The Convenience Store War｜New Distribution

As a typical symbol of urban consumption, convenience stores are 'penetrating' major and medium-sized cities. They remind managers how to organize urban operations meticulously and precisely.

Text | Reporter Wang Xianzhi, Interns Li Yuxi, Liu Chaoyu

Seemingly overnight, Beijing, once considered a 'graveyard' for convenience stores, has become the main battlefield for a new round of competition among domestic and international giants.

From foreign brands like Lawson, FamilyMart, and 7-Eleven, to local players like Haolinju, Wumart, and Jingkelong, as well as national enterprises such as China Resources, Quanshi, and Lianhua, Beijing's convenience store market has fully entered a 'Warring States era.'

Statistics are more compelling: according to the 'China Urban Convenience Store Index' released by the China Chain Store & Franchise Association in 2013, Beijing ranked second from the bottom among 26 cities; in 2016, with 36 cities included, Beijing rose to fifth place.

Not only the capital, but convenience stores, a typical consumption pattern for southern residents, are also 'penetrating' the north. For example, in Harbin, the number of convenience stores is growing at an annual rate of about 30%, seemingly breaking the constraints of the city's cold weather. Wuhan and Changsha in central China have also become cities with rapid convenience store growth.

Community commerce, represented by convenience stores, brings a bright spot to the sluggish retail industry. Nielsen's '2016 China Hypermarket & Supermarket Shopper Trends Report' shows that convenience store penetration rose from 32% in 2015 to 38%, 3 percentage points higher than online shopping.

Related forecasts suggest that China's convenience store market size may reach a record 100 billion yuan in 2016, but more exciting numbers may not yet have arrived: in Japan, the market share ratio of convenience stores to supermarkets is about 54%:46%, while in China it is currently roughly 8%:92%.

The small convenience store reflects not only changes in urban commercial layout.

As per capita GDP approaches the $10,000 mark and unprecedented urbanization progresses, Chinese cities are undergoing comprehensive and profound changes.

Research on the convenience store market shows that it undergoes substantial changes at per capita GDP stages of $3,000, $5,000, $10,000, and $20,000. These are also key nodes in urban transformation.

For example, most major global cities begin optimizing their layout from per capita GDP of $5,000, and further adjust urban commercial functions and industrial functions at $10,000. In New York, this moment occurred in the 1960s and 1970s, leading to a large number of residents and enterprises relocating to suburbs.

If per capita GDP of $10,000 is taken as a watershed, it is often accompanied by major shifts in public service system construction and urban ecological construction.

The small convenience store is a microcosm of urban development. It reminds managers to observe and operate their cities meticulously and precisely.

Convenience Stores Surround Supermarkets

Currently, domestic chain convenience stores are mainly of four types: Japanese-funded stores, local investment stores, large supermarket mini-stores, and e-commerce transformed physical stores. Japanese 7-Eleven, as the industry leader, has only completed layouts in Beijing, Tianjin, Shanghai, Guangzhou, Chengdu, and Qingdao in mainland China.

24-hour convenience stores are a typical consumption pattern south of the Yangtze River. In Shanghai, by the end of 2015, there were 461 Japanese Lawson stores and nearly 1,000 FamilyMart stores under Ting Hsin Group. These convenience stores, visible on every street corner, have almost made medium-sized supermarkets in Shanghai disappear.

Industry statistics show that there are more than 260 convenience store brands in China. In cities like Shanghai, Shenzhen, and Nanjing, there are more than 10 convenience store brands each.

However, for China as a whole, the convenience store market seems to have just begun real growth.

Wu Meng, head of the Administrative Department of Seven-Eleven (Beijing) Co., Ltd., told the reporter of Finance & Economy National Weekly that 7-Eleven's current main task is to open stores quickly, expanding at a rate of one to two years per new city. Beijing will maintain an increase of 30-40 new stores per year, and other cities are similar.

The other two convenience store giants, Lawson and FamilyMart, are also accelerating their 'land grabbing.' In the summer of 2016, Lawson announced it would accelerate store openings in China, aiming to quadruple its store count by 2020, expanding from about 750 to around 3,000. FamilyMart also announced a goal of 10,000 stores by 2024.

Wang Hongtao, Secretary-General of the Convenience Store Committee of the China Chain Store & Franchise Association, told the reporter that in 2016, convenience stores grew the fastest in the retail industry, with growth expected to reach about 15%; conversely, large formats slowed down, and large supermarkets are entering an adjustment period, with expected growth still below 10% this year.

A person in charge of a large supermarket in Beijing also said that first- and second-tier cities do not lack hypermarkets, and large properties suitable for hypermarkets are hard to find, and the cost of opening a hypermarket is too high.

Dong Gang, general manager of Wumart Convenience Stores, told this magazine that Wumart Supermarket continues to pay attention to convenience store development, but will not make a complete transformation because large supermarkets are not ideal. It will still follow its original pace and make some adjustments based on market conditions.

