Source丨China Chain Store & Franchise Association China's supermarket industry has shown clear phased development over the past 30 years, with major changes every decade. Supermarkets entered China in 1995, online retail developed rapidly in 2005, and the new retail era began in 2015. Currently, the supermarket industry is in a new round of transformation, which can be called the second revolution in the circulation field. To achieve cross-cycle development, enterprises must adapt to environmental changes and survive by being fit.
The New Round of Change in China's Supermarket Industry Currently, China's supermarket industry faces many changes in the circulation environment. According to the National Bureau of Statistics, over the past 24 months, China's CPI has fluctuated around zero, with even negative growth in some months, directly impacting the supermarket industry. At the same time, consumption stratification is accelerating, with consumers placing more emphasis on value for money. Consumption downgrading and stratification are occurring simultaneously, and changes in consumer purchasing behavior directly affect supermarket operations. Moreover, changes in China's population and family structure have the most direct and prominent impact on the supermarket industry. The aging population and declining birth rate are driving deflation, and the market will enter a contraction period over the next 10-15 years. The trend towards smaller families and single-person households is evident, forming the underlying logic for supermarket development. In this context, supermarkets and the retail industry are rapidly differentiating. According to the National Bureau of Statistics, last year, 70% of department stores saw a decline in sales and net profit margins; the supermarket industry also faced difficulties, with 70% of enterprises experiencing sales declines, especially large hypermarkets. Facing these impacts, Chinese supermarkets are rapidly iterating to respond. Notable trends include: the previous year, Hema became the focus of industry attention, and last year, Pangdonglai became a learning model. During this period of change, China's supply system has undergone tremendous changes. The rise of discount retail stores has impacted the supply system, requiring suppliers to lower prices, otherwise, they face cross-regional selling or a large influx of white-label products. Last year, many remodeled supermarkets required upstream suppliers to lower prices, even to bare prices, leading to signs of collapse in the price systems of first- and second-tier brands. Supermarkets commonly adopt practices such as soliciting quotes from multiple distributors and choosing the lowest price, and compensating buyers based on profit sharing, reflecting the trend of price system collapse for first-tier brands in China. There is a phenomenon of hollowing out in the domestic circulation sector, with large production enterprises upstream and large supermarket enterprises downstream. This has led to chaos in the circulation system but also presents opportunities. In the past two years, many in the industry have entered the intermediate circulation sector, establishing supply chain companies, viewing this as a new opportunity for enterprise development. Food supermarkets are rapidly rising in China, becoming the core format for the next generation of retail after hypermarkets. Their characteristics include the following three points:
70-80% of sales are from food
They have on-site processing, baking, fresh food processing, and cooked food processing, forming a differentiated competitive system based on processing
They offer a wide variety with small quantities, meeting upstream production and customer needs Enterprises such as Zhengzhou Sanxiu, Huayu Baijia, Xianfeng Shenghuo, and Tao Xiaopang have experienced explosive growth and good profitability over the past year, indicating that China's supermarket revolution has entered a new era. In the future, whether discount stores or food supermarkets, they will move towards a business model of wide variety and small quantities, determined by China's population and family structure. However, this model also brings new challenges, such as increased distribution and labor costs. To address the rising labor costs under this model, many enterprises are promoting part-time worker systems. To reduce waste and improve the precision of cooked food sales, the 52-week MD (Merchandising) has emerged, driving enterprises towards refined development.
