Lianshang.com New Retail Advisory Group invited Zhou Yong, former president of a famous state-owned retail company in Shanghai, now a professor at Shanghai Business School and director of the Lianshang.com Retail Research Center, who has deep insights into various sectors of the retail industry. With traditional supermarkets declining, convenience stores are growing strongly. The retail industry in 2017 may undergo major changes. To discuss this, the advisory group invited experts, professors, and executives from the convenience store sector to discuss the general trends for convenience stores in 2017. Below is an excerpt from Professor Zhou Yong's speech.

Due to a recent severe cold, I'm afraid I might not speak clearly, so I've prepared a segmented script to share my thoughts. Let me start with a few points:

1. Journalists talk about a 'convenience store war,' but I think the convenience store war does not exist! Because convenience stores are like 'waiting by a tree stump for a rabbit' (i.e., passive waiting). There are two stories in the industry that reflect the operational essentials of convenience stores. One story is about a convenience store on a main road, with the bus stop several dozen meters away. The store manager felt that being away from the bus stop hurt business, so he came up with a 'clever' idea: every night he moved the bus stop a few meters closer to his store. After a week, the bus stop was right at the store's door, and business gradually improved. This may not be a true story, but it reflects the common mindset of convenience store managers. Another story is about a convenience store with a medium-sized tree in front that blocked the store's sign. The manager felt the tree's branches affected the store's 'visibility' and hurt business, so he figured out a way to kill the tree. Killing a tree is as sinful as killing a person. But this also reflects the common mindset of convenience store managers: convenience stores must have 'visibility,' 'accessibility,' and 'traffic flow.'

2. On site selection for convenience stores. Entering communities, leaving communities, and re-entering communities is a process. Whether in Taiwan or mainland Shanghai, the first generation of convenience stores opened in communities. When convenience stores first opened, they felt like community stores, and since they were small supermarkets, as Lawson's President Zhang said, they were called 'mini supermarkets.' Because they were small supermarkets, it was natural to open in communities. But later, it was found that community convenience stores had no advantage competing with supermarkets! Hypermarkets even sent free shuttle buses to community gates to pick up customers. So they left communities and focused on street corners, business districts, school districts, bus stops, subway stations, and other commercial areas. Later, Lawson even entered economic development zones... Then, people found new opportunities for convenience stores in communities, such as FamilyMart entering communities, selling soy milk, rice balls, and sandwiches, and 7-Eleven opening inside office buildings in Shanghai, becoming the office building's cafeteria! In short, they provide food services.

3. Convenience stores cannot surround supermarkets; they are products of two different eras. Supermarkets are a product of economic downturn. Convenience stores have a longer history than supermarkets. Abroad, convenience stores came first, then supermarkets, so their positioning is clear, and consumers easily accept them. In China, supermarkets came first, then convenience stores, so convenience stores are always seen as small supermarkets.

4. Convenience stores are different from supermarkets. Supermarkets can be acquired, but convenience stores don't need to be acquired. Perhaps there's a new logic now! But I think if you can change the sign overnight, why acquire? It seems unnecessary. Later, we can develop 'regional franchising.'

5. Convenience stores not only serve passing customers but also regular customers who are mobile. Buying breakfast on the way to work and buying something tasty to replenish energy on the way home is routine mobile shopping. The customer base and traffic are relatively stable every day! So convenience stores also implement membership points and other marketing activities! It's not a one-off transaction. Previously, it was said that supermarkets have regular customers, and convenience stores have passing customers! So convenience stores are not just for passing customers but for relatively stable mobile customers! But Chinese tastes are too complex, and convenience stores cannot fully satisfy them! So meals need to be changed frequently!

6. Can convenience stores sell vegetables? Currently, there are about eight channels for selling vegetables: the wet market is the first channel; vegetable shops at the wet market entrance are the second channel, and these two are used simultaneously; supermarkets and hypermarkets are the third channel; micro vegetable shops at community entrances are the fourth channel; online shopping is the fifth avenue; farm direct supply is the sixth channel; origin direct sales are the seventh channel; and display sales are the eighth channel. For fresh food, if you don't deliver to home, delivering to a convenience store that customers pass on their way home is also fine. In Shanghai, at Xinzhuang subway station on Line 1, North Square, there is a 'Lianhua Supermarket' in the basement. I think it's a franchise, but I often go there. It not only has vegetables and fruits but also seafood and freshwater fish. Although the variety is limited, it's enough for a fresh dinner. So when I take the subway home, I stop there to buy something. If I order online in advance and pick it up when I get off the subway, I think it's very convenient. As for how Hema Fresh and convenience stores can combine, I don't know if they have any innovative ideas?

