---
title: "First-Tier Cities No Longer Suitable for Traditional Supermarkets"
description: "First-tier cities are no longer suitable for traditional supermarkets. According to a survey, the four supermarket chains headquartered in first-tier cities performed poorly, with Renrenle in Shenzhen and Lianhua Supermarket in Shanghai at the bottom; non-first-tier cities performed better overall, with Yonghui Superstores, Bubugao, and Hongqi Chain leading the sector's recovery. Price wars ignited by vicious industry competition are particularly fierce in first-tier cities. Among 11 supermarket chains, the four in first-tier cities had the lowest gross margins, several percentage points lower than the average of non-first-tier cities. Additionally, high rents and labor costs in first-tier cities are dragging down this asset-heavy, labor-intensive industry."
author: "徐霁"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2018-06-09"
language: "en"
canonical: "https://xinjignxiao.com/en/articles/first-tier-cities-no-longer-suitable-for-traditional-supermarkets-9ab3ed4e/"
markdown: "https://xinjignxiao.com/en/articles/first-tier-cities-no-longer-suitable-for-traditional-supermarkets-9ab3ed4e.md"
original_source: "https://mp.weixin.qq.com/s/--E051tih-nxDdouY2CDBQ"
translation: "https://xinjignxiao.com/zh/articles/%E4%B8%80%E7%BA%BF%E5%9F%8E%E5%B8%82-%E5%B7%B2%E4%B8%8D%E9%80%82%E5%90%88%E4%BC%A0%E7%BB%9F%E8%B6%85%E5%B8%82%E7%94%9F%E5%AD%98-9ab3ed4e.md"
attribution: "New Distribution — https://xinjignxiao.com/en/articles/first-tier-cities-no-longer-suitable-for-traditional-supermarkets-9ab3ed4e/"
usage_policy: "https://xinjignxiao.com/ai-policy.txt"
---

# First-Tier Cities No Longer Suitable for Traditional Supermarkets

> First-tier cities are no longer suitable for traditional supermarkets. According to a survey, the four supermarket chains headquartered in first-tier cities performed poorly, with Renrenle in Shenzhen and Lianhua Supermarket in Shanghai at the bottom; non-first-tier cities performed better overall, with Yonghui Superstores, Bubugao, and Hongqi Chain leading the sector's recovery. Price wars ignited by vicious industry competition are particularly fierce in first-tier cities. Among 11 supermarket chains, the four in first-tier cities had the lowest gross margins, several percentage points lower than the average of non-first-tier cities. Additionally, high rents and labor costs in first-tier cities are dragging down this asset-heavy, labor-intensive industry.

First-tier cities are no longer suitable for traditional supermarkets.
According to a survey, the four supermarket chains headquartered in first-tier cities performed poorly, with Renrenle in Shenzhen and Lianhua Supermarket in Shanghai at the bottom; non-first-tier cities performed better overall, with Yonghui Superstores, Bubugao, and Hongqi Chain (002697.SZ) leading the sector's recovery.
Price wars ignited by vicious industry competition are particularly fierce in first-tier cities. Among 11 supermarket chains, the four in first-tier cities had the lowest gross margins, several percentage points lower than the average of non-first-tier cities.
**Additionally, high rents and labor costs in first-tier cities are dragging down this asset-heavy, labor-intensive industry.**
Apart from closing stores, raising prices, and cutting wages, supermarket chains cannot think of better solutions. New retail can be understood as a relatively advanced price increase strategy and cannot fundamentally solve the problem.

**Supermarket chains in first-tier cities perform worst**
The recovery of the supermarket chain industry is already evident, so why are some still mired in difficulties?
The answer is cruel: because they are in first-tier cities.
**An analysis of the 2017 annual reports of 11 listed supermarket chains (A+H shares, excluding Lia Retail, CP Lotus, and Sun Art Retail) found a clear divide in performance between first-tier and non-first-tier cities.**
In the entire supermarket chain sector, Shanghai's Lianhua Supermarket (00980.HK) and Shenzhen's Renrenle performed the worst. If we take a longer view, this conclusion is even more obvious.
From 2015 to 2017, Lianhua Supermarket's operating revenue was 27.223 billion yuan, 26.666 billion yuan, and 25.225 billion yuan, respectively, with net profits of -497 million yuan, -450 million yuan, and -283 million yuan.
**During the same period, Renrenle (002336.SZ) had operating revenue of 11.218 billion yuan, 10.157 billion yuan, and 8.855 billion yuan, with net profits of -475 million yuan, 60.48 million yuan, and -538 million yuan.**
Non-first-tier city supermarket chains generally outperformed their first-tier counterparts.
The top three in industry growth, Yonghui Superstores, Bubugao (002251.SZ), and Hongqi Chain, all come from non-first-tier cities. In 2017, they reversed the decline of the previous three years, with growth returning to double digits, leading the sector's recovery.

