External pressures from e-commerce and group buying have overwhelmed traditional supermarkets like hypermarkets, exposing their outdated profit models and product selection management. How can offline retail, caught in massive commercial inertia, avoid becoming a giant ship hitting an iceberg?
On March 31, Carrefour's store in Zhongguancun, Beijing, officially closed its doors.
This Carrefour hypermarket, which had operated for 18 years and covered 32,000 square meters, was once Carrefour's largest flagship store in Asia. Consumers vaguely remember the grand opening in 2004, saying, "At that time, people visited it like a tourist attraction..." "Shopping at Carrefour was like strolling down the street..."
A reporter from Caijing visited this superstore before its closure, when most fresh produce and frozen food counters were already empty, and some packaged food, beverages, and daily necessities were awaiting final clearance. A banner in the mall read, "Carrefour looks forward to meeting you in the future," but no one knew when that future would be.
An employee at the checkout counter told Caijing that they had been informed the store would be upgraded along with the Zhongguancun Plaza. Employees were unclear what the renovation meant or whether the store would reopen. "We all heard it's like other stores—can't afford the rent anymore."
The closure of Carrefour Zhongguancun is not an isolated case. In recent years, well-known hypermarket brands have been closing stores one after another.
South Korea's Lotte Mart, Spain's Dia, France's Auchan, and the UK's Tesco have exited the Chinese market. Thailand's Lotus has massively closed stores in China and delisted from Hong Kong. Chinese local supermarket brand Hoyo has closed stores consecutively. Carrefour and Metro, with no improvement in their China business, have been taken over by Suning and Wumart. In recent years, Carrefour and Walmart have also been forced to close stores continuously... The traditional supermarket format, represented by the hypermarket model, seems to have reached the edge of a cliff.
Many retail industry insiders told Caijing that the generally extensive management methods of traditional department stores and supermarkets, including hypermarkets, no longer work. The dividend period when occupying a prime location and hiring a good store manager could guarantee profits is long gone.
External pressures from comprehensive e-commerce, fresh food e-commerce, and community group buying have crushed the former advantages of traditional supermarkets. The backwardness of their internal profit models and product selection management has also been exposed one by one.
The decline of hypermarkets has even changed the urban commercial landscape. In the past, a hypermarket like Carrefour or Walmart often became the community commercial center within a radius of several kilometers, and even "free shuttle buses" to various residential areas were once standard for hypermarkets.
Today, various small convenience stores and community fresh food stores have divided the customer flow of hypermarkets, changing the "centralized" commercial layout into a "distributed" one.
Such changes have not only made hypermarkets difficult but also affected the surrounding businesses that depend on them.
More than a hundred shops attached to Carrefour Zhongguancun face closure. Photo by Ma Lin.
The Carrefour Zhongguancun hypermarket is located in the center of a vast underground commercial street, with over a hundred small shops selling clothing, shoes, hats, bed sheets, cookware, snacks, and restaurants nearby. With the end of Carrefour, these shops will also close. Some storefronts display signs like "Closing sale, selling at a loss."
Among these shops, a few have branches in other malls or department stores, and employees and stalls can move there. However, many others are independent operators running small single-store businesses. One woolen sweater shop owner told Caijing worriedly that they would close by March 31, but they had no idea where to go.
Retail expert Wan Mingzhi told Caijing, "It is an inevitable trend for traditional hypermarkets like Walmart and Carrefour to gradually exit the market, and this is already a consensus in the industry."
Wu Junsheng, founder of retail consulting agency Supermarket Help, has accumulated rich work experience in several supermarket companies. He believes that 2022 might be the year with the most concentrated closures of traditional supermarkets.
How can the traditional supermarket format, caught in massive commercial inertia, avoid becoming a giant ship hitting an iceberg?
The Collapse of Traditional Supermarkets
Traditional supermarkets include large comprehensive supermarkets commonly known as hypermarkets, as well as medium and small comprehensive supermarkets.
Hypermarkets generally cover an area of more than 6,000 square meters and sell fresh fruits and vegetables, packaged food and beverages, daily necessities, clothing, and household appliances.
Medium comprehensive supermarkets refer to those with an area of 2,000 to 6,000 square meters, while small comprehensive supermarkets are those below 2,000 square meters. Medium and small comprehensive supermarkets sell fewer products than hypermarkets, but their categories are similar.
Over the past decade, hypermarket formats such as Carrefour, Walmart, Jiajiayue, Renrenle, RT-Mart under Gaoxin Retail, and Rainbow have suffered the most severe impact and have declined significantly.
