Why Are Supermarkets Closing While Convenience Stores Are Thriving?

Editor's Note: Over the past two years, amid slowing domestic economic growth, e-commerce impact, rising costs, and outdated models have kept physical retail in a difficult winter of transformation. In 2015, the retail industry experienced its largest wave of store closures in five years. Wanda Department Store announced mid-year that it would close half of its approximately 90 department stores nationwide; Parkson Group closed its only store in Tianjin after announcing the closure of its Beijing East Fourth Ring store; Beijing Itoyokado closed four stores in one year; Best Buy and Central Department Store even ceased operations in China. Data from the Institute of Commercial Economics at Beijing Technology and Business University shows that from 2012 to 2015, 138 department stores, 262 supermarkets, and 6,209 sports brand stores closed nationwide. By 2016, compared to the booming e-commerce sector, physical retail did not fare better; this once-heralded shopping model seemed unable to keep pace with development. Foreign hypermarkets that once inspired China's retail industry, such as France's Carrefour, South Korea's E-Mart, the United States' Walmart, Germany's Metro, and Taiwan's RT-Mart, are also struggling to regain their former glory. However, "small but beautiful" convenience stores are rising against the trend, bringing a touch of brightness to the sluggish retail industry. Consumers Are Rapidly Shifting to Convenience Stores Recently, management consulting firm Bain & Company and Kantar Worldpanel jointly released the fifth annual report, "How to Master the Two-Speed Chinese Shopper: 2016 China Shopper Report, Volume II," which shows that in the first half of 2016, offline FMCG growth slowed to 1.5%, with negative volume growth. But offline retail is not entirely losing ground. As a grab-and-go channel that has evolved into a one-stop service point for everything from tickets to utility bill payments, convenience store sales grew 13% compared to the same period in 2014, a stark contrast to the sluggish performance of traditional hypermarkets and supermarkets. ▲ 21st Century Business Herald A survey in August this year also showed that nearly 40% of convenience stores saw total sales growth of over 10% year-on-year, maintaining a good development trend in 2016. It is estimated that from 2016 to 2020, convenience store sales will grow at a rate of 8% to 10%, significantly higher than other formats. ▲ Forecast of sales and growth rates for department stores, supermarkets, electronics chains, and convenience stores in China, 2016-2020 In terms of numbers, by the end of 2015, 62 convenience store companies had a total of 83,000 stores, a year-on-year increase of nearly 10%. In 2016, the penetration rate of convenience stores (the proportion of people using or owning a product category in the surveyed sample) also rose from 32% in 2015 to 38%, 3 percentage points higher than online shopping. In terms of sales scale, according to the 2016 chain convenience store big data released by China Business Industry Research Institute, in 2015, China's convenience store industry sales grew by 7.6% year-on-year, ranking first among all formats (department stores -2.4%; supermarkets +3.9%; electronics chains +0.5%). It is estimated that in 2016, the market size of China's convenience stores may reach a record 100 billion yuan, but more exciting numbers may not yet have arrived: In Japan, the market share ratio of convenience stores to supermarkets is about 54%:46%, while in China this ratio is currently roughly 8%:92%. How did convenience stores, which were barely noticeable a few years ago, suddenly become the market's darling? Extreme Convenience Targeting Young People The preference and pursuit of young people is one of the reasonable explanations for the rapid growth of convenience stores. A survey of consumers under 35 shows that they visit convenience stores more often than large supermarkets. Currently, the post-80s and post-90s consumers have become the main consumer group. Their consumption views are very different from the previous post-60s and post-70s. The younger generation pursues convenient, fast, casual, and fragmented consumption, which perfectly matches the positioning of convenience stores. Behind the change in their consumption views and habits is a profound change in lifestyle. First, driven by consumption upgrading, the proportion of households with disposable income of 5,000-8,000 yuan per month (the "emerging middle class") and 12,000-22,000 yuan per month (the "upper-middle class") is increasing. These two groups are not price-sensitive but have higher requirements for shopping experience, consumption scenarios, and feelings. Second, as the pace of life accelerates, many people's consumption time becomes "fragmented," and time cost becomes a key consideration. They prefer to spend limited time on culture, entertainment, leisure, and other areas. Even though a bottle of water in a convenience store is about 10% more expensive than in a large supermarket or online, this efficient, immediate consumption experience is unmatched by other formats. Most convenience stores have oden and steamed buns next to the checkout counter, and packaged braised pork rice in the freezer. Office workers who don't want to cook can grab a bite to eat. According to statistics from FamilyMart, Lawson, and other convenience stores, about 60% of customers entering the store purchase fresh food products such as bento boxes and pastries. On the one hand, the immediate consumption nature of convenience stores makes them less