IC Lab: Serving the local community well might be the best interpretation of convenience stores. Last year, the China Chain Store & Franchise Association released two reports on convenience stores. One was the list of the top 100 convenience stores in China. In this list, which uses store count as the core indicator, the three representative brands of the convenience store industry—Lawson, FamilyMart, and 7-Eleven—ranked only sixth, eighth, and ninth respectively. The top three were all local convenience store brands: Yijie, Meiyijia, and Kunlun Haoke, each with over 20,000 stores, leading by a wide margin. The other report was the China Urban Convenience Store Index, calculated based on four dimensions: growth rate, saturation, proportion of 24-hour stores, and business environment. In the overall index ranking, Xiamen, Taiyuan, and Dongguan took the top three, with Changsha following closely, surpassing the four first-tier cities of Beijing, Shanghai, Guangzhou, and Shenzhen. These two reports are interesting and at least indicate two trends: first, in the convenience store sector, local brands are reversing the dominance of Japanese brands. Second, over the past decade, many cities have seen the transformation of mom-and-pop shops into chain convenience stores. If you often travel between cities, you might notice that not only are there more convenience stores in major cities, but the brands are also diverse, including traditional Japanese brands, local "old" stores, and new entrants expanding from other provinces—a chaotic mix. In my view, these two trends can be seen as one: convenience stores are becoming increasingly localized. Let me first ask a question: What is the most important product in a convenience store? Is it beverages, snacks, or various daily necessities? For convenience stores, none of the above; their most important category is fresh food. Fresh food refers to short-shelf-life foods made in-store or tailored by manufacturers for convenience stores. Typical examples include bento boxes, rice balls, oden, sandwiches, and freshly made milk tea and coffee. Some convenience stores even set up cafeteria-style counters. Having more fresh food has several benefits. First, it's a high-frequency necessity that customers buy often, even daily. Even the fastest-moving cola or water pales in comparison. Therefore, fresh food is also the best for driving sales. After all, running a store is about replacing low-frequency items with high-frequency necessities as much as possible while meeting basic consumer needs. Moreover, fresh food not only sells quickly but also drives sales of other items. Buying a rice ball or sandwich for breakfast might lead to purchasing a barley tea to go with it. Buying a bento for lunch might result in picking up an afternoon snack. For the entire store, fresh food is the most important traffic driver. Most importantly, the gross margin on fresh food is around 40%, higher than the average margin for all convenience store products. The more fresh food, the higher the gross margin. According to the "2020 China Convenience Store Development Report," the average gross margin for local Chinese convenience store brands is 25%, while leading brands achieve as high as 35%. The biggest factor in this 10% gap is the proportion of fresh food. According to the "2020 Convenience Store Industry Development Report" by the China Chain Store & Franchise Association, in traditional mom-and-pop stores, fresh food SKUs account for almost zero, while local Chinese chain convenience stores have about 10%. However, in some Japanese-style convenience stores, this number can exceed 60%, meaning more than half of the products sold are fresh food. This is why people often say: 7-Eleven is actually Japan's largest food service company. From a sales and profit perspective, convenience stores that focus on fresh food are indeed in the restaurant business. Here, I categorize convenience stores into three types. One is the Japanese-style convenience store, or more precisely, the "urban convenience store." Many local brands also follow this route, such as Bianlifeng and C-Store. These stores have several main characteristics: first, they have a rich format, including fresh food, freshly made beverages, newspapers and magazines, and some convenience services. Second, they operate 24 hours. Third, product prices are relatively higher. Urban convenience stores are extremely dependent on first- and second-tier city markets. Only there is there enough long-tail demand to support the 24-hour, multi-format, high-price model. The second type is the local convenience store, which often does not follow the "urban convenience store" model. Some have a wide variety of products, more like small supermarkets, while others are similar to small grocery stores. These stores often center on a provincial capital city and concentrate on third- and fourth-tier cities within the province, showing strong regional characteristics. The third type is gas station convenience stores, which rely on the network formed by gas stations. These brands are quite special, and we can discuss them another time. So, decoration and location are not the fundamental differences between local and Japanese-style convenience stores; what they sell is. Second question: What is the core of convenience? Actually, it's simple: the core is convenience. But it's important to note that convenience manifests differently in different places and at different stages of development. Take 7-Eleven as an example. Toshifumi Suzuki detailed in "The Philosophy of Retail" how he built 7-Eleven step by step. Initially, 7-Eleven's convenience was about being close to people. It didn't matter if the store was small; the key was that customers could walk to it anytime, ideally at the company's doorstep or at most across the street. So, opening stores on every corner was crucial. 