The internet is powerful, but small supermarkets are resilient. The wave of the internet, when impacting offline retail, encountered a tough nut to crack: small supermarkets. Small supermarkets include community supermarkets, convenience stores, grocery stores, and kiosks, also known as retail small stores, distinct from large supermarkets and wholesale markets. According to data from Alibaba Retail and Aowei Analysis, there are approximately 6.3 million small stores in the current offline traditional commodity retail channel, with over 75% concentrated in third-tier and below cities. These widely distributed retail small stores contribute 40% of the domestic FMCG industry's shipments. "The smaller the store, the less dependence on the internet, and the stronger the resistance. For example, many mom-and-pop stores are almost unaffected by the internet except for payment QR codes," said industry insider Lai Yonghua. In contrast, traditional chain supermarkets or convenience stores are more affected. In fact, the larger the offline retail scale, the greater the impact from the internet, and the more it needs internet support. For instance, Xinhua Du, Sanjiang Shopping, Intime Retail, and Bailian Group have Alibaba behind them; while Bubugao, Yonghui, Zhongbai, Walmart, and Carrefour have Tencent. Large chain supermarkets face enormous operational pressure and have a more urgent need for internet cooperation due to their size, capital, and scale, giving them some bargaining power. However, micro-chain supermarkets with only a few stores are much more cautious about cooperating with the internet. "They are elephants, we are ants," said Fu Song, owner of a small chain supermarket in Yunnan. Due to the huge disparity in scale, this is destined to be an unequal negotiation; unless forced, they will not lean towards the internet. In Lai Yonghua's view, there are two main reasons for small supermarkets' resistance to the internet: on one hand, the scale disparity makes negotiations unequal, with the risk of losing control; on the other hand, apart from equipment provision and system integration, the internet offers limited assistance to small supermarkets in the supply chain. For small supermarkets, people, goods, and places are highly unified. Their stores are not large, and even if they have chains, they are few, but most are deep cultivators of the local retail market, with keen insights into local consumer needs and relatively fixed supply chain resources. For example, there are now some organizational alliances in supply chain construction, such as Kyushu Brothers Alliance focusing on fresh supply chains, Ant Alliance developing private labels, regional organizations like Qilu Business Alliance, and the Heilongjiang Chain Operation Association, which are sufficient to meet the needs of small supermarkets. Internet giants' technical support might be more effective, but a digital information system that costs tens of millions or even hundreds of millions of yuan is unaffordable for mid-sized supermarkets with annual sales under 1 billion yuan, and even more out of reach for small supermarkets. Lai Yonghua stated that only a very few small supermarkets have started digitalization, such as creating mini-programs and official accounts, or setting up WeChat groups, but they are still in the early stages; most small supermarkets have not even completed digital infrastructure. Small supermarkets are also very cautious about low-cost cooperation models like online delivery integration. On one hand, they worry that online orders are just a conversion of existing sales rather than incremental growth; on the other hand, they fear that once customers develop the habit of ordering on platforms, the target customer base they have cultivated will become the platform's users. "The so-called empowerment of small supermarkets by big tech is actually castrating their future. The internet uses digital systems to build its own online mall, selling physical retail goods, with ordering, delivery, and transactions all on their platform, treating physical retail as a product supplier. Once the market is cultivated, they either raise commissions or build their own warehouses and delivery. By then, consumers will no longer belong to physical retail," a supplier told Finance and Economics. Many people think the internet's impact on offline retail is a dimensionality reduction attack, but that is not the case. Ma Yun proposed the new retail concept in 2016, and Alibaba began to aggressively enter offline, followed by Tencent, JD, and Suning. Around 2018, large supermarkets either closed stores or embraced the internet, and the claim that offline retail was about to change was rampant. But data shows that small supermarkets are growing against the trend. For example, according to data from the China Chain Store & Franchise Association (CCFA), convenience stores have become one of the fastest-growing retail formats in China in the past three years, with an average annual sales growth of about 20% and an average annual store growth of nearly 10%. In 2019, the overall market sales scale exceeded 250 billion yuan, and some institutions predict that sales in 2020 will approach 350 billion yuan. Internet giants bring their professional and complex digital infrastructure to reshape traditional retail business models, but they cannot eliminate the concerns of physical supermarkets about sensitive issues such as users, data, and traffic orientation. More importantly, compared to grafting digital tools, optimizing product structure and iterating consumer-oriented business models are the urgent issues they need to solve. "Physical retail needs to solve the problem