Source: Finance World Weekly (ID: cjtxzk)

As competition intensifies in first- and second-tier cities, 24-hour chain convenience stores are no longer exclusive to Beijing, Shanghai, and Guangzhou. Brands like Lawson and 7-Eleven are expanding into lower-tier markets. But after the initial novelty fades for young consumers in small towns, will their enthusiasm persist?

"I can't believe my Baoding has a Lawson convenience store now!" Zhang Qiao, who recently returned to her hometown in Baoding, Hebei, from Beijing, said excitedly.

Having lived in a first-tier city for a long time, Zhang Qiao had grown accustomed to stopping by the Lawson store near her office late at night after overtime, buying a bowl of oden to reward herself.

The 24-hour convenience stores tucked away in big cities have become silent companions for many young people like Zhang Qiao living away from home. So much so that when many young people return to their hometowns during holidays, they feel a sense of loss when they search all the small supermarkets and retail shops in the county and can't find that familiar feeling.

But now, chain convenience stores are collectively "going downstream."

As competition in first- and second-tier cities intensifies, starting in 2020, many chain convenience store brands have chosen to expand outward, leaving Beijing, Shanghai, and Guangzhou to enter third- and fourth-tier cities and even county towns.

Lawson has opened stores in Baoding, Langfang, Cangzhou, and other places in Hebei, as well as in Wuhu, Anhui, and Nantong, Jiangsu. 7-Eleven has also opened its first stores in Dezhou, Shandong, and other places. Domestic convenience stores like Bianlifeng have also begun to enter lower-tier markets, opening new battlefields.

These "imported" convenience stores want to win over "small-town youth." But here, they not only have to overcome "acclimatization" issues but also compete head-on with local mom-and-pop shops.

Several industry insiders also told Finance World Weekly that Japanese and domestic chain convenience stores operate fundamentally differently from traditional retail stores in county towns. Their expansion may not be as smooth as imagined.

Chain Convenience Stores Collectively "Go to the Countryside"

"Lawson entered Baoding in December 2020 and currently has about 11 stores," Zhang Qiao learned from a local convenience store owner.

Before that, Lawson had already opened stores in Shijiazhuang, Tangshan, Langfang, Cangzhou, and other places in Hebei. In August 2020, Lawson first entered Wuhu, Anhui; on the same day, it opened five stores simultaneously in Nantong, Jiangsu.

(Lawson store in Baoding, Hebei; photo provided by interviewee)

According to Lawson's 2020 financial report, as of September 2021, it had 4,000 stores in the Chinese market. It plans to have 6,000 stores in China by 2022 and more than 10,000 by 2025.

Zhang Sheng, vice president of Lawson China, once said: "During the pandemic, sales at Lawson stores in East China achieved a 30% month-on-month growth, with growth in third- and fourth-tier cities far exceeding that in first- and second-tier cities. For example, in Zhangjiagang, a county-level city under Suzhou, sales at Lawson community stores grew nearly 80% year-on-year, while Shanghai stores only grew about 10% to 20%."

Clearly, "going downstream" has become the main theme for Lawson in the Chinese market.

Sharing the same idea are 7-Eleven and FamilyMart, also Japanese convenience store brands, as well as domestic brands like Meiyijia, Jinhu, and Bianlifeng.

Among them, 7-Eleven has opened its first stores in Dezhou, Shandong, and Kunming, Yunnan; FamilyMart has entered Jiaxing, Zhejiang, Jiangyin, and Wujiang, Suzhou.

In Hunan alone, Meiyijia has opened markets in Hengyang, Loudi, Xiangtan, Yiyang, Yueyang, and Zhuzhou.

Centered on Taiyuan, Jinhu has entered seven cities in Shanxi, including Yangquan, Jinzhong, Changzhi, Linfen, and Xinzhou. Bianlifeng has laid out in Zibo, Shandong; Foshan, Guangdong; and Xuzhou, Yancheng, Lianyungang, and other places in Jiangsu. Its executives have even claimed that by 2023, it will have "10,000 stores."

(Photo source: Visual China)

Zhao Rong, a former 7-Eleven executive and convenience store training expert, analyzed for Finance World Weekly that the "downstream" and cross-regional expansion of chain convenience store brands is driven by multiple factors, including the improvement of consumption capacity and awareness among people in small and medium-sized cities, as well as the increase in "single people" due to changes in family structure, who are more willing to consume at convenience stores.

For the convenience store brands themselves, in first- and second-tier cities, with rising rent and labor costs, their operating performance is approaching a bottleneck.

Take the "big three" Japanese convenience store brands as an example. Lawson, after 25 years in China, only achieved overall profitability in the Chinese market in 2020. FamilyMart and 7-Eleven are only profitable in some regions, while still losing money in others.

In first- and second-tier cities, competition among convenience store brands is also intensifying. The previously released "2020 China Convenience Store Development Report" showed that in Shanghai alone, there are 6,430 convenience stores, with each store covering an average of 3,769 people.