In 2012, with the rise of the O2O model (ordering online, fulfilling offline), hypermarkets began to suffer. In recent years, comprehensive e-commerce platforms have launched instant home delivery services for fresh produce and daily necessities. Fresh food e-commerce companies like Dingdong Maicai and Miss Fresh, which use the front-warehouse model, have also taken a significant share of supermarket sales.
Since 2020, community group buying, which rose due to the pandemic, has further intensified competition. In addition to the above reasons, various small and medium-sized supermarkets that have emerged around community needs have also diverted customer flow from hypermarkets.
At the beginning of 2022, Carrefour announced the closure of at least four stores nationwide, all of which were nearly 20 years old. In 2021, Carrefour closed at least 20 stores in China.
Just before the closure of the Carrefour Zhongguancun store, on February 24, a Walmart store in Guangzhou that had operated for nearly 20 years closed its doors. In 2021, Walmart closed more than 30 hypermarkets in China, and even its first store in China, located in Shenzhen, closed at the end of 2021.
The direct reason for most store closures is that leases have expired and they cannot afford the rent. Generally, store leases range from 10 to 20 years. Hypermarkets that have experienced the golden 20 years of the supermarket industry are now seeing their leases gradually expire.
A retail industry insider told Caijing that when renewing leases now, rent is at least three times higher, labor costs have increased four to five times compared to a decade ago, and sales are continuously declining, resulting in a situation where "old stores cannot afford to renew, and other supermarkets cannot afford to rent either." Although there are no authoritative statistics, reports of vacant commercial properties in some cities can be seen from time to time.
According to Wind statistics, since 2011, the growth rate of A-share listed supermarket companies has plummeted from over 15% in 2011, rebounded to some extent from 2016, and then fell to only 10% by 2020.
Chart source: Wind
The China Chain Store & Franchise Association's "2021 Supermarket Format Survey Report" shows that in 2021, 67.1% of supermarket companies saw a year-on-year decline in sales, 72.2% saw a decline in net profit, and 68.39% saw a decline in customer traffic.
From financial report data, Walmart's China operating profit and gross margin both declined in the fourth quarter ending January 2022. Its China sales grew nearly 27% in the fourth quarter, mainly driven by Sam's Club, a format different from traditional supermarkets. Retail industry insiders estimate that Walmart's traditional hypermarket business in China saw sales decline by 20%-30% in 2021.
Although some companies have not yet disclosed their full-year 2021 financial forecasts, their performance is equally dismal based on the latest disclosed data.
Carrefour, 80% of which was acquired by Suning, lost 770 million yuan in the first half of 2021. Gaoxin Retail, which operates RT-Mart, saw its net profit decline by 86% in the six months ending September 2021. If rental income were excluded, the decline would be even more severe.
Better Life saw revenue decline in the first three quarters of 2021; Rainbow Holdings was also unsatisfactory, with revenue growth in 2021 only because 2020 experienced a significant revenue drop, and the growth could not offset the decline.
Why Are Traditional Department Stores and Supermarkets Declining?
For consumers, the biggest attraction of traditional department stores and supermarkets, including hypermarkets, was their complete product range, allowing consumers to buy all items on their shopping list at once, with affordable prices and guaranteed quality.
However, with the prevalence of online consumption today, these advantages have been lost. Moreover, online platforms offer delivery services that physical stores do not.
The radiation capacity of hypermarkets has also weakened, especially in first- and second-tier cities. With economic development, cities often develop multiple commercial districts, each gathering abundant shopping malls, supermarkets, and other consumption venues. Now, the radiation range of a hypermarket has decreased from 3-5 kilometers to less than 1.5 kilometers. Traffic congestion has further reduced the radiation capacity, naturally leading to lower sales.
Various categories that supported hypermarket profits have also been diverted to other channels. In addition to fresh food, hypermarkets also sell daily necessities, home appliances, clothing, personal care, and cosmetics. These categories have all been diverted by online and offline stores with richer selections and more precise consumer profiles. The only high-frequency category left for hypermarkets is fresh food.
However, for traditional supermarkets, fresh food is just a traffic driver; the large number of standard products (goods with identical packaging, appearance, quality, and specifications that can be mass-produced in one go) sold in traditional supermarkets are the profit point. The decline in standard product sales has exacerbated the crisis for traditional supermarkets.
In recent years, hypermarkets have attempted self-rescue, with one reform direction being to adjust store size—closing large stores and opening small ones. Both Walmart and Carrefour have made such attempts. Currently, RT-Mart under Gaoxin Retail and Suning Carrefour after acquisition are still trying the small and medium supermarket model.
