Source: AI财经社 (ID: aicjnews) Author: Shao Lanjie Editor: Chen Fang
The wave of hypermarket closures that has persisted for several years continues, but this year it's even more intense. This once trendsetting retail format has ultimately been abandoned by the times.
On May 21, Walmart's store on Jiefang Road in Xuzhou, Jiangsu, officially closed its doors. This hypermarket, with an investment of 380 million yuan and a business area of 11,000 square meters, couldn't escape closure after nine years of operation. The official reason given was normal business adjustment. The 99 affected employees couldn't choose to transfer locally because this was Walmart's last store in Xuzhou; those unwilling to leave home could only take compensation and look for new jobs.
This isn't Walmart's first store closure this year. On May 7, a closure notice made Walmart a hot topic again in Fengcheng, Jiangxi, where people expressed regret. The last time it received such attention was before its opening in 2010, when this hypermarket with a business area of 11,000 square meters made the county-level city of Fengcheng excited about "being favored by a Fortune 500 company," and its first employees felt proud.
However, as time passed, Walmart's glory in China has faded. AI财经社 found that since March this year, Walmart, the leading foreign hypermarket, has issued closure notices for at least 8 stores, closing 4 in April alone, withdrawing from cities like Qingdao, Haining, Lishui, Weifang, Zhenjiang, and Fengcheng.
Walmart's frequent closures are behind its sluggish performance growth. Data from the 2018 China Chain Top 100 released in early May shows Walmart's sales last year were 80.49 billion yuan, up only 0.3% year-on-year.
Of course, Walmart isn't the only hypermarket facing difficulties. China Resources Vanguard, the leading domestic hypermarket, is also struggling. Although it ranked third in the 2018 chain top 100, its performance declined, with sales of 101.25 billion yuan, down 2.3% year-on-year.
In terms of store closures and adjustments, China Resources Vanguard can compete with Walmart. However, the former didn't simply close stores but rather handed them over to others. On February 24, China Resources Vanguard entrusted all five of its Beijing hypermarkets to Wumart, transforming Fenzhongsi, Jiuxianqiao, Changping Vanke, Jinxing, and Happy Valley stores into Wumart hypermarkets.
Then on March 6, Shandong retail leader Jiajiayue announced that China Resources Vanguard had entrusted its seven stores in Shandong to its management for a ten-year period. China Resources Vanguard, the domestic retail giant with revenue exceeding 100 billion yuan, finally bid farewell to its role of integrating others and became the integrated party for the first time.
Five years ago, China Resources Vanguard gained fame for acquiring Tesco China, but the acquisition brought huge losses. In 2015, after its parent company China Resources Enterprise restructured, it divested all non-beer businesses, including China Resources Vanguard, and its stock price surged 55.26% after resumption of trading.
Now, besides entrusting some stores to others, China Resources Vanguard's Shenyang Guangyi store, Quanzhou Wanda store in Fujian, and Ningde store have also closed. According to incomplete statistics, in the first four months of this year, China Resources Vanguard closed or entrusted nearly 20 stores in Guangdong, Shandong, Beijing, Fujian, Liaoning, Hubei, and other regions.
Image/Visual China
Additionally, Auchan, a hypermarket under Sun Art Retail, was reported on May 15 to be adjusting its stores, closing underperforming ones like Nanchang Second Store and Taizhou Second Store in Zhejiang, and terminating contracts for three signed stores. AI财经社 found that since 2018, Auchan hasn't opened a single new store, with a total of 77 stores as of now.
Regarding closure rumors, Auchan responded to AI财经社 that discussions are still ongoing and details haven't been finalized. It emphasized that this isn't the biggest adjustment since entering China 22 years ago, and adjustments based on customer needs are necessary and correct.
In fact, over the past two years, hypermarket closures have become the norm. According to Lianshang.com statistics, in 2017 and 2018, 14 listed supermarket companies closed a total of 1,390 stores, averaging two closures per day. Among all retail formats, hypermarkets had the worst performance in 2018.
Data from the China Chain Store & Franchise Association shows that in 2018, top 100 companies operating large supermarkets saw average sales growth of 2.5% and store count growth of 3.6%, which were 5.2 and 12.4 percentage points lower than the average for the top 100, respectively. Sales and store growth rates were even lower than department stores. Additionally, due to rising labor costs and rents, the average sales per square meter of large supermarkets fell by 8% in 2018, with foreign large supermarkets seeing a 4% decline.
