---
title: "The Chinese Dilemma in Retail"
description: "Lagging behind means being vulnerable, a harsh reality for China's retail industry. According to the 2023 China Supermarket TOP100 list by the China Chain Store & Franchise Association, over half of the listed companies saw revenue declines, and half of the top 20 saw both sales and store numbers drop. Learning from advanced Western retail practices is a key option, as highlighted by the new book \"King of Sales per Square Foot\" by Trader Joe's founder Joe Coulombe, which offers lessons for Chinese retailers."
author: "窄播"
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published: "2024-09-27"
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# The Chinese Dilemma in Retail

> Lagging behind means being vulnerable, a harsh reality for China's retail industry. According to the 2023 China Supermarket TOP100 list by the China Chain Store & Franchise Association, over half of the listed companies saw revenue declines, and half of the top 20 saw both sales and store numbers drop. Learning from advanced Western retail practices is a key option, as highlighted by the new book "King of Sales per Square Foot" by Trader Joe's founder Joe Coulombe, which offers lessons for Chinese retailers.

Lagging behind means being vulnerable, a harsh reality for China's retail industry.
Previously, according to the 2023 China Supermarket TOP100 list released by the China Chain Store & Franchise Association, more than half of the listed companies experienced a decline in revenue scale last year; among the top 20, half saw both sales scale and store numbers decline.
Learning from advanced Western retail experience is naturally a major choice during a lagging period. Recently, Cheers Publishing and Zhejiang Education Press published "King of Sales per Square Foot," narrated by Joe Coulombe, founder of Trader Joe's, which is also a work introducing the development and innovation journey of Trader Joe's, the most favored supermarket by American consumers and the most watched by Chinese retail.
The book mentions how Trader Joe's abandoned the slotting fee model within a few years, completed procurement reform, and laid the foundation for over 40 years of brilliant performance, which is also worth referencing and learning from for domestic retail.
Pei Liang, honorary president of the China Chain Store & Franchise Association, mentioned in his preface recommendation that focusing on product strength and implementing lean procurement strategies is the key to Trader Joe's true transformation to retail operations.
But specifically, how should domestic supermarkets do it? How to absorb and apply these experiences rather than blindly copying? What different difficulties and challenges exist in light of China's retail reality? With these questions, we also had a further discussion with Pei Liang.
Pei Liang, honorary president of the China Chain Store & Franchise Association, graduated from the Trade Economics Department of Renmin University of China with a doctorate. He has been engaged in industry management in commerce and has worked at the China Chain Store & Franchise Association for over 20 years, serving as Secretary-General and President, and is currently focused on industry research and promotion of advanced experience. In his own words, he hopes to help enterprises achieve stability and long-term success, especially during this period of change.
Honorary President of China Chain Store & Franchise Association, Pei Liang
In Pei Liang's view, due to differences in social concepts and growth environment, the development space of domestic retail has long been squeezed from multiple directions. The contradictions and problems masked during the period of rapid economic growth are now emerging in a very sharp form, especially for national retail enterprises, which are currently in a trough of development.
To escape the predicament, it is necessary to rely on the building of product strength and organizational strength. Behind these capabilities, even for old enterprises, there are new requirements, and they are higher than those for developing retail in other countries. Under such circumstances, regional retail enterprises with relatively smaller scale, more flexible organization, and greater product autonomy are most likely to become the mainstream force in the future of domestic retail.
**Pangdonglai Adjustment:**
**Returning to the First Principles of Retail**
Interviewer: Trader Joe's core competitiveness is its outstanding price-performance ratio, which is also a reason why everyone is pursuing membership stores when most domestic retail enterprises are facing difficulties.
Pei Liang: In the current domestic retail situation, most supermarkets in first-tier cities are struggling, while in third- and fourth-tier cities, thanks to enterprises like Pangdonglai, everyone is doing relatively well.
Because third- and fourth-tier markets are completely different from first-tier markets, when discussing many issues, if we don't separate these two markets, we will draw many contradictory conclusions.
Interviewer: What exactly is the difference between first-tier and third- and fourth-tier markets?
Pei Liang: The problems facing the first-tier market now are: First, the online share is too high. For services like home delivery, instant retail, and local life, it is conservatively estimated that more than half of consumption has been digitized. So offline business is already very competitive.
Second, the supermarket format in first-tier cities developed early and has reached a state of oversaturation. So in recent years, stores like Carrefour and some well-known supermarket brands have closed many stores, already undergoing self-repair and adjustment.
