---
title: "Reflections on Consumption Changes Amid the Pandemic: Looking at the Future of Discount Chain Stores in China Through the Retail Evolution of the US, Germany, and Japan"
description: "Consumers are gradually returning to the essential value of goods. How will discount retail open a beautiful new world? Shanghai's lockdown has lasted over two months, and most residents have experienced a journey from racing to buy groceries online, to bartering and hoping for community supplies, to ultimately relying on community group buying led by group leaders for all daily necessities. In this special context, group-buying behavior centered on group leaders has covered almost all of Shanghai's 25 million residents, providing basic guarantees for people's lives to a large extent."
author: "陈十一"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
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published: "2022-06-12"
categories: "Industry Trends"
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citation: "陈十一. “Reflections on Consumption Changes Amid the Pandemic: Looking at the Future of Discount Chain Stores in China Through the Retail Evolution of the US, Germany, and Japan.” New Distribution, 2022-06-12. https://xinjignxiao.com/en/articles/reflections-on-consumption-changes-amid-the-pandemic-looking-at-the-futu-a9b7030e/"
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# Reflections on Consumption Changes Amid the Pandemic: Looking at the Future of Discount Chain Stores in China Through the Retail Evolution of the US, Germany, and Japan

> Consumers are gradually returning to the essential value of goods. How will discount retail open a beautiful new world? Shanghai's lockdown has lasted over two months, and most residents have experienced a journey from racing to buy groceries online, to bartering and hoping for community supplies, to ultimately relying on community group buying led by group leaders for all daily necessities. In this special context, group-buying behavior centered on group leaders has covered almost all of Shanghai's 25 million residents, providing basic guarantees for people's lives to a large extent.

Introduction:
## Consumers are gradually returning to the essential value of goods. How will discount retail open a beautiful new world?
Shanghai's lockdown has lasted for over two months now, and I believe most Shanghai residents have experienced a similar journey: initially scrambling to buy groceries online, then moving to bartering and hoping for community supplies, and finally all turning to "community group buying," relying on group leaders to sustain all daily necessities.
In this special context, commercial activities centered on group leaders have covered almost all of Shanghai's 25 million residents without discrimination, providing basic guarantees for people's lives to a large extent.
Unlike previous community group buying, this time the SKU selection is limited, and price is not the main focus. **The key is the group leader's grasp of timing, with categories mainly consisting of daily necessities such as food and beverages (strong demand, rarely novel or supplementary consumption).**
As the sole consumption node in this mega-city over the past two months, group leaders have had to do the following:
_1. Aggregate high-frequency daily needs of community residents: such as milk, eggs, bread, meat, tissues, etc. These categories generally have high participation frequency and large numbers of participants, making it easy to quickly reach transactions. At the same time, they need to precisely grasp supply timing (occasionally someone might request tiramisu cake, but if participation is low, the group buy fails);_
_2. Select manufacturers: reasonable prices, reliable quality, and manufacturers with logistics capabilities;_
_3. Precisely control product specifications, avoid excessive packaging, but ensure reasonable specifications and complete packaging._
When the group leader collects enough orders, they can initiate a delivery request to the manufacturer, who delivers directly to the community, and the group leader/community volunteers assist in distribution. We can see that the entire product value chain has been completely restructured, reflected in three points:
_1. C2F model: User – Group Leader – Manufacturer, shortening the chain;_
_2. Single category, minimal SKUs;_
_3. High minimum order quantity per item, no logistics losses._
This business model brings extremely high operational efficiency, but it seems to be a special product of the pandemic period. Does it truly have long-term sustainable development potential?
In fact, when we look back at the long river of commercial history, we will find that similar products have already appeared in the retail industry. **This article attempts to find answers by analyzing the development of retail formats in three developed countries: the United States, Germany, and Japan.**
******The Debut of the Three Retail Brothers**
**I. "King of Hypermarkets" Walmart, firmly seated as the world's largest retailer**
In 1945, American veteran Sam Walton joined a "Ben Franklin variety store" (a franchise project of a regional chain company), learning and accumulating a series of skills in store sales, product purchasing, and financial accounting.
Seventeen years later, the first Walmart opened in Arkansas, USA, in 1962. Unlike the old-fashioned grocery stores of the time, Walmart was committed to meeting customers' one-stop shopping needs from its inception.
**With the popularization of cars, refrigerators, televisions, credit cards, and the construction of interstate highways, Sam's era had arrived.**
Sam once mentioned in his autobiography "Made in America": "In many small towns, you couldn't even find a few one-stop shopping stores; you might buy fresh meat in one store and fresh vegetables in another..." "And our competitors, those old-fashioned grocery stores, still charged 45% profit margins on goods, had limited product variety, and limited shopping hours. They were immediately defeated by us."
