Click to read the original article for details. Source: Zinc Finance (ID: xincaijing) After saturating first-tier cities, chain convenience stores are expanding downward, and further downward. Recently, five Lawson convenience stores opened simultaneously in Changsha. Since opening stores in Jiangyin, Huzhou, and other places in 2017, Lawson has deepened its layout in lower-tier markets. Lawson China's goal is to reach over 3,000 stores by 2020. In addition, FamilyMart and 7-Eleven, which form a tripartite pattern with Lawson, are also accelerating store openings in China: 7-Eleven has stated it will maintain a growth rate of 30-40 new stores per year; FamilyMart plans to open 7,500 stores nationwide by 2020. 7-Eleven convenience store. Image from the internet. Entering lower-tier markets, convenience store giants face considerable competition. According to the "2018 China City Convenience Store Index Report," Changsha, Shenzhen, Taiyuan, Chengdu, and Dongguan rank in the top five for convenience store index. Dongguan is known as the capital of convenience stores due to its high saturation of one store per 944 people, with brands like Meiyijia, Tianfu, and Shanghao originating there. Data from the Dongguan Municipal Commerce Bureau shows that the total number of chain convenience stores in Dongguan exceeds 30,000, with an average annual increase of over 1,000. Meiyijia. Image from the internet. According to data from the China Chain Store & Franchise Association, regional chain convenience stores are tightly carrying out regional layouts, leaving no opportunity for external brands. Xiamen is occupied by 1,455 Jianfu stores, Xi'an has 1,219 Every Day stores, and Wuhan has 418 Today stores lining its streets. China's regional convenience store brands each occupy their own territory, resisting the invasion of foreign convenience stores. They each choose a second- or third-tier city and then closely deploy their forces. At the same time, e-commerce giants are joining the fray by empowering mom-and-pop stores. In 2017, JD.com announced plans to open 1 million offline convenience stores within five years, with 50% in rural areas; Suning plans to expand its stores to 20,000 within three years through methods such as "leasing, building, merging, acquiring, and allying"; Alibaba empowers Tmall Xiaodian through Ling Shou Tong. In the lower-tier markets beyond first-tier cities, the smoke of war is growing increasingly intense. "China's chain convenience stores struggle to make profits due to high costs. For example, a chain with ten or twenty stores might build its own supply chain, but the number of stores cannot support the marginal cost of that supply chain," Zhu Hongjiang, senior product expert at Alibaba's Ling Shou Tong smart stores, told Zinc Finance. Thus, dominating a region and making a city deep and thorough has become the survival strategy for regional chain convenience stores. As the war progresses, losses, closures, expansions, and alliances are played out daily in the convenience store sector across China. The Challenge of Opening Stores: Heavy or Light? Third- and fourth-tier cities have a core consumer group—small-town youth—who have money, time, and a huge demand for consumption upgrades. This is why Ren Guanglin founded Anda Convenience Store. He chose Hohhot, Baotou, and Ordos as his main battlefields, and has now opened over 180 stores. On June 28, 2015, Anda Convenience Store opened its first store at the gate of Hohhot Agricultural University. At that time, Hohhot already had four to five hundred convenience stores. Anda Convenience Store. Image provided by the interviewee. He chose Hohhot for two reasons: first, Hohhot has two levels of government, concentrated financial institutions, and a population of four million; second, although Hohhot has a number of convenience stores that ranks nationally, the brands are loose and usually franchise-based. Ren Guanglin gave Zinc Finance a breakdown: From a financial perspective, investing in a convenience store requires 300,000 to 400,000 yuan, but in a first-tier city, it might cost over one million including rent. In third-tier cities, the input-output ratio is one-third, rent is one-fifth, and sales may be one-half. "From a profitability standpoint, there are still significant opportunities," Ren Guanglin said. Attracting the post-85s and cultivating the post-00s is Ren Guanglin's approach. In terms of design and product selection, he differentiates from the numerous mom-and-pop stores in Hohhot, focusing on mid-to-high-end offerings. At the time, Ren Guanglin took angel round funding from the large group he previously worked for and brought along the small team from the community project he had incubated