19 Surprisingly Interesting Secrets of the Convenience Store

Convenience stores are growing while the rest of retail shrinks, and behind them lies painstaking work in reading people's minds.

"Single, young, well educated, a newcomer to Shanghai. Likes nice things, rents an old 1990s public-housing flat in the city center, and nobody at home cooks."

This, supposedly, is the person most likely to walk into a convenience store. The description comes from Zhang Sheng, general manager of Shanghai Lianhua Lawson Co., Ltd., and it is so detailed he might actually know such a person.

In 2012, Lawson ranked last in a survey of "foreign convenience store brands consumers choose," and its Japanese parent decided to take back the brand's agency rights. Zhang took over Lawson Shanghai at exactly that moment.

While everyone talks about e-commerce hammering traditional retail, convenience stores in China are in fact growing fast. According to Mintel, the convenience store retail market grew at a compound annual rate of 15.9% from 2009 to 2014. By 2019, total retail sales are expected to reach 90 billion to 100 billion yuan, about 1.5 times today's level. Even Shanghai, where the convenience store is most mature, is not yet saturated.

Like every retail business, convenience stores cannot escape the rule of "adapt to local conditions." Japanese convenience stores always have freshly brewed coffee. Taiwanese convenience stores always have tables and chairs; some Shanghai stores do too, but most don't. Why the difference?

In Beijing, convenience stores never seem to take off. One or two close, then four or five open somewhere else, and not necessarily in office buildings or upscale housing, the "prime locations" you might expect.

Then there are the smaller puzzles: why the store sign changed from dark blue to light blue, which brands greet you on the shelves as you walk in, why your favorite sushi suddenly vanished, and why convenience store lights are so very bright... This is a business built on reading people's minds.

There seemed to be plenty of small secrets here, so we recently talked with Zhang Sheng; Wang Yiwen, spokesperson for FamilyMart China; and Wu Meng, head of 7-Eleven Beijing's executive headquarters. 7-Eleven entered Beijing in 2004, and Wu has been there since the start, which makes him a veteran. 7-Eleven is now the largest foreign convenience store brand in Beijing.

Their views of the industry come mostly from practice, mixed with some guesses about the future market. But we found they agreed on most things.

1. What kind of city can support convenience stores?

FamilyMart entered the mainland market in 2003, opening its first trial store in Shanghai.

"International experience says that once a city's per capita GDP reaches US$6,000, the convenience store industry can enter. At US$10,000, it can grow fast," Wang Yiwen told QDaily. In 2002, Shanghai's per capita GDP was already close to the 6,000 mark, so the company was bullish on the city's growth and spending power.

As of October 2015, FamilyMart had opened nearly 1,500 stores in mainland China: nearly 1,000 in Shanghai, nearly 120 in Suzhou, 70 in Hangzhou, 39 in Wuxi, nearly 180 in Guangzhou, nearly 50 in Chengdu, 9 in Dongguan, 30 in Shenzhen and 15 in Beijing.

2. Why do convenience stores cluster together?

Shanghai is also Lawson's home base. Ningbo, Hangzhou, Zhenjiang, Wuxi, Jiaxing, Suzhou... notice that every city Lawson has chosen lies around its Shanghai factory, within the 3 to 4 hours that same-day delivery trucks can cover.

Dedicated food factories and a mature logistics system are what separate branded convenience stores from no-name shops.

Take 7-Eleven Beijing. Daily-delivered items such as rice balls, sandwiches and bento boxes make up about 40% of total sales. 7-Eleven holds shares in its dedicated suppliers, their factories make products only for 7-Eleven, and the recipes are developed jointly by 7-Eleven and the factories.

7-Eleven brought the convenience store model to Beijing in 2004. For a while, Beijing's streets filled with "striped convenience stores" copying 7-Eleven, but they only "looked" alike. Those fledgling brands all used the same supplier and sold identical products. Some even smaller stores simply sold boxed meals with a shelf life of 15 to 30 days.

Look closely at where 7-Eleven's Beijing stores sit, and you will find that every store has several others nearby. That is 7-Eleven's expansion strategy: it saves on delivery and management costs, and it builds the brand within the area.

Around 1 p.m. one afternoon, our reporter watched a truck deliver boxed meals. One truck serves 7 nearby stores, much as in Japan.

3. Why is it so hard to run a convenience store in Beijing?

Ah, Beijing. At night people are outside the city; by day they are inside it. When it's cold, they won't go out; the roads are so wide they can't be bothered to cross.