Truly, times have changed. In the 2008 chain top 100, hypermarkets like Walmart, Carrefour, and China Resources Vanguard boasted double-digit sales growth, with average annual sales per store of 230 million yuan. That was the golden age of hypermarkets.
The development history of hypermarkets in China can be traced back 20 years. This format gradually became the benchmark of the retail industry upon entering China, leading the industry's development.
In 1995, Carrefour opened China's first hypermarket in Beijing; in 1996, Walmart opened its first in Shenzhen; and in April 1997, RT-Mart entered the mainland market. They were undeniably the leaders of Chinese hypermarkets, leading China's retail industry into a new era.
At that time, Chinese consumers' understanding of shopping was still limited to state-owned department stores with counter service and aloof attitudes. Hypermarkets stood out with their wide variety of products, fresh and high-quality goods, open shelves allowing one-stop shopping, and low prices, opening people's eyes.
Foreign hypermarkets, represented by Carrefour, were ambitious about the Chinese market. The year after opening its first store, in 1996, Carrefour entered Shanghai and Shenzhen, and a year later, Tianjin. In 1998, it successfully entered Chongqing, Zhuhai, Wuhan, and Dongguan. By 2005, Carrefour had opened 60 stores in China over ten years, covering the entire country.
Image/Visual China
Carrefour's old rival Walmart was not to be outdone. After testing the waters in Guangdong for three years, it left Guangdong in 1999 and opened its fifth store in Kunming, Yunnan. The following year, it moved north to Dalian. Subsequently, it spread across the country, opening 11 stores in 2004 alone.
Soon, the golden age of hypermarkets officially began. Seeing foreign hypermarkets reaping huge profits, local enterprises were eager to try. In 1999, China's first wholly domestic-funded hypermarket—Shanghai Nonggongshang Supermarket's Jinshajiang Road store—opened, shaking up Shanghai and the entire retail industry. Its slogan, "Chinese people's own hypermarket," has been passed down since then.
Zhou Yong, a professor at Shanghai Business School, recalled: "On the opening day, nearly 100,000 people came, and sales exceeded 4 million yuan. In that era, a hypermarket achieving daily sales of 1 million yuan was impressive." With crowds bustling, all the thieves in Shanghai gathered at this hypermarket, stealing over 300,000 yuan in the first three days.
Seeing Nonggongshang's success, its old rival Shanghai Lianhua Supermarket quickly decided, "Hypermarkets are the trend; we must do it." In July 2001, the "Century Lianhua" hypermarket was launched. Previously, after careful consideration, it had decided to abandon hypermarkets.
Image/Visual China
"Regarding whether to open hypermarkets, the initial shareholders' meeting of Lianhua discussed it. Shareholders and directors asked, 'The money to open one hypermarket can open 100 small supermarkets; why open a hypermarket?' So it was rejected. Of course, there was another reason: Carrefour had formed a joint venture with Lianhua in Shanghai to open hypermarkets, and Lianhua thought that was enough," a participant revealed to AI财经社.
Lianhua's decision to overturn its previous stance and enter hypermarkets was correct. Due to the wide variety and low prices, hypermarkets met the one-stop shopping needs of many Chinese families, and weekend bulk shopping even became part of family life. In this context, small supermarkets, grocery stores, and mom-and-pop shops within three kilometers of hypermarkets were hit hard.
To expand coverage and quickly go national, hypermarkets also adopted merger and acquisition strategies. In 2004, China Resources Vanguard acquired Jiangsu's Suguo Supermarket to enter the Jiangsu market; in February 2007, Walmart invested $264 million to acquire 35% of Trust-Mart, then another $376 million for 30%; in December 2009, Lotte Mart successively acquired 68 stores of China Times Retail TIMES.
Yonghui Superstores, which started with the "agriculture-to-supermarket" reform, was a newcomer in 2000, opening its first such store in Fuzhou—Yonghui Pingxi Superstore. Four years later, Yonghui had 50 stores, with sales rising to 2 billion yuan. Beijing's Wumart listed on the Hong Kong Stock Exchange in November 2003, successfully raising HK$500 million.
Various reports were optimistic about the prospects of hypermarkets. A 2007 McKinsey report stated that China's retail market was the fastest-growing globally, with hypermarkets growing at 47%. It predicted that hypermarkets would grow at double-digit rates over the next five years, expanding not only in first-tier cities like Beijing and Shanghai but also into second- and third-tier cities like provincial capitals and prefecture-level cities. Traditional formats would be eaten up by hypermarkets.
