Beijing's convenience stores never took off. Now they look set to skip straight to O2O home delivery

It brings new problems.

Haolinju, the chain that held the top spot in Beijing by store count for years, was sold recently for US$84 million.

That is not much money — not even a tenth of Ele.me's most recent funding round.

But then the convenience store chain with the most locations in Beijing doesn't have all that many stores. In a city with a permanent population of more than 20 million, Haolinju led Beijing's convenience stores year after year for more than a decade, and was only overtaken by Quanshi last year. Even now it has just 260 stores.

Shanghai is a city of comparable size. There, FamilyMart, the largest chain, has 1,214 stores; the second- and third-largest, Haode and Kuaike, have 837 and 819.

In Beijing the biggest brand is Quanshi, with 340. 7-Eleven, 14 years after opening, has only 236.

A filing with the Hong Kong Stock Exchange shows the buyer is a joint venture called China CVS. Despite the name, what it plans to do is no longer the traditional convenience store business.

The largest of its three investors, with 50%, is Xianshenghuo, an O2O company in the home-delivery business. Greentown Property, spun off from the developer Greentown, holds 35%. The smallest, Yiguo, is an Alibaba-backed fresh-food e-commerce company that built its own cold-chain arm, Anxianda.

According to Xianshenghuo CEO Xiao Xin, once the deal closes Haolinju's stores will be rebuilt so that every one of them can deliver to the surrounding blocks within 30 minutes.

Before buying Haolinju, Xianshenghuo and Yiguo had already joined Taobao's one-hour fresh-food delivery pilot in Beijing in August this year.

This is not the first time Haolinju has been sold. The company began trying to bring convenience stores to Beijing in 2001, and in 2013 its investors sold it cheaply to Morgan Stanley for a total of less than 300 million yuan. This latest price is roughly what Morgan Stanley would have made by putting the money into an unremarkable wealth-management product. Wang Hongtao, deputy secretary-general of the China Chain Store & Franchise Association, told QDaily that the valuation was based on a multiple of sales and the final price was "neither high nor low." In the end it came down to too few stores and too little revenue.

Sixteen years, two owners: Haolinju, one of the first companies to open convenience stores in Beijing, has skipped the convenience store business and turned into an O2O business.

So, in fact, has Beijing.

Beijing got its first wave of chain convenience stores after the great "dilapidated housing" clearance

As the political capital, Beijing started on convenience stores a little later than China's other big cities.

Shanghai and Guangzhou both brought in 24-hour chains through joint ventures between state and foreign capital. Shanghai's first Lawson opened in July 1996, and Guangzhou's first 7-Eleven opened at about the same time. The Guangzhou 7-Eleven was a joint venture between Hong Kong's 7-Eleven China Co., Ltd. and the Guangzhou Foreign Economic and Trade Industrial Company; Lawson was a joint venture between Shanghai Hualian and Lawson.

Beijing's Haolinju was founded by Gangjia Holdings, the predecessor of the Zhongjintou Group.

As was the fashion then, Haolinju opened its first Beijing store in 2001 under a French name, Béatrice. As late as 2003, news reports still called the chain "Béatrice Haolinju."

Gangjia's retail investments in China came in two forms: supermarkets and hypermarkets in Shanghai, convenience stores in Beijing.

Beijing's huge 1990s wave of old-city redevelopment had just wound down. Great numbers of siheyuan courtyard houses had been condemned as dilapidated and torn down, and new commercial districts and multi-lane roads were going up one after another.

When Haolinju opened for business in 2001, the sweeping redevelopment of the East Wangfujing and Dongdan central commercial districts had just been finished, and Financial Street had only just taken rough shape.

Nothing in a convenience store is as cheap as buying ingredients at a wet market and cooking at home. At bottom this is a business that charges young people a premium to save them time. Old-city redevelopment destroyed traditional neighborhoods, and that opened the door for convenience stores.

By 2002 there were 200 24-hour convenience stores in all of Beijing, the main brands being Haolinju, Wumart, Chaoshifa, Tangmudun, Jinxiang Pharmacy and Sagawa Express.

But the property industry, barely off the ground itself, gave no thought to building shops into its developments.

Entering the business too early, on top of rising rents and labor costs, meant almost no chain in Beijing made money.

Kuaike, a chain owned by Shanghai's Lianhua, opened 132 stores between 2003 and 2006 and lost 40 million yuan in the process.

