"Less waste at the source, faster sales at the store, better purchases at home!"

On August 21, Zhang Haibo, co-founder of Lemeng, delivered a speech titled "Trends and Impacts of Community Retail Chainization" at the 3rd China FMCG Hard Discount Conference.

Since its establishment in 2004, Lemeng has focused on serving community retail sectors such as fruit chains, snack foods, and fresh food supermarkets. Over the past 20 years, Lemeng has walked alongside many entrepreneurial companies, witnessing the rise of the snack discount pioneer, Laoban Daren, from obscurity to becoming the largest local snack chain brand, and also witnessing Snack Busy grow from over 60 stores to a chain of over 10,000 stores. Along the way, as co-founder, Zhang Haibo has accumulated deep insights and unique perspectives in the retail chainization field. New Distribution has compiled Zhang's speech into an article to share with everyone (with some excerpts).

Community retail is changing in cycles of 5-6 years

Community retail chains are changing in cycles of 5-6 years. Taking chain snack stores as an example: from 2008 to 2012, mainstream snack specialty stores were represented by brands like Liangpin Shop and Laiyifen; from 2012 to 2018, mainstream snack bulk stores were represented by Laoban Daren; from 2018 to 2023, mainstream snack discount stores emerged, with brands like Haoxianglai and Snack Busy rising. The renewal of the retail chain industry is driven by changes in franchisee return on investment. If the ROI for franchisees slows down, new store formats will appear. The essence of store format iteration is improvement in operational efficiency. Hard discount is a product of efficiency improvement, with a business mindset that removes costs from every link and improves operational efficiency, specifically breaking down into manufacturers reducing marketing expenses, retail enterprises gradually eliminating wholesalers, and stores lowering gross profit margins. The operating costs of a retail chain enterprise mainly consist of two parts: one is supply chain costs, and the other is operating costs, which are two important topics for achieving hard discount transformation. The retail industry is like a zoo, where each link has its unique business form.

Whether it's product structure, store location, or the choice of business model—such as franchise or direct operation? Or the category operated—fresh food, fruit, or full category? Each link is like a different animal in the zoo, with its unique attributes.

The most core optimization in the renewal of retail enterprises is the cost structure, namely store operating costs and warehousing costs. Sometimes, cost structure optimization hits bottlenecks. Taking traditional supermarkets as an example, their store-end costs are typically between 20% and 25%.

To achieve profitability, supermarkets often need to increase gross margins. However, because other retail models have much lower cost structures than supermarkets, raising prices makes the situation even more difficult for supermarkets. For example, snack discount stores using the hard discount model can control costs to 10%-12% by optimizing store operations, with a comprehensive markup rate controlled at 18%, leaving a net profit of 8% for franchisees. This way, franchisees can basically recoup their investment within 18 months, making the ROI faster.

Community retail trend—hard discount

Since the second half of last year, some of Lemeng's clients have begun transitioning to the hard discount model. Among these clients, some originally operated small chain formats, while others were previously engaged in traditional supermarket businesses.

During their transformation, optimizing the cost structure still revolves around the two major areas of store-end and warehousing. As of now, some clients who have successfully implemented hard discount have achieved a 6% optimization in store-end cost control. According to data statistics, for chain stores adopting a national franchise model rather than being limited to specific regions, it is difficult to compress warehousing costs to 1%-2%. Therefore, from the perspective of optimizing warehouse management, Lemeng does not recommend that clients expand business in several provinces simultaneously. In the future, the standard rule for community retail store-end cost control is 6-8 percentage points. Suppose a community or street currently has 10 retail stores; in the future, 3 may be eliminated because they cannot control costs within 6-8%.

The remaining 7 stores will face a polarized situation. Among them, 3 may be taken over by chain brand operators. The other 4 stores may be served by new-style distributors—distribution service providers.

The essence of chain operation lies in replicating successful store formats, not just selling goods. Some enterprises can only open 20 to 30 stores over many years because they do not realize this.

True chain giants, such as enterprises adding a thousand stores per month, sell proven business models and standardized store formats. Enterprises that want to achieve discount transformation and rapid growth need to shift from a mindset of selling goods to selling store formats.

How to sell chain store formats well?

