“Taking over Carrefour, some said we were foolish, wanting to see if we could really do it. But after we moved in, we achieved twice the sales with only half the original space,” said Meng Fanzhong, founder of Biut. In 2023, Carrefour closed stores across Northeast China, and Biut moved into those locations, quickly generating high-performance media reports, making this regional supermarket brand known to more people. Starting from Hegang, a small northeastern city with a population of just over 800,000, Biut established its headquarters in Harbin in 2017, moved to Shenyang in 2021, and is set to exceed 7 billion yuan in sales in 2024. After more than two decades of development, Biut has grown into the largest supermarket chain in Northeast China.

In fact, in the supermarket industry, Biut founder Meng Fanzhong has always been a driver of change. As early as 2019, he began to abandon the traditional back-end model of supermarkets, operating entirely around the business logic of large chain supermarkets: “complete product range, low prices.” He worked with suppliers to provide customers with low-priced, competitive products. To improve sales per square meter and inventory turnover, he creatively implemented daily distribution, and later even eliminated store warehouses, reducing Biut's expense ratio from over 20% to the current 17%, with a target of 15%. Moreover, Meng began promoting the construction of distribution centers in 2023, with warehouses already built in Shenyang and Jinan, each aiming for annual sales of 100 billion yuan in the future. “By optimizing and integrating the supply chain, procurement costs are lower, and the selling prices of products are lower. Only with high efficiency and low cost can physical stores compete with online,” Meng said.

Recently, I had an in-depth exchange with Mr. Meng Fanzhong. He provided brilliant insights on Biut's business philosophy, current problems in the supermarket industry, the concept of distribution centers, and the future of industry reform. This article shares the main content of our exchange with you.

Hegang, Heilongjiang, is a coal industry city with a population of over 800,000. In 1996, Meng Fanzhong started his business with a 6-square-meter cosmetics store called Baimeisheng. In 2002, he opened his first supermarket, named Biut, which later expanded across Northeast China. In 2023, Biut had 66 stores in the Northeast, with sales of 5.5 billion yuan, and in 2024 it will reach 7 billion. The 13 supermarkets in Hegang alone generate over 1 billion yuan in annual sales. Mr. Meng told me that there were two major transformations in Biut's development.

The first major transformation was in 2019, the third year after Biut entered Harbin, when store operations began to decline and losses occurred. Meng Fanzhong conducted in-depth research on stores and the market, finding that consumers praised Biut for its environment, service, and quality, but no one mentioned price. Moreover, the same products were cheaper not only online but also in small shops. To win back consumers, Meng benchmarked against small shops and lowered prices on over 4,000 items at once, but more than 300 of those items ended up with negative gross margins after the price cuts. The reason was simple: Biut's purchase price for these items was higher than the selling price in small shops. More serious than this problem was that no one thought it was a problem. When asking procurement to negotiate prices, they had a thousand reasons why they couldn't. Suppliers said, “You charge various fees, so my prices can't come down.”

“Supermarkets and hypermarkets developed early on, with the advantage of a complete product range and one-stop self-service, but now supermarket operations have completely deviated from this track. With 18,000 SKUs, only 6,000 are selling. That's too many items, not a complete range! And for one-stop self-service, manufacturers pay fees to get good positions and hire promoters to sell. Products are not operated around consumer needs, and prices are high. How can such supermarkets not decline?” In 2019, Biut proactively reformed itself. Meng Fanzhong began to cancel various back-end fees and required that Biut's purchase prices not be higher than those of small shops. Poorly selling products were eliminated, rather than being displayed forever because manufacturers paid fees. Meng said that everyone thought it was normal for chain supermarkets to sell at higher prices. China's supermarkets have been led astray by some international hypermarkets; this is the root problem. We learned from these foreign brands as teachers, but if they themselves are failing, should we still follow them? In addition to changing the back-end model, Biut also pioneered a daily distribution logistics mechanism, which not only improved inventory turnover and reduced inventory and labor costs, but also later led to the elimination of store warehouses. These are all proactive changes Meng made after deep reflection on the traditional model.

