Why Are Convenience Stores Suddenly Expanding So Aggressively?

Against the backdrop of major convenience store chains frequently announcing ambitious targets of 10,000 stores, the domestic convenience store sector saw explosive growth in 2020 and 2021, with 121,000 new stores added—more than the total number opened over the previous two decades. It wasn't until 2017 that the number of convenience stores in China just surpassed the 100,000 mark. What exactly is driving this expansion? Is the convenience store business really a good one?01

Blossoming Everywhere

Recently, Liu Xiao, who works in Beijing's Guomao business district, belatedly noticed that a Bianlifeng convenience store had opened across from her company in the Century Fortune Center, even though there was already a Bianlifeng at Guanghua Road SOHO, just over 300 meters to the west, and another at Fortune Center, just over 300 meters to the north. Shocked, Liu Xiao opened the Bianlifeng app and counted: within a one-kilometer radius of her location, there were 11 Bianlifeng stores. Adding 7-Eleven, FamilyMart, Lawson, and others, there were over 50 convenience stores within a kilometer of her office. "I never imagined there would be so many convenience stores near my workplace," Liu Xiao said, looking at the convenience stores scattered across Beijing's streets. "Can Beijing finally shed its 'convenience store desert' label?" On September 9 this year, the China Chain Store & Franchise Association released the 2022 China Urban Convenience Store Index, which ranked Beijing among the top ten in convenience store development with a total score of 83.5. Its store growth rate was 6.31%, ranking fourth nationally. In terms of saturation, Beijing has one convenience store for every 9,277 people. Not only are convenience stores blossoming in Beijing, but according to saturation calculations, Shanghai's streets are lined with 6,400 convenience stores, making it the city with the most convenience stores in the country. In comparison, Guangzhou, Dongguan, Chengdu, Changsha, and Shenzhen have 5,100, 5,100, 4,990, 4,840, and 4,600 stores, respectively. And in Taiyuan, Shanxi, 500 kilometers from the capital, the density rivals that of first-tier and new first-tier cities, with a convenience store every 300 to 500 meters. The 2022 China Urban Convenience Store Index shows that Taiyuan has one convenience store for every 2,587 people, a density approaching that of internationally developed cities. Taiyuan once trended on social media for its convenience store abundance, ranking second among 39 key cities in China in convenience store development, second only to Xiamen, with a total score of 90.5. Although Xiamen has a relatively small population of just over 5 million, it claimed two convenience store crowns, topping the 2022 China Urban Convenience Store Development Index with a total score of 92. Its store growth rate of 10.34% also led the pack. In Xiamen, even without streetlights, the convenience store signs are probably enough to illuminate every street and alley, with one store for every 3,227 people on average. Image/VCG Japanese-style and local, colorful storefront signs are accelerating their encirclement of this coastal city. On June 1 this year, eight Lawson stores opened simultaneously on Shuichan Xueyuan Road, Shigu Road, and Xinzhou Building. At the opening ceremony, Koji Fujiwara, general manager of Guangdong Lawson, stated that Lawson would open 100 stores in Xiamen in 2022, with plans to expand to 500 stores in Xiamen and its suburbs over the next two to three years. A hundred or five hundred stores are small targets. In July 2021, at the 25th anniversary celebration, Yasuyuki Miyake, president of Lawson China, announced that Lawson China would reach 10,000 stores by 2025. What does that mean? Since entering China in 1996, Lawson took 21 years to go from 0 to 1,000 stores, only reaching that milestone on March 11, 2017. Although Lawson accelerated its store openings after 2018, it still had only 4,466 stores by 2021. To meet its 10,000-store target on time, Lawson would need to open an average of 1,384 stores per year. Another company with a 10,000-store target is the local brand Tianfu. This convenience store company, founded in Dongguan, spent its first decade exploring Guangdong and only expanded beyond the province in 2014. However, in 2020, Tianfu Convenience Store officially pressed the "accelerator," claiming it would open 10,000 stores by 2024, the company's 20th anniversary. At that time, Tianfu had 5,360 stores. To achieve the 10,000-store target, the number of stores would almost need to double in four years, meaning an average of 1,160 stores per year. Similarly, on May 29, 2022, the Meiyijia store in Tangjiadun, Wuhan, was the scene of drums and firecrackers, as if the whole city should know. The fanfare was because this store was special: it was Meiyijia's 1,000th store in the local area, a milestone. Meiyijia entered Hubei in 2016, surpassed 100 stores in April 2018, and then experienced explosive growth. Not only in Hubei, but in the second half of 2021, Meiyijia also held similar 1,000-store opening ceremonies in Jiangxi and Guangxi. Founded in 1997, Meiyijia is known as the "invisible champion" in the convenience store industry, leading in both store count and opening speed. In its first decade (1997-2007), it grew from 0 to 1,000 stores; in its second decade (2007-2017), from 1,000 to 10,000. In 2020, Meiyijia surpassed 20,000 stores, achieving its second 10,000 in just three years. Image/VCG That same year, Meiyijia's store count surpassed that of Kunlun Haoke, trailing only Sinopec's Yijie, and the gap with the former widened while the gap with the latter narrowed. In 2021, Meiyijia had only 2,081 fewer stores than Yijie. According to Meiyijia headquarters, as of June 2022, its store count had approached 28,000. This means Meiyijia is just a step away from the top spot, Yijie. According to the 2021 China Convenience Store Top 100, the top three convenience store chains by store count are Yijie, Meiyijia, and Kunlun Haoke, each with over 20,000 stores. Following them are Tianfu and Furong Xingsheng, with 6,626 and 5,280 stores in 2021, respectively.02

