Small Businesses Continue To Rise As Big Malls Close Down

摘要: When traditional supermarkets are closing down, small businesses are thriving. Is it the sign that supermarkets are losing their ground and are being replaced by small businesses? As a matter of fact, transformation from big to small is inevitable. As for giant supermarket brands, what they should do is to improve their operation model and management.

(Chinese Version)

When traditional supermarkets are closing down, small businesses are thriving. Is it the sign that supermarkets are losing their ground and are being replaced by small businesses? As a matter of fact, transformation from big to small is inevitable. As for giant supermarket brands, what they should do is improve their operation model and management.

In Shandong province, Lotte Group had no choice but closed four of its supermarkets, LotteMarts. It didn’t stop from there, however. The company then subsequently closed its only LotteMart in Nanjing. Such cases are not limited to foreign brands. In August, the Chinese supermarket giant, Wanda Dept also closed many of its department stores. Rumor has it that Wanda will transform its department store business into experience-based. International heavyweights like Carrefour and Walmart are also facing the same issue, with many of their branch supermarkets closing in China. According to statistics from the Ministry of Commerce of the People's Republic of China, in the first half of this year, the number of supermarkets that have been shutdown in the country hit 121, making a highest record in history.

As the closing-down tendency sweeps through China, small businesses are rising. It seems that small businesses are taking over the position of supermarket giants.

Has the GMS(General Merchandise Store) model reached the bottleneck?

Ever since the GMS model’s entry into China in 1995, it has been the doctrine for many retailing giants. However, in 2008 China’s GMS sector reached a turning point, with the market overrun by hundreds of thousands of supermarkets and the heating competition.

Figures from the Ministry of Commerce of the People's Republic of China show that in the first half of this year, the number of supermarkets that have been shutdown in the country hit 121, making a highest record in history. Most supermarkets closed down for their failures in sales performance and strategic structural upgrade. A little known fact is that the year 2008 happened to be the year in which e-commerce giants like Alibaba and JD took off and soared.

While major supermarkets and department stores are closing, small business model thrives. According to statistics from a survey done by the Ministry of Commerce of the People's Republic of China, the sales volume of Chinese retailing enterprises only had a 4% growth in 2014 compared to the year before, among which the department store sector segment attained a growth rate of 4.1%, and 5.3% for department stores and 3.7% for franchised stores. In contrast to that, small businesses had the highest growth, 8.2%.

Such things are not only happening in China. On October 16th 2014, Walmart Global lowered its sales expectancy and turned to focus on investing in e-commerce instead of expanding its supermarket business. In some way this indicates that the GMS model is declining globally. In this case, the downfall of supermarkets and department stores is not necessarily caused by the economy slowdown of China.

The main contributor of GMS model’s decline lies in its core flaw. Compared to small businesses like convenience stores, supermarkets and department stores are too large in scale. Most of them cover an area of ten or twenty thousand square meters and situate at the city center, which means higher rent than ordinary supermarkets scattered through different communities in cities. Additionally, the ever-increasing rent makes it harder for such big malls to survive. In recent years, supermarkets and department stores are developing in the same direction. They even look the same and feel the same. The lack of features and unique shopping experience also drives consumers away to small businesses.

On-stop shopping giant malls are also being challenged by small but sophisticated businesses. Independent bakeries, pharmacies, snack stores and fruit stores have come back to life and have been rising in recent years. Different small shops that focus on different fields have evolved and now are bringing much of a stir in the consumer market. All these factors force giant department store and supermarket brands to reconsider of the possible integration of small businesses in the future.

Nowadays e-commerce in China has evolved to the point where all ordinary merchandise can be purchased on different e-commerce platforms that also provide to-your-door delivery service, which weighs even more pressure on traditional brick-and-motor supermarkets and department stores. Big malls’ advantages in price, merchandise diversity, and shopping experience have grown less competitive. Thus, they are losing their edge.

“Under theses circumstances, giants will try to infiltrate small businesses in communities and the convenience store sector as they meet the bottleneck in the GMS sector,” Xiang Xin from the Ministry of Commerce of the People's Republic of China stationed in Shanghai explained.

