---
title: "Reshaping Value: Convenience Stores Are About to Have Their Moment"
description: "At the 2015 China Chain Store Convention, convenience stores emerged as the standout sector. While physical retail formats saw slowing growth or even negative growth, convenience stores bucked the trend with over 20% growth. Since their introduction to China in the mid-1990s, modern chain convenience stores experienced an initial expansion boom, but faced contraction due to hypermarket growth and rising rents. Now, with changing consumer preferences and technological advancements, the industry is poised for a new era, but it must overcome challenges in valuation and profitability."
author: "陶冶"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2015-11-23"
language: "en"
canonical: "https://xinjignxiao.com/en/articles/reshaping-value-convenience-stores-are-about-to-have-their-moment-f65e2251/"
markdown: "https://xinjignxiao.com/en/articles/reshaping-value-convenience-stores-are-about-to-have-their-moment-f65e2251.md"
original_source: "https://mp.weixin.qq.com/s/bQXMvBdwGT4KdxGooA9PIg"
translation: "https://xinjignxiao.com/zh/articles/%E9%87%8D%E5%A1%91%E4%BB%B7%E5%80%BC-%E4%BE%BF%E5%88%A9%E5%BA%97%E5%8D%B3%E5%B0%86%E8%BF%8E%E6%9D%A5%E5%B1%9E%E4%BA%8E%E5%AE%83%E7%9A%84%E6%97%B6%E4%BB%A3-f65e2251.md"
attribution: "New Distribution — https://xinjignxiao.com/en/articles/reshaping-value-convenience-stores-are-about-to-have-their-moment-f65e2251/"
usage_policy: "https://xinjignxiao.com/ai-policy.txt"
---

# Reshaping Value: Convenience Stores Are About to Have Their Moment

> At the 2015 China Chain Store Convention, convenience stores emerged as the standout sector. While physical retail formats saw slowing growth or even negative growth, convenience stores bucked the trend with over 20% growth. Since their introduction to China in the mid-1990s, modern chain convenience stores experienced an initial expansion boom, but faced contraction due to hypermarket growth and rising rents. Now, with changing consumer preferences and technological advancements, the industry is poised for a new era, but it must overcome challenges in valuation and profitability.

At the 2015 China Chain Store Convention, convenience stores became the most vibrant sector. While physical retail formats saw slowing growth or even negative growth, convenience stores bucked the trend with over 20% growth.

Since their introduction to China in the mid-1990s, modern chain convenience stores experienced an initial expansion boom. However, with the rapid development of hypermarkets, and the surge in rents following residential commercialization and urbanization, many convenience stores began to contract, with some even closing down. Subsequently, the sector faced a lukewarm performance, especially in first-tier cities where convenience stores suffered long-term, large-scale losses.

So what is driving this growth in convenience stores? Is it capital, or is it the bubble of O2O?

As industry practitioners, we observe that although mobile internet and O2O have attracted some capital attention this year, in essence, capital participation has not influenced the growth of convenience stores. Instead, improved sales and companies' own market choices are the key factors ensuring their growth.

We believe that convenience stores are about to have their moment.

Currently, the convenience store industry faces two simultaneous issues: on one hand, there is a huge historical opportunity requiring capital investment; on the other hand, their historical profitability has been poor, making it difficult to gain market capital recognition and investment.

**Opportunities and Challenges**

Comparing the economic development history and retail format evolution of the United States, Japan, and Taiwan, it is clear that when an economy basically completes industrialization and enters the post-industrial transformation stage, that is the starting point for rapid convenience store growth, just like China now.

In the industrial era, there was a need to quickly establish channels, efficiently sell mass-produced goods, and have cross-regional market channels for competition and integration. Customers also needed one-stop shopping to purchase various basic consumer goods they had never tried before. Therefore, high-efficiency hypermarkets and comprehensive supermarkets were the best choice, leading to their golden age over the past 15 years.

Now, as residents have basically purchased all their daily consumer goods, the demand for functional shopping is weakening, which is why hypermarkets have performed poorly in recent years. Meanwhile, consumers are wealthier, more concerned with leisure and entertainment, less price-sensitive, and demand higher service quality. Consequently, spending at small convenience stores and restaurants is growing significantly.

However, from a profitability perspective, convenience stores are still in a difficult operating period.