Fierce Expansion

Convenience store companies have unanimously chosen to accelerate expansion, ultimately leading to a phenomenon of fierce expansion in the entire convenience store market. Recently, the China Chain Store & Franchise Association released the "2021 China Convenience Store Development Report," showing that in 2021, the national convenience store count reached 253,000, an increase of 60,000 stores in just one year compared to 193,000 in 2020, a year-on-year growth of 31%. In 2020, the national convenience store count had already increased by 61,000, a year-on-year growth of 46.2%. Image/2021 China Convenience Store Development Report The data indicates that 2020 and 2021 were two years of fierce expansion for China's convenience stores, with a significant acceleration in opening speed compared to the past. The 121,000 new convenience stores added in 2020 and 2021 account for nearly half of the total 253,000. Since the 1990s, it took China's convenience stores more than two decades to reach 100,000 stores by 2017. This means that in just two years, the number of new convenience stores exceeded the total of the previous two decades. Against this backdrop, China has overtaken the United States to become the world's largest convenience store market, with 1.7 times the number of stores in the US, 4.5 times that of Japan, and 5.2 and 5.4 times that of South Korea and the UK, respectively. Wang Hongtao, executive deputy secretary-general of the China Chain Store & Franchise Association, analyzed that a very important reason for the rapid growth in China's convenience store scale in recent years is the pull from some leading enterprises. Indeed, the surge in China's convenience stores cannot be separated from the contribution of branded chain convenience stores. Over 60% of convenience stores are opened by branded chains, totaling 163,000 stores, generating sales of 305 billion yuan, accounting for 87.34% of the total convenience store sales of 349.2 billion yuan in 2021. Behind the rapid expansion of China's convenience store count is a market size that has been climbing year by year. Over the past decade, convenience store sales have maintained double-digit growth, with year-on-year growth rates of 31%, 23%, 19%, 13%, 16%, and 18% from 2016 to 2021, in stark contrast to the single-digit or even negative growth of the overall retail industry. For example, according to Zhicheng Consulting data, the total number of chain supermarkets in China decreased by nearly 10,000 in five years, and supermarket closures continued in the first half of this year. Why are convenience store companies so keen on opening stores in recent years? In a word, this is a blue ocean market with huge development space, and the development curve of the convenience store industry is strongly correlated with the economy. Image/2021 China Convenience Store Development Report Referring to the experience of other countries, the development of convenience stores can be roughly divided into three stages. In the 1.0 period, when a country's per capita GDP reaches $2,000-3,000, convenience stores appear; in the 2.0 period, when per capita GDP reaches $5,000, convenience stores enter a rapid growth phase; in the 3.0 period, when per capita GDP reaches $10,000, the convenience store industry develops at high speed. Looking back at the development history of convenience stores in China, its growth nodes align with these patterns. In 2019, China's per capita GDP exceeded $10,000, naturally transitioning to the 3.0 stage. In the words of industry insiders, it was the right time. From the perspective of per capita density, China's convenience store saturation is far from sufficient. Although China's total number of convenience stores ranks among the top in the world, the population per store is 7,033 people, far higher than the 1,000-2,000 people per store in the UK, US, Japan, and South Korea. Even in Dongguan, which ranks first in saturation, there is one convenience store for every 2,052 people. Moreover, in terms of convenience store sales, China's $54.1 billion is only one-fifth of the US and less than half of Japan. With such huge growth space, it's hard for companies not to be tempted. During the window period, not expanding is equivalent to giving up; when you doze off, your peers won't stop and wait for you. "Better to enter early than late. If you wait until one region is fully developed before entering the next city, you might miss the opportunity," said an industry insider. A founder of a regional convenience store company said that in the past two years, some prime locations have become vacant, and rents have decreased. Such opportunities are rare, so everyone is aggressively opening stores. On the other hand, convenience stores generally adopt a franchise model, where the company provides the brand and the franchisee provides capital, operating in partnership. Most of the initial investment is borne by the franchisee, so the company does not bear huge financial risks, making expansion naturally swift.03