of commercial value; digitalization is just a necessary tool. Commercial improvement must use digitalization as the foundation to enhance operational efficiency, but that is not the root. The core is that physical retail must reconstruct the core value that attracts consumers based on changes in consumer demand and competitive structure. Without solving this problem, digitalization is meaningless, so enthusiasm is low," said Lai Yang, dean of the Beijing Jingshang Circulation Strategy Research Institute, pointing out the current focus for physical retail. As early as 2016, Alibaba launched Retail Link to empower retail small stores and give mom-and-pop stores a new way of life. In 2017, it covered 500,000 stores; in 2018, 1 million; the latest data shows Retail Link now covers 1.5 million small stores, accounting for 25% of the national offline retail small stores. "In recent years, the internet's impact on small supermarkets has been more about empowerment and market cultivation, because small supermarkets themselves are not the focus of internet competition," Lai Yonghua said. Currently, online retail's share is only a quarter of total social consumer goods retail, indicating that the ceiling for e-commerce is still high. Alibaba and JD both have their own online supermarket businesses with significant growth space. In fact, the internet's foray into offline is more of a strategic layout. But the internet has capital, resources, and technology; once they enter, their destructive power is undeniable. The resurgence of community group buying in the second half of last year has put great pressure on small supermarket operators. In response, Lai Yonghua said, "For small supermarkets, it is the right path to use the convenience provided by the internet as much as possible to strengthen themselves." **-01- **Small Supermarkets Hard to Win Over Before 2016, small supermarkets barely felt the power of the internet wave. It was not until Alibaba, JD, Tencent, and Suning entered new retail. For traditional small supermarkets, stocking is a big problem. "Previously, store owners had to go to the wholesale market to personally select goods, which was tiring, and many branded products were often unavailable," Lai Yonghua said. The pain point the internet targeted in new retail was the supply chain issue. According to the giants' initial vision, mom-and-pop stores connected to the network system could directly access brand supplier sources, simplifying the stocking process, and could optimize product structure based on Taobao system product data, while also integrating online channels and opening up food delivery services, overturning their traditional business model. Ideals are full, but reality is harsh. From the current situation, most mom-and-pop stores only use the stocking system as a platform for exploiting benefits, and their cooperation with giants is not close. An individual business owner cooperating with internet giants has various platforms on his phone, considering price, minimum order quantity, delivery fees, and subsidies as comprehensive factors, choosing the most cost-effective option after evaluating overall cost-performance. This is not an isolated case; 4 out of 5 stores visited by Finance and Economics were like this, and their stocking channels are not limited to B2B platforms; sometimes they go to wholesale markets for price advantages. This leads to a problem: the stocking ratio of franchisees on the platform cannot reach 100%, or even 50%. An industry insider told Finance and Economics that if the stocking ratio cannot be increased, merchants and platforms can only stay at a shallow level of stocking and supply, making it difficult to achieve deep cooperation. On this basis, talking about expanding numbers is meaningless. The primary consideration for the above individual business owners in choosing multiple orders is still price. "Some products are indeed not cheap, but there are many promotional activities," the owner of a franchised convenience store in Fengtai District, Beijing, told Finance and Economics. "Recently, due to a large order volume, I got a quota for 1 yuan stocking, bought 17 boxes of beer, and got 1 box of Red Bull as a gift, with fresh dates. This box (12 bottles) of beer usually costs about 60 yuan at wholesale; even if we sell it at 5 yuan per bottle, the profit is considerable." A person in charge of a convenience store in Shaanxi that has long ordered Three Squirrels and Bestore online told Finance and Economics that the price was relatively cheap at the beginning of ordering, but the price has been increasing later. "They deliver directly to the warehouse, and I have to adjust the price in the system before receiving the goods. Overall, the number of price increases is more than decreases or no changes," the person said. During major online promotional activities, it is a good time for ground promotion staff to attract new customers. Once customers develop the habit of stocking on the platform, some category prices begin to rise. "The tricks are deep," the person commented. But it is undeniable that internet giants have indeed shortened the distance between mom-and-pop stores and small chain supermarkets in supply chain and scale to a certain extent. As the above convenience store person said, in some categories, they can make up for the unstable supply chain in third- and fourth-tier cities. The stocking platforms of Retail Link and New Road have about 10,000 SKUs, while mom-and-pop stores with an area of 50-200 square meters generally need 2,000-4,000 SKUs, basically meeting individual needs. The logistics system that delivers directly to warehouses or stores also saves