If you want to buy lunch at a convenience store in the Good World Commercial Plaza at noon, you might have to queue behind 40 office workers from nearby buildings.
Good World Commercial Plaza is located on East Third Ring Road in Beijing. Currently, the ground floor entrance shops are not yet occupied, while the basement level has 15 restaurants, with delivery riders coming and going, and three convenience stores have chosen to engage in a 'street battle' here.
Japanese convenience store Lawson is at the back entrance of the mall, with one door facing the small road behind, welcoming customers from other office buildings, and another door at the escalator. Walking down the escalator to the basement, within ten steps is the Chinese convenience store Quanshi. Another Japanese store, 7-ELEVEn, is directly opposite Quanshi, separated by an atrium, less than 10 meters apart.
Even consumers with a bit of business sense can see that such a mall is an ideal location for convenience stores: a transportation hub, gathering office workers, with commercial potential. However, such street battles are now also occurring beyond the East Fifth Ring Road in Beijing—the Changying business district, which combines residential areas, shopping malls, and office buildings, is far from the bustling area and not a traditional business district—yet in this area with low subway ridership, at least 8 stores hang the 'convenience store' sign.
Two 7-ELEVEn stores occupy two subway exits, Lawson has opened a store in the bottom of a residential building, FamilyMart found a corner where residential and office areas meet, and a 'Kuaijiejian' selling various novel canned goods and drinks chose a sunken plaza. In the office area, 'Oukelai' and 'Linjia' are less than 5 meters apart—in the retail industry, this is a distance suitable for 'hand-to-hand combat.'
Since convenience stores became an independent retail format in the United States in the 1960s, this channel that can instantly satisfy people's daily consumption needs has also been seen as an important indicator of urbanization. Unlike the highly commercialized appearance of hypermarkets, small and flexible convenience stores more often show the warm and tender side of modern cities. More convenience stores mean a more comfortable and convenient life. In most people's impression, the most comfortable city in mainland China is Shanghai.
A report from the China Chain Store & Franchise Association, the '2014 China City Convenience Store Index,' states that on average, every 2,975 Shanghai residents have one convenience store, while in Beijing, this number is 20,700.
Our new discovery is that Beijing is becoming a bit like Shanghai.
#Is Beijing Becoming the Next Shanghai?
Such smoke of war has come somewhat abruptly.
In 2007, Pan Longfei, who had returned from studying in Australia, took a photo of a 7-ELEVEn near Beijing Foreign Studies University. It was his first time seeing 7-ELEVEn in Beijing, although it had long been ubiquitous on the streets of Melbourne. But since entering Beijing in 2004, it has only 193 stores.
The difficulty of opening convenience stores in Beijing is an open secret in the industry. FamilyMart has nearly 1,000 stores in Shanghai. It opened its first store in Beijing at Capital Airport in 2014, immediately attracting media coverage, including from CBNweekly.
Beijing and Shanghai's convenience stores are a tale of two cities, one hot and one cold. Shanghai is dotted with convenience stores, within walking distance, offering many novel products rarely seen in supermarkets, with no fewer than 20 types of lunch bento boxes. Even after a late night shift, you can buy hot food at a convenience store. In Beijing, sometimes you wonder if you've walked into a convenience store or a dimly lit, cluttered 'Beijing specialty' grocery store.
'Once I went into a convenience store in Chaowai SOHO to buy a bottle of water. The packaging was covered in dust, the service attitude was poor, and even though I was the only customer, it took a long time to check out,' Pan Longfei said.
In that 'China City Convenience Store Index' report, Beijing ranked second to last among the 26 cities surveyed, lower than Yichang, Xuzhou, and Putian.
For a long time, there has been a saying in the convenience store industry that Beijing can only do 'three and a half' businesses: the roads are too wide, making it costly for people to cross the street, so a convenience store can only attract customers from 'half a street'; the temperature difference between day and night is large, and some people who don't like nightlife go home early, so convenience stores can only be busy for 'half a day'; some operators also complain that Beijing's high latitude and cold weather reduce people's travel in autumn and winter, again affecting convenience store traffic, making only half the year the peak season. In short, convenience stores can't spread their wings in Beijing—blame the city's planning, which is not conducive to developing capillary-like commercial forms.