The 20 convenience stores Shanghai Hualian Supermarket had opened in Beijing all closed soon after, and the company said it would stay out of the convenience store business in Beijing from then on. Chains such as Jingkelong and Haolinju were losing money overall, apart from a few individual stores that did relatively well.

"We didn't understand any of it back then. We got into convenience stores too early," recalled Haolinju general manager Tao Ye.

Part of the problem lay with the domestic chains themselves. Their stores were cramped, usually a third the size of the Japanese-backed ones or smaller, and between the lighting and the merchandise it was hard to keep anyone inside for five minutes.

Japanese brands understood convenience stores better and adapted a lot for Beijing — and still couldn't beat the "three halves"

7-Eleven, which understood the business better, entered Beijing in 2004 through a joint venture with state capital.

Seven-Eleven Japan was the majority shareholder with 65%. Beijing Wangfujing Department Store Co., Ltd. held 25% and the China National Sugar & Wine Group 10%.

In April 2004, Beijing's first 7-Eleven opened on Dongzhimen Inner Street. That store, more than 200 square meters, is still 7-Eleven's Beijing flagship and carries the widest range of goods.

Like its stores everywhere else in the world, this one is clean and bright, and the displays and walking routes a customer meets on the way in are deliberately designed. Bento boxes, rice balls, cold drinks, freshly cooked dishes, steamed buns, oden and the rest sit on separate shelves according to the storage each kind of food needs.

In the Beijing of the time, this was a novelty. On a retail trade forum, someone posted asking why 7-Eleven's first store looked more like a fast-food restaurant.

The plan was for 7-Eleven to open 150 stores in Beijing within a year. It clearly did not work out, because however 7-Eleven designed its stores, it could not redesign the city.

"Why does Beijing have so many fewer 24-hour convenience stores than Shanghai?" The top-voted answer on Zhihu boils it down to the "three halves": the business only works half the year, only half the street is usable, and a store can only trade half the day.

Beijing's roads run ring by ring, and the big ones are built for cars, so a convenience store there can generally only take business from "half the street."

Che Wenhuan, Lawson's deputy general manager in Beijing, told QDaily that roads like these bear directly on site selection: "Shanghai's neighborhoods are more open. Shanghai has a lot of lilong alleys and small lanes, while Beijing's roads are wide with a lot of median dividers, and there are many government residential compounds and government buildings — a lot of self-contained, closed-off spaces. Shanghai doesn't have this problem, so picking store locations is easier there than in Beijing."

A convenience store chain is not just the storefronts you see; it rests on a logistics system that delivers several times a day. The denser the stores, the lower the logistics cost for each. Bai Lu, head of 7-Eleven's store development department in Beijing, said, "Near Vantone we opened three stores within one kilometer, and every one of them does very good business. That's the small trade area."

But Beijing's planning leaves few such small trade areas. More often homes and workplaces sit far apart. The classic case, Tiantongyuan, has even earned the nickname "sleeper city": residents are out all day, so a convenience store there can trade half a day at most.

Chaoyang District has the best 7-Eleven coverage, because in Chaoyang "everything is new" — compared with the old districts, it offers many sites that suit a convenience store. In the south of the city, there is often one store per several dozen square kilometers.

Beijing's subway stations have no room for shops either. The ones that briefly existed at stations such as Xidan were closed after the 2003 Daegu subway fire in South Korea.

Then there is the "half a year." Bai Lu told us the slow season starts around October: people will go out at night in summer and stay in once it turns cold. Daily store sales run two to three thousand yuan lower in winter than in summer, and a 7-Eleven's summer average is around 26,000 to 27,000 yuan a day.

Policy played a part too. When 7-Eleven was brought into the Beijing market as one of the city's key investment projects, it received special approval to hold food-service licenses. Other convenience store brands got no such treatment and had to obtain food-operation permits separately. That rule was only relaxed last November.

Lawson and FamilyMart, the Japanese-backed chains that reached Beijing after 7-Eleven, both adjusted where they opened. Neither started in residential neighborhoods.

When Lawson first came to Beijing in 2013, it concentrated on Dongcheng and Xicheng, and on the CBD and other areas with higher spending power. FamilyMart, which arrived the following year, opened its first store at Beijing Capital Airport. FamilyMart spokesperson Wang Yiwen told QDaily that the first batch of stores went into airports and train stations to build brand awareness.

