Why Are Couples Groceries More Profitable Than Chain Convenience Stores In China?

(Chinese Version)

In March 1993, “Baishi Convenience Store”, the first convenience store of modern characteristics, was opened in Shanghai, China (later acquired by Liangyou Group in 1993). In 1995, “Kede Convenience Store”, the first state-owned convenience store, emerged. Since then, various types of convenience store brands, including 7-Eleven, Rawson and Quanjia, were established one after another in China.

Besides the "regular army", there is also a wave of "miscellaneous military" in every corner of every city. Many of them often have even longer history than these "foreign background convenience stores" and occupy the center of many communities. In fact, in the corner of many Hutongs and alleys you can easily find such groceries.

In Guangdong province, they are called Shi Duo Dian (“Shi Duo” is the homonym of “store”, “dian” means store); in Fujian province, they are called “Gan Zi Dian”; in Shanghai, they are called “Yan Zhi Dian”; in north China, however, they are called “Xiao Mai Bu” (which means little snack stores) or “Fu Qi Dian” (which means couple stores).

It has been 24 years since the first modern convenience stores appeared., but convenience stores have spread across China these years.

Near the end of 2016, 7-11 announced that it would enter one new city every one to two years and ensure that it would open 30 to 40 new outlets in major cities every year. Rawson also announced that it would quadrouple the number of its stores by 2020, from 750 to 3,000. Quanjia also stated that it planned to open 10,000 outlets in total by 2024

While the retailing industry is declining, convenience stores have continued to grow. Businessmen and entrepreneurs have all seen the opportunity and attempted to seize it. Recently, Bianlifeng opened five convenience stores at Zhongguancun, Beijing. It is also reported that Bee Quick is also to open its own convenience stores soon.

A 1 billion yuan market beneath groceries 

Despite the rapid growth of foreign convenience store brands, Chinese grocery stores are also thriving. According to incomplete survey, there are 6.8 million groceries across China, with an annual sales volume of 10 trillion yuan. More specifically, 3 trillion yuan comes from alcohol and cigarettes sales.

Among these groceries, 30 per cent are located in towns and villages, 21 per cent in counties and county-level cities, 25 per cent in third-tier cities, 16 and 7 per cent in second-tier and first-tier cities, respectively.

In addition, ordinary groceries contributed to 40 per cent of sales in South China region, much higher than that of chain stores.

As a matter of fact, the market is large enough to gather a large number of fast moving consumer goods players, including Huimin, Hulian, Tianxia, Dinghuobao, etc. The capital has also eyed on the sector. In September 2016, Huimin received 1.3 billion yuan Series B round financing with a valuation of $ 2 billion. Near the end of 2016, Hulian also received 700 million yuan Series B round financing.

A market as large has even drawn the attention from internet giants. Near the end of 2015, JD officially established JD New Path Business Division. At the beginning of 2016, Alibaba also launched its own retailing platform.

The other days, Richard Liu, founder and CEO of JD Group, announced that JD would open over 1 million convenience stores within the next five years, half of which in the countryside. According to the official illustration, JD’s convenience stores will be opened mainly by acquiring couples’ stores.

A respondent from JD also confirmed the plan. At present, the project was carried out by JD New Path Business Division. JD’s convenience stores will adopt the franchise model: while JD provide the brand, business model, management, supply channel, store owners can decide if they purchase part or all goods from JD. They can place orders through JD’s ZGB APP, while JD will deliver the order accordingly. In the process, JD will only charge a certain amount of deposit, so there is no franchise fee or management fee.

Around the time of last O2O battle, internet giants have already tested community convenience stores. As early as 2012, Alibaba, JD and Yihaodian had aleady attempted to team up with convenience stores and develop package pickup service at these spots.

When the line between online and offline narrowed in 2014, Alibaba and JD added their investment in O2O. That March, JD announced that it had cooperated with over 10,000 convenience stores across 15 cities. Shortly after, Alibaba invested 5.37 billion Hong Kong dollars in Intime Department.

However, online platforms and offline stores both have their own thoughts, so the effect of such loose cooperation is quite limited. Therefore, JD’s plan paled into insignificance just like other similar plans.

Through this recent plan, however, JD attempted to integrate B2B and B2C: on the one hand, it could activate the resources of its front-end supply chain and expand the coverage of ZGB APP; on the other hand, it could accumulate the traffic and consumption data of couples’ groceries and make full use of the delivery capacity of these stores.

Besides, it is worth noticing that half of these 1 million grocery stores will be opened in the countryside. These stores will take up JD’s ambition to subside its channel. This February, JD announced that it would open over 10,000 domestic appliance stores in 2017 and equip each town and county a store. In this case, incorporating couples’ groceries might as well be complementary to its cause.