affected by e-commerce; on the other hand, the rise of community commerce and changes in residents' consumption habits have made convenience stores, which offer physical shopping experiences, life services, and mobile terminal functions, increasingly relied upon by consumers. Rich Services Based on Customer Needs In many cities, there are many 24-hour convenience stores in office buildings, business districts, and communities. In addition to selling goods, various convenience services are becoming new ways for convenience stores to "stick" to customers. While meeting people's shopping needs, these chain convenience stores are increasingly like a comprehensive life service platform, providing one-stop life consumption needs within a one-kilometer radius. Many value-added services add to the appeal of convenience stores. At a Kuaike convenience store in Beijing's Jinsong community, a notice on the wall lists services such as "free hot water, mobile phone card recharge, free microwave heating, financial payment via Lakala, utility bill payment, ATM withdrawal." The store has been open for 10 years and has become integrated into the lives of nearby residents. E-commerce impacts physical retail, but the convenience store industry is growing against the trend, thanks to its continuous improvement of services and exploration of new opportunities. In recent years, well-known e-commerce companies have cooperated with convenience stores. After users place orders, the nearest cooperative convenience store delivers the goods. One side has offline stores, the other has a huge online product system; together they provide consumers with faster logistics. Service is an important way to enhance "stickiness," but not every company has this awareness. Many industry insiders admit that China's service industry still lags behind developed countries. In Japan, where the convenience store industry is most developed, convenience stores offer services such as tax payment, photocopying, bank loans, finance, ticketing, and reservations, with service revenue accounting for more than 40% of total revenue. According to statistics, nearly half of Japan's population visits a convenience store every day. Its services closely follow changes in social forms and have profoundly changed the lives of urban populations. It is clear that rich services are a major weapon for convenience stores to retain customers. Differentiated Curated Products Convenience stores differ from supermarkets in product assortment, allowing them to compete differently with large supermarkets and department stores. On the one hand, convenience stores target middle- and high-income groups; on the other hand, their profitability lies in the product configuration itself. Convenience stores reduce their product range. Due to limitations in operating area and profitability, convenience stores abandon the "big and complete" hypermarket approach in category selection, reducing product range and retaining categories with "high gross margin and high turnover." In addition to fresh food and alcohol, many cute-shaped, high-priced candies can only be seen in convenience stores. Some convenience store private-label snacks, such as chocolate-covered popping candy, seaweed cheese rolls, and shredded squid, are hard to find in ordinary malls, supermarkets, or hypermarkets. These products generally have high gross margins and have become new profit points after fresh food. At the same time, they reduce the number of products. Mainly because the operating area is about 100 to 150 square meters, which is smaller than hypermarkets, convenience stores select high-quality products for their target customers and reduce the number of similar products. Supermarkets generally carry more than 10,000 SKUs, while convenience stores like Quanshi only carry about 3,000 SKUs. Foreign 7-Eleven stores carry even fewer, around 2,600 SKUs. Conclusion Extreme convenience, curated products, rich services, and a highly unified franchise management system allow convenience stores to replicate quickly and become the core of community commerce. However, some believe that as retail giants like Carrefour, RT-Mart, and even Walmart and Metro enter the convenience store industry, "small but beautiful" will face full competition in capital and market, turning from a "blue ocean" to a "red ocean" in just a few years. At the same time, China's convenience stores are still in a sub-healthy state. Not all convenience stores can share the growth opportunities brought by market prosperity. According to statistics, the highest daily sales per store in domestic convenience stores is 15,000 yuan, while the lowest is only 755 yuan, a 20-fold difference. Although the national convenience store sales growth rate has reached 25%, the vast majority of growth comes from external expansion—store growth reached 22%. In the future, domestic and foreign convenience stores will engage in a market battle. The convenience industry may usher in an explosive period within 4-5 years. Against this favorable backdrop, several foreign brands, represented by 7-Eleven, have recently announced ambitious expansion plans in China. It is foreseeable that in the next 4-5 years, foreign convenience store companies and local convenience stores will engage in fierce close combat. Although local convenience store brands are currently stronger in terms of store numbers, according to British media reports, foreign brands are still more popular than their Chinese counterparts. Chinese local convenience stores still have a long way to go.

Source: Caijing.com (ID: caijingwangwx)

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