In the first few decades after its founding, Walmart's store size and product categories gradually expanded. Walmart's initial "discount stores" were just over 1,000 square meters, and by 1990, the average store size reached 4,000-5,000 square meters.
In 1988, Walmart launched the new "Walmart Supercenter" format, with an average area of 16,000 square meters and about 15,000 SKUs per store. Due to the large footprint but pursuit of low rent, Walmart generally located in suburban areas, becoming the first choice for family weekend shopping.
This year marks Walmart's 60th anniversary. **Its fiscal year sales revenue reached $572.8 billion, with 10,593 stores worldwide, covering about 24 countries.**
Figure: Walmart's development in the US (number of stores and US GDP per capita) Data source: Walmart annual reports, World Bank
Walmart has taken the supermarket model to the extreme. The factors behind its success are diverse, including the low-price advantage brought by extreme cost control, adherence to a consumer-centric service philosophy, and backend warehousing and logistics integration capabilities, information management capabilities, employee partnership incentive plans, etc., all far ahead of peers in various aspects.
In addition to the advanced nature of Walmart's business model at the time, we believe that during the 30 years from 1960 to 1990, US GDP per capita jumped significantly from $3,000. **The explosion of social supply and demand was the fundamental element for the success of the supermarket model.**
We can find many examples from the tide of the times: 46,000 miles of interstate highways were built starting in 1956 and completed in 1991; truck sales grew from 1 million units per year in 1960 to 5.07 million units in 1989; car ownership increased from about 400 per thousand people in 1960 to about 750 per thousand in 1990; total credit card spending surged from $23.2 billion in 1950 to $351.9 billion in 1980.
**Not coincidentally, the core business logic of "more, better, cheaper" made the shopping mall model blossom globally at that time.**
Not only in the US, but also in Japan and Germany during the early stages of economic development, representative companies emerged in the hypermarket model, such as Daiei in Japan and Metro in Germany.
Japanese company Daiei, founded by Nakauchi Isao in Osaka in 1957, typically had store areas of 6,000-8,000 square meters and around 10,000 SKUs. It became the leader in Japanese retail in 1972, but with the economic bubble in Japan in the 1990s, Daiei declined and eventually declared bankruptcy.
German company Metro, founded by Otto Beisheim in Düsseldorf in 1964, typically had store areas of 15,000-20,000 square meters and 20,000-30,000 SKUs. As of 2021, Metro had 963 supermarket stores worldwide.
Back to Walmart, it entered the Chinese market in 1997. During the same period, well-known supermarket companies such as China Resources Vanguard, Wumart, Carrefour, RT-Mart, and Metro were also established or entered mainland China in the 1990s.
At that time, China had just emerged from a nearly half-century period of shortage economy. In the following 10 years, the economy developed rapidly under reform and opening-up, with GDP per capita growing from about $800 in 1997 to about $3,000 in 2008. During this period, Walmart developed rapidly in China, with the number of stores exceeding 100. China Resources Vanguard and Wumart also expanded quickly, with supermarket store numbers exceeding 1,000 and nearly 500 respectively by 2008.
Chart: Rapid development periods of supermarkets in various countries and corresponding economic indicators Data source: Public data, compiled by Muyang Capital
**II. "King of Hard Discount" ALDI, the representative of "fast, good, and cheap"** _(*ALDI is an unlisted private company)_
In 1962, the same year Walmart opened its first store in the US, a different retail business model emerged in Germany, which would later grow into a global retail giant: ALDI.
In 1946, the Albrecht brothers began operating a 100-square-meter store, a small grocery store that only provided traditional counter service to local residents and sold a small number of necessities. It was the demo version of an ALDI store. In 1962, the first true ALDI store opened in Dortmund, Germany.
At that time in Germany, the supermarket giant Metro was rising (similar to the Walmart model, founded in 1964), but it did not prevent ALDI's small grocery store from carving its own path and growing into a leading enterprise in the hard discount model.
One of the founders, Karl Albrecht, mentioned in a public statement in 1953:
"In the early stages of development, we also thought about selling a wide variety of goods like other retailers, but we did not follow that path because we realized that **by operating fewer categories, our costs were very low compared to other peers, which was an important reason for our success.**"
ALDI stores are significantly smaller than Walmart, typically a few hundred square meters, located on the edges of residential areas or university campuses. ALDI has a very limited number of items, from a few hundred in the early days to nearly 2,000 later, while Walmart typically has 10,000-20,000 SKUs per store. **The limited SKU count greatly improves consumers' shopping efficiency.**
In addition, ALDI sets prices very low to pass savings to consumers, with gross margins generally not exceeding 15%, while Walmart's are usually around 25%.
