---
title: "Prospect: Could Convenience Stores Become China's New Retail Format? What Do Investors Think?"
description: "Following former Qunar CEO Zhuang Chenchao's heavy investment in convenience stores, capital has focused on the sector. Why has the industry, quiet for nearly two years, attracted renowned venture capital again? How do VCs view its future?"
author: "New Distribution"
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published: "2017-06-17"
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# Prospect: Could Convenience Stores Become China's New Retail Format? What Do Investors Think?

> Following former Qunar CEO Zhuang Chenchao's heavy investment in convenience stores, capital has focused on the sector. Why has the industry, quiet for nearly two years, attracted renowned venture capital again? How do VCs view its future?

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Following former Qunar CEO Zhuang Chenchao's heavy investment in convenience stores, various capital has focused on the convenience store industry. Why has the industry, quiet for nearly two years, attracted renowned venture capital again? How do VCs view the future of convenience stores?
## **I. Digging into New Retail**
When discussing convenience stores and venture capital, we must first talk about the new retail concept proposed by Jack Ma in October 2016. According to the latest "Alibaba Research Institute New Retail Research Report," Alibaba believes new retail is a data-driven, pan-retail approach centered on consumer experience.
The three major characteristics of new retail are: restructuring people, goods, and places around consumer needs; retail entities having both physical and digital duality; and leveraging digital technology, logistics, pan-entertainment, catering, and other diverse formats to extend more new retail models.
In the transformation of new retail, the capital market will play a very important role. Since the end of 2016, a large amount of capital that had focused on the TMT industry has begun to research and deploy new retail. The main reasons may include the following:
#### **1. The online business industry chain is increasingly mature**
Driven by strong capital, consumer internet has entered the second half. After nearly 10 years of rapid development of online shopping, industries in the e-commerce chain such as mobile payment, parcel logistics, online marketing, and SaaS have also developed rapidly.
Traditional retail has long been keen on rough land-expansion scale growth, with insufficient improvement in meeting consumer needs, and has lost in PKs with e-commerce. The gap and potential offline have brought new investment and development opportunities for many capital and internet companies.
#### **2. The rise of the mobile internet native generation**
The post-90s and post-00s mobile internet natives have become the mainstream and potential consumers of society. Online consumption is an indispensable part of their lives. According to Tencent's "China Youth Insight White Paper," this group's online consumption willingness and ability are 5.5 and 3 percentage points higher than the market average, respectively.
Two-dimensional culture, idol worship, and film/TV animation are their labels. Their consumption concepts of individuality, entertainment, sharing, and home life differ greatly from previous generations. The traditional offline, low-price-centered retail model is not their cup of tea, and a major transformation is urgently needed.
#### **3. The exhaustion of low-cost online dividends and the offline value depression**
Since 2015, with the basic completion of the layout by internet giants BAT, the dividend of online traffic costs has gone forever. In just five or six years, customer acquisition costs in many industries have increased 5-10 times, forcing consumer internet entrepreneurs to control costs and return to traditional media for traffic. From satellite TV variety shows to Focus Media elevator ads, even ground promotion has become new customer acquisition models.
The 2VC entrepreneurial model of burning money with subsidies to attract users is no longer favored by VCs. BAT, JD.com, and other major online retailers have begun to strengthen their layout in labor- and capital-intensive industries such as warehousing and transportation, product manufacturing, smart devices, SaaS and cloud, and even experience stores.
#### **4. New opportunities from economic transformation**
China's economy is at a crossroads. Except for a few advantageous enterprises, most online and offline retail enterprises are having a hard time. In recent years, the government has actively promoted supply-side reform and mass entrepreneurship, stimulating domestic demand through consumption upgrades, improving product quality through Industry 4.0, and stimulating new space in the consumer market by promoting the Internet of Things and opening cross-border e-commerce.
At the same time, the middle class in first-tier cities such as Beijing, Shanghai, Guangzhou, and Shenzhen, with high education and Westernized lifestyles, is rapidly rising, pursuing quality life and excellent experience. Existing online and offline retail enterprises cannot fully meet these needs, and the omni-channel integration model is the general direction.