Third, young consumers in first-tier cities face greater life pressure. In recent years, because housing prices have been rising, it has also greatly constrained the release of consumption power. This factor is very prominent in high-housing-price first- and second-tier cities, and even in some developed small cities in the east.
In the third- and fourth-tier markets in central and western regions, the online penetration rate, especially for daily consumption, is very low. Groups like civil servants or small business owners have relatively stable consumption power, and the diversity and richness of lifestyles cannot yet compare with first-tier cities. So supermarkets in regional markets are doing well, while the big brands in first-tier cities are struggling.
But next, the negative factors facing supermarket development in third- and fourth-tier markets may outweigh the positive ones. Because changes in consumption power due to economic growth pressure are still visible, and for example, in small cities, the population will further concentrate in big cities, reducing the local consumer base, and aging will lead to a decline in purchasing power, all of which will have an impact.
Interviewer: In fact, under these negative factors, many supermarkets, whether in first-tier or third- and fourth-tier cities, have begun to adjust and respond. For example, Pangdonglai's adjustment has become a particularly watched event in the retail industry from last year to this year.
Pei Liang: Donglai's adjustments are also divided into two types. One is the initial stage, where his Donglai Business School provides systematic guidance to some small regional enterprises, aiming to help solve a series of systemic problems such as financial management, capital allocation, and products.
The second type, the later adjustments of Bubugao and Yonghui, are point-to-area, using on-site renovation of some stores to force changes in corporate culture, systems, and other aspects.
These two types of assistance are completely different in nature. The first type of guidance is relatively easy for him, but the second type, because the targets are also national chains or regional leading enterprises, their management systems are already mature and have formed many models and methods. To force system iteration by adjusting stores has many uncertainties and challenges and requires a long time.
A small boat can turn around easily; it's easy to adjust products in a few stores, but to restructure the procurement system for hundreds of stores nationwide and raise employee salaries across the board is not an easy task for large enterprises.
A Beijing Yonghui supermarket announced closure for renovation today
Interviewer: Including Pangdonglai itself, as an enterprise born in a relatively less competitive regional retail market like the third- and fourth-tier cities you mentioned, people still question whether its model is replicable and whether these methods can be brought to more non-local markets, even first- and second-tier markets. How do you view the Pangdonglai phenomenon? Is it possible to replicate or popularize?
Pei Liang: **I believe Pangdonglai's core competitiveness lies in its employees' active participation, value creation, and the uniqueness and cost-effectiveness of its products. This is basically what all excellent retail enterprises need to have, or it is the first principle of retail.**
This first principle is definitely replicable, and these basic business logics are universally applicable. As for whether other enterprises can return to the fundamentals of business through Pangdonglai's guidance, it doesn't depend on Pangdonglai but on whether the guided enterprises have such determination and capability.
Our association has also advocated for many years, always promoting that products should be done well, as products are the primary productive force in retail, and organizational strength should be cultivated, with good mechanisms, etc. These have been talked about for many years. Enterprises, due to various factors, whether cognitive issues, corporate culture, or capital promotion, many have actually lost their way.
Now there is a so-called trend of Donglai adjustment, which is a reminder and a process of returning to the foundation. As for success, it still depends on each enterprise itself. If they return, they will see results; if they can't return, even gods can't save them.
**Retail is Just a Channel**
**The Core Lies in Products**
Interviewer: In fact, the issues of product strength and organizational strength have always existed in the history of domestic retail. Even later enterprises that proposed to establish a new type of supplier-retailer relationship from the beginning have not done well. Trader Joe's succeeded in transformation, but why is it difficult for domestic retail to transform?
Pei Liang: I think the main reasons are differences in concepts and growth environment.
Chinese enterprises have developed rapidly in recent years, and everyone's evaluation criteria for growth speed or success are actually very capital-oriented. When saying an enterprise is powerful, it means it has the largest scale, or the boss is the richest person somewhere. **This concept of evaluating enterprises with capital market standards, deeply embedded in the minds of entrepreneurs and the public, leads to a result: people are prone to impatience and greed for speed.**
In addition, capital often intervenes deeply. Under such circumstances, even if the method of doing business is correct, Rome wasn't built in a day. Trying to do things perfectly at once is against the laws of development.
But we have already formed such concepts. From this point, Pangdonglai is an enterprise that has not been swept away by this trend, which is a big difference. Most of our current star enterprises, to gain attention, still focus on whether you can open stores quickly or transform quickly.
