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CHINA RETAIL - CONVENIENCE STORES Overview The development of the convenience store (CVS) in China has gained increasing momentum. As small format retailers CVSs have the advantage over their competitors of having closer access to their target consumers. CVSs are also able to offer quicker services along with their attractive product selection and added convenience. China’s usual CVSs are also joined in this category by the country’s many mini stores operated by supermarkets and are spread across the country, especially in less developed areas or in older cities. Additionally, this format includes forecourt retailers located next to petrol stations and they too are a common sight. Forecourt retailers such as Sinopec Group’s Easy Joy and PetroChina Co. Ltd.’s uSmile leverage on the extensive network of petrol stations controlled by their parent companies; hence, they are able to achieve national networks. Easy Joy has over 23,300 stores and uSmile has over 14,000 stores across the country . However, for the purposes of this report, mini supermarkets and forecourt retailers are not the focus, so as to concentrate on the newer and increasingly more profitable developments and trends. Indeed, this changing sector deserves renewed analysis. Total sales revenues for CVSs rebounded in 2012 after three consecutive years of decline, reaching 26.4 billion yuan, according to the National Bureau of Statistics. The latest figures published by the Ministry of Commerce (MOFCOM) in 4Q13 shows that CVS was the retail sector’s fastest-growing format with average year-on-year (yoy) growth of 13.8%, followed by supermarkets (12% yoy) and specialty stores (9.3% yoy). The average gross profit margin for CVSs was 20.2% in 4Q13, slightly higher than for all other major retail formats. CVS operators are able to earn higher gross margins by selling products with larger markups. On average, products sold in CVSs are 30% higher than in hypermarkets . On the other hand, operating costs for CVSs are relatively high; long opening hours, multiple daily deliveries and frequent replenishment of small batches of products have all contributed to escalating running costs. July 2014 1 1 2

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Page 1: CHINA RETAIL - CONVENIENCE STORES - … · CHINA RETAIL - CONVENIENCE STORES Overview The development of the convenience store (CVS) in China has gained increasing momentum. As small

CHINA RETAIL- CONVENIENCE STORES

OverviewThe development of the convenience store (CVS) in China has gained increasing momentum. As small format retailers CVSs have the advantage over their competitors of having closer access to their target consumers. CVSs are also able to offer quicker services along with their attractive product selection and added convenience.

China’s usual CVSs are also joined in this category by the country’s many mini stores operated by supermarkets and are spread across the country, especially in less developed areas or in older cities. Additionally, this format includes forecourt retailers located next to petrol stations and they too are a common sight. Forecourt retailers such as Sinopec Group’s Easy Joy and PetroChina Co. Ltd.’s uSmile leverage on the extensive network of petrol stations controlled by their parent companies; hence, they are able to achieve national networks. Easy Joy has over 23,300 stores and uSmile has over 14,000 stores across the country . However, for the purposes of this report, mini supermarkets and forecourt retailers are not the focus, so as to concentrate on the newer and increasingly more profitable developments and trends.

Indeed, this changing sector deserves renewed analysis. Total sales revenues for CVSs rebounded in 2012 after three consecutive years of decline, reaching 26.4 billion yuan, according to the National Bureau of Statistics. The latest figures published by the Ministry of Commerce (MOFCOM) in 4Q13 shows that CVS was the retail sector’s fastest-growing format with average year-on-year (yoy) growth of 13.8%, followed by supermarkets (12% yoy) and specialty stores (9.3% yoy).

The average gross profit margin for CVSs was 20.2% in 4Q13, slightly higher than for all other major retail formats. CVS operators are able to earn higher gross margins by selling products with larger markups. On average, products sold in CVSs are 30% higher than in hypermarkets . On the other hand, operating costs for CVSs are relatively high; long opening hours, multiple daily deliveries and frequent replenishment of small batches of products have all contributed to escalating running costs.