However, Wan Mingzhi believes that merely changing size is "changing the soup but not the medicine," as the profit model remains vague and cannot compete with e-commerce. The mediocre performance of listed small and medium supermarket companies is an example.
Another profit point for hypermarkets is collecting rent from surrounding shops. After transforming into small and medium supermarkets, they correspondingly lose this profit point.
For a long time, traditional hypermarkets and small and medium supermarkets have also charged a series of fees to suppliers, which is another profit model. In the fierce market competition, this profit model has become unsustainable.
Leveraging their market dominance, Walmart and Carrefour were the first to charge suppliers entry fees, shelf fees, display fees, and end-cap fees in the Chinese market. Chinese local supermarkets have basically followed this fee structure. These fees increase the costs borne by distributors by nearly 50%, making offline product prices uncompetitive compared to online, so consumers naturally shift to online.
This model of charging suppliers, brand owners, and manufacturers is also called the "upstream profit model." Regardless of whether products sell, fees are collected first, and unsold inventory is eventually returned to suppliers.
The counterpart to the "upstream profit model" is the "downstream profit model," also known as the buyer model. Currently, Sam's Club, Costco, and Aldi discount stores operating in the Chinese market all adopt the buyer model. They purchase goods from distributors and brand owners, do not charge entry fees or shelf fees, and are responsible for the sales of all products.
Supermarket brands adopting the buyer model tend to be more demanding and selective about products. Because they earn money from customers, not from distributors or brand owners, they must offer high cost-performance and the right products. The procurement system used by e-commerce platforms is also similar to the buyer model.
"If traditional supermarkets do not adopt the buyer model, they are just shelf managers and have no combat effectiveness against e-commerce, discount stores, and membership stores," Wan Mingzhi said.
Some local supermarket brands rely on local consumers' shopping habits and survive well, such as Sichuan Hongqi Chain, which operates community supermarkets of about 300 square meters.
However, Wan Mingzhi believes these supermarket companies are equally weak. "Whether a supermarket can survive has nothing to do with its size. If you want to sell more, you need to be bigger; if you sell less, you can be smaller. The key is whether your profit model is healthy."
Weak product strength and service capability are important reasons why traditional supermarket formats have been abandoned.
For the closure of the China Resources Vanguard supermarket on Zhichun Road in Beijing, many nearby residents were not surprised. This Vanguard supermarket covered several thousand square meters and radiated to at least ten surrounding residential areas, so it should have had sufficient customers.
But at the end of February 2022, like other traditional supermarkets, due to lease expiration and failure to negotiate rent, this store that had been open for more than ten years was forced to close.
A major customer base for community comprehensive supermarkets is nearby retired and older residents, while a considerable portion of young people's consumption has been taken online.
A retired resident who visited Vanguard almost every day said she felt the store's management was poor, citing examples like "rotten fruits mixed with good ones, and staff not sorting them in time" and "often hiding rotten fruits among good ones to sell them together."
For young people who also have offline consumption needs, this Vanguard store had the same problems as most traditional supermarkets: the product selection was simply unattractive, and even if young people visited, they could not find many desirable items.
What Kind of Supermarket Can Survive?
Physical retail still has vitality.
Offline supermarket stores can naturally radiate to surrounding communities and commercial districts, meaning offline traffic is cheaper than online. The offline model also offers convenience. Consumers need supermarkets as more humanized consumption places. The fact that convenience stores and community fresh food stores are doing well is an example.
Ren Xiaodong, founder of the New Channel Research Institute, told Caijing, "Offline retail physical traffic still accounts for 60% of total brand traffic, including large comprehensive supermarkets, small and medium supermarkets, convenience stores, restaurants, and stores of various categories."
E-commerce search-based traffic accounts for 20%-30% of total traffic. Recommendation-based traffic from live-streaming e-commerce, social e-commerce, and community e-commerce, which requires recommendations from anchors, celebrities, or community group leaders, accounts for 10%-15%. The rest is attention traffic from advertisements, brand names, and brand logos.
Although offline supermarket formats are being eroded by online, their online competitors are also in a stalemate. Dingdong Maicai and Miss Fresh are still losing money. After the subsidy war, various community group buying companies are either struggling to survive or have significantly contracted their businesses. Offline retail faces external pressure, but the crisis comes more from within.
