Source: Jinjibo Finance (ID: jinjibo)

China's warehouse club battlefield never lacks excitement On September 26, I visited Sam's Club flagship store in Waigaoqiao, Pudong, Shanghai on its opening day. This is also the largest Sam's Club in the world, and it was my second experience of the warehouse club craze after Costco's opening day. Crowds surged toward displays of Optimus Prime robots, 1.5-meter-long potato chips, durian mille crepes, and 9-pound chocolates, with many bloggers taking photos.

Before this, Fudi, Hema X Membership Store, Beiguo Supermarket, Yonghui Supermarket, and Lianhua Lanyuan—both old and new players—had opened warehouse clubs offline. Now, with the recent opening of Carrefour's membership store, the warehouse club wave has risen again.

The turbulent warehouse club battles have once again focused public attention on this retail hotspot.

The Pioneering Battle of Traditional Forces

Community group buying is surging, challenging the price-differential model of traditional hypermarkets.

In March this year, media reported that many supermarket chains saw year-on-year sales declines of at least 10%, with most companies experiencing drops between 20% and 30%. In the first quarter, foot traffic in supermarkets and hypermarkets fell significantly, generally by over 10%, testing the limits of traditional supermarket channels in terms of both traffic and cash flow.

As of February 2021, Walmart's financial data showed Sam's Club comparable sales growth of 13.3%, with membership income the highest quarterly growth in five years. New member numbers grew over 60%, and core member renewal rates exceeded 80%. In China, Sam's Club has maintained double-digit growth for two consecutive years and plans to continue investing in new Sam's Club stores in Fuzhou, Xiamen, Quanzhou, and other cities in Fujian Province, along with new shopping malls and community stores.

The shift from hypermarket model to membership service model—meeting consumer demand for high cost-performance products and offline experiential scenarios—has made the warehouse club model one of the few remaining "pure lands" (among offline retail models) immune to e-commerce impact.

To understand the current state of a retail format, one must trace its evolution. The "from 0 to 1" pioneering battle of China's warehouse club model began in the last century.

Founding: In 1996, Sam's Club was the first to enter the mainland Chinese market, truly bringing the operational experience and standards of the warehouse club model to China, completing the "founding" of this model.

Today, Sam's Club has opened stores in major cities across China, but its early development in the Chinese market was a difficult, continuous process of market education. From 1996 to 2011, Sam's Club opened only six stores in China. The membership model, so different from traditional supermarkets, was not understood or accepted by users, and there were occasional reports of store closures.

In the context of Sam's Club, the market education process for warehouse clubs was extremely arduous. But arduous things and correct things are often two sides of the same coin—they are inseparable.

In 2012, Sam's Club finally caught a tailwind. Over the next four years, the number of domestic stores grew from 6 to 13, and from 2016 to 2019, another 10 were added. According to Sam's plan, by the end of 2022, it aims to have 40-45 stores open or under construction, building on the current 29 stores.

Among them, Sam's Club Shenzhen Guo Tou Plaza store has been Walmart's highest annual sales store globally for five consecutive years.

Establishing a School: As Sam's Club introduced the complete warehouse club standard to the domestic market, international giants and local enterprises rushed to enter.

These include the "orthodox school" represented by Sam's Club, which continuously educates users and adapts locally;

The "vacillating school" represented by international retail brand Metro, which early on tested the warehouse membership model but, due to market development obstacles, shifted to the hypermarket model. Recently, with the revival of the warehouse membership model, it has re-entered this space;

And the "local school" that spawned various variants, such as the "warehouse model" that peaked in 1997, which quickly spread across major cities through "no membership fee + warehouse experience." After consumers' novelty wore off, many retail enterprises lacking performance resilience collapsed.

