Click to read the original article for details Source: 36Kr Finance (ID: gh_f85b7cc3532e) Author: Xie Yunzi Do you have to pay a membership fee before entering a store? Although Sam's Club and Metro entered the Chinese market as early as 1996, due to socio-economic and other reasons, the habits of mainstream Chinese consumers did not match their model. It wasn't until two years ago that Costco (the largest chain membership warehouse club in the US) opened its first store on the Chinese mainland in Shanghai, and it unexpectedly attracted huge popularity. On the opening day, a large number of LV, Prada, Hermès, and Feitian Moutai liquor priced below market value triggered a buying frenzy, leading to a suspension of business in the afternoon of the first day and restrictions on entry from the second day. Entering 2021, 'warehouse membership stores' have truly reached a climax, with multiple giants investing heavily. This slow-burning track has finally entered an era of 'enclosing land'. Why is the market picking up this overlooked gem again?
Supply Chain is the Core
Recently, warehouse supermarkets have seen explosive openings in Beijing: On May 18, the first Fudi warehouse membership store opened in Nanmofang, Beijing; a month later, Hema opened its first X membership store in Beijing. At that time, Hema President Hou Yi stated, 'We will open 10 new X membership stores this year.' On June 25, Yonghui warehouse supermarket officially opened at Longqi Plaza in Changping. Two days later, Metro Plus paid membership stores opened simultaneously in Caoqiao, Beijing, and Chengdu. Almost at the same time, Walmart's 'Sam's Cloud Home' went live nationwide, and Sam's is expected to reach 40-45 stores in operation and under construction nationwide by the end of 2022. 36Kr compiled and charted based on incomplete public data Despite the eagerness of various forces, it is undeniable that warehouse supermarkets have had many 'failures' in China. Looking back, in 2004, PriceSmart membership stores closed in many places; more recently, in early July, 'Yilan Business' reported that Fudi, a warehouse-style membership store focusing on fresh products, had average daily sales of less than 150,000 yuan. Some believe that the failure of many domestic players in trying warehouse membership stores is more due to 'having only the appearance'—they learned the form but not the essence. In the view of Ding Yun, founder of Heyi Consulting and head of the Hejun Commercial Retail Research Center, many domestic players are just using private domains to conduct disguised promotions and discounts. 'Consumers only get the right to discount goods in advance through membership fees, without receiving real value-added services.' For warehouse supermarkets, membership is just an entry ticket. To take this model to the extreme, efforts must be made in the supply chain. Chen Zhiyu, Deputy CEO of Metro China, believes that to get members to pay, membership services must be as good as possible. To enhance the consumer experience, membership players emphasize the quality of product selection, and behind product strength lies a strong supply chain system. First, carefully selected SKUs. Generally, warehouse membership stores have around 3,000 to 4,000 SKUs, while hypermarkets of the same area can have 10,000 or even 20,000. 'Reducing SKUs is more conducive to large-scale procurement, helping to lower costs and improve bargaining power.' Take Costco, the 'originator' of warehouse supermarkets, as an example. Its biggest feature is its control over products. No matter how big the brand, when entering Costco, it must lower prices and redesign product packaging according to its principles. Chen Zhiyu stated that while reducing SKUs, warehouse membership stores have higher quality requirements for products. Therefore, warehouse membership stores often use private labels to supplement quality products. Generally, private labels in retail supermarkets mainly serve to 'adjust gross margins and increase consumer stickiness.' To better build private labels, it is necessary to have a more precise insight into consumer needs and a strong product procurement team. Based on existing successful cases, the 'combination punch' of membership + curated selection + private labels has become the winning formula. But does this logic also apply to the Chinese market?
Catching Chinese Consumers
In fact, in the industry's view, before Costco entered China, the warehouse membership track had already begun to develop rapidly. Chen Zhiyu also told 36Kr that around 2017, market education in China had reached a certain stage, and the number of 'middle class' in mainland China had increased. To 'cater' to this consumer group, 'Metro and others' have put more effort into details that consumers perceive, such as products and business philosophy. On June 27, Metro PLUS membership store officially opened at Caoqiao, Beijing, with a business area of 4,000 square meters, about 2,500 SKUs, and private labels and exclusive products accounting for 40%. Unlike other warehouse membership stores, Metro PLUS has abandoned high shelves. 'The general height of warehouse stores is 9 meters, but because it is a renovation of a traditional supermarket, the Caoqiao store has lower ceiling height, so we lowered the shelves for better visibility.' According to Chen Zhiyu, Metro PLUS membership stores are still in the 'trial' stage. To avoid cutting off traffic flow and increase family time for members, the Caoqiao store has also integrated dining and children's play areas into the sales area. To enhance the member experience, it also uses DuoMai Dmall's self-checkout system. But details don't decide everything. For foreign brands like Metro, the biggest pain point in the domestic market is how to convert paid users, especially C-end users. According to Chen Zhiyu, Metro China currently has 20 million members, with paid users in the millions. 'We hope that sales from paid users will reach 80% this year.' In addition, despite the active layout of foreign-backed players like Metro, besides objective factors, the force of emerging local players like Hema cannot be ignored. In 2019, Hema's private label SKU count had already reached 1,000, with sales accounting for over 10%. In its first Hema X membership store in Beijing, the private label 'Hema MAX' accounted for over 20% of SKUs. According to data from the first X membership store in Pudong, Shanghai, it achieved profitability within two months of opening, with an average transaction value of 1,000 yuan and daily revenue peaking at over 10 million yuan. Compared to other players, Hema X membership store's advantage lies in its backing by Alibaba's digital agriculture and over 500 direct sourcing bases. At the same time, Alibaba's global procurement capabilities are not inferior to international players like Sam's Club and Metro. 36Kr compiled and charted based on incomplete public data
Is 'Warehouse' the Antidote for Traditional Supermarkets?