time, energy, and physical effort. As for operational efficiency, it largely depends on location, product selection, and the owner's management level; the choice is entirely up to them. The above convenience store owner only uses the internet as one of his stocking channels, and many individual business owners and small chain convenience stores do the same. The transformation effect of the giants is limited and cannot fully solve the pain points of small stores, such as product selection and marketing skills. At the same time, there are interest games in some aspects, such as low-price early-stage store acquisition, and then raising purchase prices after users develop stocking habits, which is suspected of cutting leeks. Integrating online delivery systems for small stores is also one of the giants' strategies to reach end consumers. Among the JD convenience stores visited by Finance and Economics, 3 owners reported that online orders are steadily rising, but offline customer flow is decreasing, especially after the epidemic. When online shifts from incremental to existing conversion, these consumers' roles change from store customers to platform customers, which may become a key point for internet control of small stores. Owners who are not large but proficient in supermarket operations are cautious or even resistant to the internet. They already have certain accumulation and advantages in the supply chain, and the internet's stocking platforms have no advantage for them. Compared to increasing online presence, optimizing offline product structure, developing private labels, ready-to-eat foods, semi-finished products, and other new customer-attracting categories, enhancing shopping scene and experience, reshaping reasons for customers to visit stores, and making stores differentiated and humanized are their current priorities. **-02- Regional Retail Dominates Its Own Territory In 2012, Li Lin's role changed from a vegetable wholesaler to a supermarket owner. After struggling in Xining, Qinghai for 13 years, he finally acquired his first store, not large, 930 square meters. Compared to the then-popular hypermarket format, its "one-stop shopping" functionality was clearly insufficient. He missed the golden period of local supermarket development. In the 1990s, a massive wave of entrepreneurship swept the country. According to Ministry of Human Resources and Social Security data, in 1992, 120,000 civil servants resigned to go into business, and over 10 million civil servants took unpaid leave. At that time, civil servants were not a sought-after "iron rice bowl"; going into business was the way to get rich by riding the wave of reform and opening up. Some regional retail brands rose during that time and gradually grew into local regional leaders, such as Hunan's Bubugao chain supermarkets, Henan Luoyang's Dazhang Group, and Shenzhen Guangdong's Renrenle Supermarket. Although Renrenle is now struggling on the brink of death, it is more due to internal strategic and management issues; it is undeniable that it emerged prominently in the entrepreneurship wave and became a force comparable to Walmart locally. At that time, apart from foreign investment like Walmart and Carrefour, local retail enterprises had a vast blue ocean, especially in third- and fourth-tier cities where foreign investment had not yet entered. "At that time, doing supermarkets, opportunity was more important than ability," a senior retail practitioner told Finance and Economics. It is no exaggeration to say that in the era of people finding goods, opening a store meant making money. But Li Lin did not seize this opportunity. He had no start-up capital and was constrained by the cyclical nature of rice farming and harvesting in his hometown, unable to leave for business. It was not until a massive flood in 1998 submerged Li Lin's family farmland that he packed his bags and embarked on the road to business in Xining. It took him 13 years to open his first supermarket, and by then, the retail market landscape in various regions had basically been established, making it difficult for Li Lin to squeeze in. So he opened his first supermarket on the outskirts of Xining, at a time when e-commerce was booming. Li Lin, a former wholesaler, is very skilled in fresh food management, which has become the core competitiveness for the supermarket's survival and development in a market environment where e-commerce impacts standard products. While the hypermarket format declined, fresh food was elevated as a strategic product and became the core category with the strongest ability to attract customers. Li Lin seized and amplified this differentiated category. His store's fresh food area accounts for about 50% of the total, with selected standard products, abandoning categories like home appliances that are most impacted by e-commerce and have low frequency and high customer value. This category structure makes fresh food account for 50% of sales and 60% of profit contribution. Fresh food is not only a magnet for customers but also takes on the function of profitability. Li Lin adopted a curve-overtaking strategy, avoiding brands with large local market share in site selection, digging deep into consumer demand in relatively blank development zones, maturing them into familiar markets through category structure adjustment, enhancing consumer stickiness, and consolidating loyal customer groups. Once the customer base is formed, expanding stores becomes relatively easier. Regional small and medium retail enterprises like Li Lin's, with several chain supermarkets, are the largest main force in China's physical retail ecosystem. They occupy various cities, counties, towns, and townships