Editor's Note: The winter continues, with supermarket industry revenue and profit declines hard to curb this year, but convenience stores have emerged as a new battleground for major brands. Thanks to mobile O2O, new e-commerce approaches have emerged. Overall, counter-cyclical M&A and resource integration are trends, and with the internet re-evaluating physical retail, a winner-takes-all pattern may emerge.

Current Situation: Continued Decline

● Net profits generally declining ● Foreign giants seeing significant drops ● Regional supermarkets less affected

For the supermarket industry, the winter has lasted long and will continue. Several listed supermarket companies, including Yonghui Superstores, Lianhua Supermarket, Better Life, and Hongqi Chain, have released their first three quarters' operations, with revenue and profit declines still unstoppable.

Lianhua Supermarket is the only company with both revenue and net profit declines. According to its announcement, group revenue was 22.573 billion yuan, down about 6.6% year-on-year; operating costs decreased about 6.9% to 17.887 billion yuan, with a net loss of about 140 million yuan, continuing its downward trend in recent years.

Hunan regional chain Better Life saw revenue increase 25.78% to 11.68 billion yuan in the first three quarters, but net profit fell 28.75% year-on-year to 239 million yuan.

Carrefour's China sales in the third quarter dropped sharply by 11.2%, nearly double its 6.4% decline in 2014.

Renrenle's third-quarter revenue was 2.742 billion yuan, down 8.54% year-on-year; net profit attributable to shareholders was -187 million yuan, down 108.88% year-on-year; first three quarters net profit attributable to shareholders was -142 million yuan.

In the first half of 2015, Wumart's turnover rose about 11.4%, but profit attributable to shareholders fell about 19.5% compared with the first half of 2014.

In early October, Wumart announced it would delist, saying its profitability had been adversely affected by rising labor and rental costs and competition from online and offline operators.

Yonghui Superstores' first three quarters revenue was about 31.44 billion yuan, up 16.7% year-on-year; net profit was 597 million yuan, down 7.98%. But expansion did not slow; in the third quarter, Yonghui opened 21 new stores, bringing the total to 372 by the end of the quarter.

Hongqi Chain has insisted on developing within Sichuan Province, with relatively small scale, less affected by the overall retail downturn, and more able to adjust direction in response to consumption trends. Its third-quarter report showed net profit of 155 million yuan in the first three quarters, up 10.64% year-on-year; revenue of 4.076 billion yuan, up 13.31%.

Small Business Thriving

● Both store count and sales growing ● More convenience store brands ● Frequent talent poaching

Convenience stores are the only physical retail format achieving double-digit growth in both stores and sales. The "2014 China Convenience Store Development Report" shows that convenience store-led enterprises saw sales growth of 18.2%, ranking first in traditional retail.

In 2015, with hypermarkets and standard supermarkets continuing to slump, convenience stores became another outlet for retail enterprises.

"easy Carrefour" is Carrefour's original convenience store brand in China, creating a neighborhood community convenience store concept, aiming to meet residents' basic needs through rich products and quality services, bringing convenient lifestyles to surrounding consumers.

Currently, four stores have opened in Shanghai, with about 10 expected before the Spring Festival next year. According to plans, early next year, Carrefour's online mall will enter Beijing, followed by easy Carrefour as an O2O supporting format. China Resources Vanguard plans to open 10 standard supermarket stores and 30 VANGO convenience stores in Beijing this year, while suspending hypermarket expansion.

CP Group's Lotus, after struggling to turn around in hypermarkets, opened seven CP Fresh Mart convenience stores in Shanghai and Chengdu starting in April, integrating group resources and holding high hopes, with plans for 50 stores in Beijing alone next year.

However, by the end of this year, CP Group raised its Beijing target for CP Fresh Mart to 100 new stores next year and 160 the year after.

Metro piloted "Metro Family" convenience stores in Shanghai, and after mature operation, will expand widely under a new name.

Beijing 7-Eleven entered its fastest store-opening period ever, completing 32 new stores last year, with a task of 40 new stores this year.

Professional convenience store brands also see new entrants, intensifying competition.

Beijing Linjia Convenience Store poached dozens of middle managers from 7-Eleven, and by December, over a dozen new stores had opened. Linjia plans to open 200 new stores within a year.

