First-tier cities remain under pressure Looking back three years ago, signs of improvement in convenience stores were playing out in cities across China. Multiple operators in second- and third-tier cities had shared their operating data with the author, saying, "2021 was better than 2020, especially in lower-tier markets. Over the past four to five years, sales have maintained annual growth of over 10%." Fast forward to the end of 2023, when the author again checked in with several regional operators, many said their performance was not as good as three years earlier. "In the convenience store industry, although scale is growing, everyone is under tremendous operating pressure," Tao Ye, who currently focuses on convenience store investment, told the author. In terms of scale, the total number of convenience stores in China grew from 132,000 in 2019 to 253,000 in 2021, and to 300,000 in 2023. In the past year alone, 13,000 new stores were opened. According to the China Chain Store & Franchise Association's statistics on the 2023 operations of 59 convenience store sample companies, these companies opened 13,148 new stores and closed 4,076, resulting in a net increase of 9,072 stores. Among them, sample companies with more than 1,500 stores added nearly 7,000 net new stores, accounting for nearly 80% of the net increase. In 2023, 52.5% of the sample convenience store companies saw year-on-year growth in net profit, 32.2% saw a decline, and 15.3% remained flat. Although profitability was better than in 2022, companies with declining profits still faced significant pressure, with nearly 70% of these companies experiencing a "double decline" in both customer traffic and comparable store sales. "The operating pressure on convenience stores in first-tier cities cannot be ignored, mainly due to a shrinking customer base, especially in Beijing and Shanghai," Tao Ye said. In his view, the external causes of high operating pressure include economic restructuring and the loss of a large number of employed people, leading to a reduction in the customer base. Under the influence of the macro environment, the entire industry atmosphere has changed. In recent years, from the decline of the real estate industry to the downturn of the education and training sector, and then to layoffs in major internet companies, these have all led to the mobility of young employed people and the disappearance of white-collar workers, which inevitably affects convenience store foot traffic. Many factors are causing young people to disappear from first-tier cities. This has quickly become apparent in the convenience store industry, which serves as a barometer of the urban economy. Taking Beijing as an example, in late September last year, Bianlifeng, which had always focused on a direct-operated model, began opening franchising to reduce headquarters investment pressure. In 2022, factors such as store closures, suspensions, and shortened business hours put a pause on Bianlifeng's rapid development. As a result, in March 2023, Bianlifeng launched a "hibernation plan" to adjust stores with weak service capabilities and low consumer demand, and the number of closed stores once exceeded 700. Going back to February 2017, Bianlifeng was founded with its base in Beijing. In Beijing, known as a "convenience store desert," Bianlifeng grew rapidly, surpassing 100 stores in just one year, and within less than four years, its Beijing stores surpassed the three major Japanese convenience store chains and the local brand Haolinju. According to its plan, by 2023, Bianlifeng would reach 10,000 stores and rank among the top five convenience store chains in China. Unfortunately, due to a combination of external and internal factors, Bianlifeng did not achieve its goal. "Operating costs in first-tier cities remain high, which is also one of the factors leading to operating pressure. In the Beijing region, some companies' sales last year still lagged significantly behind 2019 and have not yet recovered to 2019 levels," Tao Ye told the author. "Looking at the overall industry performance, second-tier cities, including some provincial capitals, are still maintaining growth." "Including the more down-market third-tier cities we invest in, some companies are growing relatively fast overall, with growth of about 30% to 50%," Tao Ye said. How does down-market convenience store differ from first-tier? Due to factors such as geographical location, climate conditions, economic development, and consumption habits, the development of convenience stores varies greatly across cities. From a national perspective, due to persistently high rents and labor costs in first-tier cities and a significant loss of consumer groups, convenience stores face unprecedented operating pressure. However, with the continuous improvement of consumption levels in second- and third-tier cities, there is considerable room for development in the convenience store market. In Tao Ye's view, when consumers in second- and third-tier markets enter convenience stores, their choices in category structure are not much different from those in first-tier cities. For example, in Hefei's Linji Convenience Store and Nanchang's Ledoujia, the proportion of low-temperature and fresh food is relatively high. "Another example is Inner Mongolia, where winters are cold and foot traffic is low, but at Anda Convenience Store operating there, the growth in low-temperature and fresh food was also significant last year. So, although convenience stores in different cities may seem different in category presentation and sales structure, fundamentally, they are very similar," Tao Ye said. In his view, the core differences between convenience stores in first-tier cities and second- and third-tier cities mainly lie in three aspects: First, customer traffic density. In prefecture-level cities, there are basically no business districts like those in large first-tier cities, such as Beijing's Guomao or Wangjing, where large numbers of office workers gather. In second- and third-tier cities, young customers are mainly dispersed in residential and commercial areas, presenting a mixed living state. In comparison, customer traffic density will differ. In first-tier cities, it is normal for a single store to have around 1,000 customers, but in down-market areas, a store with 300 customers is considered slightly better. From this perspective, with a lower customer base, there will certainly be differences in sales structure, but customers still enter the store with a "convenience" mindset, and their choices are the same. Second, in down-market areas, young people do not regard convenience stores as a solution for their work meals. In contrast, for young people in large first-tier and first-tier cities, convenience stores have become an important