Several of the foreign chains also adapted for Beijing. 7-Eleven and Lawson cook dishes to order in-store. FamilyMart added northern tastes to its lineup: stir-fried flatbread strips, rolled pancakes, braised noodles, mini hot pot.

Both 7-Eleven and FamilyMart are now profitable in Beijing. But they have expanded far more slowly there than in Shanghai. FamilyMart entered Shanghai in 2004 and had 110 stores by 2007; it entered Beijing in September 2014 and has around 32 today.

By the time Haolinju changed hands and Lawson and FamilyMart reached Beijing, convenience stores had new competition

Haolinju changed hands in 2013. Tao Ye, who had joined in 2010, stayed on as general manager. Beginning with an e-commerce business it launched in 2011 and shut a year later, Haolinju never stopped experimenting with O2O.

The following year FamilyMart, the last of the foreign chains to arrive, also began preparing to open stores in Beijing.

At the same time, the food-delivery subsidy war, bankrolled by venture capital and the three internet giants, got going.

Ele.me began serving Beijing in 2013. In January 2014, Dianping and Meituan each launched a food-delivery channel. That April, Baidu, having bought Nuomi, rolled out a delivery service of its own.

In early 2014 an Ele.me order in Beijing could still take an hour or two to arrive. A year later, with internet companies subsidizing ten to twenty yuan an order and delivery systems maturing, getting a meal in about half an hour was no longer hard.

It took the delivery platforms less than a year to squeeze delivery times below half an hour.

The highest-margin category for a convenience store is fresh food. Fresh food is more than 60% of 7-Eleven's sales and 41% of Quanshi's. But under the subsidies, delivery was not only cheaper — it also let people keep changing what they ate.

In a convenience store survey we ran two years ago, Zhang Sheng, general manager of Shanghai Lianhua Lawson Co., Ltd., told us that even office buildings, which look like a guaranteed flow of customers, are hard for a convenience store to work with. "If the building is full, the day an office-building convenience store opens is probably its best day of business ever, because people get tired of eating the same things day after day, and new restaurants keep opening nearby, so foot traffic naturally falls." On top of that, a store in an office building does no business at night and none on weekends.

Plenty of other businesses want the same locations, above all the real estate agencies that spread as fast as housing prices rose.

Lianjia has closed more than a hundred offices in the past year, but in the years just after FamilyMart arrived it was expanding at its fastest, at one point holding more than 1,500 outlets in Beijing — 400 more than the combined store count of Beijing's five largest convenience store chains.

Internet companies have spent years trying to solve the road problem with home delivery

JD.com started a supermarket shopping-and-delivery service in 2015, and delivery platforms such as Ele.me, Meituan and Baidu Waimai opened supermarket and convenience store delivery one after another.

But they never solved one basic problem: the stock on the shelves was never in sync with the numbers shown in the e-commerce or delivery app. After placing an order, users would often get a call from the shopkeeper or the rider saying an item was out of stock, leaving them to choose between a substitute and a refund.

Haolinju's own attempt at e-commerce came earlier still. But it had no users and smartphones were not yet common, and the Haolinju online store launched in 2011 closed after little more than a year.

Later, JD.com saw the value of the convenience store as an offline channel and began working with Haolinju on order pickup. JD.com delivered orders to Haolinju's distribution center, and the packages then rode out to individual stores on Haolinju's restocking trucks, where customers collected them.

That was 2013, and JD.com had already launched its "211" same-day delivery promise. For Haolinju to meet JD.com's delivery times, it would have to lose money.

Like the e-commerce venture, the partnership with JD.com lasted only a year.

To Tao Ye, the main reason was that two kinds of company were trying to work together: e-commerce cares about speed and not about cost, while a convenience store wants low costs and good service at the same time.

Most of the small companies that tried home delivery two years ago are gone. Food delivery went furthest of all the O2O businesses: by the time Ele.me bought Baidu Waimai not long ago, the industry had raised more than $8 billion, 40% of what ride-hailing raised.

And that leaves out the companies and the money that vanished during the O2O boom.

Those few billion dollars at least burned one habit into people: ordering delivery, whether straight inside WeChat or Alipay or from a standalone app. Tapping a phone screen a few times and waiting for a meal, fruit or household goods to arrive within half an hour to two hours has become perfectly ordinary.