Next, I'll discuss five issues: (1) Convenience store chains; (2) The role of convenience stores; (3) The functions of convenience stores; (4) Convenience store models; (5) Cost and efficiency.

(1) Convenience store chains 1. Convenience stores are a tricky industry. Everyone says it's 'good,' but it's not very profitable. Take Shanghai as an example. Domestic large convenience companies nominally make money, but in reality, they don't. Foreign convenience stores like FamilyMart claim to have been profitable since 2014, but 7-Eleven is still moving slowly. When asked why they are so slow, they mention rent pressure. I said over ten years ago that 'convenience stores are not fun'! In 2001, when I was in the company competing with domestic convenience stores like Lianhua Kuai Ke, Liangyou Convenience, 21st Century Convenience (which has since closed), and foreign ones like Lawson (at that time FamilyMart and 7-Eleven had not yet entered Shanghai), and C-Store, we just wanted to open stores quickly and reach a certain scale to be profitable. The result: the industry saying that 'opening 300 stores is the basic scale, and only at that scale can you be profitable' is also misleading! The reality is: the more stores you open, the more you lose. When we reached 1,000 stores, we found that the first 500 stores performed better than the last 500! There are many reasons, one important one being that rapid expansion neglected quality. Another reason: when 7-Eleven's former vice president Xie Jiannan came to Shanghai to exchange ideas with us, what he said didn't sound good at the time, but later I realized it made sense. He said: 'Convenience stores win by systems and core capabilities. Having many stores is sometimes not an advantage but a disadvantage.'

2. Another idea seemed reasonable but later proved not to be. That is, to ensure standardized operations, focus on direct operation. The result: stores under direct operation still operate in various ways. Even now, taking Shanghai as an example, foreign convenience stores have a franchise ratio of 60%, but over the past 15 years, domestic convenience stores have not exceeded 30% franchise ratio. Companies that lack the capability to franchise or worry about franchise problems haven't done well with direct operation either. The reality is: when a company is small, unified marketing is effective; when the company grows, convenience stores are divided into different business districts and models. If unified marketing remains dominant, it may not be conducive to market competition; instead, differentiated marketing is needed.

3. As a special case, Shanghai's Lawson convenience stores are quite different from other convenience store companies. Lawson is a 'master-level' brand in the second tier of Shanghai's convenience store industry (the first tier were pioneers who later all failed and became martyrs, such as Hong Kong's Baishi Convenience; the second tier includes Lawson, Kedi, Kuai Ke, Liangyou, and 85818, later Guangming Convenience; the third tier includes Haode, 21st Century, and C-Store; the fourth tier is FamilyMart; the fifth tier is 7-Eleven; the sixth tier is Yijie, Kunlun Hao Ke, and internet convenience stores). Since its establishment in February 1996, Shanghai Hua Lian Lawson Co., Ltd. has created many 'firsts' in the convenience store industry in Shanghai and even nationwide, and it was a model for the third-tier convenience stores in Shanghai. Lawson uses 'slow work,' while local companies use 'fast work.' Both have their merits, and now they coexist and thrive together in Shanghai. General Manager Zhang Sheng said that convenience stores are a 'manufacturing-type retail format,' and self-made food is a major feature of Lawson, such as a milkshake cake made from a whole banana, rich in milk flavor, sweet but not greasy. After tasting it, many people want to buy several to share with friends. I once led students from Shanghai Business School to survey the Shanghai convenience store market, and we found: FamilyMart dominates in Shanghai, but young people like Lawson's 'face-changing' technique. In textbooks, 'chain operation' emphasizes 'uniformity,' but Lawson focuses on 'difference.' General Manager Zhang said that the biggest difference between Lawson and other convenience stores is that their 'faces look different'! To cater to different consumer groups, Lawson has developed different types of stores, such as '100-yen Lawson,' 'Natural Lawson,' 'Hospital Lawson,' 'Subway Lawson,' 'Post Office Lawson,' 'Anime Lawson,' 'Pharmacy Lawson,' etc. I wonder what other peculiar Lawsons will appear in the future! Conan Lawson opened in Shanghai in 2012, and Natural Lawson has also opened in the Shanghai World Financial Center. We look forward to Lawson opening even more unique convenience stores in Shanghai! They have also conceptually changed convenience stores to 'convenience stations.' In fact, the concept of 'convenience stations' was proposed in Shanghai around 2003 as a government project to provide financial services at convenience stores for the convenience of the people. (There is a photo, with Vice Mayor Feng Guoqin speaking, and seated from left to right are Ren Wenyan, then deputy director of the Commerce Commission—known as the 'grandmother of Shanghai supermarkets'—and Yang Dexin, chairman of Nonggongshang Supermarket Group, which now owns Haode and Kedi convenience stores.)