The Main Force Is the Lower-Tier Market

It is worth noting that in the past two years, the rapid growth of convenience store stores in China has been largely driven by the lower-tier market. According to data from the China Chain Store & Franchise Association, in 2018, the total number of convenience stores in Beijing, Shanghai, Guangzhou, and Shenzhen was 23,508, accounting for 20% of the national total of 120,000. By 2021, the national total had reached 253,000, but the number in the four first-tier cities had dropped to 18,440, accounting for only 7.3%. This indicates that the rapid growth in convenience store scale in recent years has been mainly supported by the lower-tier market. The "2022 China Urban Convenience Store Index" report also shows that the top three cities in store growth rate are Xiamen, Jinan, and Guiyang, with year-on-year growth of 10.34%, 8.33%, and 7.5%, respectively. In terms of saturation, the top three are Dongguan, Changsha, and Taiyuan, with 2,052, 2,076, and 2,587 people per store, respectively, comparable to developed countries. Cities like Zhongshan, Huizhou, Urumqi, and Haikou also have a higher population per store than the national average. In Wang Hongtao's view, first-tier cities are certainly the first choice for convenience store companies, but in recent years, the high saturation and high rents in first-tier cities have increased operating pressure, prompting brands to consider the lower-tier market. On the other hand, the capacity of China's first-tier cities is limited; you can count them on your fingers, and they cannot support the ambition of convenience store companies to open "10,000 stores." After all, the administrative area of China's 49 developed cities accounts for only about 5% of the national total. There is no reason to do only 5% of the business and ignore the other 95%. The lower-tier market has almost become the main battlefield for convenience store brand expansion in recent years. Since August last year, Lawson has entered Tangshan in Hebei, Wuhu in Anhui, and other prefecture-level cities; 7-Eleven has opened its first stores in Dezhou, Shandong, and Kunming, Yunnan. Local brands that started in the lower-tier market have also chosen to stay in their "comfort zone." As one netizen lamented: "In the past two years, convenience stores have begun to enter the lower-tier market. In a third-tier city like Taizhou, three convenience stores can open within 100 meters." The consumption potential of the lower-tier market has indeed brought surprises to convenience store companies. Whenever a new brand enters a city, news of queues, limited entry, and record-breaking sales is common. Image/VCG On October 23, 2020, on the first day of 7-Eleven's first store in Zhengzhou, sales exceeded 340,000 yuan by 14:00; by 19:00, they exceeded 500,000 yuan; by 20:00, sales reached 540,000 yuan, setting a new global record for 7-Eleven's first-day sales at a single store. In August 2021, Lawson officially entered Shijiazhuang, opening six stores at once. At 6:30 a.m. on August 17, more than an hour before the usual morning rush, the Leitai Center in Shijiazhuang had not yet woken up, but the area below Building B was bustling. The Lawson store on the street was to open in half an hour, and nearly 300 people were already waiting, with two queues stretching more than ten meters. Zhang Sheng, vice president of Lawson China, once said that during the pandemic, Lawson's sales in East China increased by 30% month-on-month, with a larger increase in third- and fourth-tier cities than in first- and second-tier cities. Taking Zhangjiagang, a county-level city under Suzhou, as an example, sales at Lawson community stores increased by nearly 80% year-on-year, while Shanghai stores only grew by 10%-20%. The lower-tier market does seem attractive, but for companies, they still need to face another huge competitor—mom-and-pop stores. According to Kantar Retail data, there are currently 7 million small stores in China, with about 6.8 million mom-and-pop stores. In 2019, mom-and-pop stores accounted for 44% of the market's shipment scale. Their main force is in the lower-tier market; currently, about 30% of mom-and-pop stores are in townships and rural areas, and 46% are in third- and fourth-tier cities and county-level cities. However, if convenience stores want to conquer the lower-tier market, simply replicating the product mix and services of first-tier cities won't work. Lawson has suffered from this. Zhang Sheng cited an example: when Lawson first entered Jiangyin, it focused on boxed meals. Consumers found them delicious and queued up on the first day, the second day, but then they stopped. Because in Jiangyin, many people have a two-hour lunch break and don't need to buy boxed meals for convenience. Later, Lawson adjusted its product mix and switched to selling desserts.04