**Low gross margins, high costs**
The most direct difference comes from the huge gap in gross margins.
**Sorting through the gross margin data of these 11 supermarket chains, the four in first-tier cities have the lowest gross margins.**
The gross margins for Lianhua Supermarket, Hualian Supermarket, Beijing Jingkelong, and Renrenle's supermarket business were 14.90%, 12.03%, 14.20%, and 14.24%, respectively; far lower than their non-first-tier peers: Yonghui Superstores (16.40%), Bubugao (17.40%), Zhongbai Group (22.50%), Jiajiayue (17.23%), Xinhua Du (15.99%), and Sanjiang Shopping (20.29%).
**The difference in gross margins for the same supermarket chain in different regions may better reveal the problem.**
Take Yonghui Superstores (601933.SH) for example. In 2017, its Beijing and East China regions had gross margins of 15.66% and 15.57%, respectively, lower than the company's main business average gross margin.
Everyone knows that supermarkets are a difficult business to make money in.
Supermarket chain operators in first-tier cities, in order to gain market share, have had to resort to price wars, which hurt both themselves and others, and over time they find themselves in a dilemma.
**At the same time, costs continue to rise.**
There is no way around it; the business model of supermarket chains means they cannot reduce marginal costs through economies of scale.
**The reporter compared Hualian Supermarket and Jiajiayue, which have similar scale and comprehensive gross margins, and found that the decisive factor for normal profitability is the cost of leases and other expenses in selling expenses.**
In 2017, Hualian Supermarket (600361.SH), mainly operating in Beijing, had selling expenses of 2.162 billion yuan, accounting for 18.39% of operating revenue, of which lease expenses were 489 million yuan, accounting for 4.16% of operating revenue.
In contrast, Jiajiayue (603708.SH), deeply rooted in the Jiaodong market, had selling expenses of 1.814 billion yuan in 2017, accounting for 16.01% of operating revenue, with lease expenses of 292 million yuan, accounting for 2.59% of operating revenue.
It was the extra 200 million yuan in rent that caused Hualian Supermarket to earn 232 million yuan less than Jiajiayue in 2017.

**Is new retail primarily about raising prices?**
Supermarket chains in first-tier cities have long discovered these weaknesses and started cross-regional operations relatively early, such as Renrenle heavily investing in Xi'an, Lianhua Supermarket relying on the Yangtze River Delta and looking eastward, and Hualian Supermarket spreading across the country.
However, the effect of hedging risks is not obvious.
**In the end, the methods supermarkets use to solve operational difficulties still fall back on the strategies previously mentioned by Zebra Consumption: closing stores, raising prices, cutting wages...**
When it comes to closing stores, Lianhua Supermarket is definitely the king of store closures. In 2017, Lianhua Supermarket closed 492 stores; in the past three years, it closed a total of 1,581 stores, with a net decrease of 870 stores.
Lianhua Supermarket "reported good news" in its 2017 annual report: because of store closures, it saved 127 million yuan in rent and reduced labor costs by 101 million yuan, which was the main reason for the company's reduced losses that year.
Relatively speaking, Hualian Supermarket's sale of its high-end supermarket brand BHG was a "big move." The company achieved profitability through this self-sacrificing act, but it was also criticized as "drinking poison to quench thirst."
**In addition, the reporter found that some supermarket chains in first-tier cities are no longer blindly pursuing price advantages in the face of survival.**
Lianhua Supermarket's gross margin rose from 14.36% in 2013 to 14.90% in 2017, and Beijing Jingkelong's (00814.HK) gross margin in 2017 directly increased by 1.7 percentage points compared to 2016.
**Most non-first-tier city supermarket chains have seen a general downward trend in gross margins due to increasingly fierce competition.**
Of course, to solve these problems, they are all scrambling to label themselves as "new retail."
But for now, rather than saying new retail is an innovation in business format, aimed at providing consumers with better life services, it is more like providing a more advanced reason for price increases.
Perhaps new retail points to a better future business model, but what we see now is just price increases: in Wuhan, a bottle of Nongfu Spring water with a retail price of 2 yuan sells for 1.5 yuan at a small unnamed supermarket at the community entrance, but some convenience stores sell it for 2.5 yuan or even 3 yuan.
Source: Zebra Consumption (banmaxiaofei)
-END-


---

## Copyright and AI use

This article is sourced from New Distribution. Search, quotation, summarization, and model training are permitted, but every use must credit New Distribution and retain the canonical source URL.

Contact: zhaobo258@gmail.com · +86 158 5481 7671