The King of Chinese Convenience Stores: Can Yijie Convenience, with 23,000 Stores, Become China's 7-11?

On December 14, Bloomberg reported that Sinopec, the world's largest oil refiner, is planning to spin off its gas station and convenience store business, with a Hong Kong listing expected next year, potentially raising up to $10 billion (approximately HK$78 billion or RMB 69 billion). The news has caused a stir both inside and outside the industry.

Public market data shows that as early as early 2015, Sinopec already had 30,000 gas stations and 23,000 convenience stores under the Yijie brand. This number far exceeds the combined store count of mainstream convenience store chains 7-11 and Meiyijia in China.

Judging solely by the number of stores, Yijie Convenience can be called China's "King of Convenience Stores." According to the saying "those who control the channels control the world," Yijie Convenience's nationwide retail network is sufficient to secure a good market value after the spin-off and listing. Moreover, leveraging its platform advantages, Sinopec has in recent years rapidly expanded its business around its 30,000 gas station outlets into emerging businesses such as automotive services, O2O, connected vehicles, financial services, and advertising, offering enormous potential.

However, this cake—Yijie Convenience—held tightly by Sinopec with natural channel advantages, has not been fully exploited over the past few years. In 2014, Sinopec gave Yijie Convenience high-profile support, bringing in well-known partners including Pacific Insurance, SF Express, Tencent, and RT-Mart, but it seemed to struggle to find its footing, ultimately drawing criticism from both inside and outside the industry for unclear positioning and inflexible management.

Why is the road to building the Yijie Convenience empire fraught with thorns?

Yijie's Ambition

Sinopec's convenience store ambitions began in 2006. At that time, Wang Tianpu, then president of Sinopec, officially announced that non-oil business (i.e., revenue beyond fuel sales at gas stations, including convenience stores, catering, advertising, etc.) had become one of Sinopec's key businesses. In 2008, Sinopec formally established a non-oil business division and launched the Yijie Convenience brand.

Financial reports show that Sinopec's non-oil business revenue was RMB 1.1 billion in 2008, and by 2011 it reached RMB 8.26 billion, with 19,200 Yijie convenience stores. However, this achievement did not satisfy Fu Chengyu, who became chairman of Sinopec Group in 2011.

"Guarding China's largest refined oil retail chain terminal, how can you be so poor that you have to beg for food?" Shortly after taking office, Fu Chengyu made such remarks about Yijie Convenience's development. Around the second half of 2012, Fu Chengyu explicitly proposed within the group to restructure the non-oil business, saying that those who occupy positions but do not work should be replaced, and if they still cannot perform after replacement, consider a systematic reshuffle, and if necessary, introduce external expertise and let go of control. It was also under his leadership that Sinopec, once just an oil seller, began its rapid advance on the convenience store path.

At the end of 2012, Sinopec's Guangdong Petroleum Company announced its entry into e-commerce, launching a comprehensive B2C online shopping platform to meet car owners' non-oil needs. Subsequently, six special sections of Yijie.com, including Shanghai, Shandong, Jiangsu, and Guangdong, were launched successively.

In 2013, Yijie Convenience opened 23,000 convenience stores within Sinopec's more than 30,000 gas stations nationwide, an increase of 4,000 stores in two years. Annual non-oil business sales reached RMB 13.3 billion, a year-on-year increase of 21.36%.

In 2014, Sinopec successively announced the introduction of more than ten business partners, including RT-Mart, SF Express, Yihaodian, and Tencent, covering areas such as pharmaceuticals, insurance, retail, logistics, and e-commerce. Among them, Fosun Group's pharmaceuticals and Huiyuan's juices became new categories for Yijie Convenience, while SF Express and Haier's logistics networks further cooperated with Yijie Convenience in distribution, and RT-Mart and Yihaodian provided Yijie with innovation support in products and models.

"In choosing partners, Sinopec is more inclined to establish cooperative relationships with well-known brands, which have a large number of loyal consumers and relatively high brand loyalty," said Zhao Ping, deputy director of the Consumer Economics Research Department at the Ministry of Commerce Research Institute, regarding Sinopec Yijie's several partnerships.

Since then, Yijie Convenience has spared no effort in seeking partners. In May of this year, Yijie Convenience announced a partnership with Zhongbai Supermarket. It is reported that the products sold in Wuhan Yijie convenience stores have increased from the original 300-plus varieties to over a thousand. In addition to a richer product range, services such as water, electricity, phone bill, and Wuhan Tong payments, which Zhongbai Supermarket can handle, have all been opened at Yijie Convenience.

Undoubtedly, behind the restructuring of the non-oil retail business segment, Sinopec is leveraging its strong position and channel resources in refined oil network retail to vigorously boost Yijie Convenience into the next star business.

Why Isn't Yijie Making Money?

In foreign countries, the non-oil business of gas stations has reached a mature stage. Data shows that in Europe and the United States, gas stations with convenience stores account for 85% of the total, and non-oil business contributes stably to about 60% of gas stations' gross profit. This is one of the main reasons Fu Chengyu previously pointed out that the non-oil business has huge potential and is a gold mine.

In China, the two gas station convenience store chains, Yijie Convenience (under Sinopec) and Kunlun Express (under PetroChina), have always been "brothers in adversity"—huge in number but awkward in profitability.

Financial reports show that in 2015, Sinopec's non-oil product turnover was RMB 24.83 billion, with non-oil business mainly covering convenience stores, catering, car washing, and car repair. If all turnover is attributed to Yijie, with 23,000 stores, the average daily sales per store would be RMB 2,958. In the first quarter of this year, Sinopec's non-oil product turnover was RMB 8.91 billion, with average daily sales per store of RMB 4,304. In contrast, some mainstream convenience stores in the market, such as Lawson, have average daily sales of around RMB 8,000, 7-11 has average daily sales exceeding RMB 20,000, and the industry average daily turnover is around RMB 6,000.

