- Convenience store growth is surging, bucking the trend of weakening physical retail store sales. 7-Eleven is the market leader, though FT Confidential Research’s latest consumer brands survey found that other foreign chains were increasingly popular.
- This is, however, a highly fragmented market and foreign chains will struggle to expand into lower-tier cities, where domestic operators offer greater competition, sometimes supported by local governments.
- International operators are also coming under pressure from other big foreign retailers in China, while domestic newcomers are expanding aggressively in the belief that online-to-offline (O2O) services will help them seize market share and overcome short-term profitability issues.
Convenience stores continue to eat into the retail market share of larger formats. In a second-quarter FT Confidential Research survey, 83.4 per cent of urban consumers described themselves as regular convenience store patrons, 0.9 percentage points up on our previous survey in the fourth quarter of last year, while the proportion regularly frequenting supermarkets or hypermarkets fell 1.2 percentage points (see chart).
The convenience store format has been a standout in an otherwise gloomy market for bricks-and-mortar retailers. Though nationwide sales of fast-moving consumer goods rose 13.2 per cent last year, according to Kantar Retail, a consultancy, hypermarket sales slipped 0.2 per cent and sales at traditional, independent grocery stores fell 10.4 per cent.
Convenience store chains are stealing market share, with store count growing an average 10 per cent each year from 2010 to 2015. Our survey found that 88.6 per cent of younger shoppers, aged 24-29, frequently go to convenience stores, up 3.4 percentage points from our survey six months ago. In contrast, the proportion of this cohort regularly going to supermarkets or hypermarkets fell 0.8 percentage points in that time.
Despite growing demand, the convenience store market remains fragmented, with no national leader. The most popular chain was different in 10 of the 11 major markets in China, according to our survey (see chart).
Beyond Shanghai
Growth is concentrated in first-tier cities such Beijing and Shenzhen and certain second-tier cities. Shanghai, the biggest market by far, is now saturated, with store count increasing just 2.9 per cent in 2015, having shrunk in 2013, according to the China Chain Store & Franchise Association. Shanghai had one convenience store for every 3,466 residents, a far greater concentration than in Beijing (7,185 people per store) and Chongqing (28,846 people per store). Second-tier Harbin, Wuhan and Changsha were the three cities with the fastest-growing store count in 2015, while Beijing came in seventh (see chart).
Foreign chains out in front
Our survey found that foreign brands remain more popular than their domestic peers. Japanese brand 7-Eleven was the most popular, with 20.4 per cent of respondents saying they frequently shopped at its stores, up 1.1 percentage points from the fourth quarter of last year (see chart). The popularity of two other Japanese chains, FamilyMart and Lawson, also rose, up 0.8 and 1.2 percentage points, respectively.
After years of losses, foreign brands may finally have found ways to consistently turn profits in China. Shanghai FamilyMart, a joint venture between FamilyMart Japan and Ting Hsin Group formed in 2004, turned a profit for the first time in 2013. This ¥745m ($7.4m) profit expanded to ¥1.5bn last year.
FamilyMart’s clean, reliably stocked outlets appeal to white-collar workers, but it is the prepared fresh food options that have really proved popular. The company now has four factories preparing ready-made food in or around Shanghai and reportedly sells about 300,000 bento boxes each day in the city. Prepared fresh food makes up roughly half of the total sales of each FamilyMart store, according to Ting Hsin vice-president Wei Yingxing.
Bottlenecks to expansion
The nature of convenience stores makes brand loyalty tough to engender: is a Shanghai urbanite going to walk further to their favourite chain for something as basic as a bottle of water?
This is helps explain why the expansion of foreign brands into lower-tier cities has been harder than they anticipated. In 2010, FamilyMart set a goal of opening 4,500 stores in China, but had only reached one-third of that by February 2016. Three years ago, Lawson targeted 1,500 stores in Shanghai and 500 in Chongqing by 2015. As of May 2016 it had opened just 506 and 111, respectively. Among the top 10 chains nationally, the market share of domestic chains has actually rebounded slightly since 2012, while the rapid growth of foreign chains has slowed, according to Kantar (see chart).
Domestic competition tough to overcome
Shanghai has provided domestic companies with a case study in how to compete against foreign entrants. Almost all big domestic convenience store chains have beefed up their offerings of ready-to-eat food products, mimicking FamilyMart’s success in Shanghai. Many are now accelerating store openings in areas dominated by foreign chains, while some have managed to poach middle managers from international companies.
This competition from domestic chains is dragging on store count growth for the multinationals: the number of 7-Eleven stores in Chengdu dropped to just 56 by May this year from 87 in February 2013 (see chart). FamilyMart has also expanded only slowly in Chengdu. In contrast, local leader Hongqi has 1,543 outlets in the city, and reported a 15.2 per cent increase in operating revenue and a 5.3 per cent rise in net profits to Rmb170m ($26m) in 2015.
The target demographic of foreign convenience stores is much smaller in second-tier cities than in the major coastal hubs, given lower incomes and different consumption patterns. In Beijing in 2015, the daily revenue of each 7-Eleven outlet was, on average, more than Rmb16,000. The equivalent figure in Tianjin and Chengdu rarely breaks Rmb10,000. This has forced foreign companies to be more strategic about where they open outlets in these cities.
Government policy may also limit expansion. Since 2009, the Chinese government has banned retailers with foreign backgrounds from selling cigarettes nationwide, a business we estimate could account for a third of convenience store sales. In Shanghai, the municipal government also offers subsidies to state-owned firms, and in second-tier cities the relationship between local companies and local government is usually even closer.
In response, Lawson has signed a franchise contract with Wuhan Zhongbai, authorising Hubei’s leading retailer to open Lawson convenience stores in the province — even though Zhongbai has its own convenience store chain, named Haobang. These sorts of tie-ups may be a solution for foreign chains to expand in the provinces, but maintaining service quality will prove a challenge.
Here come the newcomers
Furthermore, the market’s rapid growth is luring in new players. Large, established foreign retailers are looking to leverage their brand popularity and existing infrastructure. Carrefour, for example, has already opened 13 Carrefour Easy convenience stores in Shanghai. Germany’s Metro also recently opened its first two My Mart convenience stores in the city.
Domestic entrants are even more aggressive. Quanshi has opened 270 stores in Beijing since it was established in 2011. In comparison, 7-Eleven had 192 stores in Beijing as of May 2016, having entered the market in 2004.
Quanshi’s ampm brand (not to be confused with BP’s chain of service stations) is one of a swath of Chinese operations, across numerous industries, banking on O2O services to drive growth. The chain claims that short-term profitability issues from its model can be overcome once economies of scale are achieved. Companies like Quanshi see O2O services, including package storage but also delivery, as the future of the convenience store business.
The commercial viability of this strategy is so far unproven. A deal between JD.com and Taiyuan Tangjiu, a Shanxi chain, in which the online mall hosts the convenience store’s online presence while its couriers provide one-hour delivery, has not been a success.
Given such intense competition, we believe the convenience store market will remain fragmented and locally focused. For now, it is unclear that a national leader will emerge, as 7-Eleven has in Japan. In second- and third-tier cities, lower incomes and local protectionism mean that foreign chains may take over bustling, high-rent street corners, but will struggle to establish a dominant position.