in lower-tier cities. Although they are in a corner, they have solid customer bases and strong vitality. Supermarket site selection emphasizes trade areas, and product selection and operation emphasize target customers, which makes supermarkets inherently have trade area and social attributes. The pattern of China's retail market is that regional attributes are very significant. When Finance and Economics was on a business trip to Nanyang, a driver said that the local supermarket brand most recognized by locals is Wandelong, while Auchan, which entered the local market, eventually closed due to too few customers. Such examples also occur in Xining, Qinghai; Taiyuan, Shanxi; Suzhou, Jiangsu, and other regional retail enterprises. The most typical example is Pangdonglai Supermarket in Xuchang, Henan. This local retail enterprise, once visited by Lei Jun as a pilgrimage, occupies an absolute advantage in Xuchang alone, and national chains like Yonghui, Walmart, and Zhengzhou regional chain supermarket Dennis have all retreated in defeat. China Report Network summarized in the "2018 China Supermarket Industry Analysis Report - Market Operation Trends and Development Forecast" that the concentration of supermarkets in the Chinese market is low, and the brand pattern is fragmented. In second- and third-tier cities, due to the relatively solidified upstream channels and the benefits of local state-owned enterprises, regional chain supermarkets monopolize a large amount of local resources and use points, promotions, and other methods to improve customer retention, forming regional advantage barriers that hinder the further downward development of national chain leaders. Strong regional characteristics and regional differences in consumer preferences have also become natural barriers for regional retail enterprises. As long as they operate their target customer groups well, life will not be too difficult. In operating their target customer groups well, each enterprise has different focuses. For example, Pangdonglai's service is famous far and wide, Hubei Yasi focuses on visual merchandising, Henan Dazhang's killer feature is high cost-performance, and Beijing Shouhang's deli area is a new growth point for customer flow. Each brand has a thorough understanding of local consumers, driving the upgrade and iteration of products and services. These regional and personalized product structures and demand characteristics make it difficult for national chain supermarkets to replicate the experience of first- and second-tier cities to third- and fourth-tier cities through big data models. Even with professional market research teams, it is still difficult to obtain accurate consumer demand in the short term, requiring long-term deep cultivation and exploration. The regional characteristics of regional retail dominance have formed an industry pattern where national giants find it difficult to enter, and regional retail enterprises find it difficult to go out. Especially in third- and fourth-tier cities and even county-level supermarkets, the fierce competition and consumption habit iteration of first- and second-tier cities have not yet spread to them. When the epidemic dividend period passed and physical retail overall fell into a dilemma of declining sales and customer flow, Li Lin's comparable store sales still maintained nearly 20% growth. "The wolf is coming" has been heard for several years, but the wolf has never been seen, so it is normal for everyone to have low vigilance. Under this situation, the cooperation proposed by internet giants based on changes in the consumption environment is obviously not so attractive. More importantly, compared to holding hands with giants, regional retail enterprises prefer to walk independently. "The scale disparity between small chain supermarkets and internet giants is too large, and under unequal status, this cooperation has the risk of being controlled," the above senior retail practitioner told Finance and Economics. It was not until the second half of 2020 that community group buying, backed by giants, surged in. In the face of its "unreasonable" price subsidy war, chain supermarkets in third- and fourth-tier cities truly felt the pressure from the internet, directly reflected in the severe diversion of supermarket customer flow. A regional supermarket alliance told Finance and Economics that since the second half of last year, sales of more than 60 supermarkets in its system generally fell by 10%-20%. Wang Wei, founder of Fresh Legend, once publicly shared a set of data: in cities like Hefei, Wuhan, and Changsha, where community group buying is more prevalent, daily sales have exceeded 10 million yuan, even approaching 20 million yuan. "Previously, stores in good locations could avoid some impact or form their own small ecosystem, but today, everyone is beaten indiscriminately, and original business strategies are helpless against group buying," Wang Wei said. **-03- The Invasion of the Internet Internet giants, while showing goodwill and wooing physical retail, also enter the supermarket business themselves. In the e-commerce era, the battlefield was mainly online, and standard products were most impacted, so department stores and hypermarkets became sunset formats. Non-standard fresh food was elevated to the top position, becoming the cornerstone for attracting consumers to stores. This round, supermarkets successfully defended their position. "The categories and regions impacted by e-commerce are limited, and delivery speed is relatively slow. Consumers in Xining have not yet developed the habit of online shopping. After we laid out fresh-food-enhanced supermarkets, we can still