The Rise of Niche, Low-Price Retail Stores
In the past two years, a popular term in the internet industry was "dimensional reduction attack" (降维打击). It describes using new methods or technologies to disrupt an industry and achieve a corner overtaking. Wu Xiaobo, in his book "The Turbulent Forty Years," described it as: "Lei Jun was the first to shift from the internet to manufacturing, and the rapid success of Xiaomi phones caused a great shock in thinking." Similarly, Taobao attacked traditional offline supermarkets, Meituan Waimai attacked offline dine-in, and Didi attacked the taxi industry. These internet companies eventually grew into giants, while traditional enterprises that failed to adapt gradually declined or merged online and offline operations. This phenomenon has become more evident after the pandemic. Observing communities, one can see that offline store businesses are constantly changing, especially in third- and fourth-tier cities, where signs like "Prime Location for Rent" or "Transfer with No Fee" are increasingly common. These are cases of online "disrupting" offline. Recently, I have observed a phenomenon where an offline format may "disrupt" another offline format: the variety of vertical stores near communities is becoming more segmented, and their numbers are increasing. In the past, service-oriented stores like hair salons, housekeeping, and restaurants dominated community ground floors, but they are gradually disappearing or decreasing. In their place, specialized fruit stores, milk stores, beef and mutton stores, snack stores, and seafood stores are emerging. From a retail perspective, vertical community stores dismantle the role of supermarkets and hypermarkets by focusing on a single category, recombining advantageous supply chains, and diverting consumer traffic, thus delivering a "dimensional reduction attack" on offline supermarkets.
To trace the origin, the pioneers might be specialized fruit stores and fresh food stores like Qian Dama, which rapidly expanded through franchising, opening thousands of stores in densely populated areas. This business model attracted entrepreneurs like sharks smelling blood, leading to more vegetable, meat, and fruit stores along community streets. These store owners also focus on "vertical" strategies. "Compared to the north, southern vertical retail stores are more abundant and more finely divided. Some stores even specialize in selling only pork, beef, or chicken. This model simplifies the supply chain, lowers operational barriers, and may offer price advantages," a retail industry expert explained to me. According to Kantar Retail's "2022 China Shopper Report Series II," in the first three quarters of 2022, e-commerce growth was roughly on par with the overall FMCG market, while small offline store formats and O2O businesses gained momentum during the pandemic. In Beijing's retail landscape, the beef and mutton stores in Niujie (a Muslim quarter) and milk stations are the two most common vertical categories. A search on Dianping shows that there are dozens of milk convenience stores in Beijing. I visited one and found that within an 80-square-meter store, there were hundreds of SKUs, with milk-related categories taking up a huge proportion, along with a small number of other food items. The milk and dairy products sold included brands like Sanyuan, Mengniu, and Yili, at prices much lower than those in chain supermarkets. For example, a three-pack of Mengniu Daily Fresh milk (250ml) was priced at 10 yuan, while a nearby 7-Eleven sold it for 9.9 yuan per bottle; op3n yogurt cereal cups were 10 yuan for three, but online they were 12 yuan each. "Prices are adjusted based on product shelf life," the store owner told me. "For instance, a whole box of milk that might cost 60-70 yuan in e-commerce or supermarkets is sold here at a promotional price of 100 yuan for three boxes. The store focuses on sales volume."