Big malls are making their moves to expand and preserve their business. In February this year, Vanguard announced its brand new logo. “In the past decade, big malls had been managed in an inefficient way,” CEO of Vanguard, Hong Jiezeng said. “They cover a large space but barely make use of them. What we need to do is utilize every inch we have.” Very soon, Vanguard’s own action proved his theory to be correct. “Vanguard has big malls, high-end supermarkets, standard markets, and convenience stores etc. We consider convenience stores and TESCO Express as small businesses and there are currently 1,500 small businesses within our system,” Zheng Weixia, the general manager of Vanguard of Jiangsu province said. Additionally, Zheng revealed that Vanguard is going to offer franchises to small businesses and that Vanguard planned to expand to 6,300 stores by 2020.

Small business expansion plans like Vanguard’s are common among other supermarket and department store giants. For instance, Suning, who has been finding ways to find its spot in the e-commerce industry, has also planned its layout in this field. Early as in 2014, Suning had started to open its own supermarkets which focus on providing snacks, fresh goods, liquor, household necessities, and other basic necessities like most supermarkets have. Carrefour has also made its move. Last year, Carrefour opened its first East Carrefour in Shanghai to test the waters. Later on METRO also opened its own new brand of new market in Shanghai.

An integrated convenience store?

Building small businesses might be just the right alternative.

The alternative here I am talking about it's the e-commerce form of supermarkets and department stores. According to media report, Beijing Huaguan’s online supermarket literally has zero sales so far. However, Suning, who has put a great amount of resource in building its e-commerce platform, still lack behind Tmall and JD, who account for 59.3% and 20.2% of the B2C market share respectively. In contrast to the top two giants, Suning only has a market share of 3.1%, ranked the third. GOME, who only has a market share of 1.7% actually ranks the fifth.

In this case, I believe most supermarket giants are not going to focus completely on the e-commerce sector this year.

Giants like Vanguard and Better Life etc. have been working on the directions of the O2O sector and fresh good sector in hopes of finding potential areas in which they can have some kind of breakthrough in the e-commerce segment. And Suning who is still working on refining its platform reached a strategic cooperation with Alibaba in August this year. However, what Alibaba really wants are Suning’s vast inventory space (4.52 million square meters), 4 aviation transport hubs, 12 automatic dispatch centers, 660 city delivery centers and 10,000 delivery points. In a word, Alibaba wants Suning’s logistics system to boost its delivery service. However, this cooperation doesn’t seem to be useful for Suning’s e-commerce strategy. For example, in this year’s Double Eleven Shopping Festival, Suning was cru5shed by JD.

So how small businesses are making their success? Let’s take Vanguard as an example. Recently, Vanguard has launched its TESCO Express in Shenzhen, Suzhou, and Tianjin, covering basically the south of China, east, and north. Unlike the past supermarkets that integrate tons of things together and convenience stores that focus on providing consumers with fast and convenient shopping experience, TESCO Express offer extra services like fresh goods, dining, and leisure services etc. In other words, TESCO Express is more convenient and more about consumers’ daily needs. It can be regarded as an updated convenience store or a more sophisticated supermarket.

Upgrading the supermarkets and integrating more stuff is the fundamental direction that many supermarket brands are going for in the small business sector, quite similar to the definition of standard supermarkets. Such integrated stores are something between convenience stores that cover an area of 80 to 120 square meters and big malls with an area of over ten thousand square meters. “In the early stage of urbanization, big supermarkets and department stores naturally came into being since people usually live in certain places,” Chen Yan, the general manager of management department from Vanguard, believed. “ However, when cities reach today’s stage, with cities become much more larger, traffic worsens, the population grows larger, and changes in consumer needs etc., the current GMS model is no longer suitable for today’s society.”

But still, integrated stores cannot completely satisfy consumers’ needs either. When enterprises start to run small shops, they tend to make them in the same model. As a result, all of these small shops will lack their unique features. In this case, no matter how convenient and useful these shops can be, they will still fail.

Therefore, giants are starting to adopt diverse operation strategies. The classic case here is Vanguard. Vanguard’s LeGou Express made 30% of its space particularly for fresh goods. From Chen Yan’s perspective, the company’s biggest rivals are not other giant supermarkets, but rather local marketplaces. The goal of this move is to establish pick-up points for consumers to pick up their fresh goods with the help of its small businesses, signifying Vanguard’s ambition to enter the fresh good sector.

