A Survival Handbook for the New Fresh-Food Convenience Store: What Business Are They Actually In?

Squeezed between wet markets, hypermarkets, grocery delivery apps and convenience stores, why do fresh-food convenience stores still have room to live?

"This store has been open two years and it's still losing money. None of the fresh-food convenience stores around here make money," said a clerk at the Yonghui Life store on Anguo Road in Shanghai. The stores he meant were the Suning Xiaodian and the Li Xiaonong less than 50 meters away.

Losing money has not stopped more fresh-food shops from moving in. On November 25, one street over, a Qingmei Fresh Food was about to open on Baoding Road. Next June, 7FRESH — JD.com's answer to Hema — will open its first Shanghai store at Shangbin Life Plaza, directly across from Yonghui Life.

At the other end of the neighborhood, on Tianzhen Road, the fight may be fiercer still. Next to a Yonghui Life sits a Sandan Fresh. Twenty meters on there is a Suning Xiaodian, and ten meters past that, the forward warehouses of two grocery delivery services, Dingdong Maicai and Liangxian. Ten minutes north, on Xingang Road, there is a CP Lotus hypermarket, with Laodu Chongming Ecological Produce across the street.

People here seem to have an unusual number of places to buy their groceries.

Draw a one-kilometer circle around Linping Road metro station and it already holds eight fresh-food convenience stores. That is without counting two wet markets and a Hema Fresh, which is larger and has seating.

The same pattern — a Suning Xiaodian opening next door to a Yonghui Life, a Li Xiaonong eyeing a Kangpinhui a few streets away — has appeared around Changshou Road and Zhenping Road, and around Yanggao Middle Road and Century Park. More Shanghai blocks will probably follow.

Shanghai now has more than 300 fresh-food convenience stores. Count the wet markets converted into fresh-food supermarkets and the number may pass 350.

The format is new enough that "fresh-food convenience store" is not yet a settled retail category. It borrows from the community supermarket, the wet market and the convenience store all at once.

We visited more than 15 of these stores. If you had to write down what they have in common as a rulebook, it would read something like this.

The rules of the fresh-food convenience store

1. More than half the goods are fresh food

What matters most in a fresh-food convenience store is, of course, the fresh food — vegetables, fruit, chilled meat, fish and seafood. In these stores, fresh items can make up 50% of all SKUs (stock-keeping units). More than half the merchandise is fresh.

A hypermarket chasing breadth — appliances, bedding, household goods, personal care, home care, packaged food — cannot carry such a high share. Fresh food is about 10% of the mix at Walmart and about 20% at RT-Mart. By absolute count, though, those big stores may stock just as many fresh items as a fresh-food convenience store, or more.

Because fresh food is the most important and the most varied thing they sell, these stores put it at the door, where passers-by will register it. For a street-front shop the entrance is the most valuable display space, normally given to the headline product, the one that competes best. At the door of a FamilyMart, Lawson or 7-Eleven you usually find own-brand bread and pastries, plus whatever is being pushed that week.

At Kangpinhui, Yonghui Life, Suning Xiaodian and Mishu Fresh, the entrance is a flat spread of fruit and vegetables, with chilled meat, fresh milk and drinks in coolers along the walls. Non-food goods — tissue, sanitary pads, personal and household care — go at the back.

Vegetables and fruit get more than the best shelves; they also get more room, laid out wide. Yi Huairen, operations director at Mishu Fresh, told QDaily that more than half of its shelving is given over to fresh food. Anything less important — toilet paper, hand soap — is packed tight, often into a single facing stacked back to front.

2. A more refined selection and better packaging: everything for the dinner table in one stop

Next to a wet market or an older community supermarket such as Nonggongshang or Dia, these stores are simply nicer places to be: newer, better lit and, probably because they are cleaned more often, free of bad smells.

The goods are more polished too. Yonghui Life, CP Fresh Mart and Easy Carrefour weigh their leafy greens and seal them in plastic bags. This is one way to standardize vegetables, and pre-packed greens spoil less than loose piles that customers paw through. Skipping the weighing and the sorting also makes shopping quicker, which appeals to younger buyers.

Kangpinhui and Li Xiaonong keep their vegetables loose. Zhu Xiaobin says that fits the way people have always shopped: older customers want to pick and choose. A few operating tricks help — after the evening rush, staff pull the sorry-looking greens and sell them off cheap, which leaves the display looking better, cuts waste and lifts the margin.

Besides raw ingredients, these stores sell other things meant to be eaten at home: rice and cooking oil, drinks, condiments, frozen goods, packaged food such as instant noodles and self-heating hot pot. They are what shoppers pick up while buying vegetables. Like fresh food, they are consumed at home; the second step, after paying, is cooking. That is the opposite of a convenience store, which mostly sells food for eating on the go — the bread, rice ball or bento you buy at a 7-Eleven you usually eat straight away.

Yonghui Life and Kangpinhui also carry imported food, such as craft beer, and imported household products — a step upmarket from the older community supermarkets.

3. A street-front shop in a residential block, about 150 square meters

Compared with a wet market or a supermarket, these stores are small — closer in size to a mid-sized FamilyMart, 7-Eleven or Lawson.

