for this store, and I need to hurry over."
This scene is not uncommon in Shanghai. This metropolis with a permanent population of 24 million has nearly 10,000 people per square kilometer on average. People shuttle through Shanghai's intricate alleys, and the rich atmosphere of urban life provides fertile ground for the development of convenience stores. But after more than a decade of fierce competition, finding a suitable location for a convenience store in downtown Shanghai is not easy; it all depends on luck. Japanese and local convenience stores are scattered throughout the streets of Shanghai, with FamilyMart having the most stores at over 1,700, which is 2-5 times more than other convenience stores.
Under the invasion of capital, FamilyMart's performance in Shanghai seems insignificant. The strong entry of internet entrepreneurs and capital has made the landscape of China's convenience store industry unpredictable. With capital support, many convenience store brands in second-tier cities can compete with Japanese convenience stores like FamilyMart in their home bases.
But the good times did not last long. Almost beyond everyone's expectations, starting from August this year, the capital chains of Linjia and Beijing 131 convenience stores broke one after another, unable to support operations, and nearly 200 stores closed down at once. Although these are isolated cases, the impact is enough to cool down the restless capital for a while.
The long-standing high costs and profitability difficulties of convenience stores have also been exposed. Wang Hongtao, deputy secretary-general of the China Chain Store & Franchise Association, lamented that in 2018, the convenience store industry was as thrilling as a roller coaster. "Capital is like a tornado, leaving devastation in its wake. For a time, the industry was in a state of panic and anxiety."
Calming down, for enterprises that truly operate convenience stores, this is not necessarily a bad thing.
01 No Formed Trend
Convenience stores are only one step away from becoming a real trend.
In 1992, when Japanese convenience store 7-Eleven opened its first store in Shenzhen, few could have realized that years later this business model would be so close to becoming a trend and once be the darling of capital. Song Yingchun feels this deeply. This "veteran" of the retail industry founded Today convenience store chain after leaving Mengniu in 2014. But before 2014, Song Yingchun rarely had contact with media and capital; in his words, "no one paid attention."
After the unmanned shelf trend experienced a brief boom and rapid decline in 2017, some smart capital followed the clues and discovered the convenience store industry, and more capital began to approach Song Yingchun. In November of the same year, Today completed a B-round financing of 200 million yuan, led by China Equity Capital. Eight months later, General Atlantic led a B+ round of 300 million yuan, and Today's valuation rose from 2 billion yuan to 3 billion yuan.
At the financing meeting, Song Yingchun revealed that during the B round, General Atlantic had hoped to participate, but considering that they were a dollar investor, Song Yingchun politely declined. After that, the two sides maintained close communication for most of the year, and Song Yingchun eventually accepted General Atlantic.
△ Song Yingchun
Today convenience store is not an isolated case.
According to incomplete statistics from AI Finance and Economics, since the second half of 2017, at least 8 regional convenience store chains have received capital favor, including Haolinju, Jianfu, Furongxingsheng, Linjia, Yundou, Meitian, and Zhongshang Bianli, with total financing of nearly 2 billion yuan. At the same time, unmanned convenience store Xiaomaipu received two rounds of financing in the second half of last year, totaling about 300 million yuan. In addition, Xingbianli, which has already laid out physical convenience store business, also received strategic financing from Ant Financial in June this year.
Capital has brought tangible changes to the industry, and the expansion speed of convenience stores is visible to the naked eye. Taking Xinjiekou in downtown Nanjing as an example, on the four or five crisscrossing streets, almost every street has two convenience stores, including Lawson, 7-Eleven, Bianlifeng, Quanshi, as well as Suguo's Hao24 convenience stores and Korean convenience store brand 32Days.
The more brands, the more intense the competition. In order to compete for good locations and reduce store rent pressure, Quanshi even shares a store with China Mobile. Before leaving work every day, China Mobile employees collect all display phones, leaving only empty counters. "Quanshi is a 24-hour convenience store; we are afraid someone might steal the phones." Across from Quanshi, across the street, are Bianlifeng and Hao24, three stores facing each other, waiting for the bustling crowd to visit.
△ On the right are convenience store products, on the left is an empty phone display counter
△ Bianlifeng and Hao24 convenience stores opened opposite Quanshi
This is not unique to Nanjing. According to the "2018 China Convenience Store Development Report," in 2017, the number of convenience store outlets in China exceeded 100,000 for the first time, reaching 106,000, a year-on-year increase of 13%; the pace of opening stores accelerated significantly, nearly 10 percentage points faster than in 2016. Some emerging second-tier cities and Beijing, where there is still much room for convenience store density, have become targets for convenience store chains to mine gold.
