The wave of closures in offline supermarkets continues. In the first half of the year, news of offline supermarket closures came one after another. Vanguard's Huachen Century store recently issued a "Notice to Customers" announcing that it would close its offline and online businesses after business hours on July 31, 2023; Lotus's Shantou MixC store also closed on July 26; earlier, on April 22, Century Mart announced the closure of its Fuzhou Zhongting Street store; on April 11, Walmart's Fuzhou Dalijia branch ceased operations; on March 7, Walmart's Beijing Jianguo Road store closed. For a long time, large supermarkets were important places for many families' daily shopping. Usually located in bustling city centers or prime commercial areas, large supermarkets represented by Walmart and Carrefour entered the Chinese market with a "traffic" halo. Coupled with advantages in capital flow and supply chain, they once became retail "giants." However, the good times did not last. The seemingly unbreakable moat of large supermarkets lost its advantage when e-commerce "besieged the city," and even giants were not spared. Taking Carrefour's Beijing operations as an example, in March this year, Carrefour's Beijing Chuangyijia store announced closure; in April, Carrefour's Tongzhou Jiukeshu and Shijingshan stores suspended operations; in June, Carrefour's Beijing Maliandao store closed. According to Suning's first-quarter report, as of March 31, 2023, Carrefour had 114 stores in China, a reduction of 33 from 147 at the end of last year. Recently, many former Carrefour employees have revealed to the media that they had received layoff notices, with the proposed compensation generally being N months' salary, either paid in installments or as a lump sum at a 60% discount, but many have not received their payments. At the same time, suppliers such as Want Want and Uni-President have also had disputes with Carrefour over unpaid debts. Earlier this year, Carrefour China was also embroiled in issues of product shortages, empty shelves, and restrictions on the use of stored-value cards in some areas. Carrefour's experience is not an isolated case. According to incomplete statistics from the Lianshang Network Retail Research Center, in 2022, more than 34 well-known supermarket chains announced store closure plans, including Carrefour, Lotus Supermarket, Hongqi Chain, Yonghui Superstores, and JD Seven Fresh, closing more than 680 stores in 2022. Facing the rise of e-commerce, consumer transaction and service methods are undergoing disruptive changes, and supermarket brands that rely mainly on physical stores are also undergoing a transformation.

Offline supermarkets are under "attack from both inside and outside." In recent years, affected by multiple impacts such as the pandemic, rent, and e-commerce, the supermarket industry has faced huge challenges. Declining profits, slowing growth, and even store closures have become a microcosm of many enterprises' development. First, the fixed costs of physical supermarkets are high. An industry veteran told the author that the impact of online e-commerce is mainly on costs. Generally, the costs of offline supermarkets include rent, labor, utilities, and warehousing. Warehousing costs can be saved as much as possible through supply chain optimization, but rent and labor are relatively large cost expenditures, and rent, decoration, and labor costs are unavoidable costs for supermarket operations. Pei Liang, president of the China Chain Store & Franchise Association, also previously mentioned that for offline stores, even if customer traffic decreases, their products, location, storage capacity, and product reserves are fixed costs; the amount of customer traffic does not affect fixed costs. Image source: Pexels

Second, the business model is "outdated." Currently, many supermarket enterprises have not yet escaped the traditional extensive management model, and overall operational efficiency remains low. According to relevant data, the average comprehensive gross margin of domestic retail stores is 19%, the average overall loss rate for fresh produce is 7%, and the inventory turnover rate is 9 times. In terms of organizational management, most retailers are still in the traditional organizational management model, with no significant improvement in personnel efficiency and high staff turnover. Pei Liang stated that domestic retail enterprises are relatively weak in organizational capacity building. When dividends were fully released, enterprises solved problems through development; when transitioning from an incremental market to a stock market, enterprises must rely on high quality to achieve sustainable development, and organizational capacity becomes a touchstone to determine who can win in competition. In contrast, e-commerce platforms are more efficient in cost conversion, and more importantly, relying on massive data analysis and smart algorithm recommendations, they can better "understand" consumers' shopping psychology and provide personalized recommendations. As the needs of the population diverge, consumers no longer seek a dazzling array of products but prefer high-quality, curated, differentiated products. Previously, a large supermarket could almost meet the needs of all people "from 99-year-olds to those just learning to walk," but currently, the product differentiation of supermarket enterprises is insufficient, and most still rely mainly on major brands to drive sales. At the same time, after the emergence of e-commerce, it greatly dispersed the customer traffic of physical stores, especially under the influence of the pandemic, making online shopping more deeply rooted in people's minds. Under the attack from both inside and outside, the hypermarket model that people were familiar with is gradually fading away. Diversified formats such as online shopping, membership stores, discount stores, and convenience stores are beginning to show advantages.