within the group. At that time, Ren Guanglin didn't know about 7-Eleven, and wasn't even familiar with suppliers. He even considered buying goods cartload by cartload from large supermarkets. Without a supply chain, the team of over a dozen people scattered across the country to find products they believed were differentiated locally, relying on one or two hundred scattered suppliers to deliver goods directly to stores. The resulting problem was: Products were backlogged in the precious store space, and store managers had to spend more time dealing with suppliers than on sales. "We must build a warehouse," Ren Guanglin told Zinc Finance. This situation also exists in traditional mom-and-pop stores. "Many mom-and-pop store owners have a cigarette carton, and on it is their purchase list, with what they need to stock written on it," Ge Xin, head of smart stores at Alibaba's Ling Shou Tong division, told Zinc Finance. This is one of the pain points they plan to solve. Traditional mom-and-pop store. Image from the internet. From 0 to 1, and even from 1 to 10, a complete supply chain cannot be formed. This is a common challenge faced by regional convenience stores and mom-and-pop stores in lower-tier markets. Tang Guangliang, founder of New Gaoqiao, started convenience store business outside first-tier cities earlier than Ren Guanglin, and did franchising earlier than Tmall Xiaodian. He has also stepped on many pitfalls, which he describes as "a three-hour history of blood and tears." In 2008, Tang Guangliang had a thrilling year—he took out one million yuan to start a business, and within less than three months, he lost it all and closed down. He sold assets to pay wages, disbanded employees, and helped them find jobs. After the failure, Tang Guangliang slept at home. The one million yuan that went down the drain was astronomical for him. Besides sleeping, he bought lottery tickets every day hoping to recover his losses. He pondered for three months: Why could others succeed, but not me? Looking back at his first venture, Tang Guangliang attributed the failure to his own extravagance. At that time, the convenience store industry was not as hot as it is now, and Tang Guangliang didn't realize that convenience stores were not a simple business—he opened a 300-square-meter direct-operated store, found a 1,000-square-meter logistics center, and even purchased a forklift for transportation. A logistics center delivering to just one store—how much volume could it have, and how much space would it need? After a month of operation, this convenience store, due to poor location and product structure mismatched with the surrounding population, could only make two to three thousand yuan in daily sales. But fixed expenses like rent, employee wages, and utilities were burning money every day. With only one million in funds, he went high-profile before sales reached scale, and with fixed costs like employees and rent, he quickly forced himself into a dead end. "It was too crazy; I did it too heavily when funds were insufficient," Tang Guangliang told Zinc Finance. Convenience stores are a low-margin industry. This store, which far exceeded ordinary convenience stores in size and model, couldn't hold on after three months of extravagance and was transferred. Filling the Pitfalls of Supply Chain and Warehousing Convenience stores struggle to profit, often competing with themselves. After opening ten stores, Ren Guanglin chose to build warehousing. Anda Convenience Store's first warehouse was located not far from the city, covering 2,700 square meters, and could be extended without moving. When their warehousing needs upgraded from 2,700 to 5,000 square meters, Anda upgraded directly from a flat warehouse to a three-dimensional warehouse on the same site. Despite planning during site selection, this upgrade still caused Anda Convenience Store to experience three months of "disorder." He described the process as "learning to swim by oneself"—when moving from a simple, crude small warehouse to professional precision, it's like being thrown from a small pool into the sea; without professional knowledge, you'll be exhausted. "Our sales declined during that period, and many stores were out of stock. Sales dropped by about 7%," Ren Guanglin told Zinc Finance. During those three months, Anda's team had to solve the challenge of distributing over 1,400 SKUs, up from 700, with increased staffing, faster unloading, and insufficient professional knowledge testing the team. It wasn't until three months later that the three-dimensional warehouse was truly mastered. Three-dimensional warehouse. Image from the internet. But not every convenience store can successfully "learn to swim by oneself" like