Traditional supermarkets on the decline Starting in 1995, foreign retailers such as Walmart, Carrefour, and Lotus entered China, attracting numerous consumers with their comprehensive product selection, competitive prices, and pleasant shopping environments. This marked a long period of prosperity for Chinese supermarkets. At that time, despite various fees such as barcode fees, slotting fees, display fees, and end-cap fees, brands were eager to cooperate with supermarkets because cooperation meant sales. However, the dominant position of traditional supermarkets is now a thing of the past.

On one hand, intensifying competition for market share has eroded their competitive advantages. Not only is there competition between offline and online, but with the advent of e-commerce and the rise of various new retail models, consumers have more choices, leading to a gradual loss of traditional supermarkets' advantages and an inevitable decline in sales.

On the other hand, rising operating costs have also had a huge impact on this format. Costs such as rent, labor, and marketing expenses continue to expand, squeezing profits and making it unsustainable.

Under multiple factors, traditional supermarkets have gradually moved downhill. According to data from the National Bureau of Statistics, since 2017, the number of domestic supermarket stores has been continuously declining, from a peak of 38,554 to 24,082, a drop of 37.5%. Among them, large chain supermarkets have seen a faster decline, from 11,947 stores in 2012 to 5,340 in 2020, a decrease of over 55%.

In the past two years, news of store closures by major supermarket chains has been constant. In 2022, Carrefour China closed 58 stores, and in the first half of 2023, it closed 106 more. Better Life closed 139 stores in 2022. China Resources Vanguard closed at least 5 stores in Changsha, Jiangsu, Guangzhou, Xiamen, and other places in 2023. Walmart also closed stores in Changchun, Shaanxi, Jiangxi, Shandong, Beijing, and other locations.

From past prosperity to current decline, traditional supermarkets are facing increasing difficulties and are now exploring ways forward.

Rapid expansion of new offline formats In contrast to traditional supermarkets, some new formats in physical retail are thriving and growing rapidly.

1. Rapid development of warehouse membership stores After Carrefour and Walmart closed stores in Beijing, Hema and Qixian supermarkets took over, while Sam's Club and Costco aggressively expanded their warehouse membership stores. Costco entered China in 2019 and has opened 6 stores in mainland China, with a recent announcement that its Nanjing store will open in the second quarter of 2024. Sam's Club, as the longest-standing player in China's membership-based supermarket sector, has been opening about 6 stores per year since 2020, reaching 46 stores by the end of last year, compared to 23 at the end of 2020.

Thanks to the market education by foreign companies like Sam's Club and Costco, consumers are gradually accepting warehouse membership stores. Traditional supermarkets are also entering this space. For example, RT-Mart's parent company, Gaoxin Retail, opened its first M membership store in Yangzhou on April 28 last year, launching its own brand "Membership Premium." Carrefour, Yonghui Superstores, Beijing Hualian, and Jiajiayue have also chosen to enter the warehouse membership store sector, attempting to seize the transformation opportunity and break through the development bottleneck of traditional supermarkets.

According to iiMedia Research data, the warehouse membership supermarket industry grew by 12.3% year-on-year in 2021, with a market size of 30.43 billion yuan, reaching approximately 33.5 billion yuan in 2022, and is expected to approach 40 billion yuan by 2025. Clearly, the warehouse membership store model has entered a growth period in the Chinese market.

The rapid development of warehouse membership stores reflects the improvement of the supply chain system and also indicates that consumers have higher requirements for shopping environment and experience.

Membership stores minimize prices by reducing intermediate links, ensuring high repurchase rates, and providing consumers with quality goods at low prices through efficient supply chain management, giving them a core competitive advantage in the physical retail industry and enabling continuous expansion.

2. Accelerated expansion of hard discount stores In 2023, investments, mergers and acquisitions, and reforms made hard discount a hot topic in the industry.

In November 2023, Snack Busy and Zhao Yiming Snacks merged strategically, resulting in over 6,500 stores nationwide, making them a leading brand in the snack bulk retail industry. Snack Youming also plans to expand to about 16,000 stores nationwide by 2026.