Most run 100 to 150 square meters. Yonghui's financial reports put the average Yonghui Life store in Shanghai at 146 square meters. Some go to 300; Kangpinhui's stores are on the large side, with looser displays than Yonghui's and their own fish and butcher counters.

At 100 square meters or 300, a small store has far more sites to choose from near housing than a hypermarket or even a wet market, and can expand more freely.

They all want the gate of a residential compound — anywhere people walk past on the way to and from work. That is why you find them stacked up along a single street, as on Anguo Road and Tianzhen Road in Hongkou District.

Being close to housing is the first rule of site selection. Zhu Xiaobin, who runs operations at Li Xiaonong, says the company looks for "somewhere with dense housing, ideally at the gates of several compounds at once."

Fruit, vegetables, meat — people want to buy all of it nearby, and the nearer the better. Among the 13 shoppers we stopped at random in these stores, "on my way" and "close by" were the phrases we heard most. "Convenience really does matter," said Wei Jianli, head of East China commercial property services at Cushman & Wakefield, who shops and cooks herself. "If I can buy it somewhere nearer, I won't walk ten extra steps."

There are two reasons the nearest shop wins. One is freshness: many households buy food every day, and something done that often has to be done close to home. The other is that fresh goods, especially vegetables and fruit, differ little from shop to shop, so for most people a 20-minute walk to a bigger wet market buys nothing.

Unlike convenience stores built around ready-to-eat food, fresh-food stores stay away from commercial districts, where rent is higher. "Even if a customer has been out shopping downtown, when it's time to buy fruit and vegetables they still do it at their own gate," Zhu Xiaobin said. Like convenience stores, they also avoid main roads and elevated expressways in favor of side streets. A big road cuts a store off and hides it.

4. More services than a wet market

Almost all of these stores offer something extra — pre-ordering, home delivery, returns and exchanges. An individual vegetable seller in a wet market can rarely manage any of it.

Most of them run neighborhood WeChat groups: Li Xiaonong, Kangpinhui, Suning Xiaodian. "Limited pre-order, Yunnan black tomatoes." "Last few boxes of long-stem strawberries." Clerks post that sort of group-buy or discount notice every day.

Because shoppers buy where they live, a store's regulars are a fairly fixed group of people from the surrounding blocks. The WeChat group has become one way to manage them. Customers order fresh goods in the group — most stores let them collect in person or have it delivered — report problems, and even arrange returns.

Hema, which the whole industry watches, has built a "Hema Community" feature into its own app for promotions and customer relations. CP Fresh Mart, Yonghui Life and Easy Carrefour run no neighborhood groups.

Delivery is close to compulsory. Suning Xiaodian and Li Xiaonong deliver themselves; the rest plug into third-party couriers. Three kilometers is a common radius.

At some stores, regulars can order on their phones, then collect and pay later. None of this is standard at a wet market.

Many of the newer stores have also grown more generous about returns. Li Xiaonong and Mishu Fresh take anything back, no questions asked — partly because they have negotiated a return allowance of their own with distributors and brands.

Squeezed between wet markets, hypermarkets, grocery delivery apps and convenience stores, why do fresh-food convenience stores still have room to live?

1. Office workers have no time

These stores fit the office worker, who has no time for the wet market's early-morning session and finds it shut by the time he gets home.

Online grocery shopping skews young — Hema's customers are mainly people born in the 1980s and 1990s, that is, under 40 — while these stores draw a wider age range. Our own observations bore that out: shoppers ranged from twenty-somethings to retirees past 70.

The clerk at the Anguo Road Yonghui Life told me his core customers are around 40 years old. Those are exactly the people you rarely see in a wet market.

Compared with the days when most jobs ran nine to five, Shanghai residents now work longer and commute longer.

According to the employment department of the National Bureau of Statistics, employees at all types of enterprise worked an average of 45.9 hours a week in the first half of 2018. Ten years ago the figure was 44.6 hours. Shanghai has long been among the country's hardest-working cities.

A decade ago a Shanghai resident's one-way commute ran about 36 minutes. Now the figure is higher, whether you take the city human resources bureau's number (43 minutes) or one from a company such as Aurora Mobile (54 minutes). Analysis by DT Finance found that the younger the resident, the longer the commute.

Wu Xiaojun lives in an old compound near Linping Road. She is a surgeon; her husband works at SAIC. Neither of them goes to wet markets or supermarkets, buying instead at Yonghui Life or on Hema. "By five or six there's nothing left at the wet market — just leftovers." Fresh-food convenience stores and grocery apps stay open until around 10 p.m., which suits people shopping at six or seven after work. If there happens to be one at the compound gate, collecting or ordering from it will usually beat a hypermarket or an online grocery service.

Speed really has become a factor in how people decide where to shop.

E-commerce and delivery have spoiled the customer. The young are the IWWIWWIWI generation — I want what I want when I want it — but people born in the 1970s and 1980s are changing too. "On the whole, consumers are less and less patient. They want to buy anytime, anywhere," said Derek Deng, a global partner at Bain & Company and a senior leader of its Greater China consumer products and retail practice.