Ren Xiaodong said that consumers' shopping habits have been irreversibly changed by major comprehensive e-commerce, social e-commerce, and live-streaming e-commerce, but the service capability of hypermarkets has not changed. The supermarket format needs to rethink every business element, adjust to a healthy profit model, emphasize product selection, and focus on efficient turnover.
First, supermarkets should shift from the entry fee model to the buyer model, take responsibility for products, establish cooperative relationships with suppliers, and jointly discuss product selling points, consumer segments, and marketing activities to generate sales. They should not choose a supplier just because the supplier has strong negotiation power or the procurement personnel have personal relationships with them.
Second, continue to integrate online and offline, and lay out in the channels where consumers usually shop.
The "2021 Supermarket Format Survey Report" shows that although many supermarket companies saw sales decline, 78.5% of companies saw online sales increase year-on-year. In 2022, the work priorities of supermarket companies include expanding omnichannel business, deep integration of online and offline, optimizing procurement channels, developing private label products, and digitalizing stores to improve efficiency.
From a format perspective, membership stores and discount stores that break the entry fee curse and reduce supplier payment cycles align with current consumption trends and are recognized by the retail industry as models and directions.
Membership store models represented by Costco and Sam's Club target families with cars and rely on membership fees for profit. Discount store models represented by Aldi meet consumers' demand for quality and affordable products, with profits mainly from bulk purchasing and small margins on high volume.
Chinese retailers also highly admire Japan's Don Quijote discount chain and believe its successful path can be borrowed.
Since 2021, Yonghui, Hualian, Jiajiayue, and Renrenle have all begun to try membership store and discount store models. However, several industry insiders said they are not optimistic about these hastily launched membership and discount stores, believing they are unlikely to truly gain momentum.
The reason is that these copycat membership and discount stores have not yet cultivated product strength comparable to Costco, Sam's Club, or Aldi; they are "similar in form but not in spirit."
Yonghui, which failed with the high-end supermarket "Super Species," is at the forefront of this wave of membership and discount stores. Industry opinions on Yonghui's attempts are mixed: on the one hand, Yonghui is indeed trying new formats, and its new stores have welcomed long-lost consumer traffic; but because its product selection is still not unique, its long-term development capability remains to be seen.
Wan Mingzhi said that although Yonghui is doing membership stores, because it is difficult to charge membership fees, it is actually a discount store.
At present, Hema Fresh may be the supermarket brand that has discarded the most traditional supermarket ills and has the greatest growth potential. Hema adopts the buyer model, does not charge entry fees or end-cap fees, and its membership stores have real members. In product selection, Hema's standards are stricter, catering to young people, and it only looks at brand sales volume, making it a testing ground for many emerging brands.
Hema particularly emphasizes aesthetics, at least forming a consistent product selection style. If the food packaging is too rustic, even if the taste is good, it is hard to be selected.
However, since opening its first store in 2016, Hema has not achieved overall profitability and has not yet proven itself in its business model.
Wu Junsheng is optimistic about the future of the supermarket format but also admits that the current problem with traditional supermarkets is insufficient professionalism in operations, product management, and marketing.
"It's not that customers have abandoned us, but that we haven't truly managed customers." He believes that from a product structure perspective, traditional supermarket stores have not met consumer demand. Supermarkets need to go out, do global product selection, start with basic livelihood items, internet-famous products, and seasonal items, rather than waiting for suppliers to come to them to discuss business.
Compared to comprehensive supermarkets selling various daily necessities, clothing, skincare products, and home appliances, many retailers are more optimistic about retail formats focusing on a single category, such as food supermarkets focusing on fresh produce, side dishes, and packaged food and beverages, which can incorporate semi-finished fresh products, prepared dishes, and self-made foods.
The China Chain Store & Franchise Association's "Chain Supermarket Operation Report (2021)" shows that in 2020, 70% of the stores of the top 100 supermarket companies were small community stores. In addition, new stores opened by physical supermarkets are increasingly transforming into small community stores focusing on fresh food, with areas ranging from 200-300 square meters to 1,000-2,000 square meters, with an average area of about 900 square meters.
Wu Junsheng is optimistic about the transformation of Chaoshifa into a food supermarket and the path of Ito Yokado in the Sichuan market, which downplays department stores, focuses on fresh produce and condiments, and increases the proportion of self-made products. In Wu Junsheng's view, this is the best time for visionary entrepreneurs to enter the market. Traditional supermarkets that still hold onto old concepts will eventually be eliminated.
Source: Caijing Eleven (ID: caijingEleven) Authors: Ma Lin, Yang Fan
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