Chain development is divided into three major elements and four stages. The three major elements are goods, people, and stores. The four development stages are the nodes of chain evolution.

Initial stage: 0-20 stores

In the initial stage of chain stores, it is crucial to explore a replicable store format, which directly affects the ROI. ROI is closely related to personnel costs, rent, product loss, and other factors. For example, fresh food categories can attract traffic, but they have high loss rates and high personnel requirements. Without scale, it is difficult to control costs, making them unsuitable for the initial stage. Therefore, when the number of stores and scale have not yet reached a certain level, optimizing the store format to achieve a cost control point of 6% to 8% is the key task at this stage.

Second stage: 20-100 stores

Entering the second stage of development, retail enterprises need to build a professional sales team focused on franchise expansion and investment attraction. Having a mature investment attraction system and expansion team, as well as a comprehensive franchisee service system, is crucial. At this stage, enterprises have shifted from pure product sales to selling store models, so they must establish the corresponding organizational structure to support this transformation.

Third stage: 100-500 stores

In the third stage of retail chain development, enterprises typically already have one to two hundred stores. At this point, they have the ability to reduce intermediate links and cooperate directly with production bases or manufacturers. Another focus of this stage is to increase the second-store rate, that is, encouraging franchisees to open more branches. For the management side, having 100 stores does not require 100 different franchisees; rather, it is preferable to have 10 franchisees, each with 10 stores. This not only reduces operational management costs but also increases franchisee loyalty and willingness to cooperate. Furthermore, if a store can bring a franchisee a profit of 400,000 yuan, and the gross margin is 6%, then when a franchisee has 6 stores, we can encourage the franchisee to accept a slightly lower profit by adjusting the markup rate or profit. For example, from 4 million down to 3.5 million, or even 3.2 million. This is because franchisees are more concerned about the safety of their investment than minor differences in profit margins. If a franchisee has 10 stores in a region, it not only means that other brands find it difficult to enter, but also represents that their investment is safe. Therefore, they may be willing to sacrifice some profit in exchange for long-term safety and stability. This strategy enables leading enterprises to continuously reduce store markup rates while maintaining franchisee satisfaction and loyalty.

Fourth stage: 500-1000 stores

Entering the fourth stage, retail chain enterprises, such as leading companies in the snack industry, are expanding at a rapid pace, seizing key market positions. The closer to the end of the war, the more precious scarce resources become for stores with prime locations.

Less waste at the source, faster sales at the store, better purchases at home!

Since its establishment, Lemeng has focused on serving retailers, but two years ago began building a distributor system. Lemeng found that with the evolution of community retail, traditional mom-and-pop stores need to reduce their cost structure to 6% to 8%. To achieve this, they need the help of category service providers to optimize operations. In the retail transformation, some brands like Snack Busy and Haoxianglai have shifted from pure product sales to selling the entire store model. Traditional distributors, who originally only acted as agents for manufacturer products, now need to transform from simply selling goods to providing overall product portfolio solutions. This includes improving operational capabilities, organizational capabilities, inventory turnover efficiency, and in-store service capabilities. At the same time, distributors also need to pay attention to store sell-through, including strategies for traffic-driving products and profit products, the timing of new product launches, and price points that the community cares about. These services are provided by distribution service providers, who are responsible for integrating operations and sales to support mom-and-pop stores in competing against chain brands. In terms of digitalization, the solutions that chain retail enterprises have used in the past for procurement and product design can also be reused and provided to distribution service providers, helping them achieve digital transformation and improve service efficiency. In North America, many large category service providers actually play the role of distribution service providers. The future development of community retail will mainly rely on two models: one is the services provided by chain enterprise headquarters; the other is professional distribution service providers. Lemeng, as a company with 20 years of digital management experience, bears the responsibility and mission to bring this experience to distributors. Lemeng has a dream: through our efforts, we hope to contribute to China's food and agricultural product industry, with the goal of achieving less waste at the source, faster sales at the store, better purchases at home!

PS: The 2024 3rd China FMCG Hard Discount Conference, hosted by New Distribution and co-hosted by Lemeng, has come to a successful conclusion. For friends interested in the speeches at the Hard Discount Conference, please follow the recent posts on the WeChat official account of New Distribution. We will compile and publish the guests' speeches for readers.

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