## **II. Focusing on Convenience Stores**
Among the many new retail formats, convenience stores are undoubtedly a good format in the eyes of VCs. Although it has been developed globally for 90 years and is not young, in developed countries, no matter how the economy changes, it has always stood firm and vibrant. Japan's 7-Eleven is a classic benchmark for studying the retail industry.
In 2016, internet companies and investors set off a wave of studying the famous work "Retail Philosophy" by 7-Eleven founder Toshifumi Suzuki. The convenience store industry represented by 7-Eleven also began to be favored by entrepreneurs and capital again. Neil Shen, founder of Sequoia Capital China, once said that no matter how strong the e-commerce trend is, retail chain physical stores, especially convenience stores, will definitely become the final winner.
In essence, many core elements of the convenience store industry are highly consistent with the basic principles VCs use to select industries. No wonder VCs turning to new retail have begun to pay attention to convenience stores, and various e-commerce companies are also learning and trying convenience store layouts and cooperation. Below, the author discusses the five basic principles VCs use to select industries:
**1. High ceiling**
First principle: The industry is large enough and grows fast. For VCs, a market of 10 billion yuan is the starting point, and the industry maintaining double-digit growth is a long-term driver. Recently, the rapid development of e-commerce has greatly impacted original offline main formats such as hypermarkets, department stores, and shopping centers, but the small convenience store industry data is against the trend.
According to data from the China Chain Store & Franchise Association, at the end of 2015, 62 convenience store companies had a total of 83,000 stores, a year-on-year increase of nearly 10%, with total sales growth of 15.2%. It is estimated that in 2016, China's convenience store market size will reach 100 billion yuan.
During the same period, e-commerce sales growth continued to slow. According to the latest report from iResearch, online shopping sales growth in 2016 was 23.9%, slowing nearly 13 percentage points year-on-year from 2015. Convenience stores have become a new bright spot in the offline retail industry.
#### **2. Big wind**
Second principle: Align with the trend of the times and policy orientation. In the second half of 2016, new retail became a new outlet for VCs, and investing in consumption upgrades became a gradually hot trend. White-collar workers in big cities and the post-90s and post-00s are the current main consumers, and convenience stores are one of the formats they frequent most.
According to Nielsen's "2016 China Hypermarket & Supermarket Shopper Trends Report," the penetration rate of convenience stores rose from 32% in 2015 to 38% in 2016, 3 percentage points higher than online shopping. Consumers' high demand for convenience will continue, and their consumption will further shift from large stores and e-commerce to relatively smaller convenience store channels.
In addition, convenience stores are the best offline touchpoint for the omni-channel model, with huge imagination space for the last mile. In the past year or two, online giants such as Alibaba and JD.com have sought offline landing and cooperation formats. Hypermarkets and shopping centers require huge investment, complex product structures and business operations, and high management difficulty. In contrast, convenience stores with smaller areas, limited investment, and few products and employees have become their preferred landing or cooperation format.
#### **3. Strong explosive power**
Third principle: Enterprises can achieve rapid development driven by capital. High financing amounts are not a big problem for VCs, but if you give enough money and the company doesn't develop fast, that is a big problem. You know, VC money comes from LPs, and in the Chinese market, obtaining returns 5-6 years after investment is the average demand of LPs. Therefore, VCs generally prefer a model of heavy investment first and fast expansion later, that is, first strengthen the foundation, then quickly replicate.
Well-known convenience stores such as 7-Eleven and Lawson have franchise store ratios as high as about 90% in Japan. Franchise chain operation is their core expansion model to achieve over 10,000 stores. VCs favor the low investment threshold per store and high explosive power in later development. They hope to first invest heavily to build core capabilities and direct-operated store foundations, then through asset-light franchise and joint venture models, achieve rapid network scale development. This is very much in line with VC investment style.
#### **4. Deep moat**
Fourth principle: High barriers to business model, not afraid of cross-industry giant competition. The retail industry is highly segmented. Whether it is BAT or large supermarket and department store enterprises, their original sales scale advantages cannot be directly transformed into core competitiveness in convenience stores.
Internationally famous convenience store brands are all single-format companies, and hypermarket giants like Walmart and Carrefour have never opened real convenience stores. As for online e-commerce's low-price long-tail advantages, they cannot meet consumers' needs for fast and convenient purchases, which is exactly the advantage of convenience stores.