At this stage, the warehouse membership model, stumbling along, summarized a unique business path:

  • Based on membership, upholding a service mindset: from curated SKUs, supply chain refinement, private brand development, and space design to the "three-meter smile principle," the warehouse membership model is a value service filled with countless details;
  • Low gross margin, high turnover, plus membership fee income: mature warehouse membership models rely primarily on membership fees for profit and cover operating costs through low margins and high turnover;
  • Targeting mid-to-high-end consumers: the middle class is the core of the warehouse membership model, and by meeting their needs for full-category, high-quality, cost-effective products, renewal rates and loyalty are achieved;
  • Wide categories, shallow SKUs, and selected brands to ensure product quality: warehouse clubs cover almost all categories but select only a few excellent brands per category;
  • Extreme cost management, building supply chains to develop private brands and supplement quality SKUs, such as Member's Mark, positioned as "selected only for members," which is Sam's Club's agile way of responding to user needs.

The Rise of New Forces and Involution Competition

In this rapidly iterating era, the capabilities you believe in are not as indestructible as you think. For brands, to secure a place in the ever-changing market, they must anchor themselves in the present, capture market demand at all times, and build their own "anti-fragility" capabilities.

As Sam's Club validated the feasibility of the warehouse membership model track, new forces are also surging into this market, including both traditional hypermarkets transforming and rising newcomers.

These include the aforementioned hypermarket pioneer Carrefour, as well as Yonghui Supermarket upgrading two stores in Fuzhou and Chengdu to warehouse supermarkets; local innovative brand Fudi opening its first warehouse membership store in Beijing, focusing on fresh produce; Hualian opening its first membership store in Lanzhou, focusing on fresh produce and imported brands... A wave of players are learning and seeking to surpass.

With the influx of new forces, three mainstream forces have emerged in the domestic warehouse club battlefield:

Sam's Club: First-mover advantage + local adaptation, better suited to the Chinese market. As of October 2021, Sam's Club has opened 36 stores in China, covering major first- and second-tier cities;

Costco: Leveraging its US operating model, strong brand effect, and supply chain management, its first store exploded brand awareness;

Hema X Membership Store: Late entrant but fast riser, with clear digital advantages, and continuously conveying the positioning that local brands better understand Chinese people.

In the warehouse club business model, membership is just the entry ticket. To truly scale and succeed, one must work on the supply chain and ultimately deliver unique experiences to members through SKUs.

New forces typically start by learning and borrowing. For example, Hema's category structure has moved closer to Costco and Sam's, from an initial 50% product structure to 80% at its second store. Similarly, in Carrefour's warehouse membership store, we can see many of Sam's Club's star products.

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However, even if this learning can be quickly "copied," achieving high similarity in product restoration, the essence of the original creator is hard to replicate.

For example, the grain series that various warehouse clubs are promoting recently—Sam's started co-creating with suppliers three years ago, starting from soil cultivation and organic planting sources, and took three years to develop the organic grain product line. Under the news comments of this event, we also saw some consumer voices.

When the competitive environment reaches this stage, the model's dividend period has passed. If even innovation cannot form long-term barriers, the industry will be surrounded by chaos. After all, no matter how fast innovation is, it cannot keep up with the speed of imitation.

Traditional giants are not nostalgic for the old battlefield. They both feel a sense of crisis and are very calm toward latecomers. It is easy to take someone's "fish," but difficult to learn their "fishing" method.

Supply chain advantages are only part of winning the war. What truly enhances the core metric of warehouse clubs—"renewal rate"—is user acquisition and retention through innovative products and unique categories.

The user insights, supply chain advantages, and rapid iteration capabilities that established warehouse clubs have developed over time are the "unique moves" that cannot be replicated in a short time.

For example, in user insights, FMCG products centered on eating and drinking are no longer the consumption focus of member groups. Sam's Club, perceiving that members' spiritual consumption needs such as outdoor travel are growing, strategically launched the Sam's Yunjia business. By understanding the needs of the middle class, Sam's continuously iterates SKUs, providing new inspiration for members' daily lives.

For areas with limited coverage, Sam's Club has set up front warehouses and launched a "1-hour delivery" service to improve member renewal rates and coverage.

On the supply chain front, Sam's Club goes beyond end products, using quality control and standards to push every link of the supply chain—from breeding and planting to production and processing, fresh food distribution, and store presentation—through a series of optimizations.

