Introduction: Membership stores are not a blitzkrieg but a protracted war.

Author | Wang Shiqin
Review | Gou Gou
Layout | He Wen

After Sam's Club became a phenomenal retail success, some Chinese local retail enterprises have been brought into focus. Can the Chinese market only rely on foreign brands to dominate? Both consumers and suppliers are concerned about this. In fact, with the rise of retail formats, the major players in China's membership store sector currently include Wumart (which acquired Metro), RT-Mart (which is transforming from hypermarkets), Sam's Club (owned by Walmart), and Costco from the US, as well as Hema, fudi, and Carrefour. Among these, the more well-known purely local ones are Hema, Metro, and RT-Mart. Hema will be discussed in detail later; it focuses on an integrated store-warehouse model. When I visited Metro 20 years ago, the cold storage inside left a deep impression. RT-Mart is at a critical juncture of structural transformation and upgrading, from traditional hypermarkets to upgraded membership stores, which can be seen as a transformation of local membership stores. RT-Mart's M Membership Store achieved great results in Yangzhou, which strengthened management's confidence in expansion, but from a market perspective, they soon encountered bottlenecks. Where exactly are the crux issues for Chinese local membership stores? I will present the current membership store model from multiple perspectives.

Current Status of Local Membership Stores

Among the local membership stores that can compete, Hema is one, and Metro and RT-Mart are others. Regardless of their problems, they are at least on the path of transformation. Facing the impact of foreign brands, how will Chinese local retail respond?

Metro's Wuhan membership store last year launched multiple co-branded new products under its private label "Metro Selection," including craft fresh beer co-developed with Fresh Beer 30km, egg yolk pastries with Hutouju, and peach crisp gift boxes co-branded with Luxihe. In other words, Metro's membership store focuses on co-branding. The advantage of co-development over self-development is that the category has been validated by the market, so there is no need to build user awareness from scratch. However, the disadvantage is also obvious: co-branding means the supply chain decision-making power is not in the membership store's hands, profits will inevitably be shared, and there is no say in the matter.

An industry insider with decades of experience believes that Metro abandoning its B-end market to attack the C-end is tantamount to giving up a mature market to join the fray, but with chaotic product selection and an inability to provide corresponding services.

Image source: Internet

The risk can also be seen from the closure of Hutouju stores this year: the painstakingly cultivated user mindshare is lost, and customers need to subtract from existing categories, which is also painful for consumers. Of course, co-branding is not a bad thing for Metro at this stage. I believe that with Sam's Club and Costco going all out, the cost for Metro to develop self-developed products is far greater than usual, so temporarily using co-branding as a strategy to bide time is not a bad option, but in the long run, it should have its own signature products.

With years of experience serving B-end members, Metro has accumulated a large number of self-owned stores and many corporate users. If it can leverage its scale advantage, it also has bargaining power. It can be said that Metro's foundation is good, but with a large user base, how to achieve conversion? How to transform the perception of past B-end users from collective procurement to good service is what Metro needs to consider. Or perhaps a dual approach; this tests Metro's own operational level and capabilities.

From a structural perspective, the internal layout of all membership stores basically imitates Sam's Club, so in areas with few distinctive features, the competition is on soft and hard strengths. Hard strength compares whether the supply chain can truly deliver, whether it is "ready at call, able to fight when called," whether it can provide quality supply, and whether it can ensure continuous supply capability. If a product goes viral today and the supply cannot be adjusted, consumers will be 100% angry if they cannot buy it. Soft strength is about service operations: whether the store has a place in consumers' hearts and whether the service has the so-called "granularity" in the industry.

In 2022, Metro's private label overall sales grew by more than 25% compared to 2021; several categories exceeded this figure, such as frozen and convenience foods, which doubled compared to the previous year; snacks grew by 80%. But whether this can continue in 2023, product selection is of utmost importance.

Carrefour's first membership store in the Chinese market officially opened in October 2021, described as "bustling with flags flying." However, less than a year and a half later, on April 28, 2023, the membership store officially closed. Suning.com's financial report showed that from the acquisition to the end of that year, Carrefour China lost a total of 304 million yuan; in 2020, Carrefour China lost 795 million yuan. According to multiple sources, it was more that Suning drained the cash flow, leading to Carrefour's inability to operate steadily, highlighting the operational pressure faced by membership stores.