A Business Born of Macro Factors
"It used to be customer relationships, but now it's peer competition," said Ling Lin, owner of a convenience store on the southern Fifth Ring Road in Beijing. Two new milk stations have opened next to her store, and one of them is run by her upstream supplier. Vertical community stores are quickly gaining traction in the current retail market, with keywords like high frequency and low price. Behind the low prices lies the store's supply chain system. After market comparison, milk stations offer significantly lower prices for milk products compared to similar items on supermarket shelves. "Because of the obvious price advantage, even nearby small shops come to us for small wholesale purchases," the milk convenience store owner said. Regarding supply sources, the two stores I visited showed different channels. The milk station owner posing a threat to Ling Lin is a dairy distributor in Beijing. "I represent more than 10 brands and have over 50 distributors in Beijing," he explained. "I source directly from various dairy manufacturers and distribute to terminal retail markets. Merchants order, and we deliver. Not only my own milk station, but about one-third of the city's supply comes from us." This integration from upstream to downstream gives a clear advantage. Additionally, a dairy agent revealed that special offers in milk stations come from two main channels. First, distributors provide end-of-stock inventory. For example, slow-moving items from monthly stocktakes are sold at low prices after being stored for a while. Second, channel returns: unsold goods from local supermarkets or e-commerce are returned to distributor warehouses within a certain period and then processed and sold through different channels. Besides the special sourcing advantages, the low fixed costs of milk convenience stores are another key reason they can offer such low prices. Compared to supermarkets, which bear high costs for promotional staff, milk convenience stores have relatively low personnel expenses. Many are family-run, reducing labor costs. Additionally, rent is generally low, as these stores are not located in expensive commercial centers but often in alleys, near farmers' markets, or around communities. Investment is mainly in refrigerators and shelves, with minimal other costs.
This trend is not limited to milk stations. In recent years, more distributors are moving downstream to open retail stores, including liquor stores and snack shops selling standard goods. The essence is the overall predicament of distributors: vertical categories are a response to homogenized competition and shrinking profit margins. Relying on a single product or method to make money is becoming increasingly difficult for distributors. Their fallback is to expand downstream, which might be a key driver for the rise of vertical community stores, coupled with rising unemployment and an increase in self-employed individuals. Distributors have a clear cost advantage in pricing, allowing them to cover not only the surrounding retail market but also engage in wholesale. This model is quietly forming a competitive relationship with traditional retail formats.
Impact on Traditional Retail Formats
When distributors enter the community store arena, their relationship with existing community stores becomes awkward. Ling Lin complained: "My supply prices are definitely not as good as the distributor's. Now they're stealing my business. Although we're equal from a business perspective, I have no advantage in terms of capital and supply prices." After the distributor moved downstream, Ling Lin's convenience store has suffered. She used to sell nearly 2,000 yuan worth of milk daily, but now that category's sales have dropped to a few hundred yuan. This is not the first wave of community store "fire." Before the pandemic, small offline formats, leveraging their proximity advantage and strong vitality, had already counterattacked traditional retailers and fresh e-commerce, sparking a community trend. For example, Yonghui, Hema, and RT-Mart all launched mini-store formats. After the pandemic, community stores remain a primary consumer destination, and many vertical community stores have taken away market share from supermarkets and convenience stores. Thus, we see more specialized stores for fresh produce, fruit, milk, and even snacks, impacting sales at supermarkets and convenience stores. These vertical niche stores are essentially the "department products" that were once integrated into hypermarkets. "The rise of vertical community specialty stores is diverting traffic from traditional supermarkets. Some supermarkets see this as a pure price war," a retail insider told me. If they simply pursue low prices while ignoring quality and service, they will find it hard to generate high profits to support operations, and they may rely on high sales volume and profit returns to maintain cash flow. However, a supermarket purchasing manager said that the proliferation of vertical formats is a significant impact, with declines in dairy, meat, and snack categories. They can only differentiate through product mix and cost reduction. In comparison, vertical community stores have much lower operating costs than supermarkets and can offer a wider range of products in specific categories. Combined with the decline of the supermarket industry, this inevitably affects their performance and foot traffic. After all, the current categories in vertical community stores—fresh produce, dairy, and snacks—are exactly the strong categories of supermarkets, so sales diversion is inevitable. Data supports this: according to the National Bureau of Statistics, from January to July, retail sales of convenience stores, specialty stores, brand stores, and department stores above a certain size increased by 7.5%, 4.5%, 3.5%, and 8.2% year-on-year, respectively, while supermarket retail sales decreased by 0.5%. After years of evolution, retail is now at a crossroads of diversified development, not just a clash of formats. Vertical single-category stores also face many competitors. Meanwhile, supermarkets may need to carefully reassess their market positioning, product strategies, and supply chain advantages in this changing landscape.
In the future, the core of retail competition lies in who can provide consumers with an excellent experience, meet their diverse needs, and offer the ultimate cost-performance ratio.