July 2014

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Exhibit 1: Total sales revenues of convenience stores, 2005-2012

Source: National Bureau of Statistics

2005 2006 2007 2008 2009 2010 2011 2012

Tota

l sal

es r

even

ue(b

illio

n yu

an)

30

25

20

15

10

5

0

22.3 23.2

27.6 27.024.7

22.6

26.4

18.3

Exhibit 2: Total retail sales growth by format, yoy, 4Q13

Source: MOFCOM

0 2 4 6 8 10 12 14 16

Department stores

Convenience stores

Supermarkets

Hypermarkets

Specialty stores

Professional stores

7.5

13.8

12.0

9.3

8.0

7.8

C H I N A R E TA I L - C O N V E N I E N C E S T O R E S

%

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Exhibit 3: Key performance index of convenience store sector, yoy growth, 4Q13

Source: MOFCOM

0 5 10 15 20 25

Retail sales

Number of employees

Operating area

Gross profit margin

Net profit margin

Increase in rental costs

13.8

7.3

20.2

21.4

2.4

2.5

Exhibit 4: Profit margins for different retail formats, 4Q13

Source: MOFCOM

0 5 10 15 20 25 30

Department stores

Convenience stores

Supermarkets

Hypermarkets

Specialty stores

Professional stores

20.2

4.6

15.9

24.3

1.4

5.1

3.6

2.420.2

4.117.7

22.4

Gross profit margin Net profit margin

C H I N A R E TA I L - C O N V E N I E N C E S T O R E S

%

%

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Exhibit 5: Comparison of the convenience store sector in China, the United States and Japan, 2012

China United States Japan

Average sales revenue per store (yearly) (million yuan) 2.2 10

Source: China Chain Store and Franchise Association. 2014. “Development of convenience stores in China.” P.12.

Despite their smaller operating areas, CVSs sell a wide range of products with large numbers of stock-keeping units (SKUs), and offer a variety of value-added services. In 2012, 64.7% of CVSs’ revenues were from selling food, while 34.6% were generated from non-food items and less than 1% was derived from other value-added services. The average number of SKUs in a typical China-based CVS stood at about 2,325 in 2012, according to the China Chain Store and Franchise Association (CCFA).

Over half the CVSs in China operate around the clock. According to the CCFA, 51% operate 24 hours per day. The

ratio of CVSs operating 24 hours daily in Southern China is higher than in the North, and the ratio is higher in coastal cities than in inland cities. This is due, in part, to the different climates and lifestyles in various regions and cities.

Effective logistics management, including an order fulfillment process, is a critical success factor for CVS operators. In fact, according to the CCFA , around 70% of CVS chains have their own logistics centres, hoping to better control their operations.

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Average sales revenue per store (daily) (yuan) 5,785 28,548 42,032

Average operating area (sqm) 82 268 113

Gross profit margins (%) 26.2% 31.4% 30.0%

Profit margins (%) 1.1% 1.6% 1.5%

Average number of customers (daily) 434 893 919

Average sales per sqm (yuan/sqm/year) 26,000 38.000 14,000

Average customer spending per order (yuan) 15 30 46

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Exhibit 6: Percentage of convenience stores operating 24 hours per day, March 2014

Source: China Chain Store and Franchise Association. March 2014.

0 10 20 30 40 50 60 70 80 90 100

%

XianmenWenzhou

DalianXuzhou

NanningXian

GuangzhouShenzhen

BeijingPutian

HuhhotShanghaiKunming

ShijiazhuangQingdao

DongguanTianjin

UrumqiTaiyuan

ChengduYichang

ChangshaNanjing

LinfenWuhanHarbin

9083

8077

7575

717070

6967

6563

6055

4744

3633

2020

1717

137

0

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Competi t ive landscapeThe development of China’s CVS operations has been somewhat unbalanced. Guangdong and Shanghai were the provinces with the highest concentration of CVSs in 2012, each with more than 5,000 outlets . At city-level the development of CVSs has been more mature along coastal cities such as Shanghai, Hangzhou, Guangzhou and Shenzhen, yet this trend has been fragmented. Take Shanghai as an

example. There are many CVS brands in the municipality, including 7-11, Lawson, C-Store, Family Mart, Alldays, Kedi, and Quik. The operating environment remains tough in these cities. Some retailers reportedly closed a number of unprofitable stores in 2012 amid fierce competition and high operating costs .