With such a vast store network and sales network, why does Yijie Convenience struggle to support Sinopec's non-oil business? This brings us back to the differences in domestic and foreign environments and the inherent difficulties of convenience store operations.

First, gas stations are generally located in places with convenient transportation and vehicle convergence. In foreign countries, due to sparse population, gas stations and convenience stores can naturally form commercial centers. But in China, gas stations and convenience stores are surrounded by numerous street-side mom-and-pop shops, and even within a short drive, there are medium-sized supermarkets. Compared with them, Yijie Convenience's product categories, quality, and prices do not form sufficient competitive advantages. Consumers at urban gas stations generally stay no more than 20 minutes, making it difficult for them to form a habit of shopping at Yijie.

Furthermore, as an offline chain business, the operational strategy of physical stores is sometimes even more important than location. But the problem is that for Yijie Convenience, a chain format that relies on gas stations, its initial positioning was merely a supplement to fuel sales. Although Yijie has introduced business partners on a large scale in recent years, how to digest so many excellent resources while providing standardized services, and how to reasonably allocate and orderly manage resources from Tencent, Yihaodian, Zhongbai Supermarket, SF Express, etc., has become a new challenge.

"Unlike our professional convenience store companies' decision-making approach, Yijie Convenience is bundled with Sinopec gas stations, and from the start, it expanded too broadly nationwide, making the management radius too long and increasing management difficulty," said Tang Yaohua, chairman of Chengdu WOWO Convenience.

"Convenience store products require split-case delivery, and most products are daily delivery, which places high demands on the entire supply chain system. In this case, although Yijie Convenience has more than 20,000 stores nationwide, it is difficult to achieve unified distribution, so it cannot form economies of scale," said Hu Chuncai, general manager of Shanghai Shangyi Consulting.

Does Yijie Convenience have no advantages at all? Not so. Currently, the domestic retail industry is undergoing rapid transformation, with traditional large supermarkets being diverted by small convenience stores. According to statistics from the Ministry of Public Security, as of June 2016, domestic car ownership reached 184 million vehicles, and these car owners are theoretically Yijie's consumer base.

Compared with most convenience stores, gas stations' cross-regional, cross-age, and cross-demographic characteristics can give Yijie Convenience higher brand penetration and broader user reach.

"Yijie Convenience is based on gas stations, and urban gas stations also serve community functions. Coupled with the strength behind the petroleum sector, this is what many e-commerce companies value. At the same time, the big data platform can collect customer information through fuel cards held by consumers, and through transformation and exploration, it can provide a series of innovative and high-quality services. The question is whether these functions can be utilized," said Professor Chen Liping from Capital University of Economics and Business.

How Can Yijie Become King?

First, solve the incentive mechanism problem. If Yijie remains within Sinopec's system, it will be difficult to compete with market-oriented convenience store systems like 7-11 or Meiyijia. This is the core reason why Sinopec wants to spin it off and list it. The good news is that this year's Central Economic Work Conference proposed introducing mixed-ownership reform in seven traditionally highly monopolized industries: electricity, petroleum, natural gas, railways, civil aviation, telecommunications, and military industry. This is an important breakthrough for state-owned enterprise reform. "Improve governance, strengthen incentives, highlight main business, and improve efficiency" are the overarching requirements and direction. This gives Sinopec the green light to openly introduce retail giants like Suning as important shareholders in the process of spinning off Yijie for listing. After listing, Yijie will have a more flexible mechanism and can introduce more professional retail talent.

Second, truly center on the car owner demographic for product introduction, product development, and store operations. Meiyijia's success is due to its capture of factory workers in South China; 7-11 focuses on white-collar workers, preparing snacks and bento boxes for them at noon, afternoon, and evening. Yijie's target group is undoubtedly the growing car-owning class, the so-called middle class. This is the most premium customer base. The question is, does any Yijie Convenience store currently offer products and store layouts tailored to the middle class? What do the middle class need in daily life? What do they need on weekends? What are their living and consumption habits after owning a car? If Yijie does not have a professional team dedicated to studying this demographic, it will be difficult to capture the needs of China's middle class, and it can only provide basic services and earn the thinnest profits.

Third, vigorously develop private brands. The characteristic of new retail is to leverage channel or user advantages to integrate the entire industry chain and earn the thickest profits. Whether it's Watsons or the newly rising Miniso and Three Squirrels, the most profitable are private brands. Only by controlling the supply chain from the source can product quality be ensured, thereby ensuring user experience. Yijie has 23,000 stores, all directly operated, giving it absolute control. It can fully experiment with a large number of private brand products. For example, during barbecue season, it can cooperate with meat brands like Sunner Development, put the Yijie label on products, and sell barbecue supplies in large quantities at low prices. Stores that sell poorly can transfer inventory to better-performing stores at any time.

Fourth, explore O2O and B2B models. Yijie's advantage is its nationwide channel network, which provides the foundation for O2O business. This is an important offline resource for online supermarkets. Yijie can open an online "Costco" or Metro, where customers place orders online and car owners pick up goods by driving to the store, enabling wholesale-style sales. At the same time, Yijie can become a first-tier wholesaler for categories targeting the middle class. Leveraging its network advantages, it can purchase in bulk to get the best prices, and then develop a B2B platform to supply more scattered retailers around Yijie's network. This model can easily help Yijie scale up transaction volume.

*This article was written by Brother Black Horse, with some content referenced from China Business Journal and Winshang.com.

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