However, convenience stores are destined to be an industry that requires time to polish. When capital enthusiasm is high, the sudden collapse of individual convenience stores poured cold water on capital and the industry.
On the evening of July 31, Linjia issued a notice to suppliers and employees stating that the company would cease all business operations from August 1. The next day, all 168 Linjia stores closed.
The sudden closure was due to the break in Linjia's capital chain. A former employee of Shanlin Finance told AI Finance and Economics that Linjia's parent company was the P2P financial platform Shanlin Finance, and over the past year, all of Linjia's store expansion funds and daily operating funds relied on Shanlin Finance's support. As the saying goes, success is due to Shanlin Finance, and failure is also due to Shanlin Finance. After the capital side Shanlin Finance had problems, Linjia, which had held on for three months, was ultimately crushed.
In early April, Zhou Boyun, chairman of Shanlin Finance, suddenly surrendered to Shanghai police on charges of "illegally absorbing public deposits," involving an amount of 60 billion yuan. A former Shanlin Finance employee said, "If there is money, it will first be used to repay the P2P platform's debts, and Linjia basically has no chance of getting money to survive."
A serious question gradually emerged: Capital can boost the rapid expansion of convenience stores, but why can't convenience stores survive on their own after losing capital support?
The core reason is that convenience stores are not an industry for quick money. To make money, you have to honestly sell goods, do refined operations, and endure loneliness. A newly opened convenience store needs at least two years to become profitable.
From the "2018 China Convenience Store Development Report," it can be seen that the profitability of Chinese convenience stores cannot be compared with Japan; one is underground, the other is in the sky. More than 80% of convenience stores in China have gross margins below 30%; 62% of directly operated convenience stores have net profit margins below 2%, 16% are in the 2% to 4% range, and only 23% have net profit margins of 4% or above.
Even traditional convenience stores that have been solidly developing in China for many years find profitability difficult. FamilyMart China only became profitable in 2012, while Lawson and 7-Eleven are still in the loss stage in China as of now. Lawson expects to break even in 2019.
More seriously, capital has made the entire convenience store industry increasingly impetuous.
An industry insider who declined to be named said that one convenience store, after unhealthy rapid expansion, had a tight capital chain and originally planned to slow down. Unexpectedly, seeing capital influx, it not only did not press the pause button but increased its layout, trying to attract capital attention to obtain financing.
Wang Hongtao bluntly stated that in the past year, the convenience store industry has received "unprecedented attention" from capital, and some practitioners have become impetuous, no longer focusing on sales but on financing. "It seems that whoever gets financing is awesome. Simply put, this is a distortion of values."
The founder of an old convenience store chain said that in the past year, with the boost of capital, the Chinese convenience store industry has been impetuous, and the market competition environment is very harsh. Some convenience store brands, in order to win stores, have driven up rents several times, not even looking at whether the location is good or whether the store size is suitable, and directly take it.
Multiple entrepreneurs deeply involved in traditional convenience stores told AI Finance and Economics that what the outside world sees—store expansion and products on shelves—is only the tip of the iceberg of the convenience store industry. Below, the more massive and complex parts are the entire supply chain system, fresh food factory construction, team building, store staff training, system digitalization, etc. It is the unseen part of the iceberg underwater that supports the profitability of convenience stores.
Convenience stores cannot generate their own cash flow to support themselves, and after losing the protection of capital, they can only suffer the consequences.
One month after Linjia's closure, Beijing 131 convenience store also fell into financial difficulties due to the P2P thunderstorm of its investor Chunxiao Capital and the detention of co-founder Han Yue, and closed stores one after another. Then, Quanshi Shenghuo, which was once part of Fuhua Holdings Group with Quanshi convenience store but was later spun off, also closed stores due to a broken capital chain; Tianjin Haoshoucheng convenience store closed due to "moths" in the company's senior management causing a capital chain break.
These closed convenience stores all have a commonality: they did not achieve profitability, and even their cash flow was negative. For a time, the convenience store industry, which was about to become a trend, took a sharp turn for the worse.
02 The Failed "Internet Playbook"
Before entering the convenience store track, this generation of capital had already experienced the thousand-group war, the O2O wave, the battle between Didi and Kuaidi, and the orange-yellow battle between ofo and Mobike. In the current era of exhausted online dividends, a unique capital playbook of the internet era has gradually formed: invest large amounts of money, burn cash to occupy market share, form a monopoly to gain huge offline traffic, and then attract internet giants to take over.
When capital entered convenience stores, it followed the same logic, which is related to changes in China's retail market.
In 1992, the first convenience store on the mainland, 7-Eleven, opened in Shenzhen. In 1996 and 2004, its Japanese counterparts, Lawson and FamilyMart, entered China one after another. Along with some traditional retailers and distributors joining this camp, local convenience stores such as Meiyijia, Tangjiu, and Tianfu appeared. For a long time, the Chinese convenience store market was dominated by Japanese and local traditional convenience stores.
