China's consumer market is becoming a focus for capital and entrepreneurs. The iteration of consumer groups, differences across market tiers, and changes in media are generating numerous entrepreneurial and innovative opportunities. In the entire consumer retail market, while online dividends are gradually disappearing, offline retail still has great potential, especially community commerce, where breakthroughs in service experience and convenience will allow a group of excellent consumer enterprises to expand beyond their regions and become the next generation of retail service infrastructure. At the recent "Yecao New Consumption Two-Week Thought Party & Community Retail Industry Salon," Pan Jinju, founding partner of Kuanzhao Venture Capital, shared in-depth insights on China's consumer market and community retail, focusing on three major variables, differences, and the core barriers of the store-visit model. With years of retail investment experience, having invested in projects like Linji Convenience, Fresh Life, and Every Day Convenience, Pan Jinju has unique insights: "China's consumer market is a non-homogeneous, diversified economic complex. If Japan is a pond in the consumer market, China is a vast ocean with very strong absorption and accommodation capacity." Looking ahead, she believes that in the next 10-15 years, the core of urban fulfillment systems will remain store visits, which harbors many opportunities for business model upgrades. The following is a transcript of Pan Jinju's sharing, edited by Yecao New Consumption: As the founder of an early-stage consumer retail fund, today I am also speaking as an entrepreneur, sharing my thoughts on China's consumer market and how it will evolve in the next 10 to 20 years. Consumption is essentially about people. Japanese consumer society research expert Mitsuru Soma said in his book "The Fourth Consumption Era": Consumption is not only a process of labor reproduction but also a process of gradual release of human nature. I extend this: consumption is a result, an external self-expression, and a label. From the Variables of China's Consumer Market, How Will It Evolve in the Next 20 Years? I believe there are three core variables in China's current consumer market.

  1. The first major variable: Consumers As you can see, China's post-80s, post-90s, and post-00s populations are 228 million, 174 million, and 126 million respectively, accounting for 42.66% of the total population. This proportion will exceed 45% by 2020, and this group's consumption share will reach 53% of market consumption by 2020. Consumption concepts and systems across different age groups are also undergoing significant changes. For example, a male colleague born in the 1990s watches beauty blogger live streams while washing up in the morning, and he already uses eye cream. Imagine ten years later, in 2030, the post-90s will be 31-40 years old, the post-80s 41-50, and the post-00s 21-30. How will the consumption proportions of these core consumers change, and where exactly are their demand points?
  2. The second major variable: China's consumer market is a non-homogeneous, diversified economic complex There is nothing new under the sun. By studying the consumption cycles of Japan, Europe, the United States, and Taiwan, we can see the evolution of a country from poverty to wealth, from consumer market and business formats to the final fulfillment system, and gain many insights and references. Today, China's core social macro data is relatively close to Japan's period from 1974 to 1990. Japan was then in an era of rapid consumption upgrading, with many innovative channels and brands emerging. For example, Daiso in 1972 and Uniqlo in 1984. Since 2012, China has been experiencing a similar stage, with a large number of new channels and brands emerging. Many people ask, will China lose 20 years like Japan? My answer is no. If Japan is a pond in the consumer market, China is a vast ocean with very strong absorption and accommodation capacity. China's consumer market is a non-homogeneous, diversified economic complex. The so-called non-homogeneous refers to a vertical combination of economies at different stages superimposed together. On one hand, non-homogeneity is reflected in large regional income disparities. According to 2017 per capita disposable income data from 31 provinces and municipalities, Shanghai residents had a per capita disposable income of 58,988 yuan, while Tibet had only 15,457 yuan, a difference of 3.8 times. On the other hand, it is reflected in the level of higher education. China lags far behind developed countries in this regard; the proportion of the population with higher education is 15%, while Japan and the United States have basically reached 50%. Therefore, the Chinese market is not simply like Japan; it may be Japan plus the Philippines plus South Korea. When we look at Pinduoduo, we think it's consumption downgrading, but when we look at Hema Fresh, we think it's upgrading. This is because China is too vast, with very diverse opportunities.