However, while expanding, the seeds of hypermarkets' downfall were sown. Originally, a hypermarket could cover a three-kilometer radius, but as stores multiplied, three or more hypermarkets appeared within that radius, increasing store density and ultimately leading to declining customer traffic per store.
Supermarket practitioner Zhang Chenyong noticed subtle changes: "Starting in 2007, hypermarkets' operational capabilities weakened. The most direct manifestation was worsening business and reduced attractiveness to talent; many people left Carrefour."
In 2007, Carrefour China initiated a centralization reform based on cost reduction. That year, Eric Legros replaced Jean-Luc Chereau as president of Carrefour China, gradually reclaiming store power by establishing city-based purchasing centers. Previously, Carrefour store managers had considerable autonomy, managing themselves and bearing profits and losses based on local characteristics.
A background to Carrefour's reform was that the increase in store numbers didn't bring proportional returns; the crude scale expansion had failed. In 2006, Carrefour opened 22 new stores in China, the most in a single year, up 31.4% year-on-year, but sales were only 2.482 billion yuan, up just 18.6%.
"Around 2012, hypermarkets considered refined operations, using fresh produce to attract traffic and non-food sections to improve gross margins. However, the rise of e-commerce directly cut into the profits of the non-food sections. To make matters worse, labor and rent costs were rising year by year," Zhang Chenyong said helplessly.
As e-commerce's influence grew, offline retail was impacted. Hypermarkets were even more vulnerable to e-commerce, making store growth increasingly difficult.
In May 2015, Walmart's global president and CEO Doug McMillon announced that Walmart would increase investment in different businesses in China, planning to add 115 new stores over the next three years. But in the end, from 2015 to 2017, Walmart opened only 78 new stores, falling short of the target.
Walmart Global President and CEO Doug McMillon Image/Visual China
That year, a Bain report showed that FMCG growth in the hypermarket channel halved, from 7.9% in 2013 to 3.7% in 2014, and in 2015 it turned negative for the first time, down 0.2% year-on-year. Both annual shopping trips per household and average purchase volume declined.
Despite this, brands wanting to enter hypermarkets faced high costs. Besides entry fees, they had to pay display fees, end-cap fees, promotion fees, etc., causing great distress.
FAYE, a former head of P&G's KA channel, told AI财经社: "From 2011 to 2018, the changes in hypermarkets and online were earth-shattering. Hypermarket sales hovered at the same level as the previous year or lower, while online channels grew exponentially, at least 1.5 times." FAYE believes hypermarkets rarely introduced new things in shopping methods, products, etc.
Hypermarkets, once a trendsetting retail format, ultimately became "a slow-reacting, rigid-thinking old antique." More worrying, customer traffic was visibly declining, which was alarming for hypermarkets that had enjoyed traffic from day one for over a decade.
Hu Chuncai of Shanghai Shangyi Consulting received inquiries where declining traffic was a major concern. "Hypermarket traffic drops about 5-10% annually, even more in first- and second-tier cities. Since 2013, traffic in first- and second-tier cities has declined significantly, and from 2015-2016, it spread to fourth- and fifth-tier cities." The decline in hypermarket traffic has become an irreversible trend and an unsolvable problem.
Shopping has become increasingly convenient; people no longer need to do bulk shopping at hypermarkets on weekends. Hypermarket traffic is being diverted by e-commerce, fresh food supermarkets, specialty snack stores, and even community group buying, with e-commerce being the biggest diverter. FAYE said: "Stimulated by 618 and Double 11, e-commerce sales keep rising, and hypermarkets are panicking. At first, they hated having the same SKUs sold online, but later they couldn't care less and urgently needed to grab traffic."
Facing survival, hypermarkets actively went online, opening B2C channels and trying O2O delivery. Websites like Tianguo, Feiniu, Yunhou... these once-promising shopping sites emerged one after another, but reality was cruel, and they faded into obscurity. Hypermarkets also tried 24-hour operations, outlet zones, and other flashy gimmicks, but with little effect.
In 2016, Ma Yun's new retail concept gave hope to hypermarkets that had failed in transformation. Electronic price tags, 30-minute delivery, adding dining formats, and bringing in fresh seafood—hypermarkets started another round of upheaval. However, learning from the first transformation's thunder without rain and huge spending, in this new retail reform, hypermarkets often used others' help: electronic price tags could be rented, 30-minute delivery could be from third-party platforms, and fresh seafood could be from joint-venture merchants.