But strangely, now, the convenience stores in the street battles are doing good business.
The busiest time for convenience stores in Good World Commercial Plaza is lunchtime. Male office workers, in a hurry and discussing work loudly while picking items, prefer Quanshi's hot stir-fry boxed meals. One customer said he keeps his lunch budget between 15 and 20 yuan, and like most people, he chooses a lunch of two dishes plus rice. Quanshi offers more than ten dishes daily, allowing him to have a different lunch every day of the week.
Female customers, on the other hand, prefer to consider the refrigerated shelves at Lawson and 7-ELEVEn, where there are many bento boxes, sandwiches, rice balls, salads, and desserts. If you go for lunch too late, you might not find the popular spicy hot pot braised noodles at 7-ELEVEn. After each meal time, Lawson's sandwiches and sour soup beef noodles in bento boxes also decrease by several.
Unlike local company Quanshi, which puts goji berry tea and chrysanthemum tea on the shelves, the two Japanese convenience stores prefer to place some novel items, such as a ready-to-eat crab stick that Lawson is selling. One afternoon in March, a group of students were discussing in front of the drink cabinet at 7-ELEVEn whether the green-packaged Coca-Cola was cola or Sprite.
As the pioneer of modern convenience stores, 7-ELEVEn redefined this business model. The fierce competition among 7-ELEVEn, Lawson, and FamilyMart also made Japan the country with the highest density of convenience stores. By 2001, Japan already had nearly 52,000 convenience stores. For the mainland China market, Japanese convenience stores are undoubtedly the enlighteners. But as street battles become common, both Japanese and local companies are exploring new tactics.
7-ELEVEn launched a Mapo Tofu rice dish with local characteristics in Chengdu, but it faces two competitors that better understand local consumption habits: the 'Hongqi' brand, which extended from supermarket chains to convenience stores, and WOWO, which has opened more than 300 stores. Song Yingchun, a former Mengniu employee, opened the first Today convenience store in Nanning in 2008, and now its Wuhan stores exceed 100, with plans to expand to Changsha this year.
Unknowingly, the Japanese predecessors may not have had time to touch cities and corners, but local companies may have already taken the lead—these are all foreseeable places for street battles.
Miyashita Nobuyuki, president of Lawson China, doesn't understand how his new competitors have quickly squeezed into the Chinese market. Although he has lived in China for 11 years and can communicate entirely in Chinese, he is still puzzled by the 'procedures' for opening a convenience store in Beijing. Residential, commercial, and office areas require different licenses, and due to slow approval, it takes only 1.5 months in Shanghai or other cities, but in Beijing, it drags on for 3 to 5 months.
For this cautious, process-oriented Japanese company, the waiting time for licenses is enough for local competitors skilled at cutting corners to make their moves. After three years in Beijing, Lawson now has 34 stores, while Quanshi and Haolinju both have over 200 stores. 'We are puzzled how they got their licenses. Sometimes we go into their stores, and the licenses are not displayed,' Miyashita finds it incredible. 'You know what I mean, right?'
However, local convenience stores are not only good at flexibly dealing with rules; they are also more willing to embrace new things. Quanshi, founded in 2011, was among the first batch of retail stores in Beijing to enable WeChat Pay and Alipay. As more consumers get used to mobile payments and are reluctant to take out their wallets, 7-ELEVEn is still internally testing whether mobile payments' network requirements and the proficiency of customers and employees can truly improve checkout speed. 'They are very conservative, and their process system is too slow,' said Yang Bo, vice president of Quanshi, viewing foreign convenience stores' cautious consideration of innovation as an opportunity for Quanshi.
Yang Bo, 33, has worked in the convenience store industry for 12 years, the first 7 years at a Japanese convenience store. According to him, when he left, he had reached the top of local employee promotion. 'Above were all Japanese, with little room for development.' Now Yang Bo manages Quanshi's store franchising, product development, and daily operations. At Quanshi, there are more than a dozen employees who have jumped from Japanese convenience stores. These experienced managers have become another resource inadvertently left by Japanese brands to newcomers.
One thing is certain—this market can no longer afford to be slow.
#Convenience Stores: Survivors of the Offline Retail Industry?