As for the complex and efficient supply chain system, refined operation management system, and grid-like store network behind convenience stores, these are gaps that cross-industry entrants cannot bridge overnight. The seemingly simple industry actually has high barriers. As Zhang Yichun, founder of Zhongshang Huimin, believes, only heavy models can form barriers; if you enter with a light model, it is easy to be replaced by BAT.
#### **5. Close to money**
From TMT, O2O to AR/VR, AI and other hot spots in the past two years, despite a large influx of venture capital, few have succeeded in each industry. One important reason is the lack of造血能力 (ability to generate cash), unable to obtain sufficient revenue. In the face of bloody lessons, VCs have gradually returned to investment rationality and the essence of business models. Entrepreneurs should no longer talk about vanity metrics like GMV and DAU; VCs care more about how you achieve sales revenue and how you obtain real cash flow. As an FMCG format, convenience stores basically have no credit sales, and cash flow is richer.
## **III. The Tide Is Rising**
Since 2010, venture capital and industrial capital have begun to pay attention to and enter the convenience store industry, and a batch of new convenience store brands have been born and grown.
In 2010, financial enterprise Fuhua Holding Group invested to create Beijing Quanshi 365 Chain Convenience Store Co., Ltd. Now, Quanshi Convenience has more than 300 stores in Beijing, surpassing the store count of 7-Eleven, which has been operating in Beijing for 12 years. In 2016, Quanshi entered Chengdu and currently has more than 40 stores.
Quanshi's second-generation stores pioneered the introduction of beverage and fast food systems, subverting the market with an innovative combination model of Starbucks + 7-Eleven + Yoshinoya. With the expansion of scale, it is said that a well-known VC values it as high as 1.5 billion yuan.
In September 2014, Guangxi Today Convenience Store received 55 million yuan in Series A investment from well-known VC Sequoia Capital and Niu Gensheng. After moving its headquarters to Wuhan, it vigorously developed the Wuhan and Changsha markets. Under the leadership of post-85s entrepreneurial newcomer Song Yingchun, Today is unique in the convenience store industry with a strong young and trendy style. In July 2015, Today Convenience Store again received Series A+ financing from entrepreneurs at Hupan University, including Lu Wei, chairman of Qianji Group, and Wang Xiaofei. Currently, it has more than 100 stores nationwide.
In April 2015, with the support of a Shenzhen capital company, Wang Zi, the head of Beijing 7-Eleven, led almost all regional managers to resign and founded Linjia (Beijing) Commercial Co., Ltd. with a registered capital of 100 million yuan. In July, the first Linjia convenience store opened in Beijing. Subsequently, it opened nearly 100 stores in Beijing and tentatively entered Shanghai with 5 stores. At the end of 2016, due to capital side cash flow problems, Wang Zi's management team, with the support of Zebra Capital, resigned again to create the Bianlifeng brand.
In February 2017, Zhongshang Huimin (Beijing) E-commerce Co., Ltd. officially announced the completion of strategic investment and controlling stake in the well-known community e-commerce company Aixianfeng. Aixianfeng was established in 2014 and is known for its "palm one-hour convenience store" model. It had previously received a total of $110 million in multiple rounds of investment from well-known institutions such as Sequoia Capital, Meituan, Hillhouse Capital, and CITIC Capital, with a valuation once exceeding $1 billion.
In addition to gradually increasing efforts in convenience retail terminals, the FMCG B2B industry serving small non-chain retail terminals has also become an investment hotspot in the past two years.
In addition to giants like Alibaba Retail Link and JD New Channel, there are also well-known enterprises such as Zhongshang Huimin, Jinhuobao, Xingaoqiao, and Yijiupi, which focus on self-operated B2B, and Zhanghe Tianxia, Dianshang Hulian, Lingshoutong, and Gongxiao Daji, which focus on matching B2B.
According to the "2017 China FMCG Industry Annual Report" recently released by the all-media "FMCG," as of November 2016, there were more than 70 large FMCG B2B platforms on the market, and these platforms had received a total of more than 5 billion yuan in investment in 2016.