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Source: Kantar Retail. May 2012. “Convenience channel in China: Are you ready?”

Exhibit 7: A competitive landscape for convenience stores in China, 2012

Store Counts

Below 500

500-1,000

1,000-5,000

Above 5,000

XINJIANG

GANSU

QINGHAI

TIBET

INNER MONGOLIA

NINGXIA

SHAANXI

SHANXI

BEIJING

HEBEI

HEILONGJIANG

JILIN

LIAONING

SICHUAN

SHANDONG

HENAN

HUBEICHONGQING

JIANGSUSHANGHAI

ZHEJIANG

ANHUI

FUJIAN

JIANGXIHUNAN

GUIZHOU

YUNNANGUANGXI GUANGDONG

HAINAN

TIANJIN

TAIWAN

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Leading playersMost leading players in China’s CVS sector are regionally based. Currently, there is no national leader. According to UBS Investment , top CVS players in Guangzhou, Chengdu and Shenzhen have a relatively high market share. Meiyijia, the market leader in Guangdong province, accounted for more than 60% of Shenzhen’s market share and 30% in Guangzhou. Hongqi, the market leader in Sichuan province, accounted for

Exhibit 8: Market leaders and respective market share in selected cities

Source: UBS Investment. October 29, 2013. “Report on Chengdu Hongqi Chainstore Co., Ltd.”

Chengdu43.6%

Market leader;Hongqi

Beijing23.8%

Market leader;Easy Joy

Shanghai17.9%

Market leader;Quik

Shenzhen61.3%

Market leader;Meiyijia

Guangzhou30.0%

Market leader;Meiyija

Chongqing26.6%

Market leader;Chongkelong

43.6% of Chengdu’s market share. Meanwhile, the market in Chongqing, Beijing and Shanghai is somewhat fragmented - Chongkelong has a 26.6% market share in Chongqing, while Easy Joy has a 23.8% market share in Beijing; Quik has a 17.9% market share in Shanghai.

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Meiyijia is the market leader in terms of store count, with 5,580 stores in Guangdong (excluding the count for forecourt retailers Easy Joy and uSmile); followed by Tianfu, Gongxiao

*Note: Estimated value. Source: China Chain Store and Franchise Association. April 21, 2014. “Convenience store operators among the Top 100s.” http://www.ccfa.org.cn/pages/upload/up_fj/NmJTEXwWnyGz1398248837562.pdf (accessed April 22, 2014) (modified by Fung Business Intelligence Centre)

Exhibit 9: Top 10 convenience store operators by number of stores, 2013

Convenience store brand

Sinopec Group China (Beijing) National 23,300

3 Dongguan Sugar & Liquor Group Meiyijia Convenience Store Co., Ltd.

Ranking Enterprise Country of orgin Storelocation

No. of stores in

2013

Easy Joy 1

PetroChina Co., Ltd. China (Beijing) National 14,000uSmile 2

China (Guangdong) Guangdong 5,580Meiyijia

4 Guangdong Tianfu Chain Business Co., Ltd.

China (Guangdong) Guangdong 2,300Tianfu

5 Zhejiang Gongxiao Supermarket Ltd.

China (Zhejiang) Zhejiang 2,123Gongxiao; Jialian

6 7-Eleven United States Beijing, Shanghai, Shenzhen,

Guang-zhou,

Tianjin, Chengdu

1,9257-Eleven

7 Shanghai Lianhua Quik Convenience Stores Co, Ltd.

China (Shanghai) Shanghai, Liaoning, Zhejiang,

Beijing, Jiangsu

1,905Quik

8 Guangdong Sun-high Convenience Store Co., Ltd.

China (Guangdong) Guangdong 1,703Sun-high

9 Nonggongshang Group

China (Shanghai) Shanghai, Suzhou,

Wuxi, Hangzhou

1,700Kedi; Alldays

11 Chengdu Hongqi Chain Co., Ltd.

China (Chengdu) Sichuan 1,460Hongqi

10 C&U Group China (Zhejiang) Zhejiang 1,491Shizu; Zhishang

12 Shanxi Taiyuan Tangjiu Supermarket Co., Ltd.

China (Shanxi) Shanxi 1,250Tangjiu

and Jialian, 7-Eleven, and Quik. The leading players by number of stores are shown in Exhibit 9.