Anda. "We purchased a logistics center of 4,000 square meters at the time. But when the number of stores reached a certain scale, it wasn't enough, and we had to find a new space," Hong Yang, director and general manager of Changsha Shanshan Convenience Store, told Zinc Finance. Every warehouse move is a huge project for convenience stores because it involves adjusting the entire distribution system. On the other hand, a convenience store open 365 days, 24 hours a day, means the distribution center cannot stop working. The difficulties faced by regional chain convenience stores are amplified for mom-and-pop stores. Individual scattered stores have no bargaining power with suppliers, let alone a complete supply chain. After sleeping at home for three months, Tang Guangliang borrowed 500,000 yuan from relatives, temporarily gave up logistics and warehousing, aggregated convenience store orders on QQ, bought and sold at large wholesale markets to earn franchise fees, and also acted as a "matchmaker" for decoration and cash register software. With just five people, he achieved monthly revenue of 500,000 to 600,000 yuan. As for why he chose franchising, Tang Guangliang's answer was: by building a brand, he could get lower prices from suppliers. After that, Tang Guangliang founded New Gaoqiao Convenience Store, focusing on B2B supply chain, publicly promoting it as "moving the wholesale market to the internet"—the name comes from the fact that the largest wholesale market in Central-South China is called Gaoqiao Market. This is also the reason Alibaba's Ling Shou Tong empowers mom-and-pop stores. By digitizing and centralizing the purchasing needs of scattered mom-and-pop stores, they can form bargaining power with brand owners. Ge Xin told Zinc Finance: "From a purchasing perspective, Tmall Xiaodian is equivalent to supply chain empowerment, from enriching product structure to one-stop purchasing." Tmall Xiaodian. Image provided by the interviewee. In fact, the difficulty of forming a supply chain and the huge effort required for warehousing directly deepen the moat around regional convenience stores. Shanshan Convenience Store, which has opened over 70 stores in Changsha, therefore dares not extend its reach outward. In Hong Yang's view, convenience store layout must be concentrated within a region, determined by costs and personnel training. Only by opening stores densely in one area and operating continuously can brand effects be achieved and customer recognition gained. The "2018 China Convenience Store Development Report" points out that over 80% of China's convenience stores have gross margins below 30%; 62% of direct-operated stores have net profit margins below 2%, 16% are in the 2% to 4% range, and only 23% have net profit margins of 4% or above. "Once you enter a new area, generally speaking, you need to open at least 50 stores. Because a convenience store is a systematic project, not just opening a store. The backend, middle platform, supply chain, and management capabilities all need to reach a certain level to ensure operational quality isn't too poor and lead to losses," Hong Yang told Zinc Finance. Loose management is summed up by regional convenience store players as a fatal weakness. In 2014, Today, which entered the market with 55 million yuan in Series A funding from Sequoia Capital, also did not "bloom everywhere." Today founder Song Yingchun said in an interview, "We should first deeply cultivate one place and do it thoroughly." Suning Xiaodian's aggressive approach may be a lesson to the industry. Suning Xiaodian, which entered the convenience store market directly with direct-operated stores, planned to complete the expansion of 15,000 stores by 2019. However, according to an announcement by Suning.com in October 2018, Suning Xiaodian lost nearly 300 million yuan in 2017 and from January to July 2018. The announcement stated that the losses were due to the high investment required for rapid store expansion. When Suning Xiaodian's "bleeding" will stop remains unknown. Will Alibaba open Tmall Xiaodian direct-operated convenience stores? Ge Xin told Zinc Finance, "Unless one day we really clarify the relationships between franchised and non-franchised, direct-operated and non-direct-operated, we might take multiple paths. Today, we are still a platform role, hoping to empower mom-and-pop stores." The pitfalls of convenience store downward expansion are not exempt for giants; they also step on them and have to clear them. More Local, Deeper In the 1990s, Yanshan Street was a bustling night snack street in Changsha, and its prosperity made it one of the earliest fruit streets in Changsha. In 1998, Shanshan Convenience Store opened its first