Neighbors in competition: Japanese-owned FamilyMart located next to Chinese-owned Alldays on Luban Road. Photo: Cai Xianmin/GT

By Ni Dandan

Shanghai has more convenience stores than any other city on the Chinese mainland. Today around 7,000 convenience stores in Shanghai serve a population of some 20 million. In almost every lane or street one can find a place where they can buy basic daily necessities and pay their utility fees.

Behind the smiles of the shop assistants, however, competition among domestic and Japanese enterprises is now entering a decisive phase. Although domestic players continue to control an absolute ruling stake of this market, insiders worry that the monopoly of overseas investors in China's supermarket and shopping mall sectors could be repeated in the convenience store industry.

While both have taken efforts to expand, the victor will be the one that attaches great importance to the quality and the comprehensiveness of their service, according to analysts.

The variety of lunchboxes on offer at FamilyMart. Photo: Cai Xianmin/GT

The confrontation begins

Last week, the largest Shanghai-based supermarket chain Nonggongshang Supermarket Group announced that two of its convenience store chains, Alldays and Kedi, would open 260 new outlets in Shanghai and Zhejiang and Jiangsu provinces. With this expansion plan, the total number of stores would surpass 2,500 by the end of the year.

"This is our fourth massive expansion plan since the chain Alldays was established 10 years ago," said Cai Qionghui, deputy manager of Alldays. She told the Global Times that currently there are more than 2,000 Alldays and Kedi stores in the city. "The scale of our business is a major advantage that we cherish. We need to maintain that advantage," Cai said, when asked about the initiative behind the recent expansion plan.

It is believed that threat from competition is behind the latest announcement from the local convenience store giant. Earlier this year, Japanese convenience store chain FamilyMart said it would strengthen its presence in the Shanghai market by opening at least 200 more stores within the year.

"An ideal target is to increase the number to 700. But what we can guarantee is 600 by the end of this year," Zhang Kaiyi, manager of FamilyMart in Shanghai, said. The chain now has more than 400 stores across the city.

The co-existence of both domestic and Japanese chain convenience stores in Shanghai is actually not something new. But this competitive element is quite recent. Local franchise Alldays was established 10 years ago, while FamilyMart's official entry into the Shanghai market was in 2004.

At the beginning, the higher number of locations gave an advantage to local players, according to analysts.

"The history of local companies is longer and their scale is larger. We have estimated that to run a convenience store chain successfully in Shanghai, at least 300 stores should be built. Only in this way can purchasing cost be properly controlled.

Above all, the profit rate of every single product in a convenience store is not high," said Li Xuerong, a senior analyst of the retail industry who works for China Investment Consulting Corporation (CIC), adding that a company has to guarantee a certain turnover ratio to make profits.

Li told the Global Times that since local companies enjoyed favorable networking resources and their earlier emergence had helped build a brand image among the city's general population, their counterparts from Japan initially did not pose a threat to their share of the market. But the foreign chain has expanded tremendously in recent years, which has aroused much concern from local convenience store chains in Shanghai.

According to figures provided by CIC, in 2010, 85 percent of the 7,000 stores in Shanghai were run by domestic companies such as Quick, Alldays, Kedi and Buddies, while the other 15 percent was controlled by foreign investors, especially those from Japan such as FamilyMart, Lawson, and 7-Eleven.

"If we compare the figures to those from the year 2006, we can see the trend of development, which is unfavorable for local companies. Back then, up to 91 percent of stores were run by domestic companies. That means Japanese convenience stores have carried out rapid expansion in the past five years. They have been very aggressive," Li said. "Therefore, domestic companies must take action to keep their edge," she added.

According to Li, recent expansions planned by Alldays and Kedi might not exert real pressure on their Japanese counterparts in Shanghai, but such a gesture indicates the domestic chains' determination in fighting for their share of the market. "It could serve to physiologically deter their Japanese rivals. It will not be easy for them to reverse the competitive situation in this sector," Li told the Global Times.

Why Shanghai?

According to industry insiders, once the average annual income per capita in a city surpasses $3,000, it has the potential to foster a booming convenience store industry. This criterion can be reached in many cities on the Chinese mainland; however, Shanghai is where convenience stores seem to thrive most.

Mitsuyoshi Harada, vice president of FamilyMart, said the high density of population in the city has nurtured a prosperous shopping culture. "The purchasing power of people living in Shanghai is the strongest we observed. And compared with Beijing, the city has more lanes and small paths.

Unlike in the capital where people heavily rely on private cars for travel, residents in Shanghai choose to walk in certain areas of the city. The street layout here makes it easy for people to shop in convenience stores," he explained.

It is believed that the fast pace of life in the city has also assisted in the development of the industry. "Local white-collar workers tend to enjoy shopping in these places. And since the nightlife in Shanghai is rich and those convenience stores are open around-the-clock, they can properly meet the habits of those young people," Li said, adding that the bourgeois sentiments of some also lead them to shop in these places.

