Alibaba and JD.com Are Opening Convenience Stores. What's the Plan?

In the end, it's about finding an entry point for the wholesale business

Two weeks after becoming an internet sensation, Weijun Supermarket, behind Zhejiang University's back gate in Hangzhou, gets more than a dozen visitors a day on top of its regular customers — people who come just to see what the inside of the store looks like and to ask the owner, Huang Haidong, how he ended up working with Alibaba.

The storefront sign is a single red LED panel showing the store's name, "Tmall Weijun Supermarket," next to a giant Tmall logo.

The sign also carries a string of numbers. The last three digits, 001, mark this as the first Tmall Corner Store in the country.

Inside there is none of the "unmanned store" or "facial recognition" talk that e-commerce companies love, and unlike Freshippo (Hema), another Alibaba operation, the store doesn't make you install an app before you can pay.

A Tmall Corner Store Is a Neighborhood Minimart Crossed With a 7-Eleven

The area by the floor-to-ceiling glass doors has been turned into a simple dining nook — a wooden table and a few bar stools, the setup common to foreign chains like 7-Eleven and FamilyMart. It gives customers somewhere to sit and eat packaged food or oden bought in the store. Two rows of gachapon capsule-toy machines stand in the corner of the nook.

In an ordinary corner store, drinks and dairy sit in refrigerated cabinets branded with the manufacturer's logo. Weijun Supermarket has two enclosed refrigerated cases and a row of open ones, holding categories you won't find in a neighborhood convenience store — Korean soju, German dark beer, Perrier — plus several kinds of not-from-concentrate juice at a little over 10 yuan a bottle.

The most conspicuous thing in the store is the set of shelves stocked only with Tmall merchandise, placed right in your line of sight as you walk in. The shelves have a single designed look and carry goods you wouldn't normally see in a corner store: snacks from the Taobao-native brand Be & Cheery, imported instant noodles like Nissin's Demae Iccho. Next to the Tmall shelves is a display of officially licensed Disney toys and branded snacks.

Turn around from that same set of shelves, though, and you find loose pastries, bread, and dried tofu sold by weight, weighed on the electronic scale by the register at checkout.

Further in are personal-care and cleaning products, household goods, and fast-moving consumer goods like candy and cookies. The aisles are fairly wide, but the shelves are still packed. In a convenience store each category offers only a few choices; here there are more than a dozen kinds of lunch box alone, in different materials.

Circle back to the register to pay and the hybrid feel gets stronger. The checkout area has oden and a steamer cabinet, and, like the chain convenience stores, it displays what customers are most likely to grab while paying: gum, tissues, condoms, Band-Aids.

Product mix aside, the store also feels cleaner and tidier than the average neighborhood minimart, and than some domestic chains. That is because the shelves now stand a little apart, six rows of fluorescent lights have been fitted above the inner shelves, and spotlights point at the Tmall shelves.

Apart from the red-and-black Tmall branding everywhere, the store's most direct link to an internet company is how it restocks. Huang Haidong places orders through the Alibaba Lingshoutong app on his phone, and staff in Cainiao uniforms deliver the goods to his door.

Food, household chemicals, and the imported food on the Tmall shelves all arrive this way, and account for roughly 30% of the store's sales.

Huang still keeps his own handwritten ledger. Besides the goods he orders from Alibaba, he stays in touch with his old suppliers and stocks things he can sell that Alibaba doesn't carry.

The Mashup Exists Because Alibaba Is Remaking Convenience Stores the Way It Manages Tmall Storefronts

"This store still belongs to that owner. It's not ours. How the store is arranged, how it's displayed, its day-to-day management — that's the store owner's responsibility. We don't want to raise the store's costs just to make it look extremely tidy." That is how Lin Xiaohai, head of Alibaba's Lingshoutong, explains the relationship between Tmall Corner Stores and Alibaba.