store here, and within a year, it opened ten more stores in areas rich in night snacks. Due to urban construction affecting the geographical environment and surrounding population, only four of these ten stores remain today. Hong Yang told Zinc Finance, this industry has thin profits; if Shanshan opens 20 stores a year, it will close one or two stores each year. Night snack street. Image from the internet. High costs mean that every step in the development of convenience stores requires careful testing. For example, would selling sushi in communities be popular? Hong Yang gave a negative answer. "Do community aunties say, 'I want to eat your sushi or rice balls'? Even so, we still have to sell, to test and build a model. This profit model depends on whether we can effectively meet the rigid needs, pain points, and high frequency of customers within 500 meters," Hong Yang told Zinc Finance. He used eyeglass cloth as an example, telling Zinc Finance that in office areas, many people are nearsighted, but they might use tissues instead of eyeglass cloth, and elderly people in communities with reading glasses are similar. "In depth and breadth, we need to constantly hypothesize and verify," he said. Fresh food is difficult to do well, which is industry consensus. Shanshan Convenience Store also stepped on many pitfalls when doing fresh food: Six years ago, Shanshan first imitated international brands by selling coffee and purchased a batch of semi-automatic coffee machines, but due to poor promotion and staffing, they couldn't sell, and the machines ended up gathering dust in the warehouse; when trying bread with a three-day shelf life, because the taste was best within one day, the supplier required it to be sold within 24 hours, resulting in logistics center employees eating many days of off-shelf bread, until eventually no one wanted it even as gifts. Every pitfall means an adjustment to the product structure. "In factory and school stores, we can do more short-shelf-life products because there is an immediate need for breakfast." The reason is that different regions and different business districts have different demands for different products. Expanding this statement to the entire Chinese convenience store industry, it still applies. Weijun Supermarket, which has been open for seven or eight years, has not understood this principle. As a mom-and-pop store at a school gate, the owner chose various tea cups as the main products. "Because the boss's father likes cups, they stocked several shelves of cups, and they didn't sell for years, all covered in dust," Ge Xin told Zinc Finance. Through data analysis of the surrounding population, Tmall Xiaodian suggested Weijun Supermarket launch hot and sour rice noodles as fresh food. "There are many Guangxi people there, and they have a demand for such fresh food," Ge Xin said. After adding fresh food, Weijun Supermarket entered a new life cycle, revitalizing the customer base from nearby schools. In the past, convenience stores mostly imitated some practices of international brands, such as making oden, rice balls, sushi, and other standard products in fresh food, but for convenience stores, it's more about local customers. Today's convenience stores tend to use localized products to create differentiation, especially in Hunan, where convenience store popularity ranks in the top three nationally. In Changsha, which has ranked first in the industry for three consecutive years, many convenience store brands fall every year, and Hong Yang cannot afford to slack off. Hunan is famous nationwide for eating spicy food. In Shanshan Convenience Store's products, bean products and meat products are more likely to be spicy, and Hunan stinky tofu is also a standard item. Recently, Shanshan Convenience Store iterated a new lard-mixed rice noodle dish to further cater to Changsha locals' preference for rice noodles. Shanshan Convenience Store. Image provided by the interviewee. This is also a feature of Changsha convenience store fresh food—doing the opposite of the three giants' "local flavor," that is, civilianization. Xin Jiayi Convenience Store's Wu Minyi mentioned in a media interview that Xin Jiayi replaced the standard fresh food of Japanese convenience stores with locally loved rice noodles, sugar glutinous rice cakes, etc. Wu Minyi even boiled over 800 tea eggs to make a good one. Not Seeking Sameness, But Difference Ren Guanglin has been looking for whether the Inner Mongolia region can benchmark against a country or city in the world to leverage their development experience. The city he found is Hokkaido. Although this region has an oceanic climate, its winter temperatures and industrial structure are similar to Inner