Almost at the same time as the competitive landscape of the convenience store industry quietly changed, the retail industry also faced unprecedented challenges. E-commerce is not just nibbling but devouring the business of hypermarkets, department stores, and even shopping malls. Convenience stores are the luckiest among offline retail formats.
At Good World Commercial Plaza on East Third Ring Road, although the ground floor entrance shops are unoccupied, it is crowded with three convenience stores: 7-ELEVEn, Quanshi, and Lawson, with the first two even facing each other only 10 meters apart, seemingly in a competitive stance.
People are willing to buy a barrel of oil, a bag of rice, a piece of clothing, or a washing machine online, but it's hard to consume a bottle of water, a pack of tissues, or a pack of gum (of course, e-commerce won't ship a single 2-yuan lollipop). Usually, people don't include such daily necessities in their shopping plans and wait for 'half-day delivery' or 'next-day delivery'; they prefer to rush out of the house and complete immediate consumption nearby. This is the opportunity for convenience stores.
Data from the China Chain Store & Franchise Association shows that in 2013, department store sales grew by 9.6%, hypermarkets and supermarkets by 8.7%, while sales of major convenience store companies increased by 18.2% year-on-year, making it the fastest-growing retail format in China. Another report from Kantar shows that in 2015, the hypermarket format in key cities in China experienced negative growth for the first time, with both Walmart and Carrefour's market shares declining by 0.4% year-on-year. In contrast, convenience stores' national market share increased by 0.4%.
Convenience stores have gradually been shrouded in a magical aura. Carrefour, which is not doing well in hypermarkets, began experimenting with a convenience store called 'easy Carrefour.' After integrating Tesco, China Resources Vanguard launched 'Tesco Express' convenience supermarkets this year. Toshifumi Suzuki, founder of 7-ELEVEn Japan, resigned in early April due to a conflict with the group's major shareholder, hedge fund Third Point. One of the disagreements was that Suzuki wanted to continue managing the group's Ito-Yokado hypermarket business, while Third Point suggested the group focus on the more promising convenience store business.
Local small and medium-sized enterprises are also full of imagination about convenience stores. The domestic retail industry organizes exchange meetings every year, allowing executives from representative companies to share their business philosophies and experiences. In the past two or three years, sharing sessions by convenience store executives have been the most popular. Attendees sometimes have to sit in the aisles to listen to the entire sharing, and sometimes are even squeezed out the door, only able to stand on tiptoes to see the edges of the PPT slides.
Among the audience eager to gain convenience store knowledge are also owners of small grocery stores and general stores in Beijing. However, from a practical perspective, if they want to franchise a convenience store brand, the most well-known 7-ELEVEn and Lawson are not the easiest or most convenient choices.
Yuan Lang gave up franchising 7-ELEVEn after consideration. He runs a small store of several dozen square meters in a high-end residential area in Chaoyang District, Beijing, selling snacks, drinks, and daily necessities. If there is a difference between this traditional community grocery store and a modern convenience store, it is that the latter has self-developed products, freshly made food, and the cold chain logistics capability to deliver them to each store daily.
In the convenience store business model, private brands play a key role. Ready-to-eat bento boxes not only bring in customer traffic but also increase differentiation, thereby boosting profits. Conversely, homogenization is a business risk that convenience stores easily encounter.
Yuan Lang knows that to upgrade his small store, he needs differentiation, but this requires the support of a well-funded, well-regulated large company, not something a single small store can accomplish. He doesn't like 7-ELEVEn's strict control over franchisees, and besides, it has only 3 franchise stores so far, seemingly dissatisfied with the existing locations of applicants.
Although it has been in Beijing for 12 years, 7-ELEVEn's franchise stores in Beijing are mainly commission-based franchises. In this model, the brand prepares the store itself and, after it reaches a profit point, hands it over to the franchisee. Strictly screened franchisees not only have to accept home visits from 7-ELEVEn, understand family opinions, and personally participate in store operations, but also have to work as trial employees in existing stores for a day or two to confirm they are up to the hard work.
7-ELEVEn believes this approach can ensure store quality and profitability in the immature Beijing market, but it also results in high costs and slow expansion. Many small store owners who are interested in franchising are thus turned away.
