Capital and e-commerce giants are transforming communities. Small grocery stores and mom-and-pop shops, which permeate communities like capillaries, have become prey for capital. They face two paths: join a chain and fight collectively, or accept acquisition by internet giants...
"The overall environment is poor, so running a small business is just about getting by," said Aunt Liu, owner of Hengli Grocery in the Beijing Road business district, sounding somewhat dejected when discussing her current business situation.
Although physical retail has shown signs of recovery, the industry's growth rate remains below 10%. The five-year-long "store closure wave" has left all physical supermarkets in a weak position, let alone small grocery stores surviving in the cracks.
As online costs rise, both e-commerce giants and institutional investors have rediscovered the value of physical stores, dubbing it "new retail." Even large supermarkets like Walmart have had to seek "alignment."
Even the grocery stores and mom-and-pop shops scattered in every corner like capillaries have become targets for capital and trends.
They face a dilemma: either continue to fight alone, refusing to band together, but accept the reality of shrinking profits; or accept acquisition and transformation, handing over half their livelihood to new retail.
Fighting Alone or Joining Forces?
At 9 p.m., in Guangzhou's Beijing Road business district, the crowds of sightseers have dispersed. However, an inconspicuous grocery store in the district is experiencing its second peak of the day.
"Between 9 and 10 p.m., every 10 minutes, 2 to 3 customers come after work to buy drinks and cigarettes," said Aunt Liu, who, along with her husband, has been running Hengli Grocery for 30 years.
Hengli Grocery is a typical mom-and-pop shop. The less-than-6-square-meter storefront is packed with beverages and daily necessities. On the most prominent spot on the right shelf, nearly 60 different brands of cigarettes are displayed. Don't underestimate these cigarettes; they are the key to Hengli Grocery's survival for over 30 years.
"Anyone who buys cigarettes from my store becomes a repeat customer," Aunt Liu said without hesitation. "We guarantee authenticity, and we only make a net profit of 5 yuan per pack, the most affordable price in the area." This is what distinguishes her grocery store from chain convenience stores like 7-Eleven. Her strategy is to use cigarettes to earn thin margins and build a good reputation, while beverages, which are purchased more frequently, bear the burden of profitability.
However, this strategy is starting to fail as Aunt Liu feels the impact of e-commerce. "This bottle costs 3.5 yuan? I saw it online for 3 yuan per bottle in bulk..." A mere 0.5 yuan difference is enough to discourage customers from buying drinks at the grocery store. "Drinks are cheaper online; many times they won't even buy a bottle of mineral water for one or two yuan."
The 0.5 yuan difference is enough to affect Aunt Liu's family's livelihood. Like most mom-and-pop grocery stores, they do business in the front and live in the back. From 9 a.m. to 10 p.m., the couple takes turns, and their income basically covers the family's living expenses.
With the price advantage weakened, Aunt Liu can only focus on diversifying her products. Undoubtedly, young office workers are the most active group in the Beijing Road business district at night. While doing business and chatting, she gathers information that guides her product selection. In addition to diversifying products, Aunt Liu also engages in some "side income": "The store is near the Children's Hospital, so besides increasing daily necessities, I sometimes receive 'invitations' from merchants to place ads, and I set up one or two ad spaces depending on the situation."
Aunt Liu is not yet at a critical point for survival, so she has no intention of joining a chain or aligning with e-commerce. "The regular customers I've accumulated over the years can still support our small store. Many times, working late at night is more about meeting the needs of office workers." She understands that the franchise fee is equivalent to one or two months of expenses, so it's not worth it compared to fighting alone.
But there is another necessary presence in the community—retail pharmacy operators—who felt the shift in retail trends earlier than Aunt Liu. They have begun moving from independent operations to "collective" chain management.
Mr. Zhu, a traditional pharmacy owner, starts recording and organizing his medicines whenever he has free time. He has his own principles for recommending and selecting medicines: old medicines are placed alongside new ones, he doesn't blindly promote new drugs, and he prefers to sell older drugs with better efficacy and slightly thinner margins. This has been his philosophy for 20 years and has earned his pharmacy many repeat customers.