It is understood that Wumart convenience stores are growing at a rate of 30-50 new stores per year in Beijing.

In Wang Hongtao's view, the reasons for the accelerated development of convenience stores in recent years are, on the one hand, that the instant consumption nature of convenience stores makes them less affected by e-commerce; on the other hand, under the background of consumption upgrading, changes in people's consumption concepts have also promoted the rapid development of convenience stores.

The New Era of $10,000

Zhang Sheng, general manager of Lawson Shanghai, believes that China's convenience store model has entered the third stage. 'The earliest convenience stores were small supermarkets, selling whatever was missing; that was the first generation. The second generation was when Japanese-style convenience stores first emerged, mainly opening near office buildings. We call this rigid demand because everyone needs lunch.'

In Lawson's market research two years ago, office building usage had dropped to fourth place, while community usage became first, but the proportion was still 'very close' to rigid demand uses like stations, docks, and hospitals.

In addition, the trend of e-commerce using communities to lay out offline is also continuing. It has been revealed that Alibaba is currently considering opening community physical store businesses and may increase offline layout in the future.

Research shows that when per capita GDP reaches $3,000, convenience stores enter the initial development stage, and consumers begin to accept the concept; at $5,000, they enter the growth period, and the form of convenience stores begins to combine with customer needs; at $10,000, they enter the competition period, with intensified competition and brand integration; at $20,000, they enter the mature period, with further brand concentration and the emergence of oligopolistic market patterns.

According to the 2015 ranking of per capita GDP of 200 Chinese cities, the 200th city, Haibei in Qinghai, had reached $5,492 per capita, while the 10th, Zhuhai, had $20,000.

According to global experience, during the stage from $10,000 to $20,000 per capita GDP, the dominance of retail shifts to convenience stores and specialty stores.

In Taiwan, China, this shift occurred after 2000. Dutch membership wholesale model Makro withdrew in 2003, and in 2005 Tesco sold its stores to other companies in the same industry. Carrefour and Tesco also entered the Japanese market during this period but did not succeed in Japan, where per capita GDP exceeded $30,000. In Malaysia, where per capita GDP exceeded $10,000, Carrefour transferred its stores to Aeon in 2012.

Mainland China's per capita GDP is getting closer to the $10,000 mark, and large supermarkets like Carrefour and Walmart have also begun to see store closures.

New Battlefield in the North

Beijing's cold period lasts more than a month longer than Shanghai's. Under the premise of high costs for convenience stores, the long winter has become an important factor restricting the development of convenience stores in the north, so convenience stores were once considered a format suitable for the south.

The 2013 China Urban Convenience Store Index shows that in mainland China, Dongguan and Shanghai have the highest level of convenience store development, with Dongguan having one store per 2,667 people, close to the developed convenience store market in Taiwan (one store per 2,000 people), while Beijing has about one store per 20,000 people.

The head of the marketing department of Beijing Oulaike Chain Convenience Store Co., Ltd. introduced: 'It was not until the end of 2013 that convenience stores in the north began to show a development trend. Before that, they were occupied by small supermarkets and mom-and-pop stores, while chain convenience stores in the south had already matured.'

For a long time, in Shanghai, young people have been deeply dependent on convenience stores, willing to buy most things there, including food, magazines, medicine, fruits, and vegetables. But in Beijing, people prefer to go to specialized places for consumption, such as pharmacies for medicine and vegetable markets for groceries.

Despite this, as competition in southern convenience stores intensifies, the industry is very optimistic about the prospects of developing chain convenience stores in the north, and more enterprises have begun to bet on the development of convenience stores in the northeast.

Zhang Yungen, president of Quanshi Convenience Stores, predicts that Beijing will eventually see convenience stores everywhere like Shanghai.

From the China Urban Convenience Store Index, it can be seen that in 2016, the city with the highest convenience store growth rate was Harbin in the northeast, at 33.3%. Thanks to a series of incentive policies introduced by the Beijing Municipal Commerce Commission in the past two years, Beijing's convenience store growth rate also reached 23.5%, making it a star region for convenience store development.

Unlike the commonly understood climate factors, Wu Meng believes that consumption level and population size are more important factors in the development differences between the north and south. 7-Eleven's sales in Beijing are among the leading in the country, which shows that developing convenience stores in the north is actually feasible.

A person in charge of SF Preferred also told this magazine: 'The difference between north and south will change to some extent. Take us as an example: the northeast company has the best performance. Second-tier cities have few channels to access imported goods, but locals have the purchasing power. If a store opens there, with less competition, people's demand for these products will explode.'

Liu Ding, chairman of Beijing Oulaike Chain Convenience Store Company, also said that Oulaike will expand its business in the northeast next. Previously, supermarkets in the northeast were mostly mom-and-pop stores, with room for improvement in service, scale, scientific management, and decoration. In the future, the convenience store market in the northeast will be systematically upgraded.