7-Eleven originated in the U.S. but flourished in Japan, largely because the meaning of convenience differs for Americans and Japanese. In many parts of the U.S., with low population density and high car ownership, the mainstream shopping method is warehouse-style: driving to a large supermarket to buy supplies for half a month. Membership stores like Costco work on this basis. In contrast, most Japanese urban areas have high population density and narrow streets, giving small convenience stores like 7-Eleven more room to survive and grow. After meeting the spatial needs of most people, it's necessary to meet temporal needs. Originally, 7-Eleven was named for its hours from 7 a.m. to 11 p.m., but after discovering nighttime demand, 7-Eleven adopted 24-hour operation in Japan, which later became a standard for many convenience stores. Subsequently, Suzuki added more attributes to 7-Eleven, from selling bread to developing fresh food and snacks, and later services like ATM withdrawals and utility bill payments. In Suzuki's words, "Once people enjoy 'convenience,' they will have further expectations." I think he put it artistically; in plain terms, it's about laziness: if you can cross the street to buy, you won't walk a block; if you can go downstairs, you won't cross the street. Clearly, convenience in China differs from convenience in Japan. When Japanese-style convenience stores began expanding nationwide, they collided with the rapid rise of the internet industry. Internet companies are far more aggressive than convenience stores; convenience stores only cater to part of urban life's needs, while the internet aims to transform all offline industries. You want convenience? The internet thinks even going downstairs is too troublesome, so it delivers goods to your doorstep, offers all kinds of services at home, and lets you pay utility bills online. And withdrawing money? We don't even use cash anymore. In other words, the convenience that convenience stores pride themselves on has been dismantled by internet companies in many aspects. In comparison, 24-hour operation and high coverage might be more important. So, the obvious competitor for Japanese-style convenience stores' fresh food is not necessarily local convenience store brands, but food delivery. Since they are in the restaurant business, they must face the problem all offline restaurants have faced over the past decade: everyone is ordering delivery, so what to do? The impact of food delivery on the restaurant industry has never been equal. Mid-to-high-end restaurants and those specializing in hotpot, which is highly time-sensitive, are less affected, but restaurants mainly offering fast food or simple meals have to make a choice: either join the delivery trend or stick to dine-in and serve only nearby customers. Japanese-style convenience stores' fresh food almost cannot go the delivery route. This brings up the consumption model of convenience stores. Whether doing delivery or opening stores, neither model is inherently superior. The core variables are average order value, number of stores, and store traffic. If the average order value is too low, there isn't enough profit margin to cover delivery costs. If there are enough stores with good locations, and target consumers can find a store within a five-minute walk, they won't choose the more expensive delivery option. If store traffic is high enough, rent and labor costs are diluted, reducing reliance on delivery order increments. This applies to Luckin Coffee and convenience stores alike. Convenience stores are high-frequency, low-price consumption. Even fresh food like buns and rice balls costs only a few yuan, and bento boxes are around ten to twenty yuan, rarely exceeding 20. Most people spend only a few dozen yuan at a time, so the average order value is generally low. Therefore, convenience stores need good locations and dense layouts to highlight convenience and attract high-frequency visits. Especially in CBD areas, office workers buy breakfast and coffee daily, sometimes even queuing. This consumption model is precisely unsuitable for delivery. If you often buy from supermarkets or convenience stores on delivery platforms, you'll notice that you often need to meet a minimum order. Sometimes I just want a bottle of cola, but to get free delivery, I add chips, sunflower seeds, and iced tea, reaching over 20 yuan to waive the delivery fee; otherwise, the fee is at least 5 yuan, sometimes 7-8 yuan. This completely goes against the convenience store concept, turning it into a supermarket shopping trip. But the trend of food delivery is here; if you don't join, you face the impact. This is already happening. The first impact was in fresh food, and the second was in the coffee market. Around 2017, the industry widely believed that convenience store coffee would become the main form of affordable coffee in China, occupying the 10-15 yuan price range. But in 2017, Luckin Coffee appeared, using delivery and aggressive subsidies to snatch the coffee market. Although we can't simply attribute Luckin's success to the victory of delivery over convenience stores—subsidies played a role, and later Luckin found the economics didn't work and returned to offline stores—it must be admitted that early use of delivery was the decisive factor in this coffee battle. In fact, if we only talk about stores, Luckin and convenience store coffee are hardly different; convenience stores have the advantage of natural foot traffic and could easily crush Luckin. But Luckin, through delivery, completed the ultimate task of market cultivation in just one year, becoming the representative coffee brand. Local convenience stores have been much more flexible in this regard. In fresh food, due to supply chain constraints, local brands have always been weaker than Japanese-style stores. But in the past two years, due to the pandemic's impact on offline, local convenience stores quickly chose to cooperate with delivery platforms. Or, using a popular concept in the retail industry, it's called "instant retail," also known as "non-meal delivery." From the consumer's perspective, it seems similar, but on the supply side, significant changes are needed. If you're interested, I might explain the relationship between retail, e-commerce, and logistics in a future