Although his current profits are enough to support his family, he still chose to join a pharmacy chain. "The trend toward chain operation of traditional pharmacies is inevitable. Our pharmacy doesn't have a licensed pharmacist, so if we don't join a pharmacy enterprise, we'd need to hire one, which would significantly increase operating costs. After joining, the enterprise manages everything, so we don't have to hire a pharmacist, and we can get discounts by purchasing directly from manufacturers recommended by the enterprise."
Competing with traditional pharmacies like Mr. Zhu's are internet pharmacies that accept orders online, deliver for free, and never close.
In the old city of Guangzhou, the 24-hour O2O Dingdang Smart Pharmacy operates around the clock. It was formerly a chain pharmacy under Wanji Pharmaceutical. After transforming the traditional pharmacy with internet technology, Dingdang Smart Pharmacy added online services. For any online medicine order, the pharmacy promises free delivery within 28 minutes. With online doctor consultations and 24-hour pharmacist services, the store manager, Ms. Lin, believes that O2O pharmacy models like this are not just for selling medicine but for providing service.
▲O2O smart pharmacies place more emphasis on "service" than traditional pharmacies. Image from the internet.
"O2O medicine ordering protects patient privacy, and the 24-hour pharmacist consultation service on the platform is also more convenient," said store manager Ms. Lin, who receives delivery orders in the store, packs them, and notifies delivery riders. In just one morning, the pharmacy receives at least 8 delivery orders, far more than in-store customers. To improve the supply chain for instant medicine delivery, the smart pharmacy has built its own delivery team of 5 to 6 riders, supplemented by Meituan and Ele.me riders. Ms. Lin believes that "convenience" will be the killer feature that allows O2O smart pharmacies to replace traditional pharmacies.
Of course, O2O pharmacies also have their own challenges, namely profitability. How much can a pharmaceutical O2O order earn? Dingdang Kuaiyao once calculated: the average order value is 50 yuan, delivery cost is 12.77 yuan, and after deducting labor and drug costs, online medicine delivery can only break even. In January of this year, Dingdang Kuaiyao received hundreds of millions of yuan in financing from SoftBank China Capital. Founder Yang Wenlong stated that this round of financing would be used to densify urban pharmacy networks and expand offline pharmacies.
Statistics show that with the rise of online retail, the growth rate of traditional retail formats has consistently been lower than the average growth rate of total retail sales of consumer goods. Although the traditional retail industry is not what it used to be, its market size cannot be ignored. According to research reports from multiple third-party institutions, there are over 6 million small retail stores in China, of which 23% use B2B procurement, forming a fragmented but trillion-yuan B2B market.
On one hand, there are lost community retail stores; on the other, a vast B2B market—this explains why capital is reimagining the future of physical retail. According to incomplete statistics from the self-media "Third Eye Watching Retail," there were over 100 financing and M&A cases in the retail chain sector in 2016 and 2017, involving over 10 billion yuan. Clearly, the traditional retail industry is undergoing significant changes.
Capital is beginning to penetrate communities, but how long will their patience last? Whether it's Ms. Lin who joined Dingdang Kuaiyao or Mr. Zhu who chose to join a chain, neither can foresee. For now, the prospect of sticking to traditional business methods is bleak, but what about embracing capital and accepting collective transformation? Although it's still just "making ends meet," can they at least look forward to the future?
E-commerce Giants Reach into Communities
On one hand, traditional small stores are declining; on the other, O2O small stores are rising. Traditional retail is experiencing both cold and warm, as capital and e-commerce giants extend their reach into the "last mile" of communities.
In the venture capital field, Sequoia Capital and Chunxiao Capital quickly secured six or seven convenience store projects. Capital that was previously on the sidelines seems to have lost its cool, eagerly seeking promising "seed players" offline to "charge" into this trillion-yuan market.
Meanwhile, e-commerce giants are also targeting offline community convenience stores. These "small stores" are not only new traffic entrances after online traffic growth has stalled but also bear the responsibility of long-term layout in new retail.