Another point that makes franchisees hesitant is that in the commission-based franchise model, 7-ELEVEn takes at least 50% of the store's profits. 'Many franchisees choose us after listening to 7-ELEVEn's briefing. They say that if they franchise 7-ELEVEn, it's like working for 7-ELEVEn with their own money,' an employee from Quanshi's franchising department told CBNweekly. In Beijing, Quanshi and 7-ELEVEn always have some similar products and stores close to each other, making them seem somewhat confrontational. On Quanshi's official website, under 'Company News,' there is an article published last July with the title 'Don't Forget the National Humiliation' and 'Carry Forward the Spirit of the Anti-Japanese War.'
Yuan Lang eventually hung the red-and-yellow sign of Quanshi on his small store. This local brand opened franchise opportunities in 2015, allowing franchisees to choose and rent their own locations. After approval, they sign a contract, and the brand provides store decoration design, products, employee training, and daily operational guidance, with the franchisee bearing all profits and losses.
Yuan Lang finally got what he wanted. After franchising, he would proudly talk about how fresh the oden next to the cash register was, and how delicious a certain boxed milk from Quanshi was—these products attracted more customers, and sales rose accordingly.
For Quanshi, this is also a model that allows it to monetize quickly. Franchisees pay an annual franchise fee and management fee to the brand, which brings more stable income than commission-based franchising. Since opening franchise opportunities in 2015, Quanshi's stores in Beijing have nearly doubled, surpassing 7-ELEVEn to become the largest branded convenience store in Beijing.
In Beijing, two other convenience store brands, Haolinju and Lianhua Quick, have also adopted this approach.
'The ultimate direction of convenience stores is franchising; it's an inevitable trend,' Yang Bo said. He said this to CBNweekly on a morning in mid-March. Quanshi, in a period of rapid expansion, is hiring a large number of employees. At 10:30 that day, from the elevator outside the company to the lobby inside, applicants filled the space, filling out forms and chatting with each other.
Yang Bo still remembers how he snatched a desirable store location from a competitor three years ago. At that time, an agency released a listing for a shop at the entrance of a high-end residential area in Beijing. For convenience stores, a good location is half the battle for profitability. But unfortunately, another convenience store also liked the location and had already contacted the landlord first.
On that rainy evening, Yang Bo waited in a small eatery across the street from the residential area, watching through the heavy rain as the other party's negotiator walked out of the store across the street, seemingly needing to go back to the company for some procedures. He quickly rushed across the street in the rain, running until 'even his leather shoes came apart,' paid the deposit on the spot, and signed the lease.
#Convenience Stores in Continuous Expansion
But now, as convenience stores enter a leap-forward era, the business rules of this industry are no longer as effective—or rather, some unfamiliar new players have changed the original rules. For example, location seems to have become less important.
According to traditional convenience store location thinking, Shao Ming's grocery store doesn't have a good location. It is at the outermost edge of the residential area, facing a road that is always congested, with a wall opposite. This small store, open for seven years, is a typical 'Beijing specialty' grocery store: narrow aisles, dim lighting, and products—the kind you see everywhere.
The turning point that doubled this small store's revenue came in the winter of 2014, when an internet company named Xianfeng found him. Xianfeng replaced Shao Ming's store sign with a bright yellow 'Xianfeng' logo and equipped the store with refrigerators, shopping bags, and price tags in a matching style.
Xianfeng supplies the small store with meat, eggs, fruits, vegetables, mid-to-high-end snacks, and Xianfeng's private brand dairy products and braised snacks.
From then on, from 8 a.m. to midnight, Shao Ming's phone constantly receives orders from the Xianfeng platform. He skillfully navigates the slightly cluttered shelves to pick goods and delivers them to nearby residential areas and office buildings within an hour. These orders, with an average ticket price of over 30 yuan, number nearly a hundred per day, forcing Shao Ming to hire two additional male employees dedicated to delivery.
Zhang Ying founded Xianfeng in 2014. Since it initially allied with community stores using braised duck necks and other snacks, he was portrayed as a 'promising young man who studied abroad, worked in foreign companies, and finally chose to sell duck necks online.' He told CBNweekly that people now prefer to swipe their screens to buy food for the day. 'They demand anytime, anywhere; they want to eat when they want to eat.'
