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2013-07-04

Problems with CVS Development in China
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Why convenience stores in China are shifting their strategies.

Due to exaggerated real estate prices and high competition in the retail industry, high rent has become one of the biggest hurdles convenience stores (CVS) in China face when trying to expand. It was big news last year when around 10% of convenient stores in China closed owing to unaffordable rent.

I recently had the chance to talk to one of our clients, a developer working for a global CVS brand about this specific situation and how it might have impacted their business. He said, “In fact, those closed stores were not ones that necessarily performed badly. Actually, they were performing quite well. It’s just that we couldn’t cover the increasing rent. Because of the increases in rent, it became very hard for us to keep opening new stores in those central areas. Therefore, we started looking for expansion opportunities in pure-residential communities in sub-urban areas and in tier 2 and 3 cities. The rent is more reasonable there and we increased revenue after calculating basic costs (i.e. rent and management fees).”

What does this mean for CVS operations? Will 7-Eleven, Family Mart, and Circle K start to disappear in city-central areas or in tier 1 cities? We all know the answer isn’t yes. But how will developers deal with this new reality and what trans-formative impacts will it have on the CVS industry?

One of the big barriers that still exist for the global CVS industry in China is that their brand images still aren’t rooted in customers’ minds yet. When customers need to buy something for convenience reasons, they tend to choose mom-and-pop stores because they can be found almost everywhere. If they are shopping for best price, they’ll choose to shop in a supermarket. Therefore, the question of CVS’s role in China and why it matters to customers’ ordinary lives, begins to present itself. Throw in the fact that many CVS brand managers in China are still entrenched in figuring out and defining their target customers and market strategies, and you start to see the real predicament.

The situation that the CVS industry is currently facing in China is quite similar to the situation that existed in Taiwan in the early 90s. At that time, the cities were full of mom-and-pop shops along side traditional grocery stores. People knew that the quality of products found in a CVS would be more guaranteed than you could get from a small grocery store. However, when comparing price, customers wouldn’t be willing to spend more just for receiving tangible value. In addition, the old market strategy of expansion is also one of the key factors that almost ruined the CVS market at that time.

For instance, in early 90s, 7-Eleven Taiwan opened most of their stores in residential areas and small communities thinking housewives were the key target customers for buying groceries. However, they failed with this expansion strategy because those housewives were also the group that was most sensitive to price. Since the principle of a CVS is to provide convenience, knowing and defining the right target customer group increases in significant. Therefore, 7-Eleven changed their expansion plan in the late 90s. Instead of residential areas, they worked to open new stores on major roadways or intersections with high visibility even though the rent in these types of locations is almost always higher. Suddenly, 7-Eleven was highly visible and its branding started to affect people’s shopping behavior. Meanwhile, they refocused their target customers from housewives to dynamic, working population and teenagers. This shift in strategy was highly successful.

So what does this tells us? Know your target. Don’t forget the 20:80 theory. Look at the essential demand of your industry instead of just avoiding the current problems.

Opening new stores in developing residential areas might seem like a safe way to ensure CVS performance in China right now. However, unless the image of CVS has been rooted into customers’ minds and the shopping behavior is changed, the price competition will continue to present challenges no matter how low you can get your rent. So face the truth, creating uncontested market space and making the competition irrelevant could be the most important strategy for CVS development in China.