"Why does Beijing have so many fewer 24-hour convenience stores than Shanghai?" The top answer on Zhihu boils it down to "three halves": you can only do business for "half the year," on "half the road," and for "half the day."

In a city as sprawling as Beijing, a 24-hour convenience store is "painful" wherever it opens.

7-Eleven turned a profit in its fourth or fifth year in Beijing. It now has 186 stores in the city, each averaging more than 20,000 yuan in daily sales. But add the 60-plus Tianjin stores run by 7-Eleven's Beijing company, and the Beijing-Tianjin region as a whole still loses money.

Shanghai is another story. It began as a small fishing village, and most of its winding streets follow rivers. Convenience stores love small streets. Build the roads as wide and smooth as Beijing's, put an iron fence down the middle, and business would dry up overnight.

Who these days would take a long detour just to buy something at a convenience store?

4. Is the Bund, with all its foot traffic, a bad place for a convenience store?

In the past two years, Lawson has opened some 200 new stores in Shanghai and closed more than 140, and many of those choices are not what you'd expect. It recently closed its store on the Bund, for one.

"The rent was high, the profit was low, and there was no real advertising value, so we closed it," Zhang Sheng explained. Heavy foot traffic does not mean good advertising: "The customers who come every day are from out of town, not our customer base in Shanghai. They might discover (Lawson) in Shanghai, but it's no use, because there's no (Lawson) back home."

5. Why did the convenience store in your office building close?

Lawson also closed a batch of office-building stores whose rent was out of line with their revenue. Office buildings seem to promise steady foot traffic, but stores there struggle too.

"If the building is fully occupied, opening day is probably the best day the store will ever have. People get tired of eating the same food every day, new restaurants keep opening nearby, and traffic naturally falls off." On top of that, office-building stores do no business at night and none on weekends.

6. Before opening in a residential area, do this first

After Lawson's Japanese parent took back the agency rights in 2012, it launched a series of reforms and grew extremely cautious about opening or closing stores. How cautious? When weighing a residential compound, Zhang Sheng sends his staff to stand outside the buildings at night and "count the lights."

The head of Lawson Shanghai trusts what he sees on the ground more than the numbers in written reports.

"The developer says the compound is sold out, but you check online and find lots of flats listed for resale. So what's the real occupancy rate?" He has his staff count the lit windows one by one. "Even that's not enough. We also check whether the lights are different colors, because some developers leave all the lights on deliberately. And we look at whether air conditioners have been mounted on the outside walls."

Zhang calls this "on-the-ground intelligence gathering." "For doing business in China, especially retail, it's extremely important."

7. Why are Shanghai's new convenience stores all in the suburbs?

In Shanghai, where the industry is well developed, there is a convenience store every few steps. Competition in the city center is already fierce, so the room to grow lies mainly in the suburbs and new districts around the city.

"Everyone in the business says that when you check the numbers each day, daily sales are falling. People keep moving outward, downtown rents keep rising, and offices are moving out too," Zhang said. White-collar living costs keep climbing and companies are relocating to the edges: these are city trends you have to understand.

8. But not every suburb works, for example...

New opportunities are appearing in the new housing developments on the outskirts. As the city has grown, prices and home values have soared, and many people live in luxury homes and drive fancy cars in the suburbs, yet their daily life is poorly served. To buy a steamed bun, they have to eat at a roadside stall; to buy their child a small toy, there is nowhere to go.

Missing amenities in the suburbs are the convenience store's opportunity. But head to an old town on the outskirts full of local residents, such as Songjiang in Shanghai, and business is actually hard.

"Older Shanghainese love to say, 'Why is this so expensive? I can make it myself at home.' They have no idea that time costs money," Zhang said. Spending habits are very hard to change. In the end, convenience stores are a business for the young.

9. People say they want to eat lighter, but strong flavors still sell best

If you've started saying "I should eat lighter" all the time, you're getting old.

Young people's palates only register rich, oily, soy-braised food and sour, spicy, numbing flavors. That's what convenience store sales data says, and young people's tastes are what convenience stores care about most.

Why does malatang sell so well? Why does mala xiangguo sell so well? And have you noticed that Japanese ramen gets saltier every year? Zhang Sheng fired off one question after another.

"Today's post-90s generation, and the post-2000s generation coming up, grew up drinking 100% fruit juice, Coke and Sprite. Their palates now only know sweet, sour, bitter and spicy, and they struggle to tell other flavors apart." Recently Zhang was in Japan with a friend in his 40s, who said, "Whoa, why are these noodles so salty?" Zhang replied, "Look, the young Japanese on the street are all lining up for them."