C H I N A R E TA I L - C O N V E N I E N C E S T O R E S

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While foreign CVS chains are more active in expanding nationally, domestic enterprises are mostly regionally focused. Foreign chains such as Lawson, a Japanese CVS chain, has established stores in Shanghai, Hangzhou, Beijing, Dalian and Chongqing; Family Mart, another Japanese CVS chain, has stores in Shanghai, Guangzhou, Suzhou, Wuxi, Chengdu, Hangzhou and Shenzhen. By contrast, domestic players tend to focus their operations in areas near their places of origin. For instance, Tianfu operates mainly in Guangdong, Hongqi in Sichuan, and Suguo in Nanjing.

Trends Trend #1: CVSs venturing online

Online retailing is becoming increasingly popular in the CVS sector. Some operators such as 7-Eleven have launched their own online platforms, while others have set up online stores on third party B2C platforms. For instance, Tangjiu, the largest CVS operator in Taiyuan formed a partnership with JD.com in December 2013; Tangjiu launched an online mall on JD.com, selling more than 30,000 SKUs under eight product categories. The two companies have also launched a data-sharing scheme to collectively enhance their understanding of customers .

Trend #2: Facilitating and implementing O2O initia-tives Partnering with online retailers to provide pick-up services and faster delivery

The role of CVSs has been changing recently. An increasing number of CVSs now act as “facilitators” in the online-to-offline (O2O) loop. Given the vast network of CVSs, more online retailers now use CVSs as pick-up points. For instance,

Amazon China has teamed up with Family Mart since March 2013 to offer pick-up services at the latter’s outlets in Shanghai. Yihaodian, an online retailer owned partially by Wal-Mart, has recently formed a partnership with Family Mart to allow customers to pick up packages at 300 participating Family Mart Stores in Shanghai. Tangjiu stores also serve as pick-up points for products ordered on JD.com. Consumers have the flexibility to pick up their online orders at any CVS of their choice, and at any time they wish. They can choose to pay by cash, credit card or debit card at the store.

Besides offering pick-up services, JD.com has also teamed up with CVSs to provide faster and more efficient delivery. In fact, in March 2014, JD.com reportedly partnered with more than 10,000 CVSs in 15 cities, under 12 brands. JD.com hopes to build an integrated system that allows consumers to make online purchases and receive the products within one hour of placing the orders . Examples of JD.com’s partners include Quik, Renben, Meiyijia, and Guoda365 .

Such services benefit customers but also assist the CVS chains as well as online retailers. CVSs can benefit from the potential increase in customer flow, while online retailers enjoy lower logistics costs. It is clearly a “win-win-win” situation.

Domestic retailers often adopt a multi-format strategy, hoping to leverage the sourcing capabilities of stores across different retail formats. A typical example is Lianhua Supermarket Holdings Co., Ltd. The retailer’s businesses in China span three retail formats – supermarkets, hypermarkets and CVSs. The company adopts a national sourcing strategy for selected products that are sold through these sales channels and in all regions . Hence, sourcing costs can be lowered . 98

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Exhibit 10: Examples of convenience stores partnering with online platforms to offer pick-up services, December 2012 - July 2014

Source: Internet sources; Compiled by Fung Business Intelligence Centre

Partnering with courier companies

In addition to offering pick-up services for online platforms, some CVS chains have also cooperated with courier companies to serve as the collection points for parcels and posts. For instance, Suguo teamed up with SF Express in December 2013 to offer parcel collection and pick-up services in Nanjing . It handled more than 2,000 orders within about two weeks of the service’s launch . Other examples are listed in Exhibit 11.