The Matthew Effect Is Becoming More Prominent

Although the number of convenience stores in China has accelerated in the past two years, running a convenience store is by no means simple. Doing it well requires meticulous work, and a slight misstep can lead to huge losses. A typical example is Linjia Convenience Store, which was founded in 2015 with great fanfare, poaching executives from leading convenience store companies and vowing to open 200 stores in Beijing within a year. Although in reality, Linjia's 100th directly-operated store only opened two years later, its speed far exceeded the early development of 7-Eleven, Lawson, and FamilyMart in China. By the third year, 2018, Linjia's situation took a sharp turn for the worse. Not only did it fail to fulfill its promise of 200 stores, but its investor, Shanlin Financial, faced a capital chain rupture, causing 168 stores to close overnight. Linjia, still in the stage of capital transfusion, had only "played a supporting role" in three years. In the same year, similar scenarios were replayed at 131 Convenience Store and Quanshi Convenience Store. The most recent company reported to be in difficulty is Bianlifeng, which, under its "hibernation plan," reportedly temporarily closed over 700 stores. Wang Guoping, a senior retail expert, believes that Bianlifeng's stores are all directly operated, requiring higher capital. If sales profits cannot cover costs, losses will occur, and the company must make adjustments to stabilize its fundamentals. Zhang Li, chairman of Xiamen Jianfu Chain Management Co., Ltd., has been in the industry for many years and has seen too many convenience stores disappear from the market. "Running a convenience store company requires matching strategic goals with strategic resources. If the goals are set too high and resources can't keep up, it will be troublesome and easy to overturn." Jianfu Convenience Store achieved overall profitability for the first time in 2013, and in 2018 and 2020, it received financing totaling hundreds of millions of yuan from Sequoia Capital China and JD.com, among others. Since then, it has invested heavily in building an industrial park. In 2020, Jianfu's industrial park, including warehousing, logistics, distribution centers, fresh food factories, and bakeries, was completed and put into operation, enough to cover the needs of its current 2,000-plus stores. In Zhang Li's view, for convenience store companies to remain invincible, they must consolidate their basic skills, the most fundamental being store density. Because convenience stores operate on a short supply chain radius business model, if store density is not high enough, the costs of logistics, distribution, market management, and brand promotion cannot achieve marginal effects. Image/Provided by interviewee Moreover, the growth potential of a convenience store company largely represents its bargaining power with upstream suppliers. Zhang Sheng admitted that in cities with high rents like Shanghai, if one only pursues short-term profits, opening about 470 stores and then stopping expansion would definitely achieve profitability. However, suppliers will not invest more in a retail company that does not continue to grow, and the company will gradually lose its negotiating power, bargaining power, and ability to launch new products. Currently, China's convenience stores are showing a polarized Matthew effect, with leading convenience stores achieving scale expansion through mergers and acquisitions and regional franchising, while small brands in second- and third-tier cities show divergent development plans. The "2021 China Convenience Store Development Report" shows that leading convenience store companies have significantly higher sales per square meter than others. The top 20% of companies by industry revenue have an average sales per square meter of 76 yuan per square meter per day, while the average for all convenience store companies is 67 yuan per square meter per day. The same is true for gross and net margins: the top 20% have gross and net margins of 26.53% and 2.84%, respectively, significantly higher than the industry average of 25.5% and 1.4%. According to Qianzhan Industry Research Institute data, Yijie, which ranks first in store count, had sales of 80.6 billion yuan in 2020; Meiyijia, Kunlun Haoke, and Shiji Hualian had sales above 20 billion yuan; FamilyMart, Hongqi, 365, 7-ELEVEN, Lawson, and Shizu had sales between 5 billion and 9 billion yuan. The gap between the first tier and the second and third tiers is huge. In terms of per-store revenue, Japanese convenience stores are more prominent. In 2020, FamilyMart's annual sales per store were 3.166 million yuan, and 7-ELEVEN's were 3 million yuan, both significantly higher than local convenience store brands. However, Yijie, which has an advantage in store scale, also had annual sales per store close to 3 million yuan. Among the "big three" Japanese convenience stores, Lawson, which lags slightly in revenue, outperforms its competitors in profitability. In 2020, Lawson China achieved full-year profitability for the first time, making it the first Japanese-funded convenience store in China to achieve overall profitability. Since then, Lawson has continued to expand aggressively, maintaining its profitability leadership. Financial reports show that from March to November 2021, Lawson's net profit reached 24.3 billion yen, double that of the same period the previous year; total revenue was 522.4 billion yen, a year-on-year increase of 5%. During the same period, Lawson China earned 1.8 billion yen, compared to a loss of 188 million yen in the same period the previous year. Facing the aggressive expansion of Japanese convenience store companies in recent years, local companies admit to pressure, but it's not all bad. One practitioner revealed that previously they had to go to Japan to learn, but now that they are at their doorstep, it's more convenient to learn. In the face of increasingly fierce competition, the most important thing is to consolidate basic skills and differentiate in supply chain capabilities and management and operation capabilities. Note: Liu Xiao in the article is a pseudonym.