Source: Commercial Real Estate Observation (ID: sydcgc) Author: Guan Sir

Warehouse club supermarkets, which have only just gained a foothold in the domestic market over the past two years, are now embroiled in fierce competition.

In late October, Carrefour's first membership store in China officially opened in Shanghai.

On the night of the opening, an irate Carrefour Membership Store posted what was essentially a letter of complaint on its official Weibo account, accusing competitors of pressuring suppliers to "choose one or the other" and buying out Carrefour's membership store products, leaving many members unable to make purchases. This tore away the veil of industry infighting in public.

The Carrefour membership store apology letter incident appears to be a battle between individual warehouse club supermarkets, but in reality, it reflects the struggle of large supermarkets to secure a second growth curve amid industry crisis.

However, given the current situation, some supermarkets' warehouse stores have not yet achieved significant profitability and are already caught in fierce competition. Can this second curve really save the core supermarket business?

The "Choose One or the Other" Incident: Each Side Has Its Own Story

According to China's Anti-Monopoly Law, once an enterprise is confirmed to have engaged in monopolistic agreements such as "choose one or the other," it not only faces brand and reputation damage but also hefty fines ranging from 1% to 10% of its previous year's sales.

Since the end of last year, several leading internet companies have been fined billions or even tens of billions of yuan for suspected monopolistic practices like "choose one or the other."

Carrefour's choice to accuse competitors of "choose one or the other" shows how damaging such an accusation can be.

"Since the first store opened in October last year, Hema X Membership Store has encountered similar situations. At the opening of our first store, we faced a situation where a small number of suppliers bought out our products. Additionally, in cities outside Shanghai, some suppliers, under pressure, stopped cooperating with Hema X Membership Store."

Following Carrefour's declaration, Hema X Membership Store also joined the fray. Its general manager, Chang Yin, stated in an interview that Hema X and Carrefour membership stores would maintain close communication at the procurement level and work together to resolve the current "choose one or the other" situation.

Although Carrefour's apology letter and Hema's remarks did not directly name the competitor implementing "choose one or the other," many online have pointed fingers at one of the leading warehouse clubs, Sam's Club, noting that this is not the first time it has been involved in such issues.

Reports indicate that in 2015, when Wumart's Shangjia Membership Store opened, it encountered similar competitive tactics from Sam's Club.

In response to the joint accusations, Sam's Club issued a statement on Weibo: "Sam's Club has always operated in China in compliance with legal and regulatory principles. Upon learning of this rumor, we immediately launched an internal review. To date, we have found no issues as raised by the parties involved."

In the statement, Sam's Club not only denied involvement in "choose one or the other" but also called on "enterprises to focus on developing their own characteristics and continuously innovate in products and services. This is the foundation for the healthy development of the entire industry.

Simple product replication and homogeneous competition truly harm consumer interests," implying that Carrefour, Hema, and other brands' membership stores are copying and plagiarizing its products.

Sam's argument has its supporters. Some point out that from store size and interior design to in-store tasting areas and product selection (from local to imported), some players are imitating Sam's at a "pixel level."

Articles have also surfaced quoting Hema CEO's earlier remarks about "copy, operate, surpass," suggesting plagiarism issues.

Costco's First China Store Sparks Industry Potential

Currently, the war of words among Carrefour Membership Store, Hema X Membership Store, and Sam's Club has not reached a final conclusion, but it is clear that warehouse clubs, which have been in the domestic market for over 20 years, are entering another phase of intense competition.

The first wave of intense competition in domestic warehouse clubs occurred in the 1990s.

At that time, a large number of overseas retail enterprises entered China, bringing Sam's Club, Metro, Makro, and PriceSmart, among others, to compete.

However, due to limited income levels at the time, Chinese consumers did not accept the warehouse club model that required additional membership fees. As a result, these warehouse clubs did not develop smoothly in China. Except for Sam's Club, others were either acquired, transformed into supermarkets, or exited the Chinese market.

Even Sam's Club, which survived, had to endure a long period of market education. From 1996 to 2011, it opened only six stores and frequently faced rumors of closures, with its prospects long viewed pessimistically.

In recent years, however, the development of warehouse clubs has taken a turn for the better. Especially in 2019, Costco, the largest membership warehouse chain in the U.S., chose to open its first mainland China store.

On the opening day, the store attracted a large number of consumers, and business was so brisk that it had to close within half a day due to being bought out. Subsequently, within just 37 days, Costco gained 200,000 members, with membership fee revenue nearing 60 million yuan.

Costco's popularity drew more consumer attention to the warehouse club model, greatly benefiting the development of domestic warehouse clubs.

Since then, not only have new players like Hema X Membership Store, fudi Warehouse Club, Yonghui Warehouse Supermarket, and Carrefour Membership Store entered the warehouse club track, but established players like Sam's Club and Costco have also embarked on new expansion plans.

For example, Sam's Club opened its 34th store in Shanghai this September, which is also the world's largest Sam's Club and its first flagship store in China. It is expected that by the end of 2022, Sam's will have 40-45 stores open or under construction in China.

Warehouse clubs are once again in fierce competition.

Innovation and Differentiation: Shouldering the Banner of Supermarket Transformation

Once upon a time, the warehouse club model, which required paying a membership fee before shopping, was heavily criticized by Chinese consumers. Why has this model suddenly become a hot commodity in the market, sought after by numerous retail players?

In fact, the popularity of warehouse clubs among players is closely related to the transformation of domestic supermarkets.

In recent years, due to the rapid development of emerging channels such as e-commerce and community group buying, as well as challenges brought by the pandemic, traditional supermarkets have suffered huge impacts, with declining performance.

Take Walmart, which entered the Chinese market in 1996, as an example. According to relevant data, from 2016 to 2020, Walmart China closed more than 80 stores. Carrefour, which entered China a year earlier than Walmart, had to sell its China business to Suning in 2019 due to poor performance.

Amid declining performance, traditional supermarkets urgently need to find new growth curves. The currently booming warehouse club track is one of the few new options for supermarkets.

Because warehouse stores are highly anticipated, supermarkets are fiercely competing for related resources. Especially for some new players other than Sam's Club and Costco, due to a lack of prior experience in the warehouse club sector, replicating and competing for existing mature players' models and supply chains seems inevitable.

However, replication, imitation, and homogeneous competition are not conducive to the long-term development of the warehouse club format. They will not only reduce members' expectations for store visits and cause aesthetic fatigue but also intensify competition among enterprises, reduce profits, and increase burdens.

Therefore, for long-term development, warehouse clubs need to create differentiated selling points and engage in differentiated competition.

Currently, some membership stores, including Sam's Club, Carrefour Membership Store, and Hema X Membership Store, have launched private brand plans to create differentiated selling points, such as Sam's Member's Mark and Hema X's "Hema MAX."

In the design, production, and promotion of private brand products, membership stores will have deep involvement, so the products produced can better reflect the brand's own characteristics.

However, due to insufficient innovation investment, some membership stores' private brands are superficial and show a trend of similarity. For example, popular products that made Sam's famous, such as Swiss rolls, roast chicken, mochi bread, and croissants, can now be seen in similar forms at some other warehouse clubs.

It is thus clear that to create true differentiation and form core competitiveness, warehouse clubs need to increase investment in innovation.

Only by starting from the diverse needs of member consumers, providing quality, distinctive products and better services, can warehouse clubs go further, boost performance, and truly shoulder the banner of supermarket transformation.

*Image source: Internet

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