Embracing digitalization: the self-rescue path of supermarkets. This year is the first year after the lifting of pandemic restrictions, and the consumer market and retail industry are gradually recovering. National Bureau of Statistics data shows that in the first half of the year, per capita consumer spending of residents nationwide was 12,739 yuan, a nominal year-on-year increase of 8.4%. But at the same time, the consumption environment is "different from the past." Consumers' consumption habits and lifestyles have undergone major changes, with multi-channel diversion, new formats, and new models emerging one after another. In a highly competitive market, the transformation of supermarket enterprises still faces many challenges. Many supermarket enterprises are also actively seeking ways out, adapting to changes in the modern consumer market by expanding formats and improving business models, mainly starting from two directions: supply chain and product chain.

First, find new value points in the supply chain. On the one hand, in the past two years, many supermarkets have begun to try to start from consumer demand, integrating digital applications into various scenarios such as consumers' arrival at the store, shopping, consumption, and service, in order to improve operational efficiency. For example, Vanguard MART mainly meets the high-frequency consumption categories and life service needs of families in the business district, while Olé is positioned as an experiential boutique supermarket, exploring the mid-to-high-end consumer market. If it is a hypermarket-format supermarket, it can also stratify consumer needs for each store, and in limited offline space, differentiate the supply of goods and personalized services in regional stores. Lai Yang, a member of the expert committee of the China General Chamber of Commerce, said that in the past, the advantage of hypermarkets was reflected in their rich variety compared to small and medium-sized supermarkets, allowing consumers to buy everything in one stop. But now, the reason consumers go to physical supermarkets is mostly because they are "close to home," and they buy fresh produce and leave immediately. In this context, the rent, labor, and stocking costs of hypermarkets make it very difficult to generate profits, and the core competitive advantage of the past has become a burden—consumers go to small fresh produce markets near their homes and leave after buying, which is very convenient; while walking around a large hypermarket takes a lot of time, so the hypermarket with one-stop shopping as its core value has no living space. A veteran observer of the retail industry for a long time said that even for developing offline retail, the logic of supermarket site selection should change. It is necessary to consider abandoning the previous model of opening stores in large shopping malls and instead open more stores in residential areas to adapt to users' new consumption needs. Image source: Pexels

On the other hand, it is to lay out online business. The above-mentioned veteran told Value Planet that for offline supermarkets, channel layout is crucial. It is necessary to connect online and offline. In the situation where digital transformation is becoming a new development opportunity, establishing a highly integrated omni-channel of online and offline is increasingly becoming the key to increasing revenue. At the same time, various supermarkets are also exploring the development of instant retail, cooperating with other enterprises, using online platforms to divert traffic to offline supermarkets, enhancing logistics capacity, and improving operational efficiency. For example, Yonghui introduced strategic investor JD.com through a private placement, which is an attempt by an offline enterprise and an online enterprise to cooperate and win together, creating a new retail format. For Yonghui, fresh e-commerce has difficulties such as high loss rates and high logistics costs, while JD.com has been deeply involved in logistics for many years and is more mature in logistics research and construction, so the two can complement each other's advantages.

Second, start from the product chain to cater to the current consumer market and consumption habits. Image source: Pexels

According to relevant data, as of 2022, Sam's Club had more than 4 million paid members nationwide, covering 25 cities. Whether it is reducing prices on popular foods, launching various activities to let members enjoy lifestyle changes, or using social media to "plant grass," young people are increasingly fond of Sam's Club. This includes both the careful selection of products and the good shopping experience that makes members feel the value of membership. Overall, in the past few years, the supermarket and hypermarket format has been impacted. Whether enterprises choose to sell themselves or squeeze into new tracks, seeking change has become a common understanding in the industry.

Final Thoughts

In fact, the decline of traditional stores is a problem faced by all countries in the process of economic development. In the early days of entering China, Carrefour relied on its foreign background and brand influence, using the strong offline traffic of supermarket stores to support the customer flow of surrounding properties, thereby being able to sign long-term low-rent lease contracts with local governments or real estate companies. Subsequently, occupying the distribution channel, it "rented out" the fixed shelves in the supermarket stores to major brands in the form of entry fees or listing fees to earn profits. As the economic level improves, the proportion of retail sales in stores has shown a downward trend. The "2022 China Retail Digitalization White Paper" jointly released by the China Chain Store & Franchise Association and McKinsey pointed out that China's per capita supermarket area has exceeded that of developed markets such as the UK and Japan. Considering the proportion of online retail, the supply of traditional stores is approaching saturation, so retailers find it difficult to gain sales increments in the process of expanding stores. Suning.com stated in its announcement that the company has further determined the future development tone of "slimming down and seeking change" for Carrefour China's operation plan. It must resolutely close stores and exit loss-making areas, while reducing various operating costs; retained stores should reduce business area, increase integration with the appliance business, and accelerate the recruitment of community life formats. Earlier, Suning.com announced that "the company's current capital situation cannot inject funds into Carrefour in the short term" to improve Carrefour's liquidity shortage and inventory shortage. The implication is that Carrefour must find a way to support itself. The rapid development of technology and artificial intelligence, coupled with the increasing diversification of consumer needs, has further accelerated the decline of offline supermarkets. The transformation of the supermarket industry is timely. Whether large supermarkets represented by Carrefour can revive will depend on whether they can tap new market demands and respond to new customer expectations in the future.