Late at night, the city is still awake. At a 24-hour convenience store near home, enjoying a serving of oden and satisfying your taste buds is a daily routine for many young people in first-tier cities. For rural youth beyond the Fifth Ring Road, the only options are small shops and supermarkets that close early, making such an experience hard to come by. However, this is now changing. On May 5, Sichuan Province released a plan proposing that by 2025, every administrative village should have at least one rural convenience store. Other provinces, such as Jiangsu, have also proposed building convenience stores in rural areas this year. One reason many provinces are vigorously developing rural convenience stores is that convenience stores have proven particularly resilient in the offline retail market hit by the pandemic. According to a Bain report, in the third quarter of last year, overall FMCG growth in China fell 0.8% year-on-year. Except for convenience stores, sales in all offline channels declined. National-level actions are also underway. Previously, the Ministry of Commerce issued the "Notice on Promoting the Branding and Chain Development of Convenience Stores in a Three-Year Action," aiming to reach 300,000 branded chain convenience stores nationwide by 2022, up from 193,000 in 2020. Beyond policy guidance, many convenience store brands have already proactively started their downward expansion. Brands like Lawson, 7-Eleven, FamilyMart, and Bianlifeng are venturing beyond the Fifth Ring Road into third- and fourth-tier cities and even county towns to find new growth. With policy and market forces combined, convenience stores are accelerating their "march to the countryside." What kind of path will this be?

The Wave of Convenience Stores Going Downstream In the domestic convenience store market, there are roughly three factions: Japanese-style, local-style, and internet-style. According to the "2021 China Convenience Store TOP100 List" (hereinafter referred to as the "List") released by the China Chain Store & Franchise Association, in terms of store count, local brands Yijie (27,600 stores), Meiyijia (22,400 stores), and Kunlun Haoke (20,300 stores) rank in the top three. Relying on gas stations of PetroChina and Sinopec, Yijie and Kunlun Haoke are spread across cities of all sizes in China. You can see them at gas stations in both bustling Shanghai and mountainous Guizhou, so going downstream is not a significant issue for them. It is the Japanese-style and some local convenience store brands that are more urgently moving to lower-tier cities. The List shows that the "Japanese Big Three"—Lawson, FamilyMart, and 7-Eleven—have 3,256, 2,967, and 2,387 stores, respectively. Since entering China, these three have basically focused on first- and second-tier cities. In the past two years, they have been intensively charging into lower-tier markets. Lawson's store count in China surpassed FamilyMart for the first time in 2020. It plans to open 6,000 stores this year and reach over 10,000 by 2025. New stores are frequently appearing in lower-tier markets. For example, in March this year, Zhongshang Lawson opened its first five stores in Huainan, a fourth-tier city. The results from lower-tier markets are also evident. Zhang Sheng, Vice President of Lawson China, once said: "During the pandemic, Lawson's store performance 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." Take Zhangjiagang, a county-level city under Suzhou, as an example. Lawson's community store sales grew nearly 80% year-on-year, while Shanghai stores only saw a 10% to 20% increase. FamilyMart and 7-Eleven, like Lawson, have also entered lower-tier markets. 7-Eleven has opened its first store in Dezhou, Shandong, and FamilyMart has entered Jiangyin, Zhejiang. For Japanese-style convenience store brands that have long been stationed in first-tier cities, moving to lower-tier cities is both a way to tap new growth and a necessity. They first face profitability pressure. Lawson only achieved overall profitability in 2020, 25 years after entering China, while FamilyMart and 7-Eleven are only profitable in some regions, with others still in the red. In addition to profitability pressure, operational pressure is also increasing. In first- and second-tier cities, rent and labor costs are rising, and performance ceilings are being pushed down. According to data from the Qianzhan Industry Research Institute, employee salaries and rent account for over 60% of total expenses for convenience stores, with net profit margins of only 2.4%. Even if they withstand profitability and operational pressures, intense competition continues to compress market growth space. In first-tier cities, the convenience store markets in Shanghai, Guangzhou, and Shenzhen are already mature, and competition among brands is intensifying. According to the "2020 China Convenience Store Development Report," there are 6,430 convenience stores in Shanghai alone. In the show "Rock & Roast," comedian Doudou told a joke: Every time I call my girlfriend and ask where she is, she says she's at FamilyMart, next to a Starbucks, behind a subway station. In Shanghai, saying these three things is like saying nothing. With market saturation, intensifying competition, and rising costs, expanding downward to find new growth has become an inevitable choice for Japanese-style convenience stores. Among local brands, Bianlifeng and Meiyijia are also making significant "downward moves." Five years ago, Bianlifeng emerged as a dark horse from the "convenience store desert" of Beijing. It has revealed plans to open over 10,000 stores by 2023, with growth concentrated in second- and third-tier cities. Throughout last year, Bianlifeng was active in lower-tier markets. According to public information from the Bianlifeng app, it has entered third-tier cities like Langfang, Taizhou, Zhenjiang, Huai'an, and Suqian. Overall, Bianlifeng prefers lower-tier cities in North China, East China, and South China. Meiyijia started in Dongguan, a new first-tier city with the highest per capita convenience store density in the country. According to data from the China Chain Store & Franchise Association (CCFA), as early as 2019, there was one convenience store for every 1,242 Dongguan residents, compared to 8,889, 3,769, 2,803, and 1,731 people in Beijing, Shanghai, Guangzhou, and Shenzhen, respectively. Based in Dongguan, Meiyijia has already embarked on a national expansion, moving both into first-tier cities and down to lower-tier cities. Its chairman, Zhang Guoheng, mentioned that one of Meiyijia's development strategies for 2022 is to develop across all markets, from first-tier to fifth-tier. Other local convenience store brands are also moving to lower-tier cities. For example, Taiyuan's local brands Tangjiu and Jinhui have expanded beyond Taiyuan to seven other cities in Shanxi Province, including Datong and Shuozhou, covering over 30 county-level markets. Wuhan's local brand Today has entered 37 cities across four provinces—Hunan, Henan, Guangxi, and Hainan—in recent years. At the end of January this year, Today entered Xiantao, a county-level city directly under Hubei Province, opening its first store and beginning its move into county-level markets. Those convenience store brands that have long been stationed in first- and second-tier cities are now moving en masse to lower-tier cities, embarking on a "march to the countryside." What lies ahead is a vast new frontier.