**The growth environment for domestic retail enterprises is relatively poor. Doing retail in China is much more difficult than in other countries.**
Because China's market supply is extremely compressed for the development space of retail. China manufactures 40% of global products, and daily necessities are almost all produced domestically. When availability is not difficult, it is more challenging to differentiate and be better and faster than others.
For manufacturers, their products can reach consumers through online, offline, supermarkets, discount stores, mom-and-pop shops, and even group buying and live streaming. There are many channels, so manufacturers won't allocate too many resources intensively to just a few systems. As long as manufacturers can achieve growth and gain a larger market share, they will use those channels. Retailers don't have much negotiation space. You can't say you want to lower prices and not pay in cash; that's impossible in China.
So whether it's product prices or supply channels, it's very squeezed. It is very difficult for supermarkets to obtain stable operating income and gross profit. These two points are fundamental differences in domestic retail, making it more challenging.
Interviewer: There were already some problems of poverty and weakness, and now in the process of changing consumption trends, the retail industry has encountered many difficulties in recent years.
Pei Liang: Yes. We are not denying the previous development of supermarkets, but now, with overcapacity and stagnation or slowdown of the overall consumer market, the core problems accumulated before cannot undergo a slow-release process and suddenly become particularly acute.
Among these, the main contradictions are, one, products and business models, and the other, organizational strength and employee incentives. So like Pangdonglai's adjustment, the issues it addresses are core and the direction is right, but solving these prominent contradictions requires methods, time, and resources that are very challenging.
Interviewer: In such a difficult environment, what should retailers do?
Pei Liang: First, I think you can't be anxious. In the past, development was too fast. Enterprises that developed quickly in the past now face great difficulties. You still need to focus on doing well in each store's business; that's key. But changing this concept is difficult. If the boss changes but the capital market doesn't, it will be a big challenge for the boss.
Second, implement refined management. Go back and optimize your business model, processes, products, and all aspects. Previously, it was supplier-managed inventory and products; now this model is definitely powerless.
But sometimes people are unwilling to make up their minds to change, or they change hesitantly. Because this involves entrepreneurial spirit. The principle is simple: everyone knows cash procurement and buyout operations are better, but when you encounter a batch of products that you think should sell well and consumers might like, are you willing to take out 1 million or 5 million to buy them at a low price and sell them yourself? Does the enterprise dare to do this?
For many entrepreneurs, they lack the confidence to do this. First, financial risk: if you buy and can't sell, what do you do? If it becomes dead stock, can you bear it? Second, capability: do you know how to buy? Can you educate consumers? Do you have the ability to make consumers like it and buy it? And so on.
Don't look at an enterprise that has been operating for 10-20 years or has many stores. When these problems are presented, for many enterprises, it's still a new problem. But in the future, you must do this, otherwise you can't create your advantage.
Trader Joe's founder Joe Coulombe stands by the cheese shelf,
holding a piece of Swiss cheese.
(Photo taken in 1975)
Interviewer: The ability to operate products is indeed a capability that domestic retail sacrificed from the beginning when it chose the slotting fee model. In the early days, the obsession with size and speed was partly because scale was considered important, a prerequisite for leveraging low-cost procurement or even product privileges.
Pei Liang: Yes. But look at Carrefour back then; it also had a very high market position and bargaining power, but ultimately, which store consumers prefer is the fundamental determinant of all issues.
For example, consumers now like to go to Sam's Club. All brand owners and manufacturers have to consider that since your target customers are at Sam's every day, you need to put your products there and seek cooperation with it. Thus, Sam's is in a dominant position. Now many hypermarkets have so little traffic and no customers, so manufacturers naturally won't invest resources in their channels.
So we advocate manufacturing retail and private brands. In the final analysis, you need to have your own unique products. **Products are the ultimate carrier of customers' functional and value needs; retail is just a channel.**
So retail can change over time. Now membership stores and convenience stores are popular; a few years ago it was hypermarkets; in the future, it may be other formats. It doesn't matter. Consumers will use whichever channel is efficient, low-cost, and convenient. The core is that you must have your own unique products.
**The Mainstream Pattern of Chinese Supermarkets**
**May Be Regional Dominance**
Interviewer: Building private brands is certainly a higher-level capability. Let's first talk about the construction of procurement teams and capabilities. Which domestic enterprises do you think do well?
Pei Liang: Generally speaking, regional retailers' procurement teams are more outstanding. Because in the past, our supermarkets popularized the KA model. Supermarkets could open a store by managing shelves through slotting fees and having suppliers manage inventory. Under such circumstances, there was little need for buyout operations or self-procurement, nor much resource investment, so procurement capability construction lagged behind.