In the 2021 talk show, comedian Doudou joked: In Shanghai, mentioning FamilyMart, Starbucks, and subway stations is an "invalid location hint."

"Expanding downward" has thus become an inevitable choice for convenience stores.

After "going downstream," some convenience stores have received fairly positive consumer feedback. It is understood that in the first month of Lawson's Baoding store opening, daily customer traffic reached about 400 people.

Earlier, 7-Eleven's first stores in Xi'an, Fuzhou, and Changsha achieved first-day sales of 390,000 yuan, 420,000 yuan, and 500,000 yuan, respectively.

In these regions, many young consumers also told Finance World Weekly that they welcome such convenience stores. Zhao Yu, a girl from Dezhou, believes that this represents her hometown becoming more "fashionable" and "modern."

She said that with the rise of social apps like Douyin and Xiaohongshu, young people around her are increasingly aware of the various commercial trends popular in big cities and aspire to them. The entry of top convenience store brands into lower-tier markets has, to some extent, met everyone's needs.

Zhao Yu gave an example: Once, she saw a video ad for a new Nestlé ice cream endorsed by celebrity Meng Meigi and really wanted to try it, but after searching all local supermarkets and shops, she couldn't find it and had to give up.

But not long after, she found the ice cream at the newly opened 7-Eleven in her area. What made her even happier was that she discovered many internet-famous snacks, cosmetics, and daily necessities that she had seen on social platforms and ads. It was also through such convenience stores that she first tried self-heating hot pot.

Third- and fourth-tier cities still hold enormous purchasing power, especially the consumption capacity of young people, which cannot be ignored. According to the "2021 China Urban Convenience Store Index" released by the China Chain Store & Franchise Association, compared with first-tier cities, young consumers in second-tier and below cities account for 25% of the population but contribute 60% of consumption growth.

This is a market that convenience store brands do not want to miss. However, developing smoothly there is not as easy as they imagine.

The aforementioned report also shows that in some third- and fourth-tier cities, such as Huizhou in Guangdong and Putian in Fujian, the local convenience store industry has developed to a level very close to mature markets, with competition as fierce as in first- and second-tier cities.

This is not a completely blank "pure land" waiting for top chain convenience store brands to explore. Here, they face completely different competitors than in first- and second-tier cities.

Competition with Mom-and-Pop Shops and Local Brands

A bottle of purified water can cost over 10 yuan, and an imported makeup remover can cost over 100 yuan—this is common in chain convenience stores in first-tier cities. However, according to the aforementioned young consumers, in their hometowns, the pricing at these stores is basically unchanged compared with first- and second-tier cities.

For "small-town youth," facing the relatively high prices of major chain convenience stores, after the initial novelty fades, how long can their consumption enthusiasm last? In the view of Liu Kun, a franchise consultant and Douyin host, this is one of the issues convenience stores must face, but more critically, for young people, consuming at convenience stores is not a "rigid demand."

A relevant person revealed that the Lawson store that entered Zhangjiagang a few years ago does not have an advantage in fresh food over food delivery, and its winter nighttime sales are not high. Its 24-hour operation model also brings high labor costs.

Liu Kun also said that in his view, convenience stores "going downstream" must face more fundamental challenges, including differences in product structure and profit models across regions, as well as localization and supply chain issues that need to be resolved.

In addition, they must consider another issue: convenience stores find it difficult to enter communities, so how can they compete with the ubiquitous traditional retail stores in lower-tier markets?

In county towns, retail stores, especially ubiquitous mom-and-pop shops, basically serve as local "small department stores."

These stores sell more local specialty products, even vegetables, grains, and oils. For example, in Hunan, cigarettes, water, and betel nut probably account for 60%-70% of daily turnover at retail stores.

Compared with ordinary mom-and-pop shops, convenience stores have a more complete supply chain and can offer fresh food, with a wider range of product categories. However, this may also lead to "acclimatization" issues.

In first-tier cities, when many people mention convenience stores, their first reaction is the boxed meals and oden sold there. Convenience stores are mostly located in popular business districts, supermarkets, and office buildings, mainly targeting young white-collar workers, selling fresh food and private-label products, supplemented by beverages, snacks, and other daily necessities.

Zhang Sheng, vice president of Lawson China, once revealed that fresh food is Lawson's best-selling category, accounting for about 40% of store sales.

"The gross margin for snack foods is about 30%, but some fresh food categories can reach 70%. Therefore, fresh food has always been the main contributor to convenience store revenue," Liu Kun told Finance World Weekly. "But when they open in county towns, they will find that high-margin fresh food is basically hard to sell."

This is not hard to understand. You can imagine a white-collar worker in Beijing buying a boxed meal at a convenience store for lunch, but for most "small-town youth," going home for a meal is very convenient, so they naturally won't often solve work meals at convenience stores.

Moreover, fresh food has a shelf life of only three days, which places extremely high demands on the supply chain. For convenience stores, before sales take off, building local fresh food factories and supply chains is clearly not cost-effective.

