Source | Retail Circle The Joint Venture Model with a Self-Lit Fuse 20 years ago, a young man from Zhejiang named Xiao Chen, full of dreams, keenly observed that some of his fellow townsmen were opening supermarkets at an astonishing speed. So he organized a few peers who were also blood relatives, and with modest capital, they started their retail careers in economically underdeveloped areas. After entering the industry, he was pleasantly surprised to find that this was a business with fast capital turnover. He would find suitable properties, pay low rents to lease them, draw up layout plans, and even the renovation and equipment could be paid in installments. The best one-third of the space would be rented out for fixed rent. Categories that required significant labor and resources—such as fruits, meat, aquatic products, pastries, cooked food, bakery, bulk goods, dried goods, personal care, and frozen products—were all operated through leasing (fixed rent) or joint venture (commission based on sales) models (hereafter collectively referred to as "joint venture partners"), with monthly settlement based on actual sales. When calculating the contract fees from distribution and joint venture plus the outside rent, the income exceeded the property rent, and the funds deposited by suppliers could be used to sign the next property. Thus, Xiao Chen and his partners accelerated their store openings. Under the illusion of "professionals doing professional work," the number of joint venture partners grew, but neither he nor his team ever participated in the operation of any category. Although Xiao Chen was the legal representative of the supermarket, he sometimes couldn't even change a product's price, because the joint venture partners' employees only followed the orders of those who paid them, making Xiao Chen seem like an outsider. This wild growth relying on external forces allowed Xiao Chen and his partners to ride the train of scarce terminals, benefiting from rapid economic development and urbanization, and enjoying a long period of harmony with their joint venture partners, each taking what they needed. When growth stalled, Xiao Chen realized that his seemingly strong team lacked core competitiveness and had no ability to withstand risks. The once intimate partners and the seemingly unbreakable friendships were as fragile as paper lanterns when difficulties struck. Looking at his supermarket, which had already seen empty spaces, Xiao Chen said, "Now, in one quarter, we lose what we used to earn in half a year, but the team's operational capability cannot be developed overnight. The fuse I laid back then is now igniting a time bomb that could destroy my career at any moment." The Simple Truth of Joint Venture Partners Joint venture partners' choice of supermarkets is like retail investors in the stock market—they instinctively "chase gains and sell losses." If a store has good foot traffic, they will spare no expense, even paying high rents or commissions, or using connections and bribes, to secure a spot, aiming to profit from the high traffic and sales. To this end, employees, products, and equipment are all provided by the joint venture partners. Their rights are limited to choosing products within the contracted category and setting their own prices. Some supermarkets even give them only a payment code, letting them decide what to sell and at what price, with the supermarket deducting a contracted commission and fees from the monthly sales and returning the rest. In this loose cooperation, joint venture partners have only one goal: to maximize profit with minimal cost. The store's image, customer experience, and even product quality are not their priorities. Most joint venture partners mark up prices by 2-3 times the cost (except for some fresh food partners, who have lower commissions and markups). "Without this markup, after all the fees, we'd have no profit," a supplier of dried goods told the author. Once sales decline, the only excuse from joint venture partners is "no customers." They don't think about how to win customers back together with the supermarket, because they believe the fees they pay should guarantee the supermarket provides a steady stream of high foot traffic. These partners, attached to the supermarket's body, share some profits with the store, seemingly a win-win. But this behavior of taking without maintaining gradually erodes the foundation of their mutual survival—the customers. When customers leave and profits vanish, they will abandon the supermarket without hesitation, showing no nostalgia. The enthusiasm they had when entering is matched only by the ruthlessness when leaving. Supermarkets and joint venture partners are like fair-weather friends, only sharing joy, not hardship. When one store loses traffic, they move on to find another with more customers, using the same old tactics. The Mess After the Bomb Explodes The biggest harm of supermarkets squeezing joint venture partners' profits is the mutual neglect of product quality. Some partners even deliberately seek the cheapest products on the market. Industry insiders know well that prices below reasonable cost can only be achieved at the expense of quality. When pastry partners reduce labor costs by cutting down on freshly made items and mainly sell high-margin industrial products, When cooked food partners stop making food on-site and instead buy pre-made braised products and repeatedly reheat them, When meat partners pass off frozen meat as fresh to cater to supermarket promotions, When dairy partners use the supermarket as a dumping ground for near-expiry products, These short-sighted practices may seem harmless initially, but both supermarkets and partners forget that customers are the smartest. They vote with their feet, distancing themselves in response to such short-sightedness. When problems become entrenched, supermarkets may lower fees as a compromise, but partners respond by cutting costs further. With declining sales, their bottom line is to avoid losses, so they won't invest more or develop new products—changes they wouldn't make even in good times, let alone now. Eventually, partners leaving is inevitable. The conflict between supermarkets and partners ignites the long-buried bomb. Like a divorce, some part amicably, but many exchange complaints and harsh words. As the overall supermarket business weakens and the proportion of self-operated goods increases, this old joint venture model struggles to find a foothold, and both partners and supermarkets face a crossroads. Trust: The Foundation for Symbiosis Xiao Chen, once ambitious, is now old with graying temples. He says, "The model where multiple joint venture suppliers form the main sales force was the most efficient combination in the past era. There's no right or wrong; what exists is reasonable. But under current conditions, change is inevitable. Supermarkets can't find partners who only attract customers, and partners can't find supermarkets with the bustling traffic of previous years." "Letting go of the zero-sum game mentality, even though we're on the same boat, is, in my view, the best choice for both sides now," Old Chen continues. "For standard products, we resolutely take back self-operation. Former partners who are suitable become suppliers; those who aren't, we stop cooperating with. We must hold the power to choose products and set prices." "Recently, I've led fresh food partners to learn from well-run systems, anchoring ourselves to benchmarks we can emulate and following their standards." "At the same time, I've made my costs, like rent and utilities, transparent. We jointly set procurement, processing, and sales standards. I also invest money, adding equipment or working capital, and form small teams with each partner, similar to a joint-stock structure. The actual operators can also take shares or technical stakes. We set goals together, keep accounts open, and share profits and losses according to agreements." "Of course, I have a higher risk tolerance. If there are short-term losses, I'll bear more. The basic wages of the workers or employees must be guaranteed. In the past, the relationship was marred by mutual suspicion. As the leader, I'll set an example, be transparent, and exchange integrity for trust. In harsh times, someone must extend an olive branch. I choose to show goodwill first to gain partners' trust." "There's much controversy, but I still want to try because I believe the direction is right. This is the best option for supermarkets and partners to weather the storm together," Old Chen says. Conclusion: Physical retail needs a positive-sum game. Today, the long-standing zero-sum game of mutual distrust between supermarkets and joint venture partners is leading to a narrowing path ahead. When supermarkets deeply integrate with partners' unique products, resources, and technical capabilities, leveraging their scale advantages, and when both sides build on trust, share resources, complement each other's strengths, and jointly address market challenges, they can create greater business value. A positive-sum game is not only an inevitable choice for the development of physical retail but also the key to promoting a healthy and harmonious business ecosystem. Being the first to show goodwill and choose to trust may be the hardest step.