Exhibit 11: Examples of convenience stores partnering with courier enterprises to offer pick-up services, October 2011 - May 2014

Source: Internet sources; Compiled by Fung Business Intelligence Centre

Japan

December 2012 Dongguan Meiyijia Tmall

April 2013 Hangzhou C Store Tmall

March 2013 Shanghai Family Mart Amazon China

June 2013 Zhejiang Shizu Tmall, Taobao

July 2013 Kedi, Alldays Tmall

November 2013 Taiyuan Tangjiu CVS JD.com

July 2014 Shanghai Family Mart Yihaodian

CVS Online platforms

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16

17

18

19

20

21

22

23

Date

October 2011 Shenzhen 7- Eleven SF Express

December 2011 Chengdu Wudongfeng YTO Express

December 2012 Guangzhou Circle K, Family Mart DHL

September 2013 Chengdu Hongqi EMS

November 2013 Chengdu Hongqi SF Express

2013 Shanghai Haode, C Store, Guangming

December 2013 Nanjing Suguo SF Express

CVS Courier enterprise

May 2014 Taiyuan Tangjiu SF Express

SF Express

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Trend #3: Beyond the basics - extending value-added services

Leveraging mobile payment for convenience

Some large CVS chains have started rolling out mobile payment services by partnering with third-party online payment providers. For instance, Meiyijia, C-Store in Eastern and Southern China, 7-Eleven in Guangzhou, Youyizhan in Hangzhou, and Hongqi have partnered with Alipay, Alibaba’s third-party online payment platform, to provide a mobile payment service in their stores. Consumers can settle payment by using the Alipay app on their mobile devices. The whole payment process takes just seconds.

Source: 7-Eleven Guangdong Sina Weibo

Installing self-service kiosks

CVS operators are looking for ways to extend their services and boost customer loyalty. Thanks to the installation of self-service kiosks in-store, CVSs are able to offer a wide range of services that support everyday life including utilities bill payments, purchases of air tickets, train tickets, concert tickets and many other transactions.

Source: http://cd.himovie.com/Information.

Tencent’s WeChat Payment has also teamed up with CVS chains to launch a mobile payment service. For instance, Guangzhou 7-Eleven is one of the pilot CVS chains trialing the mobile payment service on WeChat . During the early promotional stage in December 2013, consumers could purchase Coca-Cola drinks at any 7-Eleven store in

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Guangzhou by scanning the QR code on the back of the can; 0.01 yuan is then deducted from their WeChat accounts.

Mobile payment services offered by Internet companies are quickly gaining ground in China. These have sparked concerns on security issues. In March 2014, the People’s Bank of China (PBOC) temporarily blocked mobile payments through scanning QR codes via mobile devices . The move by the PBOC is intended to better regulate the Internet finance market and protect consumers. Yet, many industry experts believe that the PBOC will soon reverse its policy and allow mobile payments.

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Self-service kiosk: Lakala

Lakala is a leading player in the self-service kiosk business . Lakala offers services such as bank account balance enquiries, payments of bills for credit cards and utilities, money transfers and movie ticket orders. As of October 2013, Lakala was estimated to have over 180,000 terminals in CVSs in over 300 Chinese cities . However, some experts believe that profitability in providing such self-service kiosks is rather limited, as profit margins are low .

Source: http://ycnews.cn/homepage/2014-01/06/content_1782036.htm

Alading

Alading is a self-service kiosk provider that serves consumers in Shanghai, Nanjing and Chengdu. Since 2011, Alading has offered a specialist, home electronics recycling service in Shanghai. Residents can register to recycle electrical appliances via Alading kiosks in more than 600 Shanghai convenience stores, with the registration process taking only a minute. Staff from the recycling company will contact the customer within 24 hours to arrange for the collection of unwanted home electronics devices, with televisions and computers being the most common. Consumers get a cash rebate for each item.