(FamilyMart boxed meals; photo source: Visual China)

Another fact that cannot be ignored is that with the rapid development of the convenience store industry, many regions are already dominated by local convenience store "forces."

In Anhui, there is Linji; in Dongguan, Meiyijia; in Sichuan, Hongqi; in Taiyuan, there is a Tangjiu every three steps and a Jinhu every five steps... It is not easy for foreign brands to find opportunities among them.

A Kantar convenience store demand survey shows that compared with first- and second-tier consumers, when choosing a convenience store, consumers in lower-tier markets are more likely to shop because "it's a familiar store, friendly." They generally prefer "fruits and vegetables" and "personal care and beauty" products, and also like to "try new products" at convenience stores.

Convenience stores in lower-tier markets cater to broader needs such as local socializing, home shopping, and convenience services.

Local convenience stores, retail supermarkets, and mom-and-pop shops have all adapted to local people's living and consumption habits, whether in product selection, service methods, or customer acquisition.

To attract nearby customers, they have also expanded into more "convenience services," including making breakfast, receiving packages, printing and faxing, weighing people, and even walking dogs for nearby residents.

(Functional differences between convenience stores in upper-tier and lower-tier markets; source: Kantar report)

"The business model of chain convenience stores like Lawson currently seems not to fit the needs of third- and fourth-tier cities. But as a chain brand, it has unified standards. How can it adapt to local conditions?" Liu Kun asked.

Even domestic convenience store brands can stumble when operating across regions. Liu Kun said that when Wuhan's Today convenience store entered the Hunan market, it experienced a large number of store closures shortly after.

This is because Hunan already has too many snack shops. "These snack shops are extremely competitive; the turnover of four or five convenience stores combined can't match that of one snack shop."

Expectations for Lower-Tier Markets

To gain a foothold in lower-tier markets, convenience stores have begun to innovate.

A convenience store brand can only achieve scale development in different cities if it adapts to local conditions.

For example, Bianlifeng, which originated in Beijing with a "Beijing flavor," has launched regional specialties in its stores in other cities, such as braised chicken rice, camphor tea duck, hot dry noodles, and saozi noodles.

Lawson has cooperated with Wuhan Zhongbai and Hebei Jindian Mall to build supply chains and reduce operational risks. Zhang Sheng once mentioned that Lawson will also focus on community markets in the future, including breakthroughs in store layout, product categories, and services.

Currently, some Lawson stores in certain regions already offer home delivery services, gas card recharge, and even lottery ticket purchases.

"In the end, any convenience store going downstream must improve gross margins by working on products and services to find differentiation," Zhao Rong said.

"Convenience stores don't have a fixed model of 'what to sell and what not to sell.' Many local convenience stores are imitating foreign brands, such as selling oden, sandwiches, and rice balls, but do they know how many local consumers actually like these things?" Zhao Rong believes, "Instead of spending time studying others' models, it's better to spend time and energy studying your own customers' needs, developing products suitable for local characteristics, and differentiating from foreign convenience stores based on local eating habits."

Zhao Rong gave an example: In Jiangmen, Guangdong, the "Xiao'er Street Convenience Store" has created a new format of "convenience store + bar" based on regional characteristics. At night, many young people gather in the store to drink and chat in groups.

In addition, she also believes, "Convenience stores in third- and fourth-tier cities often lack clear key product categories, trying to sell everything, leading to serious product homogenization. But customers who come to the store can't find what they want. Convenience stores should focus on simplifying products, finding products that meet the needs of customers in the business district, and increasing their shopping frequency and average transaction value."

"In the process of going downstream, it is inevitable for convenience stores to transform in a standardized, refined, and personalized way. But the hardest part is not how to do it, but how to change the way of thinking," Zhao Rong said.

Currently, the overall competitive landscape of China's convenience store industry is still relatively fragmented, with much room for industry concentration to improve.

QuestMobile's "Lower-Tier Market Report (2019)" shows that the number of users in China's lower-tier markets exceeds 600 million, and the potential of this market has not been fully tapped in many areas.

The Ministry of Commerce once issued the "Three-Year Action Notice on Promoting the Branding and Chaining of Convenience Stores," proposing to strive to reach 300,000 branded chain convenience stores nationwide by 2022. In 2019, that number was only 132,000.

Recently, the Ministry of Housing and Urban-Rural Development issued the "Notice on Printing the Guidelines for the Construction of Complete Residential Communities," which specifies relevant indicators and requirements for the construction of complete residential communities. In terms of the scale of complete residential communities, it requires the establishment of a 15-minute living circle, meaning that within 15 minutes on foot, residents can reach various life service facilities, with a service radius of 800-1000 meters, connecting with the management and service scope of streets and neighborhoods.

This also means that in lower-tier markets, convenience stores have enormous room for development.

"Conversely, the entry of giants will also bring a sense of crisis to local convenience store brands, driving them out of their comfort zones. After all, without competition, there is no development," Zhao Rong said.

(At the request of interviewees, Zhang Qiao and Zhao Yu are pseudonyms)

-END-