"If convenience stores can become a part of local people's daily life as they are in Taiwan, where many people get their meals from them, the market will be extremely attractive," Zhang Kaiyi told the Global Times.

The promising future has made some Japanese companies persist even though they suffered losses at first.

According to Professor Huang Jiangming from the Business School of Renmin University of China, because of the limited number of locations, a 7-Eleven store suffered losses even when its daily revenues reached 14,000 yuan ($2,143), while a store run by a local chain with better networks could guarantee profits once daily revenue surpassed 4,000 yuan.

"When McDonalds had only 200 stores in China, it also suffered losses. The reason is the same," Huang said.

The Japanese chain 7-Eleven is planning to increase the number of its stores in Shanghai to 150 by the end of this year and to double the figure by the end of 2012. The company is confident that local convenience store chains will gradually lose their advantage.

"With the good quality services and products we provide, we believe we'll be able to replace local convenience stores," said Su Jiaqi, vice president of President Chain Store Corporation, the authorized management company of 7-Eleven convenience stores in Shanghai.

While traditional local convenience stores are more like small-scale supermarkets, some young people in the city say they frequently visit those Japanese convenience stores for breakfast and the special lunchboxes served there. "There are some good choices there. The prices are acceptable. We don't need to queue up for food during the lunch rush at restaurants.

And it's cleaner than the food served by street vendors," Chen Wei, whose office is downtown on Nanjing Road West, said, adding that the Japanese convenience stores have been working hard on updating and increasing the variety of food in their lunchboxes.

While some find the products provide more alternative choices, others enjoy the service in Japanese convenience stores.

"They are usually young people working there and they greet us warmly. Instead, in many others run by local companies, middle-aged people sometimes give us cold looks or watch us in a weird way. It seems that they are afraid that we would steal things. It's not a comfortable shopping experience," said a white-collar worker surnamed Jiang.

While Japanese convenience stores are creating an image of vitality and friendliness, the concept of service is not a matter of concern for their Chinese counterparts.

Although efforts have been seen made by Alldays to make the prices of certain products more competitive, it is more important for domestic convenience stores to work out their innovation-oriented strategies both in terms of their services and the structure of products, according to analysts.

"In fact, there's big potential for domestic companies to further explore the market. Currently, most of the outlets they run are small-scale supermarkets. They can actually provide more services like providing photocopying, sending faxes and printing photos among others," said Li.

"The Japanese companies have been taking the lead in this regard. For instance, in almost all the convenience stores in the city, we can see simmering pots serving oden, a type of Japanese food. That's a popular practice in Japanese convenience stores and we learnt from them. It's time for the domestic players to come up with something new, something attractive and practical for the customers so they can continue to keep their edge in the market," Li added.

Lessons to learn from

While the 85 percent market occupation rate might make many feel secure that domestic convenience store chains are steadily controlling this sector in the city, some are not so optimistic. "The history of monopoly by overseas investors in the shopping mall and supermarket sectors could be repeated," Li said.

In Shanghai, there are around 30 overseas-invested shopping malls with areas above 6,000 square meters, while their major rival is the Shanghai Bailian Group, a Chinese retail giant. According to their sales performances, several renowned shopping mall chains run by Japanese companies and others from Hong Kong have been taking the lead in this sector in Shanghai.

In the meantime, for the supermarket sector, the penetration rate of overseas investment soared rapidly from 17 percent in 2005 to 61 percent earlier this year.

"Based on their sufficient capital, practice-proven management skills and other efficient logistical operation methods, international retailers rushed to grab a share of the big market in China," independent industry observer Gu Guojian said. "The entry of the overseas players happened soon after the country opened this sector to them in 2004 and their leading positions were secured quickly thanks to their rich experience in other countries," said Gu.

But not all local chains have been unsuccessful at keeping their share of the market. The competition in the home appliance industry could serve to prove that enlarging business scale by setting up more outlets in a timely manner is crucial to the success of a company.

"Domestic home appliance retailers Gome and Suning took quick action and expanded in the early stages despite suffering losses. The decision has helped them to secure considerable market share from the very beginning," Li said.

With pressure coming from overseas players like Media Markt from Germany, Best Buy from the US and Yamada Denki from Japan, Gome and Suning managed to maintain a joint market share of around 50 percent in first-tier cities, according to a report from 21st Century Business Herald.

Furthermore, since the favorable market resources had been taken by major domestic retailers, who also offered more attractive prices, Best Buy had to close all nine outlets on the Chinese mainland, plus its regional retail headquarters in Shanghai.

According to experts, the successful practice by domestic companies in the home appliance sector should serve as an important lesson for the city's convenience store chains.