Alibaba, JD, and Tencent's battle in the large supermarket sector: reshuffling, tightening, and trial and error. 2020 was not a good year for large supermarkets. Having just caught up with the digitalization progress they had lagged behind in the new retail era, the pandemic dealt another heavy blow to their offline businesses. Whether it's unmanned retail stores empowered by new technology, or mini formats like convenience stores and small supermarkets, they all seem to adapt better to this era than large supermarkets. Facing new challenges of the times, "accelerating digital transformation, tightening hypermarket operations, and experimenting with diverse new formats" became the keywords for large supermarkets in 2020.
-01- Accelerated Layout by Giants: How Did Large Supermarkets Fare in 2020? The "winter" for physical retail descended again with the pandemic at the beginning of the year. For large supermarkets, partnering with giants was undoubtedly a good choice, which coincided with the giants' strategies to accelerate offline expansion. On Alibaba's side, on May 26, Alibaba Group announced the acquisition of 18% of the domestic shares of Lianhua Supermarket from Yiguo Fresh, officially becoming the second-largest shareholder of Lianhua Supermarket. Meanwhile, on October 19, Alibaba also announced plans to invest HK$28 billion to directly and indirectly hold a total of 72% of Sun Art Retail Group, the parent company of RT-Mart. This means Alibaba's say in RT-Mart and its parent company Sun Art Retail has further increased. Behind the frequent equity investments in large supermarkets lies Alibaba's determination to accelerate its offline presence. On JD's side, it set its sights on China Resources Vanguard, the leader in the domestic retail sector. At this year's JD Daojia "1020 Supermarket Carnival," all formats under China Resources Vanguard, including Vanguard MART, Vanguard LIFE, Olé, blt, and Suguo, participated for the first time. According to the "1020 Supermarket Carnival Report" released by JD Daojia, the event covered about 1,000 counties, districts, and cities, with sales in third- and fourth-tier cities reaching 4.4 times last year's figure. Vanguard's promotional sales also grew to 2.5 times last year's. It can be said that the cooperation achieved a win-win situation. At the same time, JD also incorporated its strategy for local fresh food into its cooperation with large supermarkets. On December 15, Bubugao Supermarket announced that it had signed a "Shareholders' Agreement on Establishing a Joint Venture Company" with Suqian JD, planning to jointly invest in the establishment of Changsha Qixian Information Technology Co., Ltd., responsible for the store expansion and operation of the Qixian brand's retail fresh business in the Hunan market. As is well known, Bubugao is the first listed company among private chain supermarkets in China, having deeply cultivated the Hunan market for many years. JD's move undoubtedly found a good "partner" for its local fresh food layout, accelerating its rapid landing in second- and third-tier cities. In fact, for these large supermarkets, when transformation has not yet made significant progress in the new era, "leveraging" giants is also a wise move. For example, after Suning acquired 80% of Carrefour China last year, Carrefour China achieved its first quarterly profit in seven years in the fourth quarter of 2019. According to a Suning spokesperson, in the first half of this year, Carrefour China achieved profitability for two consecutive quarters again. With Suning's support, Carrefour China officially started its "second spring." In 2020, besides partnering with giants, the entire large supermarket industry accelerated its "integration and reshuffling," mainly manifested in domestic supermarkets acquiring and merging foreign supermarkets. On one hand, the "Metro acquisition incident" that attracted industry attention last year concluded with Wumart Group spending €1.9 billion to acquire Metro China's business. The transaction was completed as scheduled on April 23 this year. Under the new shareholding structure, Wumart Group holds 80% of Metro China, while Metro Group holds 20%. After acquiring all of Lotte's stores in North China in 2008, Wumart has again taken a majority stake in Metro China. As one of China's largest chain supermarket groups, Wumart's comprehensive strength should not be underestimated. On the other hand, British retail giant Tesco also officially announced on February 25 that it would sell its 20% stake in Gain Land, a joint venture with China Resources, to China Resources Group. Like Walmart and other foreign enterprises, Tesco also experienced "acclimatization issues" in the Chinese market. As early as 2014, Tesco had formed a joint venture, Gain Land, with China Resources Group. At that time, China Resources held 80% of the joint venture, with the remaining 20% held by Tesco. Now Tesco has transferred all its remaining shares to China Resources, meaning Tesco will fully exit the Chinese market. Overall, in 2020, foreign supermarkets continued to perform poorly in China, while local supermarkets, supported by new moves such as partnering with giants and acquiring foreign supermarkets, gradually ushered in a new round of development opportunities.