The bottom shelves of the warehouse look like a warehouse store, but this is actually Biut's Northeast distribution center, covering over 17,700 square meters and currently holding 14,800 SKUs. Based on order demand, the distribution center delivers products to stores daily using totes, and workers directly replenish shelves. Distribution is based on sales, once a day, with high-volume stores receiving multiple deliveries. This efficiently moves the action of store employees fetching goods from the warehouse to the logistics distribution center. Traditional supermarkets have store warehouses, where hundreds of square meters generate no sales, hold large amounts of dead stock, and employees slack off. This is a “hiding place for dirt” and a configuration that greatly affects store efficiency. A 2,000-3,000 square meter supermarket without a warehouse was previously unimaginable, because industry teachers like Walmart and Carrefour all had them. Meng Fanzhong thinks differently. “They had only a few stores in a city back then. How could they build distribution in one city? They built one warehouse for several provinces, so how could they do daily distribution? But now we have so many stores in one city, why can't we do daily distribution and break-bulk?” Through daily distribution, Biut has effectively improved store-level refined management. For FMCG and general merchandise, stores don't need warehouses; the typical 400-800 square meter warehouse is compressed to about 40 square meters, used only for some fresh products. Store inventory drops by 60%, and staff decreases by about 40%. Biut's reform essentially shifts from the traditional model of operating shelves to operating products with consumers at the core, which is the essence of retail. It is on this basis that Biut has the confidence to take over Carrefour. To date, Biut has taken over 12 Carrefour stores, mostly invited by property owners. “We are not expanding blindly; we have a clear idea of input and output. For example, for a store we took over in August last year, we have already recovered 40% of all investment.” In the current difficult environment for the supermarket industry, Biut is one of the few “top students.” Meng Fanzhong has been sharing his experience on various occasions, urging peers to reform and adjust. However, Meng admits that proactive reform is indeed very difficult. “In the traditional model, various fees paid by upstream are the main profit source. If I give them up, prices come down, but how many more customers will we gain? Can we make up for the loss of back-end fees? If you can't calculate this clearly, the larger the scale, the less you dare to gamble.”

“Many people think that the real economy is failing and the market is failing, but if you think that way, you can never change.” Facing the impact of online, the real economy does face difficulties, but based on Biut's experience, Meng believes it's not that the real economy is failing, but that the industry itself hasn't done well. As a member of the industry, Meng not only shares and advocates, but also actively promotes industry reform, such as building distribution centers to drive supply chain reform.

Mr. Meng told me that the first transformation in 2019 solved the problem of being more expensive than small shops. The second transformation, starting in October 2023, is to cooperate directly with manufacturers to get agency prices. This also led to the launch of distribution centers. During the process of reforming Biut's model and lowering prices, Meng discovered a problem: many products sold in larger volumes at Biut, but the purchase price was higher than what distributors paid. He later figured out that in the manufacturer's price system, the cheapest price was given to distributors, so he began to ask manufacturers for agency prices. Initially, many manufacturers disagreed, saying, “You are KA, so I use KA prices.” Meng said, “I have canceled various traditional KA fees, and my volume is larger. Why should my purchase price be higher?” It seems simple, but it's not easy to push through. Many brands believe this conflicts with existing channel policies, and there was also opposition within Biut. But Meng was resolute, believing this is the future of China's FMCG industry. Starting in March 2023, Meng began uniting many chain supermarket companies to establish Zhenshimei Supply Chain Management Company, leveraging scale advantages to obtain agency rights from many manufacturers and building “distribution centers” to efficiently supply goods to participating chain supermarkets. Zhenshimei is building a “large distributor” to allow participating companies to replace many small distributors with high purchase prices, thereby significantly reducing procurement costs, improving gross margins, and enhancing the profitability and core competitiveness of participating supermarkets.

“This is an independent supply chain company, co-owned by retailers. Biut is just one shareholder. Small distributors responsible for other channels can also join and become participating companies. Zhenshimei can empower other small distributors.” Many manufacturers are resistant to establishing a “Zhenshimei large distributor,” fearing conflicts with their existing distribution networks. But the distribution center is about streamlining, not breaking. “Before supplying to any supermarket system, we obtain the brand's consent.” In fact, if not for pooling resources with other retailers to build a distribution center, it would be much easier for Biut, given its size, to obtain agency qualifications from manufacturers. Why push for a distribution center from the start? For many small supermarkets, direct full-truck deliveries from manufacturers would lead to large inventories and even expired products, making it difficult to operate Biut's model. More importantly, Meng believes the real economy has a future. After multiple research trips to Japan, Europe, and elsewhere, comparing distribution and retail forms, he firmly believes chain supermarkets have a bright future, and distribution centers are beneficial for driving industry-wide reform. In the Chinese market, from manufacturer to consumer, prices increase by 40%. “Agents add 20 points to retailers, and retailers add another 20 points to customers,” Meng said. “What about the Japanese retail market? Around 23 points.” Why are physical stores in China failing? Because online prices have an advantage, with a markup of only 33.5%. “Through our distribution center model, we can reduce the physical markup to around 26% to 30%, giving our physical stores an advantage.” Supermarkets make money by renting out shelves and charging various fees, with upstream manufacturers paying, but ultimately it's all in the cost. Prices are high, and the products sold are not based on consumer demand, so consumers don't want to come. But most supermarkets find it hard to change, especially those with insufficient scale to negotiate with upstream. The distribution center is actually initiated by Biut to drive industry change. Moreover, this is also beneficial to upstream brands. Due to overly fragmented channel networks and long chains, R&D, production, and sales cannot form an efficient feedback system, and large amounts of goods pile up in distributor and retailer warehouses. This is the current problem facing upstream manufacturers. With scale and data, production, supply, and marketing can be connected to provide good products to consumers together. Meng added, the distribution center is also a measure to promote the integration of production, supply, and marketing, bringing huge value to upstream brands.

Written at the end

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