Mongolia, and it is also developed in agricultural and livestock products. Hokkaido has a convenience store called SEICOMART, which has opened 1,200 stores in this region with a population of just over 1.9 million, far surpassing 7-Eleven in number. Its special success experience is: cultivating regional products, such as Hokkaido milk, and after trial sales in stores, conducting multi-regional linkage; not taking the route of store expansion, but product expansion, differentiating from other Japanese convenience stores. Image from the internet. Anda Convenience Store has now expanded from Hohhot to Baotou and Ordos, opening over 180 stores. Founded only three years ago, Anda has been building its differentiated competitiveness. Anda's team has a habit of learning from experiences elsewhere. When Ren Guanglin once went to Beijing, he saw that Beijing's 7-Eleven and many other convenience stores had Le Pure yogurt, priced at 16.8 yuan per box. This is a low-temperature, short-shelf-life product that Hohhot or even Inner Mongolia dared not sell—due to short shelf life and imperfect cold chain technology. Can this yogurt be sold in Inner Mongolia? Ren Guanglin believed that Anda Convenience Store's customer base is not price-sensitive. Since it can be bought online in Inner Mongolia, it should also be available offline. He persuaded Le Pure yogurt executives, but was troubled by the lack of cold chain logistics at Anda Convenience Store. Ren Guanglin found one of his suppliers, who had the capability and technology for a full cold chain supply chain. His condition was: "You help me introduce the product, deliver to stores, and build the supply chain, and I'll give you a portion of the gross margin." "Such expensive yogurt won't sell here, and with a shelf life of only twenty-something days, the loss will be huge; we can't do it," the other party had never seen such a request and was very resistant. Ren Guanglin still remembers persuading him at the time: "You don't need to worry about sales and loss. Tell me how many points you need, and we'll discuss that." With marketing support, Le Pure yogurt became a hit at Anda. After that, Le Pure yogurt closed its online channel in Inner Mongolia and directly connected with Anda. From this first experiment with low-temperature, short-shelf-life food, Ren Guanglin concluded that low-temperature, short-shelf-life, and other relatively high-end products do have demand in the Inner Mongolia market; it's just that they weren't available in convenience stores, so this demand wasn't shown. In addition, Anda is also looking for products that bring their own traffic but cannot be sold in convenience stores, such as Chu Orange and NetEase Yanxuan products. Despite doing well in three cities, Ren Guanglin will not consider cross-province expansion in the next three years. "Why do couples gradually look alike? Why do children become more like their parents?" Ren Guanglin told Zinc Finance, "Besides imitating each other after being together for a long time, another reason is that we eat the same meals." This is also what Ren Guanglin considers the core of Chinese-style convenience stores—the gut flora is not uniform. The dietary structures of Beijing's North Fifth Ring and South Fifth Ring are quite different. Expanding this to the national level means that regional brands will develop solidly because they understand local diets and needs, thus becoming regional leaders, while external brands will find it difficult to enter due to lack of deep understanding. "The greater the regional differentiation, the greater the value," Ren Guanglin said. Each region has its own characteristics, and only convenience store brands born locally can clearly understand these differences. By creating 'local flavor,' relying on store density to thoroughly understand a small area, building brand awareness, optimizing supply chain and warehousing, and then forming a certain scale effect to increase profits. When the regional convenience store network is formed, and intertwined roots become a single outstanding branch, convenience stores need greater scale to support it. Ren Guanglin told Zinc Finance that regional leaders have not yet formed, but during exchanges, peers have begun to pay attention to capital, and the ability to introduce capital may become the core survival capability of regional convenience stores. When extending outward, brands can form alliances with each other through capital to jointly expand to other provinces, perhaps reducing the internal friction of the "Warring States period." "Effective collaboration among peers, using capital to achieve regional integration and complementary advantages, is a possibility for the future," Hong Yang said.