First, there is the pressure of rent. Since 2005, with urban commercialization (requiring extensive supporting services), residential commercialization driving rapid housing price increases, and retail growth, convenience store rental costs have risen sharply (our data in Beijing shows rents roughly double every 3 to 5 years), but foot traffic has not increased, and product prices have remained largely unchanged, creating significant operational pressure.

Second, labor issues. Since the state-owned enterprise reforms, laid-off workers are facing retirement, and the post-80s generation generally has higher expectations for job nature and quality of life. As a result, the convenience store industry is experiencing a shortage of employees.

Additionally, since 2005, the socialized social security system has been gradually implemented. Convenience stores are among the most labor-intensive industries (because most operate 24 hours or at least 16 hours, requiring shift changes, so employee density per square meter is much higher than other formats). Therefore, the rapid increase in labor costs has put enormous pressure on convenience stores and is a major reason for many contractions. According to data from Hi-24 (好邻居), from 2009 to 2015, average sales per store doubled, but the increases in rent and labor costs both exceeded double, even approaching double.

So the convenience store industry currently faces two simultaneous issues: on one hand, a huge historical opportunity requiring capital investment; on the other hand, poor historical profitability, making it difficult to gain market capital recognition and investment.

Convenience stores should rely on high-frequency customer contact and rigid demand to acquire users, then gradually introduce various local life services. Ultimately, with extremely low promotion and marginal costs, they might squeeze out existing formats and become the most influential retail service industry.

**The Uniqueness of the Format**

From a capital market perspective, convenience stores are not an independent industry and have no dedicated analysts; they are classified under retail and valued using its models, primarily PE (price-to-earnings) and PS (price-to-sales).

However, under this model, serving the same customer base, convenience stores are always undervalued. As we know, convenience stores must choose the most convenient but also the most expensive locations, and to provide convenience, their average transaction value is much lower than hypermarkets. Also, due to 24-hour operation, staffing is several times that of hypermarkets.

In terms of the entire store, the most important cost investment for convenience stores is in the backend: including IT, marketing, high-frequency all-temperature logistics facilities, processing plants, and central kitchens. These investments are far heavier than those of hypermarkets. For example, Japanese counterparts invest mainly in headquarters and backend construction, while store investment is actually delegated to franchisees.

If we calculate the enterprise value of convenience stores based on store sales scale, how should the assets invested in the backend be calculated? Or how should the funds invested in the backend achieve returns? Should the future of Chinese convenience stores be dominated by these Japanese brands?

Therefore, we call for a discussion on the value assessment of the convenience store industry and research on how to design a valuation model for convenience stores.

Japanese counterparts have an interesting description of convenience stores: small trade area, manufacturing-type chain retail. Similar companies include Japan's 7-Eleven, Muji, Germany's ALDI, and America's Rite Aid. The common features of these convenience stores are: they serve only limited trade areas and users; they create competitiveness and differentiation by offering carefully selected high-value products and services; and they long-term explore the diverse needs and lifetime value of fixed users to obtain cumulative revenue.

A convenience store is a service industry, not just a distribution industry. The purpose of a convenience store is to acquire customers and foot traffic, providing basic convenient shopping while also meeting their surrounding life needs, thereby obtaining a higher service premium. For example, in Taiwan, not only beverages, cigarettes, and snacks, but also lunch boxes and utility payments have been monopolized by convenience stores. Freshly brewed coffee occupies the largest share, and even express delivery has a significant share. Japan's Lawson is even the third-largest ticket agency, and 7-Eleven's 7-bank holds the largest share of ATMs, thus dominating small and convenient financial services.

In other words, in urban ecosystems similar to ours, such as Taiwan, Japan, and Hong Kong, convenience stores rely on high-frequency customer contact and rigid demand to acquire users, then gradually introduce various local life services. With extremely low promotion and marginal costs, they squeeze out or even replace existing formats in many services, ultimately becoming the most influential retail and service industry.

Therefore, we believe that the valuation of convenience stores is not based on stores and sales, but on user value, similar to industries like telecommunications, internet, and retail finance that rely on users. The maturity of mobile internet technology and the widespread application of O2O platforms allow this value to be realized more quickly.

Modern convenience store competition is not only a contest of traditional product development and on-site operations, but also a contest of mobile marketing and membership service capabilities.

**Exploring a New Valuation Model**

In 2013, we formulated a transformation strategy for Hi-24 (好邻居) and designed a business model: use convenient services and rigid demand to attract foot traffic, establish customer accounts and data accumulation, then complete membership through proprietary products and services and special member benefits. With mobile internet technology, we integrate online and offline, cross-selling various local life services beyond regular convenience goods.