But regional retailers, from the beginning of opening stores, found it difficult to get manufacturer support for many products and had to buy and sell products in the market themselves. So these disadvantaged regional retail enterprises had this gene early on in product procurement, and their procurement capabilities gradually became stronger.
So "poor children become independent early" is also a special journey in the development of Chinese supermarkets.
Besides Pangdonglai, regional supermarkets like Biut have become social media hotspots
Interviewer: So from this perspective, national supermarkets lack capability, and combined with the problem of a big ship being hard to turn, national supermarkets are indeed in a declining state.
Pei Liang: Yes. Overall, nationally distributed supermarkets are now facing great development resistance and are in a trough. Carrefour, Walmart, and domestic ones like Yonghui and China Resources are closing many stores and exiting some markets.
In the future, whether national supermarkets can stand up again is still unknown. If we simply compare with the United States or Europe, theoretically we should have national supermarkets. But why must we be like the US and Europe? Why can't we be like Japan? Japan is a typical country where regional supermarkets dominate, with almost no national supermarkets.
Of course, China doesn't have to be like Japan; everyone has their own views. **My personal judgment is that for a period of time, regional dominance will become more mainstream in China, and regional supermarkets are likely to become the mainstream of China's supermarket landscape.**
Interviewer: Is your judgment based on the fact that regional retail is stronger than national retail in terms of product and procurement capabilities, as well as understanding of local consumers?
Pei Liang: Because first, Chinese manufacturers themselves segment the market. Their wholesale systems are regional and do not support the unified market of national chains. In European and American countries, supermarkets play the leading role in almost all product sales channels, but China's channels are too fragmented, and this situation won't improve significantly.
So from the production and distribution system, this is also a Chinese characteristic. Because channels serve production, the construction of distribution channels at the production end largely influences the changes in China's retail landscape.
Second, the Chinese market is too complex. Under the current market environment, establishing an efficient national chain and unified national standards may not perform better in efficiency or comprehensive input-output ratio than regional retail enterprises.
So whether from the upstream production supply side or the preliminary exploration results of retail's own national layout, it seems that China is unlikely to form a supermarket landscape dominated by national chains.
Interviewer: So the current situation is that doing well in a region is already good, and doing well nationally is more difficult. But everyone feels that a high chain rate is a sign of a developed format.
Pei Liang: The industry chain rate and the national chain rate of brands are two different concepts.
Domestic national chain specialty stores and category killers are actually quite numerous. Whether it's Pagoda, a fruit store, Qiannima, a meat store, or Ziyan Baijiwei, a cooked food store, they are all national chains.
They are all small stores with relatively simple categories, making supply chains easier, and they expand through franchising, which is most effective in organizational management and incentive efficiency. So they can spread widely across the country.
**But national comprehensive retail, especially supermarkets, has complex product operations and may be the most challenging among these chain formats.**
Interviewer: With so many obstacles ahead, can we roughly predict when the decline of national retail will end and what new development stage will follow?
Pei Liang: Retail itself is very fragmented, with life and death happening every day. When consumption declines and overcapacity occurs, store closures are also a process of self-optimization step by step, and it won't cause particularly large social impact. **But in the next few years, a large number of store closures may become the norm.**
Including in the central areas of first-tier cities, the space for large stores is also very limited. Small-scale, convenience, and specialization are, in my opinion, the most likely choices. Because in central urban areas, shopping malls, convenience stores, community small supermarkets, category killers, and instant retail have all largely replaced the original functions of hypermarkets.
So community supermarkets like Aldi, or convenience stores like 7-Eleven, Lawson, and FamilyMart, may be the mainstream formats in these high-density central areas in the future.
**Private Brands Remain a Necessary Strategy**
Interviewer: Let's go back to private brands. Although the product foundation of domestic retail is poor, many retailers are gradually promoting their own private brands, and joint platforms like Ant Business Alliance have emerged. But regarding the path of private brands, whether it should be price-performance driven or differentiation driven, everyone seems to have different views. What do you think?
Pei Liang: The development of private brands is already very mature in the West, and its basic rules are very clear.
First, the starting point of private brands is that retailers, through consumer insights, discover that supplier products cannot meet consumer needs in some aspects, whether it's size or ingredients. At this point, a business opportunity arises. Since you can't buy it, you develop a private brand.