10. What earns convenience stores the most is fresh food: oden, steamed buns, boxed meals

In a Mintel survey of 3,000 internet users aged 20 to 49, 94% had shopped at a convenience store in the past six months, mostly for food and drinks.

Mainland Chinese shoppers lean toward food, especially ready-to-eat items. Among everything convenience stores sell, their own baked goods, desserts and fresh food carry high margins and are bought often, making them the main source of profit. According to figures from Wang Yiwen, fresh food accounts for more than 40% of FamilyMart's total revenue.

That is why, when convenience store operators think about winning customers, they always think first about winning their stomachs.

Packaged boxed meals, rice balls and sandwiches in the chiller; steaming oden, steamed buns, grilled skewers and freshly made boxed meals... this in-house food is where branded convenience stores can stand apart, and it is what rivals cannot easily copy.

11. Want to know a city's tastes? Browse its convenience stores

Each FamilyMart store carries at least 2,500 product categories, drops nearly 1,700 items a year and rotates more than 70% of its stock. FamilyMart settles each new store's opening product mix and brands half a year in advance, studying which combinations and brands local shoppers like.

Take FamilyMart's boxed meals. There is the curry pork cutlet rice that sells well nationwide; there are Shaoxing pork chops and pickled mustard greens with shredded pork noodles for East China tastes; and in South China there are Cantonese cured-meat sticky rice and tossed noodles.

In Beijing, 7-Eleven has teamed up with Peking Union Medical College Hospital to launch a vitamin E skin lotion, along with local-flavor foods such as a roast duck burger.

12. How do the endless new products on the shelves come and go?

"Whole banana milkshake cake," "tiramisu Christmas cake," "snow-skin moon cake"... Lawson has made a series of seasonal products. It also follows current trends, such as replacing vegetable-oil cream with healthier light dairy cream.

Lawson launches new products every week. Every Thursday, Zhang Sheng, the head of Lawson Shanghai, sits in on the new-product meeting, where stores are given a "forecast figure" when a product launches; products that miss it are cut, worst performers first. The trial period is usually three months.

Every March and April, Lawson holds blind tastings of its in-house food. "Since 2012, we've been building up desserts and baked goods." Once a year Lawson also runs a large consumer survey. It is not about convenience stores; it tracks consumers' daily habits.

According to Zhang, among the youngest shoppers, those aged 15 to 19, Lawson ranks first for desserts and baked goods. That is a very good sign: win this youngest group, and you win convenience stores' main customers of the future.

"In the end, we don't want to make one amazingly delicious item (to pull consumers) into Lawson. We need that too, of course, but mostly it should be: what should I eat today? Let me check Lawson first. That's our ultimate positioning," Zhang said. You must always have something else on hand to meet the need.

13. How can convenience stores compete with bakeries?

In China's convenience store market, competition for food comes from every street corner. Buns sold at roadside stalls are competition, and dessert shops and bakeries of every size are rivals too.

"For example, we need to know when customers come in, and why they come to a convenience store to buy bread." Zhang's research found that after 3 p.m., many bakeries have no good bread left, yet real customers often buy bread in the evening to eat the next morning. "If it's about fresh bread, I definitely can't beat a professional bakery. But by the next morning, storage conditions differ, and I have to make sure mine tastes better than anyone else's."

14. When convenience stores sell steamed buns, their competition is street vendors

"At Lawson a steamed bun sells for 2.5 yuan; on the street a bun costs 1.2 or 1.5 yuan." Zhang said he had little confidence at first. How could they outsell the vendors? The key is to work out where in the process the competition happens, and to find an edge in what customers need at each stage.

Convenience store customers will still pay for hygiene and safety. Zhang believes the first thing to fix is the taste of the buns. "Many customers think convenience store buns taste bad. It's not that they taste bad; the recipe has to change."

Convenience store buns sit in the steamer for hours. How do you keep their texture so they don't turn to mush? The recipe has to change, but nothing harmful can be added, so the only room to work is in blending high-gluten and low-gluten flour.

Frozen buns also lose some of their saltiness, and there's a science to that too.

15. How does a convenience store get you a bowl of fried tofu and glass noodle soup?

Even a simple convenience store dish has to be planned for production, transport and storage.

Lawson has launched soup noodles, fried tofu and tofu-skin glass noodle soup, curry beef soup, udon... all these soupy dishes are a pain to transport. Lawson adjusted the freezing and boiling points of the food so it stays frozen when chilled and turns into broth only when heated.