Capital had no desire to enter. On the one hand, traditional convenience stores tended to form joint ventures with local retailers or set up separate subsidiaries to operate, making it difficult for capital to join; on the other hand, capital was unwilling to put money into convenience stores with high input costs, long return cycles, and low profits.
However, times and trends change. In 2017, new retail broke everything, and convenience stores became important offline traffic entrances. Capital turned its attention to unmanned shelves and convenience stores. In early 2018, when small and medium-sized unmanned shelf companies began laying off employees and closing down, capital's interest in investing in convenience stores increased even more.
"Convenience stores are a hot track. I may not invest in the leading companies, but I cannot be absent," an investor said bluntly. This is also the core reason why capital has continued to join the convenience store track since last year.
Following the logic of the previous internet playbook, some convenience stores rapidly opened stores with capital support, and in 2017, the total number of convenience store outlets in China finally exceeded 100,000. To speed up and reduce costs, some convenience stores chose to lower the threshold and reduce store area, with 10-square-meter stores being included in the plan.
But in the end, the "internet playbook" that capital was good at failed in the convenience store industry.
Jian24 unmanned convenience store, established in June last year, finally called off its convenience store project after a year, closing all six stores that had opened and transforming into smart vending cabinets. Earlier this year, the company had planned to open 30 to 50 unmanned convenience stores in 2018. A former employee of the store told AI Finance and Economics that funding, costs, and technology were difficult to break through, and these were the three major hurdles.
It is reported that Jian24 used RFID technology, which involves attaching RFID tags containing chips to each product, and consumers need to scan the chips on a machine to pay. For convenience stores with already thin profits, the cost of an RFID tag is between 0.3 and 1 yuan, which is enough to cover the profits of some low-margin products.
For convenience store companies that want to expand rapidly, this is still a small cost; the bigger costs are rent and labor. "The biggest costs for most convenience stores are rent and labor, with utilities being a small part," Gu Jun, vice president of marketing at Xiaomaipu, told AI Finance and Economics. In first-tier cities, the daily rent cost for convenience stores is between 8 and 15 yuan per square meter, depending on the location. Calculated at 10 yuan per day, a convenience store needs to pay 300 yuan per square meter per month, meaning a 100-square-meter convenience store has a rent cost of about 30,000 yuan.
In addition, labor costs in first-tier cities are also relatively high, with the average salary of each convenience store employee ranging from 3,000 to 5,000 yuan. And a 24-hour convenience store needs at least 3-5 employees.
Data from the "2018 China Convenience Store Development Report" shows that in 2017, the operating costs of convenience stores rose rapidly, especially rent and labor costs, which increased by 18% and 12%, respectively. The rise in costs undoubtedly brought operational pressure to convenience store companies that already had low profits.
And the above costs are only part of the costs above the waterline of the iceberg; the costs below the waterline are even greater. "Convenience stores have four key points: high-density store opening, unique products, efficient logistics systems, and intelligent information capabilities," Zhang Li, chairman of Jianfu convenience store, told AI Finance and Economics. Among these four points, satisfying even one requires long-term industry accumulation and a large amount of capital investment.
Currently, capital has realized the iceberg beneath convenience stores. Multiple convenience store companies told AI Finance and Economics that as capital understands the convenience store industry more, both capital and some internet entrepreneurs have become more rational.
Even Xingbianli, which developed rapidly, has slowed down.
In September last year, Xingbianli opened 8 convenience stores at once. This startup, which other entrepreneurs saw as "born with a silver spoon" and received 100 million yuan in investment from Lightspeed China, Meituan-Dianping founder Zhang Tao, and Wang Xing personally within two months of its establishment, did not dare to blindly open offline convenience stores in the following year. To date, Xingbianli has only opened 10 convenience stores, all in Shanghai, with only two added in a year.
△ Scene inside a Xingbianli convenience store
03 Capital Rationality, a Long Road
The closures of Linjia and Beijing 131 convenience stores have now brought a very bad impact on the industry.
"People originally couldn't understand the convenience store industry, and now they understand it even less," Zhang Li said bluntly at the beginning of the interview. The successive closures of Linjia and Beijing 131 convenience stores have brought considerable trouble to the convenience store industry, and he feels that capital has become more cautious towards the industry.
Song Yingchun has the same feeling. At the end of the interview, he repeatedly emphasized to AI Finance and Economics that there is no wave of closures in the convenience store industry, and the closure of individual convenience store companies cannot represent the entire industry. Another industry insider said that the closed convenience stores are a minority phenomenon, and these closures all have a commonality: their cash flow has always been negative, and they also adopted the practice of drinking poison to quench thirst, using P2P financial funds. With unhealthy cash flow and unstable funds, closure was only a matter of time, but there is no large-scale closure phenomenon in the industry.