Lingshoutong is a business unit Alibaba set up only in May of last year — a platform that provides ordering, logistics, and marketing services to urban neighborhood retail stores, essentially a Tmall for the owners of city corner stores. Lin joined Alibaba from Procter & Gamble last September and spent his first few months as an assistant to Alibaba Group CEO Daniel Zhang.

Tu Xiaoyu, general manager of Lingshoutong's marketing center, who also worked at P&G for nearly a decade, told QDaily that joining the Tmall Corner Store program costs the owner a 10,000-yuan deposit. Renovation and equipment are paid for by the owner as well, with Alibaba matching them to contractors at a standard 800 yuan per square meter. Renovations run from 8,000 to 150,000 yuan, the gap coming not just from store size but from the fresh-food and refrigeration equipment each owner picks. Huang says his store cost 150,000 yuan in all.

Put simply, these owners get a chain license for a third or less of what joining a franchise normally costs. A Tmall Corner Store brings the kind of name recognition attached to chains like 7-Eleven, Lawson, Quanshi, and Meiyijia, but the store itself will not be standardized the way those chains are.

Foreign convenience-store brands work differently. Lawson mainly franchises; FamilyMart and 7-Eleven mainly run their own stores. Even franchising takes an investment of at least 300,000 to 500,000 yuan, and everything from the path customers walk to the overall renovation is decided at headquarters. Store managers have little control over the store, goods are distributed centrally, and these chains run their own plants to make their private-label products.

Tmall Corner Stores are different. Once a store is authorized, running and managing it still falls to the owner. The basic condition for authorization is owning the premises outright or holding a lease of at least a year, and the paperwork has to be submitted for review at registration. The owner also needs enterprise certification on 1688, Alibaba's wholesale e-commerce platform.

What the store sells and doesn't sell is still the owner's call. Corner-store owners are in the shop all day and know their neighborhood; the experience they have built up over the years covers ground a chain's central planning cannot.

What Tmall Corner Store fixes are the problems owners either never noticed or noticed and didn't know how to solve: lighting, the space between shelves, what to carry.

The one display requirement is that a store must have at least one set of Tmall shelves, arranged as specified. Lingshoutong plans to give owners product recommendations based on the tastes of the consumers around each store and on big-data analysis. Despite the name Tmall Corner Store, the only real link between the store and Tmall, apart from shared suppliers and branding, is that in future you will be able to search Tmall for corner stores nearby — which isn't how most people go about finding a convenience store.

After the renovation, owners pay a technical service fee of 3,999 yuan a year. The deposit and the service fee are both barriers to entry.

On top of that, Tmall Corner Store owners must order at least 10,000 yuan of goods through Lingshoutong every month. What to order, and how to price it afterward, is entirely up to them.

We compared prices for some of the products on the Tmall shelves. Of 34 items, most were priced differently from the same items sold directly on Tmall. Small packets of Be & Cheery snacks, for instance, were in some flavors half the Tmall price in Huang's store and in others a third cheaper; only two cost more than on Tmall. The differences followed no pattern.

A few months ago, Alibaba's Lingshoutong team came to Huang Haidong about renovating Weijun Supermarket. He and the team agreed quickly, work began on July 23, and it took a week.

The store stayed open throughout. Each night the Alibaba coordinator running the project — a "xiaoer," in the company's internal term — would tell Huang the next day's plan and which part of the store had to be cleared.

On August 1 the work was done, and the store, now renamed Tmall Weijun Supermarket, began a trial opening.

Weijun Supermarket is the demonstration store for the Tmall Corner Store program, and Alibaba contacted the media a week in advance to arrange interviews introducing the business.

On August 28, at a press conference, Alibaba CEO Daniel Zhang announced plans to open 10,000 Tmall Corner Stores nationwide by next March.

That same day, Alibaba published a set of before-and-after promotional images on a local Hangzhou WeChat account, telling the story of Weijun Supermarket's makeover. The account also handles publicity for Alibaba's annual company gala.