Downstream Growth and Convenience Store Advantages This vast frontier is full of potential for major convenience store brands. According to data from Alibaba Retail and Aowei Analysis, there are currently approximately 6.3 million small stores in the offline traditional commodity retail channel, with over 75% concentrated in third-tier and below cities, contributing nearly 40% of the domestic FMCG industry's shipment volume. In this huge market, consumer spending power is continuously rising, narrowing the gap with first-tier cities. According to the "2021 China City 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. Additionally, in the first quarter of this year, the ratio of per capita disposable income between urban and rural residents was 2.62, narrowing by 0.05 year-on-year, indicating a reduction in the income gap between urban and rural residents. In other words, convenience stores can tap into consumption growth in lower-tier cities that is no less than in higher-tier cities. More importantly, consumers in lower-tier cities welcome convenience stores, with strong demand. A survey by the China Youth Daily Social Survey Center found that 51.0% of respondents look forward to chain convenience stores entering rural areas. More and more young people, unable to bear the high-pressure life in first- and second-tier cities, are choosing to return to their hometowns. At the same time, they want to enjoy the same convenient life as in first- and second-tier cities. Of course, the large market space in lower-tier cities does not mean convenience stores can rush in and freely claim territory. They face a common "enemy": mom-and-pop shops. According to the New Distribution "2020-2021 FMCG Retail Small Store B2B2C Research Report," mom-and-pop shops in lower-tier markets account for 75% of the total number of mom-and-pop shops nationwide. Mom-and-pop shops generally refer to small retail stores near streets and communities. They are small in area, with limited products, and usually staffed by two people. You may never have been to a Lawson or 7-Eleven, but you have certainly bought cigarettes, alcohol, snacks, or soda from such a shop. For convenience stores to enter lower-tier markets, they inevitably compete with mom-and-pop shops. Yidian Caijing believes that convenience stores have three advantages in this competition: Brand power, digitalization, and supply chain. On August 8, 2020, Lawson opened six stores simultaneously in Wuhu. This was the first time the Japanese Big Three entered a third-tier city. At that time, red carpets were laid outside the stores, decorated with flowers and balloons, and customers excitedly queued to enter, resembling a wedding scene. On the first day, shelves were quickly emptied, making neighboring mom-and-pop shops envious. In some lower-tier cities, Japanese-style convenience stores, like McDonald's and Starbucks, are still a novelty. With their brand appeal, they can attract many consumers, something mom-and-pop shops cannot match. Moreover, during the franchising process of Lawson, FamilyMart, and 7-Eleven, the headquarters provide support to franchisees in product operations, store construction, and development perspectives, reducing the impact of the franchise model on brand image. The second advantage convenience stores have over mom-and-pop shops is digitalization, exemplified by Bianlifeng. Bianlifeng has built a comprehensive digital system internally. This system can understand customer needs at specific times and places, adjust products on shelves in a timely manner, and supply consumers with the most suitable products. This intelligent and convenient experience is attractive to many young people, and it is something mom-and-pop shops cannot provide. Additionally, digitalization delegates daily operational decisions to the system, requiring employees only to follow system prompts, significantly shortening training cycles and improving operational efficiency, supporting rapid replication in lower-tier markets. Supply chain is another area where convenience stores outperform mom-and-pop shops. Compared with many mom-and-pop shops, convenience stores with economies of scale have bargaining power for quality products. Ultimately, there will be a certain quality difference in products, such as high-quality fresh food and desserts, and selected imported goods. Furthermore, convenience stores have relatively complete and developed supply chains, capable of providing fresh products that require high-frequency delivery. In contrast, mom-and-pop shops have weaker supply chains, making it difficult to achieve a full product range. From a broad perspective, convenience stores have absolute advantages over mom-and-pop shops. However, from a detailed perspective, mom-and-pop shops also have their own strengths.

