This week, translation column China Voices brings TechNode Squared members a unique take on the new retail landscape. TechNode has not independently verified the claims made below.
Convenience stores have given e-commerce giants a choppy ride as they’ve raced to deploy automated “new retail” concepts. Fang Yu, writing at One Billion Customers, argues that they must learn from the real masters of ubiquity: China’s budget snack food chains, which have developed a loosely-managed franchise model that’s allowed them to open ten of thousands of locations across the country.
Do Chinese convenience stores have a chance against the mighty Shaxian Xiaochi?
Fang Yu, One Billion Customers (Shiyi Xiaofeizhe)
Oct 19, 2019
Why Shaxian Xiaochi has no need for big data, AI, or any other tech tricks to play big in China.
Everywhere you look in China’s larger cities, you’ll see convenience stores these days. But how they operate is fairly hidden. Some have started to test their employees’ math skills, with the toughest questions at gaokao level. Other convenience stores, you have to ask yourself how on earth do they make money? It’s really hard to find out.
Not long ago, the author was at a Haolingju (Good Neighbor) convenience chain store conference and overheard some tasty yet unanswerable questions:
- How do you make the most tasty zhajiang noodle sauce?
- How come fennel dumplings have such green wrappings after steaming?
- How hot should the oil be when you fry stuffed buns?
Boring? Fun? Or pretty deep? Well, if you really want to understand how convenience stores work, you should probably choose the third option. Because convenience stores put a lot of work into their formula. And if you think their fresh food offerings are just rice rolls and sandwiches, you’d be surprised. Keep reading.
Convenience stores fear Shaxian Xiaochi
Plenty of people know the trouble convenience stores got into in 2018. Once hotly pursued by capital markets, many have since closed, switched owners, and lost funding. But Beijing Municipal Party Secretary Cai Qi, and gusts of positive wind at a national level, have given the sector new momentum. Since September, convenience store chains can get permits to sell over-the-counter drugs, for example.
The larger chains are stepping up expansion. For example, Xinrui has announced plans to open a thousand new stores. Foreign-backed brands such as Beijing Lawson’s Tianjin Fresh Food Factory are on the rise.
At the end of September, Beijing’s longest-established brand, Haolingju, started offering franchises again after a two-year break, expressing new confidence in the market. But at the company’s recent conference, most of the chatter was not about how to make fast cash through franchising, but how to make snacks. They weren’t talking about the kind of snacks convenience store tended to rely on in the past. These were hot snack meals traditionally served at small restaurants dotted around town.
Why hot snacks? Well, in the past two years, Tao Ye, Haolingju’s GM, has been carefully observing trends and shifts in market consumption. Ye realized his truest competitor was the convenient urban mini meal, or hot snack. The fast food of the nation before fast food chains existed.
While no convenience store chain has reached the scale of 7-11 globally [translator: 7-11 claims more than 67,000 stores], China’s brand layout has begun to take shape in recent years. We have Meiyijia with 15,559 stores at number three, and Yijie Convenience Stores in top position. Because they started to sell coffee in 2018, they now have a whopping 27,259 stores nationwide.
You shouldn’t be surprised that some chains have secured heavy backing. This comes with support from Japanese and Taiwanese experts. Combined with favorable national policy, it isn’t a surprise that convenience stores have scaled up the way they have.
But you know the cheap and cheerful Shaxian Xiaochi hot snack chain? Just how many restaurants do they have across the country? Well, in 2014 when we had our most authoritative figures, there were over 20,000. Five times more than KFC had in the same year. Lanzhou pulled noodles, with the stated ambition of beating Shaxian Xiaochi at its game, has around 50,000 restaurants worldwide. Unverified statistics say that Shaxian Xiaochi has up to 88,000.
In other words, China’s convenience stores have not been able to follow in the footsteps of 7-11, but Shaxian Xiaochi has found it fairly easy. And the brand isn’t alone. Huangqi chicken rice has also done well. What do they have in common? They stick to their grassroots and franchise like crazy.
The magic of Shaxian Xiaochi is not just its scale, but also its model. Anyone in retailing will tell you about free association chain stores: management is loose, quality is variable, but you get the name above the door. Basically, this is their model.
The honest truth is that convenience stores, with all their capital, technology, and talent, need to learn how Shaxian Xiaochi does it. Why Shaxian Xiaochi doesn’t need big data, artificial intelligence, and cool new technology to have such vitality.
First, Shaxian Xiaochi works more like a government than a company: restaurants are managed by Shaxian county’s snack association, trade groups, and liaison offices originating in the mountains of Fujian. You must be from Shaxian to open a store. Some people have even married into Shaxian families to learn the tricks of the trade. The core of the matter is supply consistency: all ingredients and flavorings are from Shaxian and shipped across the country. Where there are Shaxian Xiaochi stores, you can bet there are ingredient distribution centers. In summary, this is why Shaxian franchises don’t need to be locked in: they rely on a unique taste at the commodity level and specificity at the supply chain level.
There are many specialty foods like this in China, and today, with increasing competitive pressure, large numbers of convenience stores are seeking a way to integrate such products into the system. Convenience stores in Wuhan, for example, are now selling the city’s local dry hot noodles.
Consumers have long favored Lawson’s sweets, Quanjia’s bread, and 7-11’s rice balls, and the reason is simple. They are unique offerings both in terms of ingredients and in production. And it’s no accident. Those sweets have been developed out of intense research, and those rice balls are made with premium rice. And then we have the “Black Egg Legend” of Taiwan’s 7-11. It’s basically a traditional hot snack, the tea-boiled egg, but it has a historic role in how hot snacks made their way into the convenience store. Opposition was fierce at the start: they didn’t look great, and probably couldn’t be trusted, people said. But these eggs, boiled in big rice cookers under the careful attention of store owners, were a runaway hit. In one year 100 million were sold, and account ledgers registered a gross profit margin for the company of 40%.
People are beginning to think about the strategic position of hot snacks in convenience stores. In today’s increasingly fierce competitive landscape, commodification is the key to success. Convenience stores have shifted from seeing hots snacks as simply part of fresh food to seeing them as unique local commodities. And if these can be standardized and become amenable to minimal manual operations, they can do incredibly well.
Emphasizing local specialties is not simply a practice that just happens to have sprouted in cities across China. The government also encourages convenience stores to emphasize Chinese features in food as in other cultural areas. As cities become bigger and bigger, people’s lives are increasingly uprooted. Consumers need something different, something creative yet soothing, and steam-filled snacks fulfill their need. And as China celebrates 70 years since the People’s Republic began, consumers are craving time-honored brands and unique products, such as Guangming’s White Rabbit sweets, which recently witnessed a sales spike of 1170% at Haolingju (Good Neighbor) convenience stores.