In the suddenly booming track, Yonghui is somewhat of an outlier—'warehouse only, no membership.' Unlike mainstream players, Yonghui warehouse supermarkets waive membership fees and control gross margins below 10%, which is lower than Hema X membership (no more than 14%) and Costco (13%). Not only free, but Yonghui warehouse supermarkets are also opening at an exceptionally fast pace. As of July 30, Yonghui warehouse supermarkets have completed layouts in 12 provinces nationwide, with total store count exceeding 35. 'In terms of store count, Yonghui may soon surpass Metro and become the player with the most warehouse stores in China,' Wang Guoping, senior advisor at Lianshang.com, told 36Kr. Wang Guoping believes that the reason for Yonghui's aggressive replication is its high debt ratio and the low recognition of its 'new retail' format in the capital market, urgently requiring increased turnover and reduced cost leverage. The warehouse store model just fits Yonghui's urgent needs. Previously, Yonghui had repeatedly stumbled in 'new retail.' Public data from Yonghui Yunchuang also shows that from 2015 to 2019, it accumulated losses of over 2.6 billion yuan. After the failure of 'Super Species,' Yonghui mini also faced a wave of store closures. In essence, Yonghui's layout of warehouse supermarkets may be due to the pursuit of high average transaction value and high sales per square meter. According to 36Kr, under normal circumstances, the sales per square meter of warehouse membership stores is at least 2-3 times higher than traditional supermarkets. According to data provided by Jiuqian Zhongtai, in the first quarter of 2021, nationwide, Sam's Club's overall average monthly sales per square meter was 3,697 yuan per square meter, with average monthly sales of 82.01 million yuan and average transaction value of 527 yuan. In the same quarter, nationwide, Yonghui Superstores' overall average monthly sales per square meter was 1,364 yuan per square meter, with average monthly sales of 11.334 million yuan and average transaction value of 98 yuan. Under the significant gap, the eagerness of traditional supermarkets like Yonghui and Beiguo to transform into warehouse supermarkets is fully exposed. So, will the warehouse system become the direction for hypermarket transformation? Will new entrants become strong competitors? At least for now, it is certain that the operating logic of warehouse membership stores is quite different from traditional supermarkets. The former pursues member renewal rates, while the latter pursues maximization of sales and profits, and renewal rates are directly linked to services. Moreover, in Chen Zhiyu's view, China's market education is not yet complete, and the entire track is still in its early stages of development. Its biggest competitor remains traditional supermarkets. 'For sustainable development, warehouse membership stores need to think more about how to serve those consumers who are not satisfied with traditional supermarkets.' -END- PS: The 2021 (4th) China FMCG Conference, hosted by New Distribution, is about to open in Shanghai. Focusing on industry trends + practical cases + growth connection as the core, 3,000 FMCG practitioners will gather for the event. 10 themed forums cover new retail O2O, community group buying, short video live e-commerce, distributor transformation, rise of new consumer brands, new wine and beverage interpretation, distribution B2B supply chain, omni-channel marketing, B2B2C new technology applications, etc., with operators from various segments bringing the latest case interpretations. Some of the confirmed heavyweight guests so far include: **1. Tao Shiquan, founder of Jiangxiaobai; **2. Yao Xuhong, general manager of Meiyijia Holdings Co., Ltd.; **3. Lu Xiuqiong, global expert partner at Bain & Company and former vice president of marketing for Coca-Cola China; **4. Chen Xiaodong, senior vice president of Nestlé Greater China; **5. Zhang Fujun, president of Lee Kum Kee Sauce Group China; **6. Bi Chaojiao, general manager of China Resources Snow Breweries (China) Marketing Center; **7. Yang Hongbin, vice president of Junlebao Dairy Group; **8. Yang Shun, COO of Lipton Greater China; 9. Zhang Yipeng, general manager of Kuaishou E-commerce SKA Brand Operations Center; 10. Li De, e-commerce general manager of Gold Hong Ye Paper Group... A grand event for FMCG professionals, you must be there! Are you 'watching' me?