## **IV. The Waves Are Calm**
As someone who has worked in the convenience store industry and then turned to venture capital, the author sees a stark contrast between the eagerness of venture capital, the urgent desire of online enterprises to enter offline, and the calm polishing of convenience enterprises. Inside and outside the city, it's like fire and ice.
Perhaps the influx of third-party capital can bring more cross-border concepts and bolder new models to the convenience store industry. Perhaps capital is just a pebble, temporarily bringing small waves to the industry. After the ripples, convenience stores will continue to develop at their inherent speed. The following are some suggestions for capital interested in entering this industry:
#### **1. Choose the right city**
In cities like Shanghai, Guangzhou, and Shenzhen, which are most suitable for the convenience store format, various convenience store players are already fiercely competing. Historically, capital-invested convenience brands have mainly focused on cities like Beijing and Wuhan, where competition seems less intense and space is large. Is it that traditional enterprises turn a blind eye to such markets, or has capital misjudged them?
A simple comparison between Beijing and Shanghai shows huge differences in retail history, commercial planning, government and regulation, population distribution and density, transportation, climate, shop distribution and rent, consumption concepts, and service awareness. This has resulted in Shanghai having many chain convenience stores and few single grocery stores, while Beijing is the complete opposite. This difference is difficult to reverse in the short term, no matter how much capital is invested.
#### **2. Face up to investment**
Convenience stores cannot become a golden goose for VCs in the short term. To grow, they require sustained early investment. Admittedly, in recent years, convenience stores seem to stand out offline, but their profitability is not as rosy as it appears. Offline rent and labor costs have been rising for over a decade, and store upgrades every 3-5 years are the norm.
Not to mention the huge investment in network expansion and supply chain system construction. Although gross margins and store sales have also increased year-on-year, they are far from enough compared to cost increases. The capital crisis at Beijing Linjia Convenience Store is a result of VCs overestimating returns.
#### **3. Fresh food trap**
Fresh food is the core category that differentiates convenience stores from traditional supermarket stores, and it is also a weapon for Japanese-funded convenience stores to compete with domestic ones. However, doing fresh food well is not easy. The industry often says: "If you don't do fresh food, you wait to die; if you do fresh food, you seek death."
Fresh food seems to have a gross margin 10-15 percentage points higher than常温 (room temperature) products, but circulation costs and management difficulty are huge. From factory construction, cold chain logistics, to store equipment and sales loss, the intermediate costs are not low. If management capabilities are not strong, the real gross margin may be much lower than expected.
#### **4. Franchise puzzle**
Once the scale of direct-operated stores reaches a certain level, capital will inevitably hope that the brand will quickly expand through asset-light franchise models. Currently, investment in mainstream convenience store brands ranges from 600,000 to 1 million yuan. Due to high fixed costs and fierce competition, whether it is fixed income or gross profit sharing models, it is difficult to face the general cost increase problem. If franchisees cannot make money, rapid development becomes empty talk.
#### **5. Chain is king**
The so-called convenience stores on the market now do not entirely refer to fresh food convenience stores. They may also be convenience supermarkets (Carrefour Easy), supermarket-type convenience stores, or even non-chain grocery stores. The first type is the mainstream format in Japan and Taiwan and may be the most competitive and the general trend for future industry development.
The second and third types are essentially a subdivision of supermarkets. As mentioned earlier, the many FMCG B2B projects invested by VCs deal with the fourth type of store. There are 7 million such individual grocery stores in China, and VCs have huge imagination space for this, but resource integration is also extremely difficult. The competitiveness of a single store of this type is very weak. Once chain brands enter the local market, they may face huge impact in the future.
Of course, for the convenience brands that are still working hard, the industry outlet brings greater development opportunities for our next step. Original new brands are too slow; capital is more willing to invest in existing enterprises, helping them transform and upgrade through capital, reducing the time cost of investment.
The tree wants to move but the wind does not stop. Every economic downturn gives rise to great companies. In 1989, Japan's economic bubble burst, and Japan entered the "lost decade." Large stores closed one after another, but Japan's convenience store industry developed rapidly against the trend, becoming the main retail format in Japan today.
In 2017, China entered the new normal of an L-shaped economy, and more enterprises will face increasing difficulties. Whether China's convenience stores can become the hottest retail format remains to be seen.
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