On August 28, 2017, the first Tmall Store serving community users officially began operations in Hangzhou. This "Weijun Supermarket," called the "model room" for Tmall Stores, had been on the Retail Link platform since August 2016, using Alibaba's business resources for ordering, logistics, and data queries.
▲"Weijun Supermarket," known as the "model room" for Tmall Stores. Image source: Zhejiang News client.
The store focuses on intelligence, with a facial recognition system that customers can experience upon entry. It creates consumer profiles based on each store's customer composition, store size, owner's age, and financial situation, summarizing the best-selling products for the supermarket and community, aiming to meet customer needs closely.
Tmall's transformation of mom-and-pop stores doesn't seem to rush into "acquisition" from the start; instead, it first lets owners experience their B2B procurement platform. According to Tmall, Tmall Stores will later integrate online data and provide training to owners. The most attractive condition Tmall offers supermarket owners is the ability to use data analysis to understand consumer preferences and needs for more precise marketing.
"No matter how fast delivery is, you still have to wait. Tmall Stores can meet the immediacy needs that other new retail formats haven't covered yet," according to Lin Xiaohai of Alibaba's Retail Link division. In his vision, future Tmall Stores will integrate with Alibaba's ecosystem services such as Ali Health, Fliggy, Rural Taobao, Cainiao Post, and Alimama.
From the perspective of the "acquired," the impact may not be so obvious. Some have hung up the "Tmall Store" sign and feel it's just an additional procurement channel—maybe a bonus, maybe dispensable. Liulv Supermarket in the old city of Guangzhou was transformed into a Tmall Store six months ago. Although it was renovated, the owner believes the transformation hasn't brought much practical change: "Our supermarket originally had its own procurement channels, and now only a small portion of our goods come from Tmall. Joining Tmall is just an additional way to compare prices, and sometimes we can participate in some cost-effective promotional activities."
If capital becomes more aggressive in the future, even demanding a "choose one of two" in interests, will small store owners still accept acquisition and transformation? The owner of Liulv Supermarket hasn't thought much about it.
Alibaba isn't the only one driving the integration of e-commerce and traditional retail; JD.com and Suning are also following suit.
JD.com's "borderless retail" requires franchised convenience stores to uniformly adopt JD's supply and marketing system. Brand owners issue orders and tasks, and store owners accept orders based on their needs. After matching through the platform, applicable products are delivered to stores via JD logistics. "JD Speed" refers not only to delivery but also to its "million convenience store" opening plan.
Another giant, Suning, has adopted a self-operated model different from Alibaba and JD.com, building five different store formats in high-traffic areas, including community stores, CBD stores, and high-traffic stores, providing products for different consumption scenarios to meet personalized needs.
▲E-commerce giants enter community convenience stores.
Zhang Jian, an industry expert at the China Electronic Commerce Association, said that the empowerment of big data brought by Tmall Stores is more beneficial to the traditional retail industry: "Merchants can use big data statistics to identify popular product categories and purchase frequency in the surrounding area, optimize the procurement chain, and minimize inventory backlog."
Given the current retail market environment, it can be inferred that the future offline retail market will present a diversified landscape. Traditional retail must break down business boundaries and expand consumption scenarios to create customer value.
In the midst of transformation, what will the development of traditional retail look like? Zhang Jian believes that the layout of consumption scenarios will take the following forms: "Some large traditional retail stores will receive equity investments from large department stores like Intime and Yonghui; small and medium-sized traditional retail stores will integrate and move toward chains; and several small retail stores will form organizations to improve their risk resistance."
Online retail has revitalized offline retail resources. After being "acquired," small retail stores on the verge of closure have changed their previous fragmented state, making it easier to cultivate consumer habits. On the other hand, the continuous segmentation of consumer demand is driving the iteration of infrastructure, products, technology, and data applications in the new retail industry. The form of "new species" in retail will also evolve around user experience. Once consumer habits are changed, the subsequent capital layout will naturally follow.
Source: Wumian Finance
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