-02- Digital Transformation: Who Has the Edge? As offline businesses were impacted by the pandemic, large supermarkets had to "step up" their online operations. Therefore, "accelerating digital transformation" became the first keyword for large supermarkets in 2020. For RT-Mart, thanks to its backing by Alibaba, its digital transformation progressed rapidly. According to data released by Alibaba in October, all 484 stores of RT-Mart and Auchan, another supermarket brand under Sun Art Retail, have been fully digitalized and connected to Ele.me, Taoxianda, and Tmall Supermarket's shared inventory services. At the same time, Alibaba's new retail format Hema Fresh's supply chain and intelligent logistics systems are also being gradually synchronized to RT-Mart stores. The results have been significant. According to Sun Art Retail's 2020 interim report, the company's net profit increased by 16.8% year-on-year. China Resources Vanguard also "leveraged" giants. In April this year, China Resources Vanguard opened membership services on JD Daojia, a third-party platform, for the first time. In just over two months, the number of members increased by 14.6 times. On July 24, China Resources Vanguard and Dada Group officially upgraded their strategic cooperation. JD Daojia under Dada will provide Vanguard with technical output for three fulfillment solutions: full-warehouse, half-warehouse, and full-store. In terms of product management, JD Daojia will also provide Vanguard with intelligent product management tools and continuous category expansion suggestions. According to data released by China Resources Vanguard, since the second quarter of this year, Vanguard has gradually resumed positive revenue growth. Due to timely digital transformation, Vanguard's online business grew cumulatively by 532.2% in the first half of the year. In contrast, Wumart Group, with the support of Dmall, achieved "self-reliance." Dmall was founded by Zhang Wenzhong, the founder of Wumart Group, with the original intention of using comprehensive digital services to help physical retail enterprises achieve online-offline integration. With Dmall's help, Wumart solved a series of retail pain points such as logistics efficiency, product management, and cost control. Dmall, which had already "tested the waters" in community group buying as early as 2018, also enabled Wumart's online business to proceed smoothly during the pandemic. In addition to Wumart's own supermarkets, Dmall's digital capabilities also cover Metro China, which was acquired by Wumart. In November this year, Metro's first paid membership system—Metro Plus Membership—was fully launched. Consumers can complete membership upgrades by simply opening the "Dmall App" and enjoy new benefits including "fastest 1-hour delivery within 5 kilometers." Furthermore, some large supermarkets that had not fully "gone online" accelerated their digitalization processes under the impact of the pandemic. During the pandemic, Bubugao's original home delivery business saw a surge in orders, but faced a shortage of delivery personnel. Taking this as an opportunity, Bubugao Chairman Wang Tian proposed: placing orders by residential community, using its own logistics for multiple delivery waves per day, with direct delivery from warehouses to communities. This accelerated the birth of Bubugao's community group buying business, "Xiaobu Youxian." Due to its short history, "Xiaobu Youxian" did not launch an APP but was opened to consumers in the form of a mini-program. Like other community group buying projects, Xiaobu Youxian also adopts the form of WeChat group ordering and mini-program ordering, with its own logistics delivering directly from warehouses to communities. Data shows that on the fifth day of the Lunar New Year, "Xiaobu Youxian" launched in 27 communities in Changsha, exceeding 1,000 orders within an hour of launch. However, according to "Tanglang Finance," Xiaobu Youxian does not seem to have developed into an independent business of Bubugao but has been strategically integrated into the "Jishida" section of "Bubugao Better Buy." It can be seen that although Bubugao has its own offline supermarkets, logistics centers, and reserve departments, and has potential in community group buying, it does not seem to want to get involved in the "community group buying battlefield" that has developed to a white-hot stage. It is not difficult to find that in 2020, the "vanguard" large supermarkets represented by RT-Mart and China Resources Vanguard have entered the acceleration stage of digitalization, while followers like Metro and Bubugao are gradually catching up. As online business competition intensifies, digital transformation will continue to be a "key topic" for large supermarkets in the future.