According to data provided by Xianfeng, it has partnered with 12,000 stores in 16 Chinese cities, including over a thousand in Beijing, with the highest density of 3 to 4 stores within one kilometer.
Zhang Ying said that the model of cooperation between Xianfeng and community small stores 'utilizes the convenience stores' geographical location, storage space, and idle delivery capacity.' This can also be translated as: some internet companies are integrating the resources of community small stores scattered across cities, including time and space resources, to solve the 'last mile' problem that plagues the delivery industry.
Xianfeng is not the only one thinking this way. As early as the beginning of last year, more than a dozen other O2O startups approached Shao Ming to discuss cooperation. While e-commerce is eroding traditional retail market share, it is allying with convenience stores.
JD.com found Tangjiu convenience stores in Shanxi. Consumers in Taiyuan can order on JD.com, and the nearest Tangjiu store can deliver to their door (interested readers can click on 'Taiyuan Street Battle'). Alibaba has signed up 40,000 convenience stores and small grocery stores near residential areas across the country as its 'Cainiao Post Stations.' In addition to facilitating self-pickup, it also tries to bring products from partner brands to these stations, allowing people to come into contact with them and scan to pay at these extensive offline points.
Quanshi and Lawson have joined Baidu and Meituan's delivery platforms. Although it remains unknown whether these partnerships can bring higher sales to convenience stores, Miyashita believes it can increase the company's brand effect among online shoppers.
Capital, which has always had a keen sense, has also begun to touch this format as the 'survivor of offline retail.' In 2012, Morgan Stanley acquired 72% of Haolinju's shares for 100 million yuan; Xianfeng raised $70 million in its Series C round, with previous investors including Sequoia Capital, Hillhouse Capital, and Tian Tu Capital; Sequoia Capital also invested in Today, which is seeking opportunities in Central China; this convenience store had previously received investment from Mengniu founder Niu Gensheng.
But be careful: in the internet field accompanied by bubbles, convenience stores that receive investment favor are by no means a safe zone.
#Convenience Stores Also Have Risks
Some people may be optimistic about the convenience store industry because of data from the China Chain Store & Franchise Association—in 2014, national convenience store sales increased by 25.12% year-on-year, and the number of stores increased by 21.96%. But these two numbers, too close, also indicate that the industry's performance growth is more due to an increase in the number of stores rather than an increase in per-store sales.
Fresh food such as bento boxes, boxed meals, salads, and rice balls remains a constraint for some branded convenience stores. These products, crucial for attracting customer traffic, account for 34% and 18% of sales in convenience stores in Japan and Taiwan, respectively, but only 7% in mainland China.
The creation of a fresh food product requires not only a dedicated team within the brand to develop it based on customer preferences and the market, but also finding reliable suppliers. In more mature convenience store markets like Shanghai and Guangdong, branded convenience stores often find exclusive partner manufacturers. Shanghai Pianjiang Food Co., Ltd., which OEMs rice products for Lawson in Shanghai, updates four bento boxes, one sushi, and one rice ball for Lawson every month. To support the entire Shanghai supply, Pianjiang purchased a bento machine costing 700,000 yuan, a triangular rice ball machine costing 560,000 yuan, and a long roll sushi machine costing 1 million yuan. In 2013, when the song 'Eating Fried Chicken in People's Square' went viral online, both R&D teams immediately incorporated fried chicken into new bento products.
But in pioneering markets like Beijing, it's hard for brands to find OEMs willing to cooperate and invest heavily, and even harder to find exclusive partners—when 7-ELEVEn first arrived in Beijing in 2004, there wasn't even an OEM capable of such business in Beijing.
In Beijing, everything is just starting. OEMs that have noticed the demand for fresh food in convenience stores are increasing, and some fast-food suppliers have begun developing fresh food products that are easy to transport, have a long shelf life, and are balanced in meat, vegetables, and nutrition.
At the beginning of this year, Zhao Lei and her employees began visiting residential areas across Beijing to sign up stores. She founded a company called 'Weibianli' that acts as an agent for a brand that can make frozen bento boxes, emphasizing easy storage and on-site processing for sale. During a one-month trial period, 400 community stores in Chaoyang District signed contracts with Weibianli. 'When we mentioned this meal, all of them (small store owners) had bright eyes. Previously, they were mom-and-pop stores without the conditions to sell meals,' Zhao Lei said. In the future, she wants to export more fashionable products from branded convenience stores to these community stores. She told CBNweekly that if she can form stable cooperative relationships with these small stores, she would effectively push the products she represents to the sales points closest to consumers' lives.