Now, Song Yingchun is more willing to contact the media than before, repeatedly saying, "It is normal for capital to return to rationality, and there is no need for everyone to panic." He hopes to boost industry confidence.
In the final analysis, convenience stores are an industry that requires long-term accumulation to achieve economies of scale. The galloping mode of expansion, while helping companies improve data in the short term, is prone to problems in the long run.
Lawson, which has been immersed in the convenience store industry for many years, only began to open stores rapidly last year because it finally found a "light capital" path—cooperating with local retailers. In August last year, Lawson announced cooperation with Nanjing Central Mall, with the latter providing stores and warehousing, and Lawson providing brand, product supply, and staff training, with plans to open more than 300 stores within 3-5 years. Previously, Lawson also used this method to enter the Wuhan market, cooperating with Wuhan's local retail giant Wuhan Zhongbai.
△ Exterior of a Lawson store in Nanjing
Zhang Sheng, vice president and director of Lawson China, once told AI Finance and Economics that due to geographical reasons, Lawson and other convenience stores had not entered Nanjing for a long time. The distance between Shanghai and Nanjing is 300 kilometers, while Lawson's farthest logistics delivery distance is 200 kilometers, and it had not set up a warehousing center near Nanjing. Blindly opening stores would only result in fresh food products expiring or about to expire upon arrival.
Cooperating with local retail giants can save the cost of acquiring stores, part of the logistics costs, and the costs of supply chain and fresh food factories. These costs account for the bulk of convenience store operating costs.
"A real fresh food factory requires at least hundreds of millions of yuan in investment," Zhang Li said. Jianfu convenience store started in Fujian, mainly in second- and third-tier cities such as Xiamen and Fuzhou. Over 12 years, Jianfu convenience store has a total of over 1,000 stores.
Compared to the rapid expansion of some convenience stores after capital injection, Jianfu convenience store's opening speed is not fast. But Zhang Li feels this speed fits his plan. In April this year, Sequoia Capital invested about 240 million yuan in Jianfu. After the financing was completed, Zhang Li did not use it to open stores but invested all the funds into the construction of a fresh food factory.
"It's okay to take money, but what you do with the money is the most important thing. Whether you prepare supplies before troops move, or have troops scattered all over the mountains and then look for supplies when they arrive, these are two different corporate strategies," Zhang Li said.
Song Yingchun used the two rounds of financing for the construction of a fresh food factory and the backend cloud platform system, the latter being to upgrade the system's agility and intelligence based on data analysis and technology iteration. If the cloud platform system is improved, Song Yingchun estimates that store operation processes will increase threefold.
Although the closed companies have poured cold water on the convenience store industry, there is still capital betting on the convenience store track. On November 2, Haolinju announced it had received tens of millions of dollars in financing, with a valuation of $200 million, from Megvii Technology, which invested in Haolinju for smart retail. On October 30, Sinovation Ventures injected 60 million yuan into Zhongshang Bianli.
Why focus on the convenience store track? Zhou Jiajun, investment director at Sinovation Ventures, said that compared to other retail formats, convenience stores have had the highest growth rate in the past few years, and the consumption behavior of the current young generation is undergoing structural changes, which will further release demand for the convenience store format. In addition, convenience stores have the charm of scale. If revenue can reach 10 billion yuan, net profit will be in the hundreds of millions, and there will be a corresponding valuation.
He believes that it is not difficult for convenience stores to become profitable. Japanese convenience stores have net profit margins of 3% to 5%, but they can make money. Many local convenience stores in China do not make money because cost control is poor; there is always one cost that is particularly high, and the final result is losses.
Zhongshang Bianli is very confident about future development. Liu Mengjie, executive president of Central Mall, told AI Finance and Economics that convenience stores are an industry that requires refined management. In the future, they will pay more attention to product strength, operational strength, and refined management, and balance scale development with the quality of single-store operations.
Wang Hongtao did not show blind joy at the financing of the two convenience stores. He reminded convenience store entrepreneurs that when financing, they need to consider what else capital can bring besides funds. "These questions need to be thought through clearly. Capital is icing on the cake, not a lifeline in times of need."
"The convenience store industry has developed for more than a decade and has finally gotten on the right track. Capital has become rational, and speculators and followers have exited. I think this is a good thing," Song Yingchun said. In a market that is not yet truly mature, it is natural for some capital to leave. Capital that truly understands will stay, and only after the industry returns to rationality can it have longer-term healthy development.
This article is republished with permission from AI Finance and Economics (ID: aicjnews) -END-