4. A few summary points on convenience store chains: (1) 'Territory advantage' has not been converted into 'brand advantage,' so as scale grows, customer experience worsens. (2) Lack of consistent product development. Product development should involve all employees, and even high-frequency consumer participation. For example, Lawson mobilized all employees to develop 'borscht' and 'hot and sour soup' suitable for Shanghai tastes, and created an afternoon tea featuring 'dessert Lawson.' (3) The two motivations are not well balanced: one is the headquarters' motivation, and the other is the store's motivation. Well-performing convenience store systems can effectively stimulate both. (4) The concept of convenience stores is rigid and lacks innovation. In the internet age, convenience stores, service stations, collection points, fresh food stores, fruit stores, coffee shops, breakfast shops, fast food restaurants, bakeries, gas stations, canteens, repair shops, help stations, laundry services, recharge stations, new product promotion stations, etc., may all merge into a composite store. (5) Franchising remains a basic development trend and should be actively promoted. (6) Too many people are used. Below is a picture of a European gas station convenience store, which I call a 'one-person convenience store.' It has three basic functions: gas station, driver's rest area, and convenience store, but only one person. If there are too many people, convenience stores definitely won't do well. (7) Although technology is not a big issue, system optimization, interface optimization, analysis optimization, and equipment optimization must always be monitored. For example, the recent unmanned checkout convenience stores. (8) It's good to cultivate a habit of pursuing innovation and efficiency, but innovating for the sake of innovation may lead to many 'pseudo-innovations' and 'pseudo-efficiencies,' mainly because some 'pseudo-problems' and 'pseudo-demands' are identified. (9) The organizational structure of a chain system needs more mobility and combat effectiveness. For a chain system, from an operational perspective, store development is the head, merchandise and operations are the two arms, logistics and information are the two legs, and the belly contains 'information processing capability,' 'innovation and development capability,' 'people motivation capability,' 'financial operation capability,' 'collaboration capability,' and 'communication reach capability.' Among these six capabilities, the first two are the 'brain,' the next three are 'people, money, and goods,' and the last two address supply chain and consumer issues, respectively. Among them, merchandise and operations are the two main parts. In China, these two are generally managed with mutual checks and balances. In reality, cooperation between these two departments should outweigh checks. So, rather than having two directors manage them separately, it's better to have a 'vice president-level' executive manage them uniformly, making the chain company more collaborative, responsive, and flexible.

(2) The role of convenience stores The upgrade of convenience stores is beneficial to improving the circulation landscape. In China, large stores are becoming more and more upscale, but over 90% of small stores nationwide are still shabby, out of step with our era and far behind developed countries. This gap actually reflects the difference in national living standards. Therefore, the upgrade of convenience stores is conducive to improving the appearance of the entire national distribution terminal and will completely change the domestic trade circulation pattern. The Ministry of Commerce has been working on 'domestic trade circulation system reform' and selected nine cities as pilots. Not only did they not understand what to reform, but the nine pilot cities were also in a fog, implementing 'fast reform' that was supposed to show results in one year.