  3. The third major variable: Media is changing China's media is changing. In the past, consumer goods like Procter & Gamble in the United States built brands through mass media such as television and newspapers. But today, apart from traditional media like television, the overall media landscape is becoming fragmented and diversified. Changes in media directly affect China's consumer goods and have spawned many local brands. For example, we might buy private-label clothes on Dibeika or buy fruit on Youhaodongxi. From the Interesting Differences in China's Consumer Market, Look at Future Opportunities Based on the variables just mentioned, we observe some interesting differences from a global perspective and see some future opportunities for China. First, China has an extremely powerful C-end. For example, apps like Alipay and Ele.me with hundreds of millions of monthly active users are rare globally. China's mobile internet development in the information technology era will be stronger than any other country, even surpassing the United States. Second, China has unique infrastructure—riders. With riders, innovative models like Meituan and Ele.me can achieve O2O and cover the last mile. We are also considering the possibility of combining online riders with offline retail, but whether this combination is sustainable remains unknown. Third, a retail layout with Chinese characteristics. Whether it's Walmart, Alibaba, or Meituan, any expansion in the consumer field is standardized, industrialized, capitalized, and intensive. But China's characteristic is that the stages of information technology and traditional consumption expansion are mixed together, forming the retail layout of Alibaba, Tencent, Meituan, and JD.com. We believe that today's offline consumer retail market in China lags behind the United States by many years. However, in mobile internet, China is actually on par with the United States. Especially, the trend of traffic monopoly in China's mobile internet is obvious. In 2017, the retail customer acquisition cost for the two major platforms Taobao and JD.com was 250 yuan per person, and social e-commerce total online shopping accounted for 15% of total social retail sales. Social e-commerce is also developing, diverting some traffic, but a large portion of the consumer market remains offline. So where are the opportunities for China's consumer market in the next 10-20 years? We believe that the core of urban consumption in China is still the fulfillment system for purchasing goods and enjoying services. The upgrade demand for community commerce is very typical, and the current physical supply in lower-tier markets is relatively scarce. Therefore, a large number of future opportunities in China lie in the offline consumer retail market. Urban Consumption in China, Store Visits Remain the Core Method Among various offline retail formats, community group buying is currently the most attention-grabbing, with a large influx of capital, but I think there are several problems:
  4. Profitability issues Community group buying can explode in the short term, but it needs to answer one question: how to make money? Meituan's 2018 order volume was over 6.3 billion, with a fulfillment cost per order of 8.3 yuan in 2016 and 7.89 yuan in 2017. So the core is whether your average order value and gross margin can ultimately bear this fulfillment cost, which is how you can make the business model work.