Why are Hutongs and alleys filled with groceries?

As a matter of fact, JD “incorporated” these grocery stores not by acquiring them or opening new ones by itself. This also has to do with the living situation of groceries. Whether hidden in Hutongs or alleys, there are scattered around the residential communities and super close to consumers.

It’s common sense that to make money, you have to open convenience stores in the right place in major cities. However, it’s rather difficult to find the right place. Therefore, why can’t internet or retailing giants just purchase these tiny groceries hidden in Hutongs and alleys?

First of all, we have to understand what group of people are opening grocery stores.

Huoquanquan, a Chinese stock purchase price comparison tool, once conducted a survey over stores on its platform. According to the survey, 87.95 per cent of store owners only have senior high school degree or lower, and 63.86 per cent of them are male. To our amazement, the majority of store owners are not middle-aged. Instead, 42.17 per cent of store owners are under the age of 30, 6 times higher than that of store owners above the age of 50.

Among these groceris, 60 per cent are run by couples. 30 per cent of these couples choose to open grocery stores because they don’t want to work for others; 25 per cent of them choose to do so because their kids are still young, so they can take care of the kids while running grocery stores; another 17.14 per cent of them do so because it’s more stable and less risky to run such business.

Besides, there’s considerable revenue. According to the survey, 53.01 per cent of such grocery stores earn less than 100,000 yuan a year, 33.73 per cent earn 100,000 to 20,000 yuan, 6.02 per cent earn 200,000 to 300,000 yuan, while less than 8 per cent of them earn over 300,000 yuan.

Like the past, couples would do the business in the front and live just behind the store. They don’t have to work for others, while they can set their own schedule and strike a good balance between life and work. Why do they bother to sell their stores to others, then?

Besides, they might have to face stricter rules if they decide to join a franchise, pay for the franchise fee and share their revenue with others. To ensure franchise owners understand the working mechanism, chain convenience stores like 7-11 would even require them to work in a 7-11 store for a couple months and get them familiar with the corporate culture.

Secondly, we have to understand the advantages of these Hutong-based convenience stores.

Chain convenience stores often cover first-tier cities. On the one hand, their access areas are limited; on the other hand, it’s quite expensive to open chain convenience stores in first-tier cities. That’s why many chain convenience stores have no choice but to to open their outlets near major shopping malls and office buildings.

Zhang Ze, founder of Huoquanquan, revealed to TMTPost that in general, every grocery store has around fifty regular customers. They are enough to support a grocery store. For chain convenience stores, however, they often need 200 or more regular customers to make ends meet.

For example, there are no regular customer around some office buildings, since most people are passers-by and traffic during weekdays is often busier than that in the weekends. Therefore, to make ends meet, such chain stores have to focus on weekdays and days, instead of nights and weekends.

In comparison, groceries’ opening hour is often flexible. Stores owners would open the door once they wake up and close the store once there are no customers. Sometime, you can knock at the door at midnight and still buy goods. To some degree, they are like 24 hour stores, though they don’t have to assign three shifts. A couple are enough to run such a store, so their labor cost is a lot lower than chain stores.

Moreover, there’s one open secret: these grocery stores hidden in Hutongs and alleys often don’t have any credential or certificate.

In residential buildings of many northern China cities, couples would rent the first floor rooms and changed them into stores. They should have acquired necessary certifiactes to do so, but most couples did so without any permission, nevertheless.

While Japanese chain convenience stores can’t sell cigarettes based on relevant regulations, these grocery stores make full use of their natural advantages and managed to sell cigarettes, self-made box lunch, etc. After all, the margin from selling cigarettes can be significant.

Last but not least, these grocery stores are welcome by regular customers.

When grocery store owners will help out and help you pick up packages and chat with you, you will be embarrassed not to buy something at their stores. Different from chain stores, they promote themselves by chatting with customers, which is of low cost but highly efficient.

While you will still have to wait a couple hours or days to receive your packages or meals, you only need to make a call and the groceries owner will knock at your door and deliver your order within five minutes. By the way, there’s no delivery fee. Instead, it’s just a favor.

These groceries are so close to ordinary customers that many internet giants have eyed on them. However, the market is still rather scattered and mixed, so it would be too difficult to integrate them all. That’s why it may be a good temporary expedient to acquire them.

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[The article is published and edited with authorization from the author @Xie Kangyu please note source and hyperlink when reproduce.]

Translated by Levin Feng (Senior Translator at A), working for TMTpost.

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