(3) The functions of convenience stores The social functions of convenience stores are evolving. Many expectations and problems regarding convenience stores are some real, some false. (1) In China, convenience stores are still a supplementary retail format, so their share of total retail sales is low, which is very different from Japan. We should not have overly high expectations that exceed their capacity. (2) The functions of convenience stores are evolving from general stores to food service stores to service stations (as Lawson puts it) to community stores. Step by step, from the current mainstream demand, various immediate needs manifest differently across brands, cities, business districts, and locations. It's clear that China's convenience stores are not one or a few models but diverse models. Habitual needs (fixed mobile customers, such as food service), sporadic needs (such as residential areas), temporary needs (such as hospitals), emergency needs (such as guests at home without ice), passing needs (such as bus stops), leisure needs (books, snacks), fashion needs (new products, desserts, tasty things, fun things), and derived needs (as service stations, such as express delivery, gas recharge, fine payment, etc.). These eight 'immediate needs' each have their own focus. Some stores can meet all types of needs, while others only meet some. There should be brand guidance.

(4) Convenience store models China's convenience stores are not a matter of one or multiple models. There are three forces operating in different spaces: chain convenience stores, about 80,000 strong; mom-and-pop stores, about 1.7 million, less than 5%. This is a 5:95 relationship! It's hard to say who is stronger, but one thing is certain: chain stores survive within the layers of mom-and-pop stores, not in the cracks between chain stores. Another force is e-commerce. Tmall and JD.com both want to do B2B business with small stores. The future is uncertain, but I think it's a good attempt. Who will become the future leader? I think it's brand owners, chain brand owners, who develop brand chains through franchising, entrusted franchising, regional authorization, and other methods.

(5) Cost and efficiency It's mainly not a rent issue. It involves multiple issues: (1) Rent issue. Rent is just an operational issue. It's mainly because sales are poor that rent feels expensive. (2) Organization issue. Mom-and-pop stores use 2 people, chain stores use 6+1 or 7+1. Some chain stores are trying to do 'minus 1' personnel reductions. Although this saves costs, it doesn't solve the mechanism and management system issues, so costs definitely won't come down. (3) Cross-industry cooperation issue. Due to inconsistent goals, the sustainability of business is questionable. For example, with in-store pickup, convenience stores hope to attract traffic, but after implementation, they find that customers who pick up orders often don't have time to buy anything else. They pick up and leave, so the convenience store works for nothing! Therefore, some convenience stores in Shanghai don't want to do this 'brick-moving' work anymore. For example, Liangyou Convenience. (4) Policy support issue. The function of boxed meals and other food services involves government regulation. A small restaurant selling boxed meals is rarely regulated, but after a convenience store operates in a standardized manner, someone comes to regulate it and requires a license. The government hasn't figured out what should be regulated and what shouldn't. Government research projects are outsourced, and the results often don't match corporate reality, causing many conflicts with the industry. Making rules arbitrarily, or based on 'leadership instructions,' 'leadership speeches,' or 'leadership intentions,' often becomes 'invalid' from the start. That's waste paper! I once heard at the Beijing Ministry of Commerce from former Vice Minister Jiang Zengwei say: 'When making rules, we should listen more to the opinions of enterprises!' I think that's the stance, attitude, and work style that government authorities should have. (5) Cross-industry cooperation issue. For example, public utility fees, gas recharge. Due to profit considerations, after Shanghai FamilyMart took on some gas recharge services, they couldn't accept card payments, and the recharge limit was 3,000 yuan (only for Shanghai Songjiang area. For households with floor heating, 3,000 yuan of gas is not enough for one winter). This shows that to break through cross-industry cooperation scenarios or balance the interests of all parties, some require business negotiations, system interface optimization, equipment updates, and some require improvements in government regulations. (6) Core capability issue. The implementation of product category management and planograms is not thorough enough. This is an internal management issue. Established convenience store companies all believe that one of the core competencies of convenience stores is the planogram. Essentially, it's about 'fixed areas,' 'fixed shelves,' and 'fixed quantities' (fixed areas, fixed shelves, fixed quantities). (7) Product development issue. No signature products, no highlights, no clear reason for customers to enter the store. This is a common problem among many domestic convenience stores! I see that FamilyMart's ice cream cones are very good, so sometimes I get off at a subway station with a FamilyMart, have an ice cream, and then continue. I also stop to buy a dessert at Lawson... These are good examples. 7-Eleven is also good, but there are too few stores, so they can't attract more customers. Maybe that's part of their gradual strategy. In short, you have to give customers a reason to enter the store, which is the signature product and specialty!

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