16. Why is there no room for a table in Shanghai's convenience stores?

First, of course, because rent is expensive. On Shanghai's precious land, operators have to think hard: how many people actually want to sit and eat in a convenience store?

According to Lawson's survey, not many: fewer than 10% of customers are willing to sit down and eat in the store.

But walk into almost any convenience store in Taiwan and you'll usually find a spacious, bright seating area, the kind with Wi-Fi. That's easy to understand: fewer people drive in Taiwan, the weather is hot, and after walking a while people can't go any farther.

Likewise, you'll notice that Tokyo's streets are full of coffee shops, and very cheap ones. Why? Because a Tokyo coffee shop is a place to rest your feet. Japanese office workers in full suits get hot walking around, and rather than show up at a client's dripping with sweat, they have a cup downstairs first. In China, a café may still be a place to "snap, snap, snap and post to Moments."

In Shanghai convenience stores, what you usually see is a row of narrow counters along a wall or window, offering only a place to eat standing up. The design exists because the government used to ban chairs inside stores.

So even a convenience store table says something about its city. "It's not that we won't do it (in-store seating). We just won't force it. Where conditions allow, we still do it," Zhang added.

Who says that 10% isn't real demand?

17. Why does a convenience store boss carry a deck of cards on store visits?

Mintel's survey shows that what most often puts customers off convenience stores is rude staff, followed by poor hygiene.

After the Japanese parent took over, Lawson introduced a quality-control system, with a team of a dozen or so "mystery shoppers" visiting stores to watch how they run.

Zhang Sheng also drops in on stores for surprise inspections. "I look at a lot of things. First service and greetings, then the product mix, third hygiene, fourth whether the shelf layout makes sense..." He reeled off a string of criteria in one breath.

In an industry built on dense clusters of stores, franchises now make up more than half of Lawson's stores, and around 70% at FamilyMart and 7-Eleven.

To tighten store management, Zhang had photos of his supervisors printed on a deck of playing cards. At each store he spreads the cards in front of the staff and asks them to pick out their own supervisor.

It's a tough trick. Zhang found that soon after he visited one store, every store in the area knew about it. "I suspect they set up a WeChat group (to tip each other off)."

18. With traditional retail in decline, why are convenience stores growing?

A Bain & Company report shows that under pressure from e-commerce, sales at traditional department stores and supermarkets have dropped sharply, while convenience stores have grown, outperforming department stores, supermarkets and other large formats for three years running. In 2014, convenience store sales rose 25.12% year on year and store numbers rose 22%, the fastest growth in all of retail.

"Everyone says e-commerce wiped them out, but I think it's because department stores did nothing," Zhang said. "Have you noticed that all department stores look the same? You walk in and it's cosmetics everywhere. You could find every counter with your eyes closed."

Big supermarkets' problems are also of their own making. To collect higher rebates and slotting fees, chain supermarkets have dropped niche, specialized products. "At some hypermarkets, 97% of sales come from 3% of the product range. That's a big problem, because that 3% can just as easily be bought online."

In Japan, hypermarkets typically get 80% of sales from 20% of their products; the other 80% of products bring in only 20% of sales but are still worth keeping.

Convenience stores are the same. In-house products and national brands are like MSG and salt: without salt you can't cook, but if everything is salt, nothing stands out. 7-Eleven, FamilyMart and Lawson all have their own in-house brands, and compared with those of big supermarkets, convenience store house brands are more refined and don't feel cheap.

At the same time, easy online shopping has thoroughly spoiled consumers, and they walk into stores with ever clearer goals: since I've come all this way, you'd better have it.

"Even if we don't have what the customer wants, we must have an alternative. Say you come in and the boxed meals are running low; there will still be bread, desserts and soup noodles." Zhang hopes to build customers' trust in the brand over time.

19. The best days for convenience stores are still ahead

Shanghai has more than 6,000 convenience stores, about three times as many as Beijing and the most of any Chinese city. Taiwan has one convenience store for roughly every 2,300 people and Japan one for every 2,000; by that ratio, Shanghai could hold around 10,000 stores, leaving plenty of room to grow.

Data from Sequoia Capital show that in 2015, 3 new convenience stores opened every day. The industry is booming as never before.

"The convenience store is just one retail format. Department stores and supermarkets each had their moment. Now people don't like going to big supermarkets; they prefer convenience stores," Wu Meng said. For now, he isn't thinking about rivals but about how to draw in customers and grow the whole convenience store market.

Zhang feels the same. "You could say 2020 will be a period of major growth. In four or five years, it will suddenly take off."

Images in this article are from Hellorf