  5. Model issues Community commerce accounts for 60% in Europe and the United States, but only 30% in China. Everyone knows that despite rapid real estate development, there is a lack of supporting commercial planning. I think the current market direction is correct, which is to innovate and upgrade community commercial services around the last mile. So what are the future directions? First, fresh food community stores. This direction is highly recognized because it meets the rigid demand of household spending. In the future, it may combine with convenience stores or be pure fresh food stores. Second, discount supermarkets. Taiwan, with a population of 20 million, has 11,000 chain convenience stores. As of the end of December 2018, Taiwan had over 5,300 7-Eleven stores and over 3,000 FamilyMart stores. This density and penetration are already high enough, but against this backdrop, Taiwan's consumer cooperative, Pxmart, which pursues a low-price strategy, has emerged and now has 1,000 stores. Pxmart has risen over the past five or six years due to first, substantial financial support; second, its fresh food category, which now accounts for nearly 20% of its sales; third, an efficient organizational system, with excellent logistics and information systems, and deep community penetration. Pxmart achieves low prices with a gross margin of 18%, and through an efficient organizational system, it keeps stores running. This is its core capability building and is difficult to imitate. In the next 10-15 years, there are many opportunities for category and business model upgrades offline. The core of urban fulfillment systems is store visits, and in corresponding consumption scenarios, either provide an ultimate service experience that online cannot replace, i.e., the third space, or allow consumers to conveniently buy good products, seeing is believing. Convenience Stores Are a High-Cost Chain Industry, Quality Scale Is the Core of Profitability In offline retail, besides community group buying and discount stores, convenience stores remain a focus for us. Convenience stores are a high-cost chain industry. They need to build warehouses, logistics, a strong headquarters to sell products, and front-end stores and staff training. This high-cost model can only be profitable through quality scale. So where is the future of regional convenience stores? I think it's simple: achieve higher density penetration and scale within the region. That's the first step in the short term. First, achieve scale. If you let others make money, supply chain is just a result; the premise is that with scale, you have the ability to build supply chain advantages. No one will give you low prices out of personal favor. This requires financial support. Over the past two years, we've seen some capital investing in convenience stores, especially local ones, which is a good phenomenon. Second, how to achieve better scale? There are essentially two models. One is direct operation, where you open stores yourself. In Beijing, including rent and labor costs, a single store requires at least 1 million yuan, so capital needs are very large. The other is franchising, where others open stores. In Japan and Taiwan, 90% of chain convenience stores are franchised, and 10% are directly operated. To achieve scale through franchising, you need a very good chain franchise system. Japan's 7-Eleven does this best. Most of 7-Eleven's factories, logistics centers, stores, and staff are not self-owned; it uses a very efficient organizational system to coordinate the entire production and operation process, from product development and logistics distribution to store management. We talked with the head of Beijing 7-Eleven, who said that Beijing 7-Eleven's franchise training lasts 7 days, and the first day's training content is how to mop the floor quickly and cleanly. To a certain extent, whether they can efficiently and scalably build this organizational system is their core capability building. Third, how to achieve quality? From a broader framework, there are the following two points. 1) Choose cities Because the core gross margin of convenience stores is 30%-35%. If the proportion of fresh food is high, the gross margin will be higher; the rest is rent, labor, store decoration costs, etc. Today, China's convenience stores still have a big gap with Japan in food manufacturing. This is the supply chain of the product itself, i.e., the current situation caused by the upstream supply chain of China's food manufacturing industry. So changing this will take time. Beijing 7-Eleven has been open for so many years and has supported only one fresh food factory called Yami Yami. Moreover, we found that local convenience stores in China's regions, even without financing, still have room to open a store and make money from it. Among the top 10 U.S. retail companies, those that do particularly well mostly started in third- and fourth-tier cities. Their cost structures also allow them to open a store and make money from it. Therefore, China's convenience stores still have a very large market space in the future retail market. 2) Have enough time and space Because competition is very small, you need to build a very strong and combat-effective retail team. Taiwan's 7-Eleven actually evolved from Uni-President. In the first year, they opened 14 stores and 2 warehouses in 3 cities. Convenience store companies exploring offline need to truly immerse themselves in the industry and build capabilities one by one. With the internet, you can break through traffic and compete. But offline is different; from supply chain, operations, product selection, etc., you need to master multiple skills to initially do this systematically. This is the difference between online and offline teams. So, how do internet teams enter the offline market? You can look at Bianlifeng. Zhuang Chenchao is a typical internet entrepreneur entering a very difficult industry. Compared to traditional convenience stores, Bianlifeng's front-end store quality, store iteration, and evolution speed in Beijing are very fast, but it has indeed spent a lot of money. To do this well, I think you still need to seriously dig in, find the right team, and truly integrate with the original internet team to build a retail team with strong offline store-opening capabilities. That will create many new opportunities and spaces. Source: Yecao New Consumption (ID: yecaoxxf) If a tip is adopted, a payment of 400-2000 yuan will be made. China FMCG + Internet Professional New Media Dedicated to FMCG manufacturers' transformation, upgrading, and channel digitalization solutions