2. Too few wet markets, and nobody wants to go to the supermarket

There are not enough wet markets, and that gap is the opening.

The Shanghai Development Plan for the Wholesale and Retail Markets of Edible Agricultural Products (2013–2020) says the city needs roughly 1,350 standardized markets of about 1,500 square meters each. In 2017 it had 869 — slightly fewer than the 880 it had in 2012, though the total edged up if you count non-standard markets. Over those same years Shanghai gained about 400,000 permanent residents.

Deng told QDaily that 70% to 80% of fresh-food buying in China still happens through traditional channels such as wet markets and produce shops, leaving modern channels — supermarkets and fresh-food convenience stores — with only 20% to 30%. He thinks the new stores are mostly taking business from the wet market.

That shoppers have gone off the hypermarket is no longer news.

Bain and Kantar data show that sales of fast-moving consumer goods in hypermarkets — stores over 6,000 square meters — have been falling since 2015. In China Shopper Report 2018, the two firms found the channel still shrinking, with shopping frequency, average annual household volume and penetration all down.

At 6:30 on a weekday evening, in the fresh-food aisles of the CP Lotus at Youdian Xincun, I counted five people under 40; the dozen or so others were middle-aged or older. Cheng Jiayi, 30, said her last visit had been more than a week earlier. "I buy everyday things online now, so I don't come to the supermarket much."

Their size limits where hypermarkets can go, which is not always near housing. And while a hypermarket may carry a wider choice in some categories — eggs, milk — fresh food is rarely near the door, so shoppers spend longer hunting for it. For the single trip that has to cover vegetables, condiments and packaged food, the small store may now be doing the hypermarket's job. Wei Jianli of Cushman & Wakefield told QDaily that these stores are hitting hypermarkets hard.

Supermarket and small-supermarket sales grew 4.8% in 2017, which Bain and Kantar put down partly to their role in online-to-offline delivery. "One of the big trends in retail is the hypermarket getting small," Deng told QDaily. Yonghui Life, the Easy Carrefour stores near housing, and CP Fresh Mart are all small-format experiments by retailers whose strength was traditionally the hypermarket.

3. Retailers want in because they see a chance to take over the supply chain

Lifestyles are changing on one side; on the other, the retail companies that shape those lifestyles have their own reason — profit — to open these stores.

Fresh food is bought often and, for most Chinese households, cannot be skipped. The market is worth 5 trillion yuan a year in sales, larger even than the 4 trillion yuan restaurant business.

Modern channels take only 20% to 30% of that, and e-commerce about 3%, so there is plenty of room to grow. Starting from fresh food, a retailer can pick up the rest of the dinner table on the way: semi-prepared ingredients, ready-to-eat dishes, condiments, packaged food. The business of eating, in short, can get very big.

Fresh food that reaches a wet market has passed through several tiers of distribution, and every handoff to a first- or second-tier wholesaler adds cost. A retailer that buys at source and controls the chain keeps more of the difference. This is why not only Yonghui, which grew out of the drive to replace wet markets with supermarkets, and CP Group, a long-time investor in farming, but other retailers online and off — Alibaba, JD.com — are all trying to take hold of the fresh-food supply chain. The parent companies of Li Xiaonong, Kangpinhui and CP Fresh Mart each own or have invested in farming operations upstream.

There may be room in the market, but most retailers are still feeling their way. Margins on fresh food are thin — Yonghui's accounts show about 15%, against 19% for packaged food and general merchandise — waste in transport and on the shelf is high, and the supply chain is long and awkward. Few players actually make money. As Deng put it: "Either you sell the expensive, high-margin categories" — imported seafood, say — "or you get to real scale and connect online, offline and the supply chain. Otherwise there's no profit."

Suning Xiaodian, whose operations are still raw, hopes to pass Yonghui on the strength of good sites and sheer store count. This year it bought Dia's China business and kept opening stores; it now has 77 in Shanghai. From January to July, Suning Xiaodian took in just 143 million yuan, lost 296 million yuan, and carried debts of 653 million yuan. In October, Suning transferred its controlling stake to an affiliate, taking the chain's results off Suning.com's books. Suning, it seems, intends to let it burn cash a while longer.

The other big piece of news in fresh-food retail: Yonghui has cut its opening target for Yonghui Life. It set out this year to open 1,000 stores; by the end of the third quarter it had opened just over 400. Yonghui Yunchuang, the unit that holds the chain, is still in the red — revenue of 905 million yuan and a loss of 387 million yuan in the first half of 2018.

"Older people are sharp about price. Usually they finish at the wet market up the road, then top up at Yonghui on the way home," the clerk at the Anguo Road store told me.

Wan Qi, 76, drops into Yonghui Life after dinner, part walk and part errand, picking out discounted fruit or meat. What he said could not be more ordinary, and yet it captures how tangled the competition is: "I don't buy leafy greens here. I go to the produce shop up on East Yuhang Road — it's cheaper."

Charts: Feng Xiuxia

At their request, Wan Qi, Cheng Jiayi and Wu Xiaojun are pseudonyms

Cover image: Dong Zhifei, rawpixel on Unsplash