SFExpress took it even further by opening HeiKe stores in some communities and central districts of some major cities in May 2014. In HeiKe stores, there are items labeled with QR codes for payment, which allows consumers to order merchandise online. However, after months of operation, rumor has it that HeiKe has burnt one billion RMB and it’s going to close down. SFExpress announced officially later that HeiKe’s name would be changed to SF Home and such stores would continue to exist. Even though these stores are not in fact closing down, this change still means that HeiKe’s model has failed and met its death.

Small businesses are still finding their paths to a mature model, but what about big malls? “Supermarkets are becoming smaller,” Liu Hui, from Beijing Hui Yi Retail Management Consulting Company, concluded, confirming the situation. “GMS model is dying in China.”

If this is true, big supermarkets in China are indeed losing their ways.

Mixed models cause long tail effect

Any theory related to supermarkets and small businesses tends to focus on one region. But once we apply them to first and second-tier cities, we can actually understand something better.

One is that GMS model still works.

On the surface, the GMS model is no longer appealing to consumers in first and second-tier cities, but can rather create more business opportunities in third and forth-tier and other cities. Thus, there’s a tendency that big supermarkets will use the lessons learned in first and second-tier cities and turn to build more, newer, and better malls in smaller cities.

According to Dong Gang, general manager of Wu Mart, big supermarkets have to pay more attention in refining their operation model in order to maintain a stable profit rate. What’s more, big supermarkets should also provide existing consumers with better products at lower price and improve the shopping environment and facilities. Looking at the development tendency of big supermarkets in the western world, big supermarkets will gradually move to suburb, leaving only convenience store and standard supermarkets in downtown. Apparently, China has just entered something in between, a transitioning process.

Secondly, adopting small business model doesn’t mean making big malls smaller.

Small businesses can seemingly cover the city very quickly. But nice as it appears, small businesses are not the mini version of big malls, but rather shops and stores that have a clear positioning and are targeting specific consumers. In other words, they must meet communities’ needs.

In industry insiders’ opinion, traditional supermarkets are all too similar and lack unique services and features. Such drawback also occurs in the small business sector. Besides factors like the local weather and lifestyle, the high cost also makes it harder for convenience stores to set themselves apart from supermarkets. “Convenience stores in Japan can get a 1% commission from providing payment and ticket booking services while convenience stores in Taiwan can get a 0.6% commission,” an insider revealed. “However, in mainland China convenience stores only get 0.1%.”

Some small businesses have already started to work on this issue. Instead of following foreign companies’ path and provide life services, they provide more and better choices in merchandise. For example, a shop that sells office items will make pens and notebooks etc. as its must-have merchandise. And white collars are the main consumers of takeout service. In this case, convenience stores in CBDs will naturally provide them with different takeouts. And convenience stores in residential districts the main merchandise would be daily necessities. Foreign convenience stores in China will also offer imported items for certain foreigners in that area.

At last, being comprehensive can’t always win.

Traditional supermarkets usually store around 20,000 items. It sounds like tons of merchandise right? However the categories of these items are very limited. Generally there are only two or three hundred kinds of items, or even less. This is where small business shines. Convenience stores have around two thousand kinds of items in stock in general, much more than any shop on Taobao can offer. In this way, convenience stores not only can provide consumers with diverse merchandise, but also create its own “voice” and features. This is something big malls can’t achieve.

However looking from its core, such small business models are still big malls’ forces that are supposed to dig deeper into communities’ needs. Simply put it’s like dismounting different components of big malls and installing them in communities according to communities’ needs while the big malls still serve as the operation, logistics and inventory centers. In this case, these small businesses are like tails of big malls, which sweep through targeted communities.

Even if enterprises are able to make the right strategies, they still might not be able to bring success to their small business layout. So how can they jump out of the box and accomplish what they have started?

Using Internet thinking to shape small businesses

Using Internet thinking as a way out has been a mutual alternative for many supermarket giants that have failed to make their e-commerce business. When such thinking model is being applied to small businesses, its power finally starts to work its way around.