For example, in the red date SKU, because existing suppliers could not meet standard requirements, Sam's Club traced back to upstream production and did it themselves, tasting samples globally and researching red date cultivation knowledge. Ultimately, they chose Hetian red dates with higher sweetness and larger size, and established a breakthrough standard of dual inspection for weight and volume.

As they delved deeper into cultivation practices, Sam's also discovered the secret of air-dried red dates. If, during the harvest season, the dates are left to air-dry on the tree for a few more days, they can absorb more nutrients from the mother tree, resulting in heavier and sweeter air-dried dates. So, red dates left to dry for an extra ten days were placed on shelves, and Sam's once again drove product quality upgrades from the supply chain end.

In terms of rapid iteration, after Swiss rolls, roast chicken, durian mille crepes, and other internet-famous products went viral, many merchants saw market demand and consumer preferences and began to imitate. When market categories converge, new innovative factors are needed.

For example, in the durian mille crepe SKU, Sam's Club pioneered the introduction of D197 Musang King durian, specifically selecting durians from a private plot of the Nadu Duke, giving the crepe a richer taste. Additionally, unlike the commonly used plant-based cream or mixed cream that is easy to shape, Sam's uses animal cream, which poses new requirements for process development.

First, in storage conditions, plant-based cream can be frozen, but animal cream separates oil and water when frozen, leading to waste. In shaping, because animal cream is less stable and highly temperature-sensitive, piping with animal cream is truly difficult. Plant-based cream does not have this issue; regardless of temperature, plant-based cream cakes maintain their shape well. So most cakes in bakery windows are made with plant-based cream.

But in taste, because animal cream's melting point is lower than body temperature, it melts in the mouth. It is also sugar-free, requiring sugar or similar to be added during whipping for flavor, so the sweetness is not greasy, and the taste is refreshing.

Sam's Club, starting from user experience, continuously optimizes its supply chain and R&D to achieve rapid iteration of the durian mille crepe SKU.

There are no eternal internet-famous products; only the discovery of consumer needs and relentless product innovation. For membership stores like Sam's, advantages in private product development, shopping scenario creation, and new category development are stronger competitiveness.

This logic differs from traditional supermarkets that rely on entry fees and fixed multipliers. Sam's Club personally engages in R&D, continuously improving supply chain and ingredient selection capabilities. In the traditional mall context, these are matters for FMCG brands.

Therefore, traditional supermarkets urgently seeking transformation to find a second growth curve are turning their attention to the rapidly growing warehouse membership model. But "wanting to do" and "being able to do" are two different dimensions, involving countless details and core barriers that need continuous accumulation.

Summary: The Next Starting Point for Hypermarkets?

From 2019 to 2020, domestic chain top 100 sales reached 2.4 trillion yuan, down 7.2% year-on-year, accounting for 6.1% of total retail sales of consumer goods, down 0.2%. Especially in March 2021, amid the surging community group buying, most companies saw declines of 20%-30%.

On one hand, there is the bitterness and helplessness of the traditional hypermarket model; on the other, continuous transformation has become the instinctive response of domestic retail enterprises. From new retail to unmanned retail, except for a few players who successfully landed, most have failed.

This also indirectly verifies that as online models continue to penetrate, especially the "one-kilometer circle" community group buying model, "price difference" and "convenience" have been pushed to a certain extreme. Traditional hypermarkets that previously followed the "price difference" model need to return to the irreplaceable "experience" and "service" mindset of offline retail formats.

This requires meticulous craftsmanship in retail enterprises, returning to the mainstream. Only by thoroughly mastering inventory, payment terms, supply chain, display, and a host of other details can one be considered a true retail professional. Only by taking experience to the extreme—this is also the direction represented by the warehouse membership model.

Whether membership stores transformed from multiple leading retailers can become the next starting point for hypermarkets remains unknown. But full competition is not necessarily a bad thing for the development of China's retail industry.

However, regardless of the industry, only healthy competition can drive industry evolution and bring benefits to both the industry and consumers. If we still follow the old path of imitating products, seeking public attention, and unfair competition, it is harmful to everyone.

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