"Our WeChat search index on August 28 was higher than Freshippo's in July," the Lingshoutong team told us. On the day of the press conference alone, Lingshoutong's customer service team took more than a thousand applications.

On September 5 and 6, a week after the program's media debut, Lingshoutong held information sessions in three cities. Huang Haidong went to the one in Hangzhou.

He had never spoken in front of more than a dozen people, and for the first few dozen seconds on stage he looked lost. "Just tell us how much you make in a year!" someone in the audience shouted.

"It's only been open a month," he answered, "so I can't say yet how much I'll make in a year." But near the end of his talk he mentioned that August revenue was up 45% — and that was before Alibaba publicized the store everywhere. The Tmall shelves by the entrance alone brought in 600 to 700 yuan a day. Still, Huang said, July was taken up by the renovation, and even though the store never closed, it did dent revenue.

Tmall Corner Store Is the New Channel Alibaba Has Found for Its Consumer-Goods Wholesale Business in Tier-2 to Tier-5 Cities

At a time when everyone is talking about what e-commerce has done to traditional retail, convenience stores are the one brick-and-mortar channel going through a period of fast growth.

According to Mintel, the convenience-store retail market expanded at a compound annual rate of 15.9% between 2009 and 2014, and from 2011 on, convenience-store sales grew faster than department stores and supermarkets.

That is truest across the whole fast-moving consumer goods market — food, drinks, home care, personal care. A recent report from Kantar Worldpanel and Bain & Company found that over the past year hypermarket share fell 2%, and growth at supermarkets and small supermarkets slowed to 2%, barely above inflation. Convenience stores grew 7.4%.

Over the past year China's convenience-store market reached 100 billion yuan, growing at around 15%. Against supermarkets and hypermarkets facing waves of closures, convenience-store penetration also climbed from 32% in 2015 to 38%.

But China already has 260 convenience-store brands, large and small. The big foreign chains are expanding aggressively, and even the fastest-growing of them has not passed 10,000 stores. Independent corner stores like Weijun Supermarket number 6.8 million.

For more than half of fast-moving consumer goods companies, traditional channels still account for over 50% of sales. Corner stores remain an important channel.

That isn't hard to understand. Going to a convenience store is about convenience, and people don't fuss much over price when they shop there. However fast e-commerce delivery gets, it is hard, at a sensible cost, to beat walking downstairs and buying a bottle of water at the corner store.

Lingshoutong grew out of a project team under Alibaba's 1688 wholesale business, providing a B2B ordering platform for neighborhood convenience stores. It launched in early 2016, aimed at stores exactly like Weijun Supermarket.

These small stores have no edge against the chains, and no idea where to start changing.

In an interview, Huang Haidong said what first made him want to do something with the store was that a Lawson, a FamilyMart, and a Haoshiduo had opened nearby and taken his business.

Before joining Alibaba, Lin Xiaohai was president of marketing for P&G Greater China, after 21 years at the company; plenty of others on the Lingshoutong team came from P&G too. Chain convenience stores have mature supply chains and standardized operations, and by early this year Lingshoutong had decided to renovate corner stores directly.

Alibaba Isn't the Only One Selling to Corner-Store Owners

In Gu'an, Hebei Province, there is another convenience store that recently changed its name.

The store opened only recently, covers more than 200 square meters, and sells what any supermarket sells — household goods, food, cigarettes, liquor, snacks. The register is a smart device, and the store takes in and hands out parcels.

The owner, Yang Hao, 33, started ordering from JD Zhangguibao last year, a stocking platform much like Lingshoutong. The difference is that everything on Zhangguibao is sold by JD itself; once the owner places an order, JD's own delivery system brings the goods to his door.

Yang's store also has two rows of promotional shelves for a shampoo brand, a task he picked up from JD's Xingzhe platform. Brands post promotional tasks on the system; once an owner "grabs" one, the materials and products come to him through JD's delivery. He sets up the display as required, photographs it, uploads the photo, and gets a reward from the brand — usually cash back or a discount on his next order.