The Challenge of Localization Yidian Caijing once talked to a mom-and-pop shop owner in a county town where there is no convenience store yet. The owner was not worried about future competition from convenience stores. According to him, "I'm not afraid of customers being taken away by convenience stores because I understand them, know what they want to eat, and what they need." The owner's confident words actually reflect that in lower-tier markets, small retail stores are a highly regional business, and they also rely heavily on repeat customers from personal networks. From this perspective, in terms of products and services, mom-and-pop shops have more down-to-earth "customer relations" than convenience stores. In first-tier cities, when many people think of convenience stores, they first think of fresh food like bento boxes and oden. Because of the fast pace of city life, many young people choose to have a meal at a convenience store when going to work in the morning or returning late at night. 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. However, for most small-town youth beyond the Fifth Ring Road, the pace of life is relatively slower, and eating at home is common, so fresh food in convenience stores naturally lacks appeal. They prefer foods with local characteristics or familiar tastes, such as the baozi and braised snacks that mom-and-pop shops have sold for years. Shortly after entering the Hunan market, Today convenience store experienced a wave of store closures, partly because Hunan has many small shops specializing in local snacks. These snack shops are extremely competitive; even four or five convenience stores cannot match the sales of one such shop. Only by adapting products to local conditions can convenience store brands compete with mom-and-pop shops in different cities. Zhang Sheng, Director and Vice President of Lawson China, once said, "The post-60s and post-70s generations built hypermarkets, the post-80s built Taobao and the internet, and the post-90s built Ele.me, Meituan, and JD Daojia. What the post-00s will create depends on our efforts. Each generation is different; if we don't segment our products, we won't succeed." Bianlifeng has done relatively well in "localization." Since starting in Beijing, Bianlifeng has introduced regional specialty foods such as hot dry noodles and minced meat noodles in stores in other cities. Beyond hard products, mom-and-pop shops also have unique advantages in soft services. From a location perspective, mom-and-pop shops and convenience stores differ significantly. The former are usually close to residential areas with a lively atmosphere, relying on foot traffic from regulars, while the latter are typically located in commercial areas and near subway stations where there is high foot traffic and young people gather. To attract neighborhood customers, mom-and-pop shops have expanded more convenience services, including receiving packages, printing and faxing, and larger ones might even open a mahjong parlor to gather people. This is similar to convenience stores in Japan, which offer services like ATMs, restrooms, printing, parcel delivery, and utility bill payments. In other words, mom-and-pop shops in lower-tier markets not only sell products but also sometimes serve broader needs such as local socializing and convenience services. Through these services, mom-and-pop shops have already understood the consumption habits of surrounding customers and integrated into their lifestyles. Acquaintances help each other's businesses, and this stable network is difficult for outside convenience stores to break. So you will see that even when chain convenience stores open in communities, most customers are young people, and they rarely attract middle-aged and elderly people. Besides price factors, there is also a considerable element of personal relationships. To use an inappropriate metaphor, if convenience stores are the "strong dragon," then mom-and-pop shops are the "local snake." Whether the strong dragon can overpower the local snake depends on whether it can integrate into local life through products and services.

Conclusion In 1968, China's first 24-hour convenience store, Xinghuo Day and Night Store, opened in Shanghai. Since then, this small retail format has spread like a spark across the country. Over the past fifty years, convenience stores have almost always flourished in high-tier cities, rarely venturing into lower-tier cities. Now, moving into lower-tier markets has become the consensus of most convenience store brands, as there is new growth space. The vast frontier offers great opportunities, but they face competition from a large number of mom-and-pop shops and rivalry from peers. How to navigate the "march to the countryside" smoothly? Yidian Caijing believes the words of 7-Eleven founder Toshifumi Suzuki can serve as an answer: The real competitor is not other convenience store brands, but the ever-changing needs of customers.

Source: Yidian Caijing (ID: yidiancaijing) -END-