The convenience store industry in China continues to see rapid growth, finds joint report by KPMG and the China Chain Store and Franchise Association

The convenience store industry in China continues to...

Digital transformation is key for future success

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19 August 2020, Hong Kong –The convenience store industry in mainland China continued to grow rapidly in 2019, outperforming other physical retail store categories, with the number of convenience stores hitting a record high and average single-store sales increasing year-on-year, according to a joint report by KPMG and the China Chain Store and Franchise Association (CCFA). Tier 2 and tier 3 cities have become the new areas for expansion as the economy continues to grow, the report finds.

The China Convenience Store Development Report 2020 is based on research of 86 convenience store companies (including gas station convenience stores) across the country conducted by the CCFA. The report analyses the current conditions, operating environment and development trends of the convenience store industry. The industry is expected to see further transformation, resulting in the reshaping of the value chains around people, products and marketplaces.

The research finds that leading convenience store chains maintained their competitive edge over local convenience stores and “mom-and-pop” stores. They are focusing on profitable products and cost optimisation, and their net profit margin in tier 2 cities is around 5 percent. In terms of product structure, local convenience stores and “mom-and-pop” stores seldom sell instant food products; In comparison, the chain stores can meet customer demand for instant food products while obtaining a higher gross margin from this segment. The average sales per square metre of convenience stores in mainland China is estimated to be RMB 69 per day, lower than the operating efficiency of some of the top international companies.

Jessie Qian, Partner, Head of Consumer and Retail, KPMG China, says: “An increasing proportion of convenience stores are adopting a membership system, and more companies are using digital technologies to achieve precision marketing and improve service quality. Network retail channels and mobile payment are so popular now that they have become mainstream in the market. Nonetheless, it is noteworthy that while many companies are actively launching pilot digital projects such as smart logistics, smart video monitoring and unmanned stores, most of these companies are still in the initial stage of digital transformation.”

Contactless operations during the pandemic are the new highlight of industry development, according to the report. Integrated online to offline (O2O) operations are being promoted at convenience stores. In this regard, the expansion of sales channels through online business is making shopping easier for consumers while also making purchases more secure. As the impact of the pandemic diminishes, more physical stores are resuming business each month, while the number of new stores is also increasing.

In addition, this year’s report also provides a detailed analysis of the industry’s business environment. Wang Hongtao, Deputy Secretary-General of the China Chain Store and Franchise Association, says: “While governments at all levels have placed high importance on the development of convenience stores in recent years and have given policy support to the industry, we hope our analysis in this report can help to drive continuous enhancements.”

With respect to the market environment, most companies consider the market to be relatively fair, with few cases of false reporting and unfair competition. About 40 percent of the surveyed companies believe the market is not saturated and that there is still room for expansion. In terms of the policy environment, the overall scores of the convenience store industry’s improvement indicators are lower than those of the supermarket industry. While fee issues have improved notably, the overall satisfaction rate regarding licence processing is low compared to other retail sectors.

The surveyed companies indicated satisfaction with the current business environment. However, outdoor advertising facilities and signboard management are associated with lowest satisfaction rates. 

In recent years, the overall growth of the physical retail business in mainland China has slowed and gradually matured. In contrast, the country’s convenience store business has maintained rapid growth. Compared to Japan’s mature market, the convenience store industry in mainland China still has room for growth in terms of market concentration. Going forward, integration and concentration will be an ongoing development trend for the industry. Convenience store companies will need to improve their management and operating efficiency through digitalisation, and franchising will remain the major way to expand a convenience store brand.

In terms of operating costs, increased labour and rental costs have been squeezing the profitability of convenience stores. Cost control and enhanced operating efficiency are therefore key to success. Willi Sun, Partner, Consumer and Retail Sector Strategy Advisory, KPMG China, points out: “Convenience store companies need to analyse and control costs and benchmark their cost structures with those of leading companies in a timely manner in order to clarify the direction for cost optimisation. They can improve operating efficiency and cut excess costs through process streamlining, structural adjustment, personnel training and digitalisation. In the long run, convenience stores should shift from extensive cost management to refined cost management.”

Additionally, the report finds that convenience store companies are still facing a “long-term battle” in terms of cash flow management. A reasonable cash management plan is particularly important for monitoring profitability. Convenience store operators need to conduct careful cost and expense data analysis, contract life cycle management, operating model design, and cash usage and reserve analysis; and they need to optimise their inventories and use financial and taxation technology tools.

Michael Mao, Partner, Advisory Head of Consumer and Retail Sector, KPMG China, says: “Convenience store companies will need to focus on meeting different consumer demands by adjusting their product structures and increasing the share of their own brand products. By using all sales channels, they will be able to break through business boundaries and product type restrictions. Additionally, operators will need to accelerate business development in their communities, use digital technology to enhance operating efficiency, and build more resilient supply chains.”

 

-ENDS-

About KPMG China

KPMG member firms and its affiliates operating in mainland China, Hong Kong and Macau are collectively referred to as “KPMG China”. KPMG China is based in 26 offices across 24 cities with around 12,000 partners and staff in Beijing, Changsha, Chengdu, Chongqing, Foshan, Fuzhou, Guangzhou, Haikou, Hangzhou, Jinan, Nanjing, Ningbo, Qingdao, Shanghai, Shenyang, Shenzhen, Suzhou, Tianjin, Wuhan, Xiamen, Xi’an, Zhengzhou, Hong Kong SAR and Macau SAR.  Working collaboratively across all these offices, KPMG China can deploy experienced professionals efficiently, wherever our client is located.

KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We operate in 147 countries and territories and have more than 219,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such. In 1992, KPMG became the first international accounting network to be granted a joint venture licence in mainland China. KPMG was also the first among the Big Four in mainland China to convert from a joint venture to a special general partnership, as of 1 August 2012. Additionally, the Hong Kong firm can trace its origins to 1945. This early commitment to this market, together with an unwavering focus on quality, has been the foundation for accumulated industry experience, and is reflected in KPMG’s appointment for multidisciplinary services (including audit, tax and advisory) by some of China’s most prestigious companies.

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