Some institutions have estimated that China's warehouse membership store GMV in 2022 was about 30 billion yuan, while the overall supermarket and hypermarket sector exceeded 1.1 trillion yuan. It can be seen that China's warehouse membership store industry is still on an upward slope. Carrefour has no price advantage, and Sam's Club is superior in procurement. There were rumors that the opening turmoil of Carrefour's membership store was due to Walmart telling suppliers to choose between the two, and with weak and cash-strapped Carrefour, suppliers naturally found it hard to choose, and they dared not take the risk.

RT-Mart's M Membership Store achieved great success at the beginning in Yangzhou, almost on par with Sam's Club's popularity, but over time, some consumers reported issues such as price fluctuations.

Hema X Membership Store chose a small-store model, setting aside Sam's large-store model. Due to the consistent membership base, it has an efficiency advantage, but whether the actual conversion rate of membership stores is high and whether it can work remains to be seen, after all, paying for membership is a real investment. fudi is smaller in scale and focuses on an internet-famous style, making it difficult to draw conclusions.

Is the growth path of Chinese local membership stores really difficult? Indeed it is.

Where Exactly Are the Problems with Membership Stores?

In my view, Chinese local membership stores still need to be polished. On one hand, the supply chain system needs refinement; the advantages Sam's Club has accumulated over 20 years in China cannot be perfectly replicated by copying. On the other hand, there is a need for updated thinking: whether they have truly broken away from traditional mindsets. Next, I will analyze the current problems of local membership stores.

The success of the first M Membership Store is certainly gratifying, but more practical issues need to be considered. First, can the success in Yangzhou be replicated? Looking at various channels, Yangzhou previously had no membership stores, and RT-Mart's position in the hearts of Yangzhou friends is deeply rooted. As a first experience with the membership format, the popularity is reasonable. However, when RT-Mart crosses the Yangtze River into large cities like Suzhou, it will directly face competitors that have been deeply entrenched for years. Consumers in these cities are already familiar with the membership format, and when novelty no longer works, it comes down to a competition of soft and hard strengths.

RT-Mart's layout model is similar to Sam's Club, which has exposed many problems.

Image source: Internet

First, there are too many products with mediocre quality, and some items have unstable prices with significant fluctuations. This greatly affects repurchase rates, and some consumers have complained. Some consumers even said in anger that they would never go again. Of course, not going is false; the hope is that RT-Mart can stabilize its price system.

The second issue is too many SKUs. I have repeatedly emphasized that we must avoid falling into the "Tacitus trap" of membership stores. It is good that RT-Mart wants to use the hypermarket mindset to provide consumers with more and richer SKUs, but membership stores are different from hypermarkets; product selection requires extremely high standards. Consumers today are different from the past; they are less tolerant of products, and any slight discomfort can lead to no repurchase. RT-Mart evolved from hypermarkets, so it naturally has a rich SKU base, but the quality is uneven. To use an analogy, it's like previously everyone could pass the exam, but now the requirement has changed to 85 points, which will filter out many people. The same goes for SKUs. RT-Mart's previous supply was not a problem; it was just a bit expensive, which could be solved by coordinating with distributors to reduce procurement deductions. Eliminating unreasonable fees is definitely a future trend, whether one is willing to change or not; the wheel of history does not move according to any individual's will, but it should also be recognized that if no fees are charged during the transformation of hypermarkets, it will be basically impossible to make a profit. Therefore, compromise has become one of the practical considerations. One option for hypermarkets to repair relationships with distributors is to upgrade to membership stores, striving for non-conflicting interests, but both sides need to make efforts.

After entering the membership store track, the game is about refined and excellent categories, extreme cost-effectiveness, and the requirements for goods have increased by at least three levels. Using a huge SKU assortment then has the opposite effect; consumers do not think more is better, and the more SKUs, the higher the probability of consumers stepping on mines. Therefore, it is not that RT-Mart's products are all inferior to peers, but the feeling given to consumers is average. In addition, competitors' control over the market leaves local membership stores like RT-Mart with few categories to choose from, severely squeezing their living space.

In fact, I believe the core problem is that RT-Mart's M store still operates with a hypermarket mindset. To be honest, this is very dangerous. For example, selling cars inside the store; the strong industrial attributes of cars will dissolve the family attributes of membership stores. As I wrote in a previous article, Sam's Club revolves around family life, while RT-Mart selling cars blurs the focus in consumers' eyes. Moreover, for a long time, selling cars has been strongly associated with shopping malls and commercial areas. When it becomes symbolized, consumers think of shopping malls when they see cars, but shopping malls and membership stores are completely different things.

My feeling is that RT-Mart has made efforts, but the direction is not quite right. They start a membership store, but as they go, it turns back into a hypermarket. So we must see through the appearance to the essence. RT-Mart leaders work hard, employees are tired, and they are criticized for service attitude; they have worked hard but with limited results, all because of the hypermarket mindset.