From Retail Revolution to Circulation Revolution The future business model of wide variety and small quantities places clear demands on supply and logistics. China is currently in a period of circulation revolution. The concept of circulation revolution was first proposed by Rin Shuji of the University of Tokyo in 1962, when Japanese supermarkets were developing, and small wholesalers could not meet the needs of large-scale production. The theme of the circulation revolution was decentralization. The theoretical framework of the circulation revolution is that the consumption revolution drives the retail revolution, which in turn promotes changes in circulation organizations, triggers changes in trading systems, and ultimately leads to a shift in circulation dominance. China's last circulation revolution began in 1995 with the entry of hypermarkets into China, similar to Japan's circulation revolution at that time. In 1994, commercial producers represented by Wahaha established regional distribution systems, using first-level agents, distributors, and retailers to strictly control regional prices and prohibit cross-regional transactions. This was a trading revolution driven by the retail revolution. Distributors, to control retailers and prices, charged entry fees to retailers, provided services such as delivery and returns, solved logistics problems, and holiday promotional funds also came from suppliers. The first circulation revolution promoted the rapid development of Chinese supermarkets and the development of food industry brands, but now this system faces the challenge of disintermediation. I believe that disintermediation is a false proposition. For example, although large producers and retailers can negotiate bare prices, logistics and returns still need to be resolved. Currently, supermarket enterprises face numerous suppliers, and production enterprises also face numerous supermarkets, resulting in extremely high social circulation costs. Disintermediation is not a viable path. The previous circulation revolution did not achieve disintermediation either; instead, producers and retailers extended into the intermediate links. Producers extended their production end into the circulation sector through distributors and regional agents, while large supermarkets played a wholesale role through centralized procurement, distributing to their stores. In the future, enterprises of different sizes will have different levels of dependence on intermediate links. For large supermarkets, wholesalers will mainly undertake logistics and services; medium-sized supermarkets (with annual sales of 1-2 billion yuan) will need to rely on both wholesaler services and logistics; while small and medium-sized retail enterprises will mostly rely on wholesalers for supply. This may be the future development trend.
How Will China's Circulation Industry Develop in the Next 10 Years? In this context, how will China's circulation industry develop in the next 10 years? I have made some predictions. Existing brand distributors may gradually disappear, and traditional wholesalers, if they do not transform, will also face elimination from the market. Currently, there are still many traditional wholesale enterprises in society, including some large supermarkets and intermediate wholesale enterprises in the supply and marketing system. These intermediate wholesale enterprises are not without any role, but they have failed to make clear adaptive changes to new social changes. In the coming years, the most growth potential in China will be in retail-led intermediate supply organizations. These organizations come in two types: one is voluntary chain organizations like Ant Alliance, which, although not yet fully developed, are continuously improving; also, Baoting Commercial Alliance will play an important role in the circulation sector. The most growth potential lies in retail-enterprise-led wholesale enterprises, such as Biyoute, whose business model combines wholesale and retail. Retail-led wholesale enterprises can be divided into two types: internalization within the enterprise and marketization (such as Biyoute's 2B business). 2B enterprises have huge development potential in the future for the following reasons: First, the value of supermarket stores is rapidly declining, and even supermarkets in prime locations are not immune. Many large hypermarkets find it difficult to attract suitable tenants, indicating that the value of stores is rapidly shrinking. Over the past 30 years, many enterprises have been expanding store scale, investing significant funds, but looking back, these investments have not yielded expected returns. If the supplier system collapses, enterprises that rely solely on stores will find it difficult to survive. If a supermarket enterprise's income is 100% dependent on its stores, its risk resistance will be extremely low because stores are highly susceptible to external environmental influences. Enterprises that concentrate their income in stores without backend support and supply systems will almost certainly fail in their remodeling efforts. This is because remodeling ultimately requires coordination with the supply chain; without supply chain support, enterprises can only seek bare prices from suppliers, which is clearly unrealistic. I believe that for stable growth, an enterprise should ideally derive 50% of its income from stores and the other 50% from the supply chain. Take Jianfu Convenience Store as an example; one of the right things they have done in recent years is developing their supply chain and industrial park, providing catering services to the military and schools, and their profits are growing rapidly. At the same time, the proportion of income from stores is declining. In the new era, if enterprises only pursue store income, their future growth will be severely limited. Currently, the entire retail industry is actively investing in supply chain construction. I predict that China's supply chain system will go through three stages. The first stage: many enterprises will rush into the intermediate links and establish numerous supply chain organizations. The second stage: Chinese wholesalers will enter a consolidation phase. Enterprises currently in the supply chain business must quickly scale up, or they will not be able to establish themselves in the industry. Therefore, all supply chain enterprises are striving to expand their scale, such as Leerle and others. In the future, those enterprises that can "sit at the table," meaning wholesale enterprises with a certain scale and strength, will integrate resources, hold shares in each other, and form larger companies. This is the global development pattern of the wholesale industry, from scale to monopoly. If enterprises cannot "sit at the table" during this stage, they will be quickly eliminated in the future. Competition in the intermediate links will be extremely fierce. Therefore, during the three-to-five-year window of the first stage, all enterprises in the intermediate links need to strive towards this direction, especially in 2B business. If 2B business cannot be strengthened, cannot achieve scale, and cannot "sit at the table," then when several enterprises jointly form a large company in the future, these enterprises will certainly be eliminated.
