Retail Business Review: The retail industry is steadily recovering. Recently, the China General Chamber of Commerce released data showing that in May, China's retail prosperity index was 50.9%, up 0.5 percentage points from the previous month, maintaining a steady upward trend. Leading indicators such as the logistics prosperity index and retail prosperity index performed better than expected, indicating enhanced market confidence and consumer expectations. Convenience stores, as the capillaries of the retail industry, are in a period of continuous chain branding evolution. There is still significant room for growth in both market size and store count. In terms of models, they are also rapidly iterating, with instant retail, community group buying, and livestreaming bringing new operational models to convenience stores. The development of convenience stores is on the fast track. We observe that on one hand, the number of chain convenience stores is leaping forward, but on the other hand, they face challenges from homogenization and new formats such as various discount stores. In this process, branded convenience stores need to build their own moat of differentiation and refined operations.

Convenience Stores 'Leap Forward,' But Challenges Coexist

The scale of chain convenience stores in China is continuously growing. According to the "2023 China Convenience Store TOP100" list released by the China Chain Store & Franchise Association, Meiyijia, Sinopec Easy Joy, and PetroChina Kunlun Hao Ke ranked in the top three, with Tianfu Convenience and Lawson ranking fourth and fifth with 7,208 and 6,330 stores respectively, followed by Furong Xingsheng, 7-Eleven, Shizu, Hongqi Chain, and Shenzhen Yizhan.

Convenience store TOP40 list. (Image source: China Chain Store & Franchise Association) In terms of performance, many domestic chain brands have emerged. In 2023, convenience store enterprises showed a recovery trend, and companies became more optimistic. According to the China Chain Store & Franchise Association, in 2023, 81.4% of convenience store enterprises saw year-on-year growth in total sales, while 16.9% saw a decline. Compared to 2022, the overall sales of the convenience store industry improved. Among enterprises with declining sales, 90% saw comparable store sales decline year-on-year, including some leading companies. In 2024, chain convenience stores accelerated expansion. Taking Meiyijia as an example, the latest data shows that Meiyijia has over 35,000 chain stores nationwide, with a net increase of 3,000-4,000 stores per year, serving over 200 million customers monthly. Meiyijia has been the top brand for two consecutive years, becoming the convenience store brand with the most stores in China. Compared to 2023, companies are more optimistic in 2024, with 71.2% of surveyed convenience store enterprises choosing an expansion strategy.

Based on our insights, in the long term, the convenience store market remains attractive. It is worth noting that convenience stores have been one of the fastest-growing retail formats in terms of sales in China over the past three years, with an average annual sales growth of about 20% and an average annual store growth of nearly 10%. "Branding and chain operation are the main development trends for convenience stores, especially evident in first- and second-tier cities. The momentum of brand chains is accelerating store expansion. When the scale of chain convenience stores reaches a certain level, the advantages of density effects (especially single-store profitability) will also emerge," a chain retail industry consultant told us.

From the consumer side, "youthfulness" has become a label for high-frequency convenience store consumer groups, and it is necessary to meet their multi-time, multi-scenario needs to a certain extent. According to iiMedia Research data, in 2023, Chinese consumers spent an average of 44.8 yuan per visit to convenience stores. "Brand convenience stores have high standardization and more complete product categories. I usually choose convenience stores for daily necessities and fresh food. Some hot products are also easier to buy at convenience stores." "Convenience stores, as the name suggests, are valued for their convenience. Now you can also buy products from nearby convenience stores at home, with delivery to your door," some consumers said. From the consumer market, it can also be seen that the younger consumer demand is pushing supply-side brands and merchants to iterate and upgrade. The brand chain operation of convenience stores is the mainstream trend. Data shows that the number of chain brand convenience store outlets increased from 62,147 in 2013 to nearly 300,000 by the end of 2022. But even so, there are nearly 6 million mom-and-pop convenience stores in China. If calculated by proportion, chain brand convenience stores account for less than 5%. This also indirectly confirms the inevitability of the transformation and upgrading of this market. The author believes that although the growth of chain convenience stores has maintained a certain rate in recent years, in the long run, it will take a long time for China to reach a relatively high saturation level. Compared with mature convenience store markets internationally, only a few cities in China have a convenience store saturation of less than 2,500 people per store, while most cities have a saturation of 3,000 to 9,000 people per store. The incremental space in the market is also obvious.

Convenience Stores Are Still 'Changing'