Currently, the core problems of domestic local membership stores are inseparable from SKU selection. Sam's Club is doing subtraction, refining categories; that is, Sam's "more" is a refined "more," while local membership stores' "more" is a wild "more."

Image source: Internet

Many companies have only learned the form but not the essence. What makes Sam's Club great? It's the supply chain, the ability to stabilize prices, product selection, and service. Of course, I am not writing this article just to raise problems, but also to explore a feasible path for domestic membership stores.

How to Solve It?

First, solving the SKU problem requires bold and resolute reform. Membership stores, by their nature, still focus on convenience. From numerous consumer feedback, buying blindly at Sam's Club is a pleasure point, which is built on excellent product selection. Many people have said they can pick items at Sam's with their eyes closed without stepping on mines. 100% is a bit exaggerated, but achieving a unified recognition is quite good. The simplification of SKUs will definitely lead to increased productivity, and at the same time, doing well with signature products helps build brand awareness. For example, when you see Swiss rolls, you think of Sam's Club. If you can see a product and think of a specific membership store, that's basically half the success. Of course, doing SKUs well is not just a matter of words; behind it is the adjustment of the entire supply chain system. Making quality suppliers able to make money should be one of the future goals of membership stores.

Eliminate the supplier bidding model, improve product quality, stabilize quality control, and simply put, don't let distributors subsidize promotional activities. There is a saying: "Steady and far-reaching." Do things steadily, step by step, and do not try to achieve market dominance through rapid scale crushing. Membership stores are not a blitzkrieg but a protracted war.

Sam's Club has an excellent global supply chain that provides absolute bargaining power, such as direct supply of beef from Australia, but domestic local membership stores are not without advantages. How to convert their advantages into profits? First, make good use of the quantity of local product SKUs and refine quantity into quality. Find your own winning point; don't do everything but excel at nothing. For example, while Sam's focuses on family, domestic membership stores can focus on outdoor and other categories. Find your own rhythm and space in consumption scenarios.

To speak frankly, since local membership stores are constrained in product selection, they need to be even more selective with SKUs. Chinese consumers have different shopping habits compared to those in developed countries like Japan and the US. Chinese consumers like to try new things, and if they receive positive feedback, they will repurchase. If Sam's focuses on American-style family, can local brands focus on Chinese-style family? What are the needs of Chinese-style families? Although Sam's portions are generous, to be honest, they are still not suitable for the vast majority of Chinese families; portions are too large, inevitably leading to waste. Is there something Chinese people love to eat? Chinese people don't necessarily have to eat Swiss rolls. If we can find foods that Chinese people love and eat regularly, and industrialize their production, we can also reduce costs. In fact, this is one of the reasons why some domestic membership stores have high costs. Comparing the supply chain of American-style products with Americans will definitely put you at a disadvantage. Because most membership stores select products based on Sam's selections, they are greatly restricted from the start. Break out and use our own product selection logic to educate consumers. The premise is that the products must be done well. Consumers are not only willing to accept Sam's products, but are happy to accept "Sam's-style" products and services.

As for whether to adjust the organizational structure, it should be entirely based on the adjustment of business lines and characteristics. In short, everything should be close to the business, and everything should empower the channel.

In the future, at most two brands can stand out in the minds of users for membership stores, because for many people, two membership cards are the limit, and they don't have the energy to compare multiple membership stores. Of course, this is based on membership stores nationwide. If membership stores develop into a regional format in the future, diversity may be richer. I think it is quite possible to develop into a regional format. Membership stores are not easy to roll out nationwide; they test supply chain capabilities and have slower store opening speeds. Unlike snack collection stores, scale may not bring advantages but will expose shortcomings. That is to say, the membership store format needs local density, forming a huge advantage within a region.

Therefore, domestic local membership stores do have advantages, but they need better product selection and service. As for the problems some membership stores currently encounter—complex organizational structures, hardworking employees, but poor sales—perhaps a change of thinking will solve them.

Sun Art Retail Group stated that the M Membership Store does not plan to make a profit within 3 years. "In the first year, I did not set a profit target for the team, only two indicators: membership numbers and renewal rate." But I believe, from an OKR perspective, it might be more important to set a consumer satisfaction indicator.

Scenes like "500 Thai Golden Pillow durians sold out in 29 minutes, 600 boxes of mochi, 180 durian mille crepes, and 300 sets of SK-II Facial Treatment Essence sold out in an hour, and roast chicken requires at least half an hour of queuing" will frequently appear.