**ALDI hopes customers only pay for the "naked" product itself, not for the additional conditions behind the product**, such as TV advertising, celebrity endorsements, etc. These extra steps can sometimes be more expensive than the production itself.
Data source: Wind, public publications; converted based on EUR/USD exchange rate of 1.0511
Data source: Wind, public publications; converted based on EUR/USD exchange rate of 1.0511
In addition to rapid development in Germany, ALDI's overseas business has continued to expand. It entered the US in the 1970s, France in the 1980s, and the UK in the 1990s. Even in wealthier overseas societies (Engel coefficient below 20%, GDP per capita over $10,000), ALDI's expansion went smoothly.
Data source: Wind, public publications; converted based on EUR/USD exchange rate of 1.0511, and GBP/USD exchange rate of 1.24
In 2020, according to Deloitte's Global Powers of Retailing report, ALDI's annual revenue reached $117 billion, with 11,540 stores worldwide, covering 24 countries.
**Hard discount works in the US as well. Once again, not coincidentally, the best merchants always have the same sense. Costco appeared.**
Shortly after ALDI entered the US, Costco appeared.
In 1983, Jeffrey Brotman, a lawyer, and Jim Sinegal, a former executive at Price Club, opened the first Costco in Seattle, which later became the leader in membership-based hard discount. _(*Price Club, the pioneer of membership, founded in 1976)_
Although Costco and ALDI have different business models, both focus on "saving customers money and offering selected products," so they also keep gross margins low (about 13%) and select about 3,700 SKUs (higher than ALDI but significantly lower than Walmart).
With the development of the US economy, both excellent companies, Walmart and Costco, have been conquering US territory.
From 1983 to 2000, Costco grew from 1 store to nearly 250 stores in the US (corresponding to $31.6 billion); during the same period, Walmart's US stores grew from 642 to 2,643 (corresponding to $4.7 billion to $191 billion).
**In this era of large supermarkets led by Walmart, Costco defended its own market with a differentiated value proposition.**
According to the 2021 fiscal year report, Costco's annual sales reached $192.1 billion, with 828 stores in 11 countries and regions worldwide.
**III. "King of Convenience Stores" 7-Eleven, the representative of "more, fast, and good"**
In addition to supermarkets and hard discount models, another retail format quietly emerged: convenience stores. The representative company of the convenience store model, 7-Eleven, originated in the US as early as 1927 but flourished in Japan.
In the early 1970s, Toshifumi Suzuki, a director of Ito-Yokado (then a new large general merchandise store in Japan), brought 7-Eleven back to Japan as a franchise after a business trip to the US. In 1974, the first 7-Eleven store in Japan opened in Tokyo.
When Suzuki first proposed this idea within the group, he faced skepticism from many. The core reason was that **since the emergence of large supermarkets led by Daiei, most small street shops had seen a sharp drop in sales, and going against the trend to open small stores did not make business sense.**
But it turned out that the 7-Eleven model was a huge success in Japan, and in 1991, it made a reverse acquisition of 7-Eleven's parent company, the US Southern Company (when Suzuki inspected Southern Company, 7-Eleven already had over 4,000 stores in the US; Southern Company had an advanced model but loose management, leading to weak subsequent growth).
Unlike Walmart's rich product categories, 7-Eleven focuses on limited categories such as convenience foods, fast food, tobacco, and alcohol, and within these categories, it offers as many choices as possible, such as various instant noodles, rice balls, sake, and manga books.
7-Eleven stores are only about 100-110 square meters, but they can carry up to 2,000 SKUs, with a gross margin of about 32%. **7-Eleven has always pursued ultimate convenience, even going beyond the retail framework to add service-oriented formats that meet community convenience needs, such as deposit and withdrawal services, utility bill payments, etc.**
As of early 2022, 7-Eleven had nearly 74,000 stores in 17 cities worldwide, with nearly 22,600 in Japan. In 2021, domestic sales in Japan exceeded 4.8 trillion yen (about $37 billion), and global terminal store annual sales exceeded 11 trillion yen (about $86.1 billion).
**The development of Japan's convenience store industry is closely related to the leap in GDP.** GDP per capita jumped from nearly $20,000 to over $30,000, and the Engel coefficient fell from over 25% to below 15%.
