The convenience store business has become an ocean of opportunities for Chinese companies seeking investment opportunities.
In May, the China Chain Store & Franchise Association and the Boston Consulting Group, together, presented their findings in the ‘2017 China convenience store development report’. They pointed out that the number of convenience stores in China has reached 100,000 with an annual sales revenue of USD 19.3 billion (RMB 130 billion).
Such an uptick in the industry could partly be due to an increase in funding by Chinese investors who keep pumping cash into convenience-store-related businesses. However, rushing to expand massively to Chinese cities instead of building core competence can lead to future problems.
Prominent Chinese investor, He Wen of Chunxiao Capital, one of leading VCs in China, recently wrote an opinion piece for Chinese newspaper The Economic Observer. His mainly compared the convenience store giant 7-Eleven to the convenience store business models currently existing in China, concluding that the Japanese convenience store industry has much to offer in the way of establishing a stronger Chinese convenience store industry.
Let’s look at some takeaways.
Success of 7-Eleven
By the end of 2016, 7-Eleven had more than 56,000 stores in 18 countries, making it the largest convenience store chain group in the world.
7-Eleven’s core competence is the source of its success.
The giant maintains a low cost by selling its own self-branded products. With over 180 factories as stable suppliers in its supply chain, it has the flexibility to develop its own products at extremely low costs. This allows it to stock its stores with 60% of its own self-branded products.
7-Eleven has a high profit margin for its ready-to-eat cooked food offerings, such as oden, rice ball, sushi, etc. The more such items are sold in any given store, the more profit that store earns. The ready-to-eat cooked food category contributes to over 40% of profits earned among all of the products sold in 7-Eleven stores.
7-Eleven has a strong IT system, which covers the entire supply chain, from the factories to the stores. Every 7-Eleven, whether directly-managed or franchise, is equipped with the same system.
Status of Chinese convenience store industry
Compared to 7-Eleven, Chinese convenience stores have a long way to go. For example, Chinese convenience store brand Meiyijia in Guangdong province has opened about 10,000 stores by 2017. Another convenience store chain Shizu in Zhejiang province has 1,700 stores.
Despite the strides that the Chinese convenience store brands have taken over the recent years, He Wen points out that they are in need of an overhaul. Urgent reforms should lead to the creation of a robust IT system, competitive supply chains and partnerships and, lastly, strong centralized-management.
- Firstly, Chinese convenience stores need to adjust their business models and upgrade their IT systems. In the Chinese model, the individual stores are only provided the brand name. Therefore, their business model is one of generating revenue by making sales at a large scale in order to get rebates offered by suppliers. The Japanese franchises, on the other hand, share their profit with the headquarter, which, in turn, provides the stores with stable suppliers.
- The broken supply chains of Chinese convenience stores cannot support high-profit-margin products. On top of that, the high-profit-margin products, like ready-to-eat cooked food, account for very low sales in the stores.
- Lastly, in China, the headquarters of the convenience stores provide very weak management and guidance to each of the stores in their franchise system. The development of convenience store brands follows a certain strict model. They first run a few directly-managed stores and then expand the market by using the franchise system. However, this is all done with very poor management and tremendous oversight. For example, the store’s brand strength suffers because less than 10% of its product offerings are supplied by the brand headquarters.
Possible strategy for Chinese convenience stores
It’s not all over for the Chinese convenience store industry. With strategic improvements, the industry can take on a massive tidal wave-like momentum.
Chinese convenience store brands, first, need to scale quickly. After reaching certain scale, the store headquarters have negotiating power with the suppliers. They can benefit, not only, on the price of the products, but on the number of products, and the speed with which the products are delivered to the stores. Keeping costs low and having good cash flow will allow the headquarters to gradually upgrade their supply chains, develop warehouse systems and optimize operations to increase single-store outputs.
Secondly, expanding into second-tier cities is key. In many second-tier cities, foreign brands cannot set up chains easily because the best locations have already been taken by the local brands. With sales revenue only a little less when compared to stores in the first-tier cities offset by lower rent costs means that the profitability is very high. Large foreign brands are concentrating on developing their core positions in the first-tier cities, thus, dedicating almost no time to developing in second-tier cities.
The Chinese convenience store industry has many opportunities to grow and develop if they do it right.