In a typical northeastern city like Harbin, there have always been low-end community retail outlets—'cangmai' (small grocery stores or food shops) scattered across urban and rural areas, streets and alleys. On the surface, 24-hour, year-round small supermarkets are convenience stores. In fact, small supermarkets and grocery stores with fewer product categories, focusing on food and daily necessities, and meeting customers' emergency and convenience needs, can also be considered convenience stores.

Public reports show that there are 60,000 'cangmai' of various sizes in Harbin, of which about 35,000 are registered with the industry and commerce bureau. Despite certain safety hazards, they have advantages in tax and labor costs, and their product prices are also lower.

Differences in Urban Policies

Despite optimism about the northern market prospects, Liu Ding also said that overall, local governments in the north have previously provided less support for convenience store development, and handling various procedures and licenses often takes longer.

The Quanshi convenience store flagship store in Yong'anli, Beijing, has more than 20 licenses and is said to have the 'most complete licenses.'

Another example is the subway convenience stores that were restricted for more than 10 years. In early 2016, Xie Zhengguang, chairman of Beijing Subway Operation Co., Ltd., confirmed to the media that commercial pilots for several subway stations on several lines are being implemented, and relevant details are being planned.

In 2005, for safety and other reasons, Wumart and others withdrew from the Beijing subway. Insiders revealed that FamilyMart and China Resources Vanguard have been paying attention to opening subway convenience stores.

Tao Ye, managing director of Haolinju Convenience Stores, once said that opening a store in Beijing costs between 300,000 and 500,000 yuan for housing deposits, decoration, equipment, and miscellaneous fees, not including rent.

In Beijing subway convenience stores, it is also required that stores cannot sell freshly made products or foods with strong odors, which means the highest-margin products will not appear in the subway.

Industry insiders also said that the Beijing subway only opened a dozen or so stations this time, and some locations are not on the main passenger flow lines, requiring passengers to detour to make purchases, which actually reduces shopping opportunities, making it difficult for merchants to profit.

'Beijing's management is relatively strict, but it is much better than before,' Wu Meng said. In his view, some southern regions have policies supporting convenience stores, with subsidies and various 'green lights.' However, in Beijing, 'I am already quite satisfied.'

Wang Hongtao also said that in recent years, the Beijing Municipal Commerce Commission has attached great importance to the convenience store industry, providing support through policies and funds every year; on the other hand, given the special status of the capital, supervision requirements are relatively strict, and coordination issues between departments do exist.

Breaking the 'Last Kilometer'

In addition to offline brands, many online forces have also hoped to use convenience stores or community stations to break through the 'last kilometer' in the past few years, including JD.com, Alibaba, and Yihaodian, all of which have entered convenience store O2O.

In 2013, JD.com cooperated with Tangjiu Convenience Stores in Taiyuan, Shanxi, on an 'online hypermarket' project. After achieving some success, in 2014, JD.com conducted O2O cooperation with more than 15 cities including Shanghai, Beijing, Guangzhou, and Wenzhou, and over 10,000 convenience stores, with partners including well-known chain convenience store brands such as Kuaike, Haolinju, Liangyou, Meirimeiye, and Renben.

However, to date, it seems that no e-commerce company has truly mastered O2O convenience stores, and companies with large investments like SF Express have begun large-scale adjustments to their O2O strategies.

Alibaba also launched a '1-hour convenience online shopping' activity on Taobao Convenience Store, allowing orders to be placed via mobile or computer and delivered within 1 hour. Products may come from e-commerce self-operated or partner convenience stores and supermarkets. For this, Alibaba plans to invest 1 billion yuan.

But some experts believe that the 1-hour delivery behind is a public contest of comprehensive strength of various platforms, but the timing is not yet mature and cannot become the norm.

Many convenience store industry insiders are also not optimistic about the 'Internet + convenience store' model. Some companies even believe that Internet integration not only fails to bring performance growth to convenience stores but may cause a decline in store performance.

'We all know that if you shop on a mobile phone, if the free shipping threshold is set at 30 yuan, consumers may only buy 31 yuan and stop. But in a physical store environment, consumers may be stimulated to spend more through interaction and feeling,' Liu Ding told the reporter. 'From this point of view, the Internet platform cannot contribute to the performance improvement of convenience stores.'

Wu Meng also said, 'Our current main goal is to open stores quickly, because the operating capacity of a single store is limited; only by increasing the number of stores can we create more profits. The Internet may not bring substantial growth to 7-Eleven's performance, and 7-Eleven will not consider online business for now.'

Whether or not they embrace new trends, standing at the threshold of per capita GDP approaching $10,000, convenience store industry leaders almost unanimously choose to open more stores.

Although the prospects are good, not everything goes smoothly. For example, as early as 2010, FamilyMart said it would increase its store count to 4,500 by 2015, but ultimately completed less than one-third of the plan.

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