During this period, the number of 7-Eleven stores and average revenue per store continued to rise, entering a mature phase after 2000, with domestic average annual revenue per store maintained at around 230 million yen ($1.77 million).
******The Three Giants Each Show Their Prowess**
As mentioned earlier, during the early stages of economic development in the US, Japan, and Germany, the supermarket format was booming, and small store formats were squeezed. However, ALDI and 7-Eleven managed to break through in the small store format with extreme cost-effectiveness and extreme convenience, respectively, building their own business empires.
Let's first look at how ALDI provides consumers with extreme cost-effectiveness:
**1. Select functional, high-frequency, rigid-demand SKUs to maximize sales of limited SKUs and systematically improve efficiency.**
In terms of category selection, ALDI focuses on food, supplemented by daily necessities such as cooking oil, bacon, flour, soap, and toothpaste. It insists on selling only the fastest-moving items, allowing customers to make purchasing decisions more quickly, thereby achieving economies of scale for individual items and reducing procurement costs.
At the same time, streamlining SKUs means smaller stores, fewer staff, simpler restocking operations, etc., reducing the complexity of store operations and achieving an exponential reduction in overall operating costs.
Several data comparisons:
_• Product turnover efficiency: ALDI has 1,000-2,000 SKUs per store, with sales per SKU 12 times that of Walmart._
_• Sales per square meter: ALDI's sales per square meter are close to $13,000 per square meter, 2-3 times that of Walmart._
_• Labor productivity: In 2016, ALDI's labor productivity was $480,500 per person, about twice that of Walmart._
**2. Private labels, C2F to achieve the lowest delivery cost**
Private labels are a key strategy for ALDI, accounting for over 90% of its assortment. The extremely high proportion of private labels means no brand marketing expenses, minimal waste, minimal logistics and warehousing costs, minimal display costs, and other cost savings.
More importantly, ALDI thus holds a strong bargaining position in the industry chain, allowing it to deepen coordination across all links of the industry. For example, for manufacturers that produce large orders for ALDI over the long term, ALDI requires them to modernize their production lines to make processes more efficient.
**3. Strict quality control, pursuing good quality and low prices, but not absolute low prices**
ALDI's private label products have always been of high quality. It introduced quality management concepts such as "ISO900" and "Total Quality Management" ahead of peers and implemented them in daily operations. In UK consumer surveys, ALDI even beat Waitrose, a high-end supermarket known as the "Royal Supplier," and was rated one of the best supermarkets for buying spirits in the UK.
Now let's look at how 7-Eleven provides consumers with extreme convenience, comparing it with ALDI:
1. ALDI wants to reduce time spent on inefficient shopping to lower labor costs, so it sets operating hours from 8 am to 8 pm, **while 7-Eleven offers 24-hour non-stop operation, covering consumers' lives at all times.**
2. ALDI wants to provide community services but also avoid high rents, so it chooses locations on the edges of communities with a few hundred square meters, while 7-Eleven pursues prime locations and high density in areas to achieve extreme convenience in physical distance (Japan and Germany have similar land areas, but ALDI has only about 4,000 stores in Germany, while 7-Eleven has 22,600 stores in Japan).
**If going to ALDI for shopping is a light decision, going to 7-Eleven seems to require no decision at all; it has become part of your life.**
3. ALDI continuously deepens its product system, with private labels gradually expanding to over 90%, while 7-Eleven continuously deepens its definition of convenience and supply capabilities. **Unlike ALDI, which subtracts from products, 7-Eleven thinks about how to add.**
For example, to meet the dining needs of people in a busy society, it developed products such as rice balls, bento boxes, sandwiches, pastries, and oden; to shorten the housework time of busy dual-income families, it explored new needs like "soup stock" for development, or deepened the development of dishes from "home-style dishes" to "high-difficulty dishes."
4. Furthermore, although both develop private label products, their value propositions are completely different. ALDI's proposition is "same quality, lower price," **while 7-Eleven's proposition is not to engage in price wars but to develop products with high added value.**
For example, during Japan's economic downturn in 2001, McDonald's offered half-price burgers on weekdays at 65 yen, Yoshinoya's beef bowl dropped from 400 yen to 280 yen, and other convenience stores launched 100-yen rice balls to compete. But 7-Eleven went against the trend, launching a higher-quality, higher-priced golden salmon rice ball (160 yen).
******The Emerging Beautiful New World**
If we observe from the perspective of demand elements, "more, fast, good, and cheap" seems to exhaust all consumer demands. Walmart, known for "more, good, and cheap"; ALDI, known for "fast, good, and cheap"; and 7-Eleven, known for "more, fast, and good," each take three of the four, seemingly covering all possibilities.