Based on various convenience store targets, in 2016, at least 500 new convenience stores of different brands will appear in Beijing, bringing the total to over 1,000 stores.

Reshaping E-commerce

● Self-built e-commerce platforms losing money ● Using O2O to expand markets ● Focusing on mobile

Since 2012, supermarkets have gone through three stages in e-commerce: first, self-developed e-commerce channels; second, entering e-commerce platforms; the first two had high traffic costs and user retention issues; now entering the mobile e-commerce stage, using O2O to redevelop online markets at low cost.

Wumart and Dmall reached a strategic cooperation. In Beijing, Dmall delivers Wumart products to consumers within 3 kilometers within 1 hour. Such supermarket agent O2O companies began explosive growth early this year, with startups like JD Daojia, Xiao e Daojia, and Shenghuoquan giving supermarkets another way to go online.

To date, in Beijing, Wumart, Meilianmei, Huapu, Huaguan, Shunfu, and Lotte Mart have established cooperation with the above O2O companies.

Data from Chaoshifa shows that after connecting to O2O platforms, single-store sales increased by up to 20%. For struggling supermarkets, this increment is especially significant and precious.

However, supermarkets insisting on self-built e-commerce still exist, mostly foreign-funded. RT-Mart's Feiniu.com lost 162 million yuan last year and continues to "burn money" this year, while opening its platform to attract more merchants.

Carrefour's online mall launched in Shanghai in June, with all goods shipped from hypermarket stores, either delivered to home or picked up at easy Carrefour stores.

After Yihaodian was fully acquired by Walmart, it became "online Walmart." Some Walmart Shenzhen stores provide pickup services for Yihaodian customers, allowing buyers to pick up at convenient nearby points. Meanwhile, the Walmart App uses Yihaodian's Shenzhen logistics team for home delivery.

According to Walmart data, after four to five months, the Sugou app had over 200,000 downloads, and Walmart hypermarket online sales increased by 700%.

Metro, after joining multiple O2O platforms like Dmall and Xiao e Daojia, also operates its own online mall and the Paike app, exploring online retail through multiple channels, then rapidly developing the viable model after identifying it.

Trends: Resource Integration

● Frequent counter-cyclical M&A ● Accelerated brand integration ● Establishment of joint procurement platforms

Counter-cyclical M&A is common in the industry. Besides same-industry mergers, cross-industry cooperation has been particularly prominent this year.

In March, Hongqi Chain acquired 125 stores of Chengdu Hongyan Supermarket for 238 million yuan, then spent hundreds of millions to acquire 388 stores of Huhui Supermarket, and in October completed the acquisition of 32 stores of Leshan Sihai Supermarket. All three targets are Sichuan provincial chain brands.

This horizontal integration makes the store network more complete and enhances radiation capacity, while improving logistics distribution center efficiency, reducing logistics costs, and further enhancing market competitiveness.

Yonghui Superstores' resource integration has focused nationwide, from Wuhan Zhongbai Group last year to Shanghai Lianhua this year. In April, Yonghui acquired up to 21.17% of Lianhua for 743 million yuan.

In August, JD.com invested 4.31 billion yuan in Yonghui, becoming the first deep integration case of e-commerce and physical retail in the supermarket industry. In February, China Resources Vanguard officially unveiled its new red brand logo and stated that integration with Tesco had entered a substantive stage.

Unwilling to have its valuation suppressed long-term and to facilitate quick decision-making, Wumart announced in early October it would delist from Hong Kong. Wumart believes new expansion and M&A will bring cost increases and earnings dilution, and with slow overall market growth, payback periods will inevitably extend.

Once privatized successfully, the company will have more flexibility to make investment decisions promptly while minimizing adverse effects on shareholder returns.

After delisting, Wumart will focus on M&A of top three regional retailers. Currently, Wumart has taken over several TESCO stores in Beijing.

Procurement resources have also become a sharing topic. In early November, Better Life Group, together with 22 domestic retail enterprises including Rainbow Department Store, Shanxi Meitehao Supermarket, and Shanghai City Supermarket, established a "Global Joint Procurement Crowdfunding Platform." This platform will integrate demands of large retailers across regions in China for bulk joint procurement, significantly improving bargaining power, reducing intermediate procurement links, achieving the shortest F2B2C path from factory to retailer, lowering costs, and obtaining the lowest purchase prices.