The unit that connects brands with corner-store owners is JD's New Channel unit, set up in December 2015. This April, when Richard Liu posted on Weitoutiao, a Toutiao microblogging feature, that JD planned to open a million JD convenience stores, this was the unit he meant.

As with Tmall Corner Store, JD provides the renovation plan, and the owner pays for it. Owners can source all their goods from JD or only part — Yang currently gets about 30% of his stock that way. There is no minimum order, and at least for now orders over 99 yuan ship free. Ordering looks much like an ordinary user shopping on JD.

Owners who join JD's convenience-store program, like those in Tmall Corner Store, have to put up a deposit. Tmall Corner Store owners have theirs frozen in an Alipay account; JD convenience-store owners, in a Zhangguibao account.

Apart from requiring that materials and goods taken from the Xingzhe platform be displayed the way the brand specifies, JD makes no strict demands about the layout of a JD convenience store either.

For customers walking into Yang's store, the biggest difference is one they cannot see. Distributed the traditional way, a new product could take about a month to reach a tier-3 or tier-4 city store after launch. Now it arrives as if ordered online: customers can find it on Yang's shelves in three days.

Whether It's Alibaba or JD, Corner Stores Are Still About the Offline Business

Alibaba and JD are helping corner-store owners renovate their shops for one reason: growth.

The most recent quarterly results show JD with 258 million active buyers over the past 12 months and Alibaba with 454 million annual active buyers — growth already bought at the cost of enormous investment.

Starting with JD's strategic partnership with Yonghui Superstores in August 2015, China's e-commerce giants have piled into stakes in, and outright purchases of, offline supermarkets and department stores: Alibaba took a stake in Suning, then three years later acquired Intime, took control of Sanjiang Shopping, and struck a strategic partnership with Bailian; JD Daojia merged with Dada and took investment from Walmart.

To reach the people who never got into the habit of buying fresh groceries online, Alibaba opened Freshippo (Hema), while JD partnered with Walmart and entered fresh groceries mainly through delivery.

In the countryside, Rural Taobao's local "xiaoer" staff place Taobao orders for villagers and collect their deliveries, working rather like a service station. That, too, is a business where an offline entry point drives online sales.

What the corner stores are doing now is building new sales entry points in the cities where the convenience-store chains are still weak. Tmall Corner Store will not open in Beijing or Shanghai for now; those cities get Flash Store instead, which launched last month and delivers fresh groceries to your door within an hour.

Be & Cheery has already begun working with Lingshoutong on packaging made for convenience stores, shrinking the 400-gram size sold online to 70 grams, a size people pick up on impulse. P&G has just worked with JD's New Channel unit to put new Ariel packaging on shelves.

But all of this is only beginning.

So far 500,000 corner stores have registered on Lingshoutong and JD Zhangguibao covers 300,000 — far short of the 6.8 million corner stores out there. And even the registered ones don't buy all their stock through the two platforms.

Huang Haidong's son later told us that a large share of the store's goods still comes from the wholesale market, much as before, and that stock in and out is still written down in a notebook.

Neither Tmall Corner Store nor JD's convenience stores set uniform prices, and neither has a clear exclusivity rule for where stores can open. Every store competes with the others just as merchants do on Tmall, with the platform matching them to goods and taking a service fee.

Every successful chain today is trying to copy one standardized set of renovations, processes, and services at scale. At foreign brands like 7-Eleven, FamilyMart, and Lawson, headquarters schedules and plans what is sold, so that walking into any store under the same sign feels familiar. That tight control is what earns consumers' trust in the brand: you see the sign and you already know roughly what you will get.

The old fight between Alibaba and JD — direct sales against platform — is being staged again in convenience stores. Except now both of them want to be the platform. This time, can e-commerce win?

Unless otherwise noted, photos in this article were taken by the author; the cover image is from Visualhunt.com.