In the current global economy, the thriving Amazon is just an electronic version of a follower of Walmart's "more, good, and cheap." Globally, it seems that only JD.com, with its self-built logistics, has achieved "more, good, and cheap" while also being as "fast" as possible.
**Of course, for the interpretation of "fast," JD.com uses deterministic fulfillment time, ALDI uses more efficient decision-making efficiency, and 7-Eleven uses the convenience of a 3-minute walk 24/7.**
If we observe from the perspective of time and space, the US, Japan, and Germany have all experienced significant economic leaps in the past 80 years, and people's lives have entered a more affluent state. The three retail giants have also taken off in this context.
Walmart's abundance and 7-Eleven's convenience seem to align with consumption upgrades, while ALDI goes against the trend, conquering the market with low prices.
The core reason is that **although ALDI was born out of material scarcity and consumers' pursuit of cheapness, its development is driven by affluence and consumers returning to product value.**
As people's living standards continue to improve, their demands for basic consumer goods also change. From initially meeting basic needs (buying food), to pursuing a sense of security (sufficient variety), to pursuing satisfaction (choosing branded goods), and then returning to simplicity, efficiency, cheapness but with guarantees (de-branding).
As the Engel coefficient declines, food's share of total expenditure decreases, and the marginal utility of food diminishes, users naturally allocate more time to experiential consumption such as reading, socializing, and exercising, while reducing the energy allocated to basic food and daily necessities.
Thus, users need a trustworthy channel brand like ALDI: **products directly reach users, no redundant markups, guaranteed quality; categories are rigid demand but SKUs are streamlined, high purchase efficiency; stores are close to home, reducing travel time.**
The community group buying during the Shanghai lockdown is somewhat like an ultra-simplified version of ALDI.
Although the background is special, the commercial chain maintained by group leaders is highly consistent with ALDI in essence: minimal SKUs, mainly food and beverages, C2F, supply-oriented, de-branded, with almost no demand for category diversity but with requirements for the depth of supply of individual items (i.e., minimum order quantity, allocation limits, allocation efficiency).
In China, the large supermarket format represented by Walmart and the convenience store format represented by 7-Eleven are already very mature, while the discount retail format represented by ALDI is clearly still in its infancy.
The community group buying during this pandemic may be a short-term helpless move for consumers, but in the long run, the user demand corresponding to this model will inevitably grow.
**As people's living standards continue to improve and consumers gradually return to the essential value of goods, Chinese consumers need a channel for daily necessities that offers high cost-effectiveness, high purchase efficiency, and safety guarantees.**
**Postscript:**
During this pandemic, we have also made many interesting discoveries, such as: many young people's dependence on food delivery is unimaginable—some don't even have any cooking utensils at home; things we thought were about to exit the stage of history have been called back into household consumption, such as freezers, canned luncheon meat, and other long-shelf-life products.
Professional fitness needs, which were originally met by city gyms, have actually been met at home. To some extent, this represents a reversal of professional division of labor; many people's first reaction after meeting basic needs is consumption upgrading, starting to have demands for better experiences like chocolate, desserts, roast duck, bread, ice cream, cola, etc.
Coffee, cigarettes, alcohol, and other so-called non-essential consumer goods are actually more essential than we originally thought; WeChat has become almost the only way to exchange information...
After the pandemic, many things will change. Let us look forward to the beautiful new world together.
Definitions: GDP per capita: total output (total GDP, i.e., total output of social products and services) / total population, a standard for measuring the living standards of people in various countries. Engel coefficient: the proportion of food expenditure in total personal consumption expenditure. The United Nations has a standard for classifying the living standards of countries based on the Engel coefficient: an average household Engel coefficient greater than 60% is poverty; 50%-60% is subsistence; 40%-50% is moderately well-off; 30%-40% is relatively affluent; 20%-30% is wealthy; below 20% is extremely wealthy. SKU: refers to a product variant; each variant corresponds to one SKU. If a product has multiple variants (e.g., multiple colors), it corresponds to multiple SKUs. C2F: Customer-to-Factory, meaning "no middleman to earn the difference."
Source: Muyang Capital (ID: mumiancapital) Author: Chen Shiyi
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## Citation metadata

- Publisher: New Distribution
- Author: 陈十一
- Published: 2022-06-12
- Canonical: https://xinjignxiao.com/en/articles/reflections-on-consumption-changes-amid-the-pandemic-looking-at-the-futu-a9b7030e/
- Original source: https://mp.weixin.qq.com/s/qcxUFwlmMtKWYliWWpxeyw

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