However, having most stores sell the same fresh food products is not the best choice. If you carefully look at the fresh food product labels of different convenience stores gathered on the same street in Beijing, you'll find that some come from the same OEM, and some, even with different convenience store logos, have the same production address.
It seems that the growth rate of OEMs capable of producing fresh food has not kept up with the development speed of Beijing's convenience store brands. This has led convenience stores, which should use fresh food to differentiate, to become homogenized again.
The risks of the leap-forward era are not limited to homogenization.
Compared to hypermarkets and supermarkets, convenience stores located in crowded areas need to bear higher rent and store maintenance costs. Unlike the former, which charge suppliers entry fees and display fees as a revenue model, convenience stores buy products outright from suppliers and then handle promotion and sales themselves.
For convenience stores with an average area of about 100 square meters but possibly up to 2,000 product types, profitability requires more accurate prediction of which products will be popular and more skill in using clever shelf placement to stimulate impulse purchases.
This is also why Japanese convenience stores expand slowly, but their store operations and product management capabilities are still held in high regard.
Zhao Lei attended a sharing session for the convenience store industry. She remembers representatives from 7-ELEVEn, Lawson, and FamilyMart speaking passionately on stage, while the audience was local convenience store operators with hidden ambitions. 'Maybe they talked about five steps, but what we are doing now is still at the first step. We haven't started from customer needs, and many details are overlooked.' She believes that in terms of awareness, local peers have a clear gap with their Japanese predecessors. She still keeps the admission pass for that event in her office.
Gong Yinquan, general manager of Duiyin Lean Retail Management Consulting, has worked with former 7-ELEVEn Japan executive director Usui Makoto. He recently started a WeChat group with many operators of local convenience stores, supermarkets, vertical specialty stores, and e-commerce. Every night, people discuss the operational management experience of companies like 7-ELEVEn.
Gong Yinquan believes that most local convenience stores have only learned the external appearance of Japanese brands and are still in the stage of 'similar in form but not in spirit.' He doubts how many operators will ultimately be willing to invest tens of millions of yuan and several years in doing the boring basic work.
Like any new format in China, compared to solid and slow basic skills, latecomers in the convenience store industry prefer to quickly see scale effects.
Impatient convenience stores have already had problems. This year's March 15, Quanshi and Haolinju were found selling expired oden. Local convenience stores rapidly expanded through open franchising, but they seem unprepared to manage so many stores. 'Chinese small store owners don't do business by the book. Opening franchising is like opening Pandora's box; once you open it, it's hard to stop,' said a convenience store practitioner.
Quanshi quickly made improvements. It suspended franchising in March and is considering adjusting the cooperation model with franchisees. During the past year of crazy expansion, some of its franchise stores looked old and dimly lit, and now it wants to improve these details step by step.
Also in March 2016, a new Linjia convenience store opened in a residential area on East Fourth Ring Road in Beijing. Within a three-minute walk, there is already a Quanshi, and in the same residential area, there is also a Haolinju, a Zhengtai Youxian under CP Group, and a 7-ELEVEn. This new store uses wooden floors and wooden shelves, and offers services like laundry and free mobile phone charging, looking more high-end and refined than existing convenience stores in Beijing. Unlike Shanghai convenience stores, where staff rarely recommend products, this store's staff introduce the fresh bread to customers—although you can also see this bread in other branded convenience stores.
You could say 2016 is the 'first year' of Beijing's convenience store market, or that this market has finally entered the leap-forward era. Convenience stores are like the capillaries of a city, adjusting the daily consumption experience of urban residents to a comfortable level—whether Beijing will become the second Shanghai remains to be seen, but the premise is that convenience stores need to run steadily.
(At the request of interviewees, Pan Longfei, Yuan Lang, and Shao Ming are pseudonyms.)
Huang Hanyu
To write this article, she really rode a convertible tricycle to deliver goods. She said that if she ever opens a convenience store, if you can recite a sentence from this article, she'll give you a 30% discount.