This is the basic motivation for private brand development. If the motivation is not identified correctly, product development has great risk because there is no demand support.
Second, making private brands is a high-level capability; not everyone can do it. You need to have very strong product procurement capabilities to do private brands.
If your procurement capability is weak, and you don't understand production processes, brand positioning, and promotion, like many small and medium-sized retail enterprises, you don't have the professional capability to develop private brands. Ant Business Alliance does private brands by externalizing this capability, partially solving the capability deficiency through a third-party platform where everyone participates.
Third, in the long run, whether private brands focus on price-performance or differentiation, they will eventually converge.
Look at the private brands of mature international retail enterprises now; they range from low to high across price bands. Generally, they are divided into two or three categories: one is the same function at a lower price to meet the needs of price-sensitive consumers; another can be called differentiation, with higher quality than ordinary products on the market but cheaper than high-end ones.
Aldi once revealed that its private brand rate in China will reach 90%.
Interviewer: But if private brands go for the low price band, no matter what form of retailer, it's hard to compete with online platforms like Pinduoduo, because Pinduoduo's ability to procure at low prices, its flexibility, and the people it can cover are too many, and its efficiency is too high.
Pei Liang: Although Pinduoduo is strong, it cannot supply all categories to all consumers in all regions. For example, in third- and fourth-tier markets, can Pinduoduo deliver shampoo or daily necessities in a timely manner? If it can't deliver quickly, and your price is not much different, that's your opportunity.
But Pinduoduo is indeed a Chinese characteristic. With its prices, it's very difficult for supermarkets to be particularly cheap. So when doing private brands in the Chinese market, you can't completely copy foreign experience and do super cost-effective products. Sometimes differentiation may be a more reasonable choice.
But as we mentioned earlier, as a manufacturing powerhouse, retail enterprises need to differentiate, design special products among so many abundant supplies, and make consumers' eyes light up, which is also very challenging.
Interviewer: A phrase repeatedly mentioned in "King of Sales per Square Foot" is that during reform, it was a shift from customer-centric to procurement-sales-centric. In fact, it corresponds to the procurement-sales team needing to spend more effort to find differentiated products, whether through private brands or buyout operations. Because differentiation is a core competitiveness relative to other channels like e-commerce.
Pei Liang: Yes. Look at mature international retailers; their common practice is that procurement runs around the world to find products that other channels and platforms cannot reach and puts them in their stores. It's just that it's harder now because the internet has reduced information asymmetry, and this method's advantage is no longer as obvious.
But private brands, I think, are relatively less affected by the internet. After all, these products are exclusive to you, and they are more immune to channel substitution. So private brands are still a strategy that retailers must rely on in the future.
Interviewer: Online channels like JD.com are also doing private brands. Of course, the logic may differ from offline retail, but they are doing it anyway. It seems we are entering a product era rather than a brand era. Especially for this generation of consumers, the internet provides too much information. Maybe everyone now thinks brands are high-premium and exploitative, so they endlessly pursue Pinduoduo, 1688, factory goods, white-label products, and channel private brands.
Pei Liang: Because the problem of information asymmetry is not as prominent as before. When consumers solve functional needs, their dependence on brands does weaken. This is indeed a phenomenon. But I think the basic functions of brands still exist; they solve consumer trust and convenience issues.
Not all products have consumer trust. For example, in food safety in catering, the brand is an endorsement. Even white-label products placed in a farmers' market and in Sam's Club are definitely different. Brands still play a role, but trust has shifted to channel brands, to Sam's.
The convenience function of brands also exists. For example, male consumers buying clothes or some items, once they recognize a brand, for convenience, they may not need to make more choices and will continue to consume certain products.
**The issues we've discussed are largely undergoing a transfer process. Now, who carries the functions of trust and convenience is no longer fixed.** If some non-well-known brand products have more efficient ways to replace these brand functions, the corresponding brand momentum will be weakened.
Interviewer: Consumers like going to Sam's because they trust Sam's value as a channel brand. But to become Sam's, you need to form a so-called brand sense through precise consumer positioning, even become a channel brand with cultural attributes. That's also very difficult.
Pei Liang: Yes. Building trust in the minds of target customers for any brand is a long process. Especially for channel brands, they provide many products, and each product, detail, and experience affects consumers' overall perception of the channel brand. So channel brands are harder to build strong brand mindsets than product brands; that's why.
Channel brands are hard to build also because it's difficult to directly reach consumers. If the store isn't there, roughly speaking, for consumers in that area, it's just a white-label product.


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