1. Rapid modifications

In Germany, ALDI, which focuses on running small-sized supermarkets that sell food, was able to push the international giant Walmart out of the local market. In general, one franchise store only covers an area of 500 to 800 square meters and has over 700 items in stock. However, ALDI defeated the seemingly gigantic Walmart due to its principals on the careful choice of merchandise, low price, and high quality of the products. Besides that, ALDI also lowered its operation cost to the lowest by reducing the unnecessary merchandise they had. The ending was surprising yet predictable: Walmart lost.

In this model, the crucial part is that ALDI modifies its merchandise structure fast. In China, Letus’s snack market Big Mouth Snack Kingdom has been the perfect example. Accroding to Letus, Big Mouth Snack Kingdom’s staff will literally taste everything before considering purchasing them and having them in the store. They, as a matter of fact, only pick merchandise they deem as good. In Big Mouth Snack Kingdom, almost 30% of snacks will be replaced by new ones monthly and about 70% of merchandise will be replaced in a year. This is something that big supermarkets cannot pull off since they are just too big to manage that.

Every time you walk into the Big Mouth Snack Kingdom you will find something new to try. And this constant and rapid modification on products satisfies consumers’ needs for new and customized products. Such “small” stores can in fact become as “big and diverse” as big supermarkets thanks to this model.

2. Vertical and specific sectors

As small businesses are becoming more mainstream, small shops that are closer to consumers’ daily life, such as bakeries, pharmacies, snack stores and fruit stores etc. have been thriving within communities. Among companies that adopt the small business model, the BESTORE have been the classic case. It only took BESTORE 7 years to expand to 1,200 stores in the country and accumulate a sale volume of 1.5 billion RMB by the end of 2013.

The secret of BESTORE’s success is its ability to penetrate a vertical and specific market. BGYshop, who has over a thousand stores across the country and focuses on the fresh fruits sector, directly penetrates communities and has access to international fruit purchasing system, which allows it to import fruits from 16 countries, including the U.S., UK and Argentina etc. and deliver to different communities. Such brick-and-motor shop model that connects local communities with the source areas can effectively avoid situations in which fresh good e-commerce platforms aren’t able to deliver goods to their consumers and have no choice but rely on other logistics services. Additionally, it helps better preserve the goods.

As a matter of fact, this kind of approaches is not uncommon in developed countries. For example, American department store brand Target has recently opened the second smallest Target store in St.Paul in Minnesota State, which focuses on pharmacy in order to satisfy the needs of the local communities, old residents and college students there. It’s actually a product of a much more vertical and specific model as well.

3. Utilizing big data

BGYshop’s success mainly attributes to its mature logistics system. Whenever the brand enters a big city, it will first establish a logistics center in the city, which will use big data to better serve its consumers. Through analyzing big data, BGYshop is able to predict the demand and supply of certain fruits monthly, and therefore order the needed fruits in advance. In this way BGYship can target consumers’ needs and combine fresh good model with e-commerce business, successfully boosting its efficiency.

Such mechanism proves to be an extremely powerful tool since the big data small businesses can collect from communities are invaluable to accurately serve consumers’ consuming needs.

Similarly, cosmetic product brand Dr Plant can track its sales data through its system at the headquarter, including which products are sold in which store and by which member consumers etc. Every related data can be seen visually in Dr Plant’s system. Based on that, Dr Plant was able to roll out products that are more popular in the market.

4. The O2O model is a way out for supermarket giants

For supermarkets, they have already reached the bottleneck in e-commerce development. As O2O comes along, supermarkets that have comprehensive logistics system and inventory system now are trying to build their own O2O ecosystem through small businesses. In comparison with giants like Alibaba, Tencent, JD and SFExpress, small businesses are more down-to-earth and are a crucial part on the O2O closed-loop chain.

The catering, fresh good, and local life service sectors are the areas that major supermarkets and small businesses are trying to penetrate, which are already the current short sides of all the O2O platforms out there. That being said, they are also the entry points for big brands to enter e-commerce once again.

In a word, the downfall of supermarkets can be attributed to the urbanization development and the changing consuming needs. However, the game-changer lies in whether big brands can make up the shortages created by their past poor management.

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

Translated by Garrett Lee (Senior Translator at PAGE TO PAGE), working for TMTpost.




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