Delivery riders have become a new piece of infrastructure in people's lives. Since 2015, every day at midday, the streets of Beijing, large and small, have belonged to them. Riders in red, yellow and blue weave through the lanes and alleys.

After their delivery partnerships with supermarkets and convenience stores failed, the internet companies decided to do it themselves.

This year Hema has opened three stores in Beijing, and JD.com has built "in-store warehouses" inside Walmart supermarkets. Convenience stores were the one retail business e-commerce had not disrupted. Now the e-commerce companies are opening stores of their own and going into fast delivery.

By the end of the year a Hema convenience store of about 400 square meters will open in Beijing too. That is not a size that squeezes easily into a residential neighborhood, but as an offline showroom and forward warehouse for e-commerce, Hema's convenience store needs the room, and it can stock more.

The smaller players are deepening their ties with the delivery platforms. Open any delivery app today and the home screen has a supermarket and convenience store entrance. Whether it is a chain whose name you know or the corner shop downstairs, you can order on your phone and have a rider bring it up.

After the acquisition, Haolinju will add fresh produce and prepared food on top of its existing categories. Later there will be the ingredients, washed-and-cut vegetables and frozen goods needed to cook a simple meal at home.

Xianshenghuo, Haolinju's largest shareholder, will also build Haolinju a factory of its own to make private-label fresh food. That is one of the advantages of the Japanese chains: private-label goods hold quality up while pushing costs down.

"This will be a solution for a neighborhood's everyday consumption," said Xiao Xin, CEO of Xianshenghuo, Haolinju's largest shareholder.

Xianshenghuo started working with Haolinju at the beginning of this year, on supply chain and product selection — customers could buy goods from the Xianshenghuo platform in Haolinju stores, for instance. But cooperation between the two companies was not easy, and Xiao Xin said that was an important reason for the acquisition.

Asked how he would cut delivery from 30 minutes to 15, Xiao Xin's answer was simple: "Open more stores."

But replacing convenience stores isn't easy for O2O either

Walk into a 7-Eleven and one glance takes in a hundred-odd products. Browse for two minutes and you will have passed most of the 2,500-plus items in the store.

On the way to buy a bottle of water, it is easy to leave with a few extra things. That is one advantage of a physical store.

To browse a comparable number of products in an app like Ele.me, you have to scroll down screen after screen and tap a pile of buttons. It isn't intuitive.

The delivery market has now narrowed to two platforms, Ele.me and Meituan Waimai, and the subsidies are easing off.

You probably won't pay a delivery fee twice the price of the goods to buy a single can of Coke. When an order falls short of the minimum, people's first instinct is to not order at all.

That is the opposite of how people shop at a convenience store. Walking in off the street to buy a bottle of water carries no pressure at all, and on the way from the cooler to the register you may spot other things and leave with a great deal more.

That is also why convenience stores have kept doing well despite e-commerce.

Over the past year China's convenience store market reached 100 billion yuan, growing at around 15%. Against supermarkets and hypermarkets and their wave of closures, convenience store penetration has risen from 32% in 2015 to 38%.

Home delivery solves the problem of streets that are too wide and winters that are too cold. It also gives up the convenience that convenience stores were built on.

New policy is shifting at the same time. Beijing has gradually loosened its rules on convenience stores, and 7-Eleven has once again set a target of 100 new stores a year. The weekly franchise briefings at 7-Eleven's Beijing headquarters draw more than 200 groups of applicants each time.

But convenience stores are not shaped only by the rules that govern them directly; any policy that changes the city changes the business. As municipal campaigns like sealing up walls knocked through for street-facing shops and clearing out small-goods wholesale markets are carried out, Beijing's migrant population will keep being pushed out beyond the city.

Che Wenhuan believes dispersing the population could thin out foot traffic for convenience stores, and that another drag is rising labor and staffing costs. On the good side, he said, clean and sanitary convenience stores are reportedly going to be encouraged from now on.

Convenience stores won't be the only industry short of workers. After the new ride-hailing rules formally took effect, cars with out-of-town plates could no longer take orders, and drivers whose household registration was outside Beijing had to leave the platforms too.

And the O2O business the internet companies are trying to build rests entirely on cheap labor.

Convenience stores, and the O2O that wants to replace them, are in the end both fragments of a city that keeps changing.

Cover image from Visualhunt.com