Future Development Trends of China's Circulation Industry We are currently in a period that could be disrupted at any time. China's traditional distributors are gradually disintegrating. Japan's five major trading companies, which have risen over the past 30 years, are worth attention. Last week, at the investment conference, Buffett expressed regret that he had invested too little in Japan's five major trading companies and plans not to sell these stocks for 50 years. These five trading companies are Mitsubishi Corporation, Itochu Corporation, Marubeni Corporation, and Mitsui & Co., which control nearly 85% of Japan's market share and have grown through mutual shareholding and mergers. In the future, China's circulation industry will show two major trends. First, the wholesale industry will develop towards full-category operations. Currently, wholesale enterprises mostly focus on a single category; for example, meat wholesalers do not engage in fish wholesale. However, in the future, advantageous enterprises will achieve full-category operations through mergers and integration. These enterprises will also hold shares in upstream production enterprises and downstream retailers, forming large-scale intermediate organizations. In China, at least 20 such scale enterprises can meet market demand. In the next 10 years, China will see wholesale enterprises with transaction volumes exceeding one trillion yuan, similar to Japan's trading company organizations. Currently, enterprises like Leerle, Zhenshimei, and Ant Alliance are developing rapidly, but it is still difficult to predict who will win in the circulation revolution. These enterprises need to continuously integrate and compete to form a new circulation system. Japan's trading company development model is worth learning for China's circulation industry. First, Japan's window wholesale system is a full-category supply model for retailers. Its characteristics include providing daily delivery services to retailers through automatic ordering systems, with retailers invoicing after goods are delivered to stores and then returning payments to upstream producers. This model effectively reduces circulation costs and improves efficiency. In contrast, China's current retailers and producers have too many intermediate links, leading to inefficiency and difficulty in ensuring profitability. Second, Japan's retail logistics center model is also worth learning from. In this model, products produced by producers are directly transported to wholesalers' logistics centers, with ownership remaining with the producer until sold, then transferring to the retailer. This model greatly reduces inventory for both producers and retailers, improving capital turnover efficiency. For example, Biyoute's hypermarkets have achieved zero inventory, significantly reducing operating costs and enhancing competitiveness. Traditional wholesalers' business methods urgently need transformation. The model of profiting through price markups is no longer sustainable. Modern wholesalers should profit by providing services to upstream and downstream enterprises. For example, Biyoute charges logistics and service fees, transferring goods to retailers at near-bare prices, which is more in line with future development trends. Wholesalers should provide upstream enterprises with support such as account period management, brand promotion, and data services, helping them solve capital recovery issues, enhance brand influence, and provide market insights through data analysis. At the same time, wholesalers should collaborate with retailers to develop products, provide targeted delivery and site selection advice, and help retailers optimize operations. The intermediate circulation link is the only area in retail that can be closely integrated with autonomous driving, AI technology, big data, and robotics. In the next 5 years, with the popularization of autonomous driving technology, multi-variety, small-quantity delivery will no longer be a problem. AI technology can optimize sales plans in real-time and improve inventory management precision. Robotics will play an important role in split-case operations, enhancing warehouse operational efficiency. Buffett's emphasis on investing in the intermediate circulation link is precisely because he sees the huge potential of combining this field with new technologies. China's circulation industry contains enormous business opportunities, and there will be losers and winners in the future. Who wins in the circulation revolution depends on who can better utilize new technologies and establish new retailer-supplier relationships. In the future, retailer-supplier relationships will shift from adversarial to strategic alliances. Currently, many enterprises develop products behind closed doors and forcefully promote them through distributors and retailers, a model that is no longer sustainable. In the future, retailers, producers, and wholesalers should be consumer-centric, establish a whole-process management system, jointly reduce costs, and create consumer value. China's circulation industry needs to establish a new wholesale system and management framework, embracing big data technology. Despite fierce competition, through continuous iteration and involution, China's circulation industry will usher in a new period of rapid development. Therefore, practitioners should not be pessimistic but should see new business opportunities and jointly promote the development of the industry.