The development trend of China's convenience store industry is positive, with the market size expected to reach 503.3 billion yuan by 2025. In terms of market development, competition is also intensifying, with leading brands increasing their scale. First, chain brand convenience stores are targeting lower-tier markets. Currently, the lower-tier market convenience stores are mainly traditional mom-and-pop stores, which lack supply chain advantages and have relatively low efficiency. At present, both foreign and domestic chain convenience store brands are accelerating their expansion into lower-tier markets. According to the China Urban Convenience Store Development Index, Xiamen, Taiyuan, Dongguan, Changsha, and Guangzhou rank in the top five. In 2023, 64.1% of surveyed cities saw positive growth in the number of convenience store outlets, with most cities maintaining stable development. The trend of convenience stores expanding to lower-tier markets continues, having already reached fourth- and fifth-tier cities and county-level markets. At the same time, convenience stores in various cities still focus on deepening regional markets. For example, 7-Eleven has long extended its strategy to lower-tier markets in mainland China, expanding into Jiangsu, Shaanxi, Hubei, Henan, Hunan, Fujian, and other provinces. Lawson is not to be outdone. Over seven years, Zhongbai Lawson convenience stores have covered Hubei, Hunan, and other regions, opening up the lower-tier market. Some local brands are moving faster. For example, Tianfu Convenience focuses on second-, third-, and fourth-tier cities, and even villages, towns, and remote towns, which are currently in need of vigorous expansion. Meiyijia has already started its national expansion model, going both to first-tier cities and down to lower-tier cities. One of Meiyijia's development strategies is to develop across all markets from first-tier to fifth-tier. Additionally, local brands in Taiyuan such as Tangjiu and Jinhu, and Wuhan's local brand Today, have begun targeting lower-tier county markets. The author believes that there is still significant incremental space in lower-tier markets, and both foreign and domestic brands are competing for it. But it is not about blindly competing with regional brands for market share, but rather about tapping into market increments. The key is how the 6 million mom-and-pop stores can catch the fast train of chain convenience stores.

At the same time, some convenience stores are experimenting with multi-format operations, such as exploring discount stores. For example, Guangdong local convenience store brand Tianfu recently quietly opened two discount stores in Dongguan. According to the Tianfu Convenience Store official website, these two stores focus on hard discounts, based on its "Price Year" strategy, launching the discount store as a new retail format. The two stores have an operating area of about 80 square meters and are located near communities. Currently, the products sold in the discount stores are "much lower" than other Tianfu stores. In our view, discount stores have indeed had some impact on convenience stores in the past two years, especially with the emergence of various snack discount stores. However, the overall business model still has significant differences. So brand convenience stores launching discount stores should be exploring the possibility of new formats. After all, chain convenience stores have natural advantages in supply chain and logistics.

Another point is that instant retail brings incremental growth. Many small and medium-sized supermarkets, chain convenience stores, and mom-and-pop stores are accelerating their integration into the instant retail army. Instant retail brings more incremental space to convenience stores. "It not only brings traffic from online, but the average order value tends to be higher."

The author observes that instant retail is a deep integration of online and offline, increasing revenue for offline entities. For community small stores, the "business playbook" has changed. For example, the sales radius has expanded from 1 kilometer to 5 kilometers, and operating hours have become around the clock. Convenience stores rely on riders from retail platforms to meet community consumption needs within 30 minutes. The service radius has also expanded from 1-2 kilometers to 5-6 kilometers. In terms of traffic, they no longer only focus on natural store traffic, but also need to stabilize online traffic. In the past, for offline stores, the most important thing was foot traffic. Through instant retail, they now pay more attention to stable online customer flow. Now there are also more and more convenience stores, warehouses, and other retail entities focusing on online delivery. We observe that in fact, Meiyijia, 7-Eleven, FamilyMart, and other convenience stores have already integrated into instant retail and other online layouts. Instant retail will become one of the normalized models for convenience stores, and in the future, the delivery efficiency of instant retail should move towards 15 minutes. For example, Meiyijia, with over 35,000 stores, strengthened online marketing during the May Day holiday, expanding revenue through instant retail, livestreaming, and other models. Meituan data shows that from May 1 to 5, Meiyijia's instant retail orders were nearly one million, and Meituan livestreaming became a new growth point, with live room orders increasing by 36% compared to the end of April. On May 1, the live room order conversion rate was as high as 45%, meaning that for every two people entering the live room, one placed an order. In April as a whole, Meiyijia's live room average order conversion rate was 38%. Through livestreaming + instant retail, they completed a complete and efficient chain.

Another core point is that "thousand stores with thousand faces, one city one strategy" will be the key to convenience store expansion. There are significant differences in consumer and product structures across different provinces. When it comes to product structure, the same category may have different product combinations in different cities. NielsenIQ conducted a cross-analysis based on the importance of convenience store city sales changes and store opening/closing rates in 2022, finding that convenience stores in several cities in Guangdong Province have high sales importance but low store change rates, requiring intensive layout and identifying the city's people, goods, and places for efficient store expansion. "Among the current types of chain convenience stores, community-based stores account for the largest proportion and are still the main store type, of course, there are also business types and specific business districts. Now convenience stores no longer rely solely on offline store traffic. Online and offline home delivery, community group buying, livestreaming, etc., each type of store combines various scenarios, and then matches corresponding marketing, with digital insights into single-store consumers, to achieve one city one strategy and thousand stores with thousand faces," an industry insider said.

There is also the differentiated new format of the "convenience store +" model, such as + fruit, bakery, coffee, etc. And more cross-border combinations, such as Lawson collaborating with Bilibili and other IPs to create themed stores to attract young consumers. "Convenience store +" has also become a new attempt at cross-border combinations with other formats. The author believes that convenience stores still have great explosive potential, with development opportunities in lower-tier markets and emerging models. In the future, convenience stores will also use digitalization as the core base to carry out more social and scenario-based penetration, which is the true goal of conveniently meeting the "15-minute living circle."

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