Digital Management

● Mobile payment popularization ● Improving effective traffic ● Challenging original business models

In the mobile internet era, the digital service capabilities of the retail industry are challenged. With consumer behavior deeply influenced by digitalization, the supermarket industry needs to mobilize various forces to reshape consumers' omni-channel shopping experience.

Haolinju Convenience Store has over 200 stores in Beijing, accumulating 200,000-300,000 active fans through mobile services like Happy Shopping, One-Yuan Flash Sale, Flash Purchase, and Order Online Pickup In Store, enabling analysis of consumer shopping behavior for more precise product operations and marketing.

Mobile payment and WeChat official accounts have almost become standard in the supermarket industry in 2015. Alipay and WeChat Pay are relentless in competing for supermarket resources, spending heavily, while Best Pay and UnionPay Wallet also follow suit.

This is an effective means to turn every in-store customer into effective traffic, thereby generating commercial value. Many supermarket companies use mobile payment to improve checkout experience and provide more interesting, convenient, and additional services.

After adopting mobile payment, checkout time per customer significantly shortened, and sales increased year-on-year. Besides subsidies from mobile payment companies, attracting more young customers and analyzing consumption big data to adjust product structure are also opportunities for supermarkets.

In the environment of online-offline integration, user migration online will eventually drive e-commerce across all categories, and the advantages of physical retail need to be recreated in digital form.

Digitalization poses certain challenges to the original business model of supermarkets. Procurement and product operations, inventory management, and consumer services all need to change accordingly, but what supermarkets have done so far is far from enough. Based on current cases, the maximum value of technology in supermarket operations has not been fully realized.

Physical retail has traffic entrances that internet companies envy, but wastes a lot of traffic at store entrances. How to turn every in-store customer into effective traffic and generate commercial value is a key issue for physical retail under "Internet Plus."

Back to Basics

● Changing supplier-retailer relationships ● Establishing new management models ● Matching consumer needs

On the surface, e-commerce takes market share from offline, but essentially it's the loss of consumers; supermarkets adopt various means to improve products or environments, actually to win consumers. In 2015, the supermarket industry reached a consensus: in the new retail environment, returning to business essence is key to transformation.

The development of domestic chain supermarkets benefits from China's economy and market, but their basic skills are not solid. The internet is a new tool and means that can help retail enterprises better reflect their fundamental value, i.e., satisfying consumers with quality products at reasonable prices, efficient supply chains, and good customer service.

Business essence is providing products and services that satisfy consumers, involving cooperation between suppliers and retailers. Over the past decade, conflicts between retailers and suppliers have been constant. Now, under the impact of internet retail and mobile e-commerce, both sides have set aside past grievances and sat down together.

China Resources Vanguard, P&G, Better Life, Carrefour, Coca-Cola and other 11 enterprises initiated the "Shenzhen Bay Consensus," which takes consumers as the core value and evaluation standard, establishing management models suited to their own characteristics. Currently, 26 enterprises have joined.

To reconstruct a new retail ecosystem, the core is returning to consumers. Both suppliers and retailers must move from game-playing to value sharing, but it remains difficult, requiring breaking some interest patterns.

Consumer demand is also changing at any time. The latest change is a significant rise in demand for high-quality products, including overseas goods, and home delivery services, which is why many supermarkets are increasing imported products and developing cross-border e-commerce.

In fact, due to years of supply chain accumulation, traditional supermarkets find it easier to start cross-border e-commerce than pure cross-border e-commerce companies, but this is undoubtedly a re-entrepreneurship. Whether to dabble or deeply explore vertical fields depends on their respective advantages and disadvantages.

But it cannot be ignored that professional cross-border e-commerce has begun offline layout. Tianjin Dongjiang Imported Goods Direct Operation Center's Beijing store officially opened, with plans for chain franchising in the future.

Meanwhile, some supermarkets have made free delivery to surrounding communities or joining third-party delivery platforms a routine service to increase consumer stickiness. For supermarkets, matching customer needs with commercial value is the foundation for "Internet Plus" omni-channel transformation.

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