video. What surprised local convenience stores most was that after the pandemic, people's enthusiasm for instant retail did not wane; instead, delivery became a stable growth point. Starting in 2021, Shanxi Tangjiu implemented unified management of store goods and marketing through its headquarters' central system. With delivery platforms, consumers can get products from convenience stores within half an hour. Thanks to delivery services, single-store order volume increased significantly by over 20%. In Hunan, Xinjiayi's instant retail orders grew 208% year-on-year in 2022, with sales volume up 254%. This might be the opposite of Suzuki's words: once people enjoy convenience, they won't want to lower their experience. Besides the internet, I personally think another factor of localization is that China is too large; differences in geography and culture between cities and between north and south lead to huge differences in convenience. For example, Beijing has been called a convenience store desert. As a first-tier city, its per capita convenience store count is very low. Having lived long-term in both Beijing and Shanghai, I have a clear feeling about convenience stores. A popular saying is that Beijing's market is a "three and a half" business. The "three and a half" refers to: the roads are too wide, so you can only do business on half a street; winters are too cold and there are many major conferences, so you can only do business for half a year; nightlife is not rich, so you can only do business for half a day. These conditions are not conducive to convenience stores. In contrast, take Changsha in the south: because streets are narrower, temperatures are warmer, and nightlife is quite rich, the saturation of convenience stores is quite high, making it a battleground for countless convenience store brands. However, some institutions like to use the convenience store index to measure cities, which I think is very inappropriate. You cannot use the relationship between Japan's urbanization process and convenience store development to infer China, because the area and diversity are completely different. Here are my personal views on convenience stores; take them with a grain of salt: I believe convenience stores, at least Japanese-style ones, have a limit to growth in China. The core profit comes from fresh food, but there are many small eateries diverting this demand. Take breakfast, lunch, and dinner: you can solve them at a convenience store, but from my observation, even if some convenience store bentos taste good, few people choose to eat all three meals there. Various breakfast shops, Shaxian snacks, noodle shops, and even 19-yuan buffets are strong competitors. Moreover, tastes vary by region; some like spicy, some like sweet. This is why many local convenience stores adapt fresh food to local tastes. In my opinion, why do Beijing convenience stores sell oden? They might as well sell braised offal. Although convenience stores are opening more and more, whether Japanese-style or local, the core issue remains: does it truly bring convenience to people? I believe many people share my feeling: those breakfast stalls with different styles and good prices are becoming fewer in cities. When it becomes difficult to buy soy milk and fried dough sticks, and I have to go to a corner convenience store for a sandwich, is this transformation really more convenient? Additionally, those mom-and-pop shops and small grocery stores in alleys might not have as refined or branded products, nor internet-famous snacks, but compared to convenience store premiums, they are cheap enough. Can we say they are not convenient just because they aren't chains or don't have a convenience store sign? When major convenience store brands eye unsaturated cities and use promotions to tell people how profitable it is to franchise, we must think clearly: a brand having many stores does not necessarily mean you will make money operating one. As I said earlier, due to the large area, the convenience needs in Northeast China and Fujian may not be the same, and whether chain brands can solve these cross-regional issues is still a question. Japanese-style convenience stores are not a label, and instant delivery may not suit all regions; finding a suitable local business model might be the most important. Just like Pangdonglai in the retail industry, which developed its own unique style—cheap prices, quality service, humane management—and most commendably, it insists on not expanding, staying rooted locally, focusing on quality over quantity. Its philosophy of serving the local community well might be the best interpretation of convenience stores. References: "Waste Rate Drops from 7% to 4%, Fresh Food Gross Margin Rises to 38%: Where Are the Improvement Points for Convenience Store Operations?" Longshang.com; "Fresh Food Becomes High-Margin Category for Convenience Stores: How to Polish This 'Killer Move'?" Longshang.com; "Fresh Food, Instant Retail, Private Brands: Which Is the Way Out for Convenience Stores?" Retail Circle; "Instant Retail: The 'New Elevator' for Convenience Stores" Entrepreneur's Frontline; "The New Game of Giants: Why Sprint for 30-Minute Delivery?" Xinwan'er; "New Retail Mid-Game: How '30 Minutes' Reshapes E-commerce Landscape?" Xinwan'er; "Millions of Small Stores Embrace Instant Retail: Who Will Get the First Bucket of Gold?" Kaiboluo Finance; "Thirty Years of Sino-Japanese Convenience Store War: Local Brands Stage a 'Great Reversal' with 'Delivery'" Daozong Youli; "Instant Retail Series Deep Dive: Spatial Outlook and Sandbox Deduction Based on Channel Comparison" Dongwu Securities; "Fresh Food: The Methodology of Convenience Store Ultimate Capability" Retail Boss Insider; "Convenience Store Cateringization and Restaurant Convenience-ization: Which Is the Correct Posture for Success and the Way Behind It?" Oses OSENS; "2020 China Convenience Store Development Report"; "Convenience Stores Push Delivery: Change or Die" E-commerce News; "Behind Convenience Stores and Mom-and-Pop Shops Going Online: New Business, New Human Touch" Zhengu Research Fellow