Image/Visual China
FAYE revealed to AI财经社: "Some innovations in hypermarkets, like automatic ads when customers stand in front of shelves, or scanning QR codes to see product knowledge, are just gimmicks. They're micro-innovations lacking impactful experiences that don't drive orders." In a well-known new retail benchmark hypermarket, the company's product sales didn't increase.
Unable to increase revenue, they had to cut costs. Closing underperforming stores is the most direct way to reduce costs.
After all, hypermarket costs as a percentage of sales are relatively high among retail formats. A survey by the China Chain Store & Franchise Association found that in 2018, operating costs for large supermarkets continued to rise, with employee compensation up 13.0% and rent up 10.6%, higher than other retail formats.
For this reason, hypermarkets have frequently closed stores over the past few years. According to statistics, Walmart closed 5 stores in China in 2012, 15 in 2013, and 17 in 2014. In July 2010, Carrefour closed its Xi'an Xiaozhai store, its first closure in China. From 2010 to 2017, Carrefour closed over 40 stores in China, with 30 closures from 2013 to 2015, including 18 in 2015 alone.
Another reason for closures is that stores opened during the golden decade have basically reached the end of their lease terms. The mainstream lease term for hypermarkets was 15 or 20 years, and over the past decade or so, commercial real estate rents in China have skyrocketed, with renewal rents up to eight times the original, making it difficult even for profitable stores to bear the rent burden.
"Small hypermarkets" that can share rent and attract traffic have become a new attempt. Carrefour's Shanghai Chengshan Road store opened in 2017, occupying three floors but with a sales area of only about 6,000 square meters, the rest being rental and leisure areas. Walmart's Shengbang Street store opened in December 2018, with an area of about 5,000 square meters, nearly 50% smaller than typical hypermarkets, with a rental area of about 4,000 square meters.
"In the industry, previously at least 5,000 square meters was needed to be called a hypermarket, often over 10,000 square meters. For brands, it was a symbol of strength, giving more bargaining power with suppliers and better terms," Hu Chuncai lamented to AI财经社. Now, over 3,000 square meters is already considered a hypermarket.
Zhou Yong has witnessed the entire parabola of hypermarket development in China: "Now a hypermarket has only 5,000 daily visitors, with an average transaction of 70 yuan, resulting in annual sales of just over 100 million yuan." Compared to the golden decade, it's almost halved. And that's still the aspiration of most hypermarkets.
Image/Visual China
Zhou Yong believes that measures like expanding rental space to increase rental income and reducing costs can achieve profitability, but they are relatively passive strategies. "They work in the short term, but in the long run, things will get worse."
Worse has already happened. Looking at Sun Art Retail's financial reports over the years, since 2014, Sun Art has strictly controlled administrative expenses, with the growth rate falling from 18.9% in 2014 to 0.1% in 2018. Store operating cost growth fell from 19.8% in 2012 to 6.1% in 2018. Even with strict cost control like Sun Art, it couldn't change the downward parabola; since 2012, Sun Art's sales growth has declined year by year, from 14.3% in 2012 to -1% in 2018.
Zhou Yong believes hypermarket transformation is caught in a contradiction: operating a hypermarket has high investment costs, transformation costs are even higher, and risks are great, so no one dares to act rashly. Thus, they can only adopt defensive strategies, which mask the real problems.
The ultimate defensive strategy is complete exit. On November 20, 2017, Sun Art Retail announced that Taobao China Holding planned to invest HK$16.121 billion to acquire 26.02% of Sun Art Retail's shares; simultaneously, it would spend HK$6.293 billion to purchase 19.9% of Jixin's shares for sale. After the acquisition, Alibaba would hold a total of 36.16% of Sun Art Retail, becoming the second-largest shareholder. Then on December 8, Sun Art Retail announced that Taobao China would make a mandatory unconditional general offer in cash to acquire all issued shares of Sun Art Retail.
Although Sun Art Retail CEO Huang Mingduan clarified on multiple occasions that the quote "I defeated all opponents but lost to this era" was not his own, people still saw the direction of the times.
A month later, on January 23, 2018, Carrefour announced it had signed a preliminary equity investment letter of intent with Tencent and Yonghui, without disclosing the investment amount or shareholding ratio.
A year later, before the 2019 Spring Festival, Beijing employees of China Resources Vanguard learned that its five Beijing hypermarkets would be packaged and entrusted to Wumart. An era has finally passed.
Tips will be paid 400-2000 yuan upon adoption.
China FMCG + Internet Professional New Media Committed to FMCG manufacturers' transformation, upgrading, and channel digital solutions