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| Convenience Stores Not Yet Convenient in China |
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Due to rising income, urbanisation and change in consumer attitude, convenience stores (CVS) have been on the rise in some large cities of China in recent years. But the Chinese CVS industry is not yet sophisticated, for example, the industry in Shanghai only started to make a profit in 2006. And there are some other problems within the industry amid its rapid development.
Industry issues
Small franchise and fierce competition
By the end of 2005, Shanghai had the largest number of convenience stores in China with 4100 shops. But the two biggest players in Shanghai, Quik and Kedi, which had a collective market share of 51%, were only starting to make a profit in 2006. Due to small franchise chain sizes, low levels of franchisee connection, lack of unified procurement and delivery and proximity of competitors, individual CVS has to bear high operating costs. The high costs in turn result in high product prices, thus customers would rather shop in local supermarkets.
Suboptimal locations
Many CVS hold the same or similar strategy with supermarkets when it comes to location selection, paying too much attention to residential areas, resulting in high concentration of outlets and overlapping of business. On the other hand, many of them have ignored office areas, schools and parks, hence failure to utilise an important CVS advantage – location freedom. In such a high competitive environment, performance of CVS would inevitably be affected by their lack of customer diversity. |
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Lack of uniqueness
Also, many CVS in China are quite similar to their supermarket rivals in terms of inventory selection. They not only fail to emphasise their advantages in stocking "necessities, urgent goods and fast meals", they are also lacking the ability to independently develop or influence suppliers to develop unique products. Many of their inventories are simply supermarket goods, instead of differentiated products. Furthermore, due to their lack of diversified services, many so-called CVS in China are just smaller supermarket chains, or an extension of supermarket models.
Inefficient supply chains
Because of their limited shop space, CVS will need to reduce their in-store inventory level as much as possible, therefore they require a logistics system that can deliver large variety, small quantity and high frequency of goods. But the lack of capital and modern management expertise in China's logistics industry has hindered the development of mass procurement activities, and there is a chronic underinvestment in logistical centres, distribution centres, warehousing functions and management skills within the industry. This has directly resulted in higher selling costs among China's retailers than their foreign rivals.
Suggested solutions
Large franchise models
Research showed that a CVS brand will need at least 100 outlets to survive, so for long term prospects, CVS operations have to be franchised. Apart from government assistance and bank lending, CVS can utilize their reputation to issue equities and bonds to attract capital from the society. They can also raise capital through employee ownership, mergers, acquisitions or licensing agreements. The Chinese government should also facilitate asset and ownership restructuring in franchise industries, so that large-scale franchise corporations can be created.
Location diversity
Foot traffic is the primary factor in choosing CVS location, not necessarily residential areas. CVS operators can focus on a diversified location profiles, such as subway stations, petrol stations, office buildings, schools, research institutes, parks and entertainment venues. Active social activities can lead to an increase in consumer demand nearby, so as long as there are targeted customers, there will be a market for convenience services.
Innovative products
In terms of product lines and operating hours, CVS should differentiate themselves from supermarkets and retail chains, instead of substituting them. Therefore, CVS should establish their own uniqueness, providing comprehensive and diversified service items to satisfy people's various convenience needs.
For example, CVS may introduce fax machines, printers, public phones and lotteries into their stores, as well as handling utilities bills, bus tickets, ferry tickets or even air tickets. CVS operators may also accept online orders and deliver goods to customers nearby. In terms of operating hours, CVS should be running 24-hour business, in order to provide real convenience to customers. And all these service details can then differentiate CVS from other retailers.
Establishing efficient logistical systems
A logistical system is vital to any CVS operation, and delivery and management temperature-controlled products are the core of such a system. In China's situation, a CVS logistical system should be divided into four categories: normal temperature, frozen, daily meals and direct delivery. It is worth noting that due to the small number of outlets that many CVS companies have, a totally-independent logistical system may not be economically justified. In that case, they may share logistical resources with other retailers in the same region, or employ third party logistics providers to deliver goods.
Produced by China Business Intelligence; Source: www.xfdk.org |
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