survive well," Li Lin told Finance and Economics. After the new retail concept was proposed, giants began to attack offline. Besides empowering retail small stores, Alibaba incubated Hema, and JD opened 7Fresh, but competition was concentrated in first- and second-tier cities. In the past two years, Hema has also begun to penetrate second- and third-tier cities, but Hema, focusing on middle- and high-end consumer groups, has little overlap with small supermarket customer groups. "Hema's opponent is not us," Li Lin said directly. As for JD 7Fresh, it has changed leadership twice, opened stores slowly, and progress has not been smooth. The two rounds of food-grabbing battles did not have much impact or squeeze on small supermarkets. Coupled with the protection of regional attribute barriers, small supermarkets can still maintain their existing market share through differentiated operations. It was not until the emergence of community group buying that a truly targeted hunting war against small supermarkets began. The epidemic accelerated the shift of consumption habits to online. At the same time, fresh food standardization is being rapidly promoted. After front-warehouse fresh food e-commerce players like Daily Youxian and Dingdong Maicai first tested the feasibility of buying fresh food online, giants entered one after another, betting on the community group buying track without limits. Ultra-low-priced hot products sparked a carnival among consumers in third- and fourth-tier cities. After the fresh food traffic attraction function was weakened, physical retail fell into a dilemma of declining customer flow. According to "Third Eye Retail" reports, in March this year, supermarket sales declined significantly, generally by 20%-30%, exceeding corporate expectations. The sales decline was mainly concentrated in vegetables, grains, and oils, which are categories used by community group buying for low-price traffic attraction. The crisis sense of physical retail has become strong, especially for small-scale chain supermarkets. "In-store customer flow has been in a growth bottleneck for a long time, and consumption habits are shifting online. This is a dangerous signal for supermarkets that rely on in-store traffic. We cannot stick to the old ways, so we have also cooperated with the internet to open online channels, with commissions ranging from 8% to 12%. Currently, Meituan has the most orders because Meituan's food delivery stickiness is high," Fu Song told Finance and Economics. Li Lin's stores have not yet integrated online channels. "We have only made official accounts and mini-programs as a trial, regularly pushing a few special-priced hot products. Consumers need to pick up orders at the store after placing orders, aiming to attract online traffic to the store and use promotions to drive sales of high-customer-value products in the store." He agrees to catch up with the wave of digitalization, but he remains cautious in choosing partners and will not easily cooperate with third parties. "People from Meituan and Alibaba have come to us, but I am not ready to embrace big internet companies yet. If consumers develop the habit of ordering online, they will inevitably reduce store visits," Li Lin expressed his concern. "Customers order, the platform delivers, and the store becomes their offline warehouse. We are in a passive position. Once the online platform's customer base matures, giants are very likely to build their own warehousing and delivery systems, and the customer base we cultivate will ultimately be a wedding dress for others." Fu Song and Xia Yong, general manager of a local chain supermarket in Gansu, also have this concern, but they have still opened online channels. "If we don't cooperate, others will cooperate with Meituan and Alibaba, and then we will lose our opportunity. There is no need to be a mantis trying to stop a chariot," Li Lin said about the original intention of cooperation, and he has no suitable solution for this hidden worry. To reduce risk, Xia Yong chose to cooperate with Duodian, a third-party platform that overflows from supermarket digitalization, and chose Meituan for the delivery team, keeping consumer data and user profiles in his own hands, but still unable to completely avoid the risk of being restrained. This concern has already appeared in a relatively large chain supermarket in Jiangsu and Zhejiang. An industry insider told Finance and Economics that in the early stage of cooperation, the commission point agreed by both parties was 4%, with a one-year contract. When online annual sales reached a scale, the commission point rose from 4% to 10%. The supermarket was helplessly restrained but could not give up online members, so it had to continue negotiating with the platform to minimize losses, finally reaching 8%, but only for one year. The next year, it would face such a tug-of-war again. If the supermarket exits, consumers will naturally settle as platform traffic. With the advancement of fresh food standardization, more and more categories can be delivered directly from warehousing centers to consumers, making the possibility of full-category online supermarkets increasingly high. Holding hands with the internet may end with being marginalized. This cooperation may eventually become a game of chess with internet giants, consuming energy and effort, especially for retail enterprises with small scale. Under the new consumer market and competitive landscape, they have not figured out how to respond gracefully. The only certainty is to try their best not to get involved in this unpredictable wooing war. Source: Ranciyuan (ID: chaintruth) Tips will be paid 400-2000 yuan once adopted.