Currently, we have launched mobile payment, store and product lookup, online shopping, in-store package pickup, utility payment and points redemption, cross-border e-commerce, and financial services. We have also moved customer interaction and marketing activities to mobile applications (mainly via WeChat). Within less than a year of launch, we have achieved good results.

We are trying to prove that the value of convenience stores is not simply based on store count or scale, but on users' local life services.

Of course, not all convenience stores have this value foundation. To complete the transformation from store value to user value, the following considerations and deployments are needed.

First, user density. That is, the density of users that each store can serve and cover; the higher, the better. The service radius varies by city characteristics, but generally, users within 500 meters are core users. So the density of target users within 500 meters is an important consideration. Conversely, if customers have to walk a long distance to reach a convenience store, this value is greatly diminished.

Second, penetration and coverage in a given market area, or coverage capability. In a chosen relatively closed market area, convenience stores need high penetration and high coverage to achieve full coverage, maximizing the marginal benefits and minimizing costs of various marketing activities and value-added services.

Third, the cost and efficiency of maintaining foot traffic. Convenience stores rely on location and time convenience to acquire foot traffic. If rents are too high or store investment and operating costs are too high, more gross profit and revenue are needed to sustain. Of course, whether high cost/high revenue or low cost/low revenue, as long as they match, it is feasible. Generally, higher costs require higher foot traffic, which naturally affects site selection and rent. We believe we should explore models that can sustain store operating costs with lower foot traffic.

Fourth, the degree of user digitalization and digital capability. The first three points are about stores, but the current situation for most companies is that hundreds of thousands of users come in repeatedly every day, yet we hardly know who they are, how often they come, or what they need. So we often say physical stores have customers but no users. Internet businesses inherently have customer digitalization, creating more cross-selling opportunities and allowing careful management of users for longer-term and broader revenue and value.

Therefore, the ability to digitalize customers is a new challenge for traditional convenience stores. For example, in the Hi-24 transformation mentioned earlier, after the new system went live last year, we acquired users through payment and marketing, conducted various targeted marketing activities at low cost, and store foot traffic significantly increased. In the first three quarters, average sales per store increased by over 20% year-on-year, and online value-added services, which were previously negligible, reached 300,000 transactions, with business scale approaching 10 million. The stores have accumulated nearly 500,000 members, equivalent to an average of 2,000 mobile, digital users per store. If we use the current VC valuation model for internet company users, this user level is already a staggering number.

Fifth, user recognition, dependence, and loyalty to convenience stores. The products sold by ordinary convenience stores are largely homogeneous; it doesn't matter where you buy them. But in modern times, recognized customers are users. So we need to develop unique new products and services, such as private labels, hot and cold fresh food services, and a wide range of life services to stick with users. Through flexible and interesting marketing, we give long-term users special rights and emotional recognition, making them highly identify with their local stores.

To evaluate the user value of a convenience store system, besides the number of digital users and user density per store, we also need to consider visit frequency and loyalty. So, modern convenience store competition is not only a contest of traditional product development and on-site operations, but also a contest of mobile marketing and membership service capabilities!

Sixth, the ability and conversion rate to cross-sell multiple products and services to users. As mentioned earlier, after acquiring customers and completing membership, the next task is to examine the cross-selling and monetization capability for members. This is similar to industries that rely on user numbers: how good is the customer monetization ability? Even if you acquire a large number of users, if you cannot find effective ways to cross-sell for more revenue and expand store products and services, the member value is greatly diminished. So examining a convenience store company's cross-selling capability is also an important factor in valuation.

Overall, the convenience store industry is a sunrise industry. The value of this industry lies not only in the channel for selling goods, but more importantly in acquiring users and continuously providing them with high-value services that keep pace with the times, forming network effects. It is said that the value of a network is the square of its nodes. This article hopes to provide the capital market with a new perspective on the value of convenience stores, and also hopes these thoughts can help convenience store practitioners reconstruct their business models and operational priorities.

(The author is the director and general manager of Beijing Gangjia Hi-24 Chain Convenience Store Co., Ltd.)

**-END-**

Content Selection
Click on the title below to read directly:
[Line Sales Representative Practical Operation Guide (with full PPT download)]


---

## Copyright and AI use

This article is sourced from New Distribution. Search, quotation, summarization, and model training are permitted, but every use must credit New Distribution and retain the canonical source URL.

Contact: zhaobo258@gmail.com · +86 158 5481 7671