-03- Under the New Consumption Wave, Where Are Hypermarket Businesses Headed? It is worth noting that compared to small formats, traditional hypermarket businesses have gradually entered a period of slow growth. According to Nielsen's "China Shopper Trends Report - Convenience Stores" released in February 2019, supermarkets (growth 10%), small supermarkets (growth 9%), and convenience stores (growth 14%) have seen strong growth in numbers over the past three years, while the number of hypermarkets has declined by 1%. As a result, some large supermarkets have adopted "tightening" measures. According to statistics from Winshang.com, in the third quarter of this year, Walmart and Carrefour each closed three of their stores. On December 16, Walmart's Donghai branch in Wenzhou also posted a notice that it would officially close on December 22. This is expected to be Walmart's seventh store closure in the Chinese market this year. Although lease expiration is one reason for store closures, according to industry insiders, the fundamental reason for some closures is that store sales are insufficient to cover various costs. For example, Carrefour's Zhengzhou North Ring Road store has been losing money for three consecutive years, with annual losses of about 10 million yuan. In this context, closing stores is a helpless move. In the same third quarter, some local supermarkets' hypermarket businesses continued to expand. Data shows that in the third quarter of this year, Wumart Supermarket opened 6 new hypermarkets in Beijing, Tianjin, and other places, while China Resources Vanguard opened 4 new hypermarkets in Guangdong, Shaanxi, and Jiangxi. Facing the same declining hypermarket format, large supermarkets have adopted different attitudes. There are many reasons behind this, but two are particularly relevant. On one hand, the "localization dividend period" for foreign supermarkets is coming to an end. In the new consumption era where diverse formats such as fresh food stores and convenience stores are increasingly valued, foreign supermarkets that were already "acclimatizing poorly" are finding survival even harder. Although most of their China businesses have moved under the "umbrella" of giants, Rome was not built in a day, and "rebirth" requires time. On the other hand, compared to foreign supermarkets, local supermarkets represented by China Resources Vanguard and Wumart are more advanced in digital transformation. In fact, regardless of consumption trends, improving store efficiency is a long-term task for large supermarkets. Local supermarkets that are more successful in digital transformation are clearly more composed in responding to new consumption trends than foreign supermarkets. But stepping back, although it is an indisputable fact that the growth space for hypermarket formats is limited, the physical industry, which has been held back by the pandemic, has not fallen into a "deep sleep." In the new retail era, the new trend is the simultaneous progress of online and offline businesses. Therefore, although it is difficult to assert the future of hypermarket formats, at least they will not disappear in the short term.
-04- Will Diverse Formats Be the New "Fuel"? As hypermarket formats are gradually tightened, for large supermarkets, new diverse formats have become the next "growth point." Most large supermarkets have focused on expanding small formats. For China Resources Vanguard, at the beginning of this year, its Jiangxi company launched the first batch of standard supermarket format "Vanguard LIFE." In terms of positioning, Vanguard LIFE focuses more on being family-centered, committed to creating a preferred shopping place within a 5-10 minute walk for residents, with an area basically between 200m² and 1000m², making it a true small format. Hema has been experimenting with small formats, including Hema Cai Shi, Hema Mini, and Hema Xiaozhan for daily meals, and Hema F2 and Pick'n Go for office and convenience store scenarios. Among these, Hema Mini, which focuses on cooked food and fresh produce, is particularly expected to be Hema's solution for penetrating lower-tier markets. Similarly, Yonghui also has high expectations for mini stores. At the 2019 shareholders' meeting, Yonghui Supermarket founder Zhang Xuan Song set a goal of opening 1,000 mini stores throughout the year. Of course, this goal has not been achieved. As of the end of the third quarter of 2020, Yonghui had 405 mini stores. In addition, Carrefour China, with Suning's support, has begun to try community fresh food stores. On September 30, Carrefour's first community fresh food store, "easy Carrefour," landed in Shanghai. According to Carrefour's "1+2+1" new format plan, the community fresh food store is the second "1," positioned at the user's doorstep, covering fresh produce, daily necessities, and other categories. So, how are these new formats performing? According to Hema Fresh's official website, Hema Mini currently has 8 stores, located in Beijing and Shanghai. Although there is still a distance from conquering lower-tier markets, Hema is accelerating its expansion. In December alone, Hema opened 21 new stores nationwide, involving 13 cities. At this pace, it's only a matter of time before Hema Mini takes off. Of course, while the expansion of new formats is important, whether their operations can add luster to the overall business of large supermarkets also needs consideration. According to Yonghui's 2020 interim financial report, Yonghui mini stores incurred losses of 130 million yuan. Although 16 new stores were opened, the number of closures was higher, reaching 88. In fact, this also reflects that the advancement of new formats requires time to settle. After all, small formats differ from traditional store formats in many aspects such as store area, digital investment, and labor costs, so large supermarkets need to continuously adjust and learn from trial and error. Moreover, these new formats generally focus on fresh produce as the main category, and trying to open up the market by going deep into communities actually faces many challenges. After all, around communities, there are not only community group buying physical stores like Xingsheng Youxuan, but also convenience stores, mom-and-pop shops, and other small formats, making competitive pressure significant. According to the "2019 China Supermarket Top 100 List" released by the China Chain Store & Franchise Association in June this year, China Resources, RT-Mart, Yonghui, Walmart, Lianhua, Hema Fresh, Wumart, Carrefour, Jiajiayue, and Bubugao ranked in the top ten. As 2020 draws to a close, large supermarkets need to start planning their "new moves" for next year. How will this list change next year? Let's wait and see.
Source: Tanglang Finance (ID: TanglangFin) Author: Tu Lin Tips will be paid 400-2000 yuan upon adoption.