In December, Haoxiangni and Yanjin Puzi Holdings announced investments of 700 million yuan and 350 million yuan respectively in Snack Busy Group, which received a total of 1.05 billion yuan in investment. Haoxiangni stated that it will use snack channels as a breakthrough point and, relying on the strategic partnership with Snack Busy, continue to add new snack channel products with richer categories to boost the rapid development of its second growth curve.

On January 29, 2024, Three Squirrels stated that four nut products (macadamia nuts, pecans, pistachios, and almonds) will enter all stores of snack bulk retail brands "Snack Busy" and "Zhao Yiming," covering an estimated 7,000 to 8,000 stores.

High-end brands can quickly enter more markets and reach a broader consumer base through cooperation with hard discount channels. At the same time, leveraging the strong distribution capabilities of hard discount channels helps brands reduce inventory risks and logistics costs.

Traditional retail systems are also seeking transformation. Yonghui Superstores has added "authentic discount stores" in its stores nationwide and simultaneously added discount sections on its online APP and mini-programs. Hema has been continuously implementing discount reforms, and Jiajiayue has opened snack discount stores. The expansion of the hard discount snack track has attracted many brands and merchants to follow this trend.

Why has hard discount developed so rapidly?

Essentially, it caters to the shift in consumer demand. Lian Jie, a hard discount research consultant for New Distribution and author of "The Third Kind of Retail," once mentioned, "Resident consumption growth is slowing, and supply-side quality and capacity issues have basically been resolved. In this environment, the circulation of goods must primarily meet customers' demands for higher cost-performance." The rise of hard discount is a result of adapting to this change, providing consumers with products of extreme cost-performance.

This change is not only reflected in lower product prices but also in the comprehensive optimization of product quality, service levels, and consumer experience by retail enterprises.

According to predictions by the China General Chamber of Commerce, the discount market will continue to grow rapidly in 2024 compared to other formats, seizing more market share originally belonging to hypermarkets, supermarkets, and department stores. This means the hard discount transformation will continue to deepen.

Disorderly price wars In 2023, price wars raged across the retail industry.

Hema, as a pioneer in new retail formats, began aggressively competing on low prices in the second half of last year. At the end of July 2023, it launched the "Move the Mountain Price" campaign, openly declaring war on Sam's Club. Starting with the popular durian mille crepe cake, Hema and Sam's Club engaged in a price standoff, with the regular price of 128 yuan eventually dropping to 88 yuan after several rounds.

On October 13, Hema announced the launch of a "discount" transformation, setting "offline exclusive prices" for products in categories such as dairy, biscuits, and instant food, with price reductions of up to 20%. At the same time, it reduced SKUs from 8,000 in standard stores to 5,000, demonstrating the scale of the change.

Other retail enterprises are not far behind. In mid-August, Meituan Youxuan launched a "tug-of-war price," and Sam's Club followed Hema's lead with significant price cuts.

The prevalence of the "low-price trend" has swept the entire FMCG industry. Competition in the retail industry will also trigger "involution" competition among brands.

In November 2023, Liangpin Puzi announced its largest price reduction in 17 years, with an average price cut of 22% across 300 products and a maximum reduction of 45%. Although Liangpin Puzi publicly stated that the price cuts were mainly driven by supply chain efficiency, based on the first three quarters of 2023 financial reports, the company's revenue declined by 14.33% year-on-year, suggesting the price cuts may be a last resort.

Price wars have always been a competitive tool, and low prices have been an important entry point for every major change in the retail industry. However, the current competition is not simply about pursuing cheapness but meeting consumers' pursuit of "extreme cost-performance."

Consumers' emphasis on price does not mean they lower their requirements for product quality. Therefore, whether traditional retail enterprises or brands, the ultimate competition lies in supply chain efficiency. Whoever can produce better products at lower costs will win in this competition.

In 2024, whoever establishes an advantage in the supply chain first will seize the initiative.

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