solution for work meals, and this is certain. "In first-tier cities, breakfast and lunch are the busiest times for convenience stores, while in down-market areas, young people are more likely to buy a bottle of drink, yogurt, or chocolate, which is also a platform for young people to find a 'little happiness' or 'small but certain fortune.' Or they might drop by during afternoon tea time or after school," Tao Ye explained. At the same time, young consumers in down-market areas also value quality "little happiness." For example, if there are two convenience stores in the same county town, one with better quality and more fashionable products, with more fresh and low-temperature items, and the other with abundant but cheap products, mainly dry goods and many generic brands, customers will still choose the first store with quality. "In down-market areas, young consumers entering convenience stores are still willing to seek a relatively good life experience and 'little happiness,'" Tao Ye said. Third, price differences. Consumers in first-tier cities have higher incomes and are less sensitive to product prices, while those in lower-tier cities have relatively lower incomes and are more price-sensitive. "For example, in snacks, in large first-tier or first-tier cities, products priced at 20 or 30 yuan can sell well, but in lower-tier cities, products priced above 15 yuan are harder to sell," Tao Ye said. Currently, driven by the search for new growth and policy guidance, going down-market has become unstoppable. Going down-market is easy, but survival is not Fifty-six years ago, China's first 24-hour convenience store, Xinghuo Day and Night Store, opened in Shanghai. Since then, this small retail format has spread across the Chinese market like a spark. Over the past 50 years, convenience stores have almost always flourished in high-tier cities, rarely venturing into lower-tier cities. Now, to find new growth, going down-market has become a consensus among many convenience store brands. Coupled with policy guidance in recent years, many convenience store brands have already embarked on the path of going down-market, and even further down. Brands such as Lawson, 7-Eleven, FamilyMart, and Bianlifeng are moving into third- and fourth-tier cities and even county-level cities. Relying on the gas stations of PetroChina and Sinopec, Yijie and Kunlun Haoke are spread across cities of all sizes in China. Of course, they can be seen in gas stations both in downtown Shanghai and in mountainous Guizhou, so going down-market is not significant for them. But Japanese and some local convenience store brands are particularly eager to move to lower-tier cities. For example, Lawson's store count in China surpassed FamilyMart for the first time in 2020. In the past two years, new stores have frequently appeared in down-market areas. For Japanese convenience store brands that have long been stationed in first-tier cities, moving to lower-tier cities is both a way to tap into new growth and a response to increasing profit pressure and operating cost pressure. "The real challenge convenience stores face today is how to go down-market, from business districts to urban areas, from provincial capitals to county areas, and how to adapt and survive in the down-market environment," Tao Ye said. He believes that the essence of adapting to the down-market environment is operational management, and the hidden skill or capability behind this is digital operation capability. Tao Ye said that the further down you go, the farther the management endpoints you need to reach, and the stronger the digital management capability required. In addition, localization is an unavoidable challenge. Although the market space in lower-tier cities is large, it does not mean convenience stores can rush in and claim territory arbitrarily. They face a common "enemy"—mom-and-pop stores. According to survey report data, mom-and-pop stores in down-market areas account for 75% of the total number of such stores nationwide. For convenience stores to enter down-market areas, they will inevitably compete with mom-and-pop stores. In first-tier cities, for many people, the mention of convenience stores immediately brings to mind fresh food categories such as oden and bento boxes. Because of the fast pace of city life, many young people choose to solve their breakfast and lunch at convenience stores. However, for most small-town youth, the pace of life is relatively slow, and eating at home is common, so low-temperature fresh food in convenience stores naturally lacks appeal. They prefer foods with local characteristics or familiar tastes, such as the baozi and braised foods that mom-and-pop stores have sold for years. Back then, when Today Convenience Store entered the Hunan market, it experienced a large number of store closures shortly after, partly because there were too many specialty snack shops in Hunan. These snack shops were extremely competitive, and the sales of four or five convenience stores combined could not match that of one such shop. Therefore, for convenience store companies, going down-market is not the challenge; how to adapt and survive locally is the real challenge. Furthermore, in Tao Ye's view, although low prices currently envelop the entire retail industry, the chain convenience store format has not shown obvious low-price competition. He gave an example: if a new store opens across from a convenience store and the convenience store shows no reaction, then that convenience store is not far from closing. Using promotional activities to stimulate customer attention and purchase desire is normal, but the essence of competition is not to succeed by lowering prices. "I have repeatedly said on various occasions that the ultimate form of retail is discounting, but this 'discount' does not necessarily mean discount stores," Tao Ye explained. Business operators need to control channels and products themselves, rather than relying on distributors. Some supermarkets currently face their biggest problem here—they do not truly operate the products themselves but leave it to distributors and dealers, while they only handle product selection and store sales. Therefore, in today's face of market changes, many companies cannot respond to the market environment. Similarly, for convenience stores to succeed, they must also achieve this "ultimate discount." "Currently, after the ordeal of the pandemic, convenience store operators have become much more rational. Everyone knows the few knives for operating a convenience store well. Whether they can have the last laugh mainly depends on whether the team can be trained, and whether they can be faster and better than others. The road ahead mainly relies on diligence, intelligence, and persistence," Tao Ye said with a smile.