Source: http://www.alading.com/news4.html

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More on-site catering services

CVSs have been offering fresh, prepared foods for years, but the trend has become more pronounced as increasing numbers of time-conscious consumers look for on-the-go meals. Some retailers have revamped their stores and added on-site catering to provide hot and cold food and drinks. For instance, some Circle K outlets provide in-store catering to offer meals and drinks under its own Hot & In brand. Circle K believes its Hot & In service is the main revenue driver in the Guangzhou market, contributing approximately 40% of its sales mix in

FY2013 . Suguo has also increased its offering of fresh food, and provided fresh ground coffee in-store . In general, profit margins for catering services are higher than for many other categories of merchandise. Indeed, an increasing number of CVS operators have set up their own central kitchens or use their own manufacturing or supplier units to directly supply meals to stores.

Hongqi, on the other hand, has introduced fast food and catering services via its new “Hongqi Express” stores . Foods are prepared in the central kitchen and reheated in-store. Consumers can eat in-store or order takeaways, with free delivery services available for orders above five sets. Ten “Hongqi Express” stores were launched by the end of 2013 . Gross profit margins for “Hongqi Express” stood at about 35%, higher than for normal CVSs (at 27%) .

Similarly, Family Mart opened its first third generation convenience store in Shenzhen in May 2014. The 100 sqm store features a dining area and a variety of fresh food offerings. Other value-added services such as mobile phone top-ups and credit card payments are also provided at the new store.

Source: http://cd.qq.com/a/20130205/000543.htm

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Trend #4: Better connection with customers

Launching membership programmes

While membership programmes are less common in China than in other places such as Japan and Taiwan, some CVS chains are putting more effort into launching these. Family Mart and Circle K are among the pioneers. Members-only special offers and promotions have been introduced to encour-

Source: http://www.familymart.com.cn/members Source: http://www.circlek.cn/ok_web/vip.jsp

Source: http://www.circlek.cn/ok_web/

age repeat purchases. For instance, Circle K recently launched a series of limited edition 2014 World Cup paper fans and membership reward points can be used to redeem them.

Successful membership programmes can enable retailers to ex-amine the purchasing behaviour of customers and this results in better products and services being offered according to their preferences.

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Engaging customers via social media

Many CVS operators use social media to better engage their customers. Most players have created accounts on Sina Weibo, China’s most popular microblog. Lawson, Circle K, 7-Eleven, Hongqi and many others often use their Sina Weibo accounts to alert customers of their new products and latest promotional activities. Some have also set up WeChat accounts for the same purpose, with examples including Meiyijia, Family Mart, Lawson and Tangjiu. Family Mart has developed a mobile app for consumers to get the latest news.

Trend #5: Launching private labels

Currently, the development of private label products is not particularly mature in China’s CVS sector. However, some CVS operators are stepping up efforts to launch private labels, hoping to differentiate themselves and to meet their customers’

higher expectations. The trend towards a growing assortment of private labels as seen in Japanese CVS chains is likely to become more pronounced in other Asian markets such as China, as retailers continue their strategies to boost brand loyalty and profit margins . For instance, Family Mart has its own brand “YUMMY” in China. 7-Eleven has introduced a private label series called “Seven Premium” , offering drinks, instant soup, snacks and canned coffee among other products, targetting the mass market.

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Trend #6: Specialist theme stores to woo customers

Some CVS chains have opened specialist theme stores to attract more potential consumers. For instance, Lawson launched a Rilakkuma-themed store and a Detective Conan-themed store in Shanghai in 2013 . Cartoon character-themed products are offered in the stores.

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Source: Lawson HP http://www.lawson.com.cn/news/2013/09/000584.html Source: Lawson HP http://www.lawson.com.cn/news/2014/03/000693.html

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ConclusionThe CVS has never been in the mainstream of China’s retail industry in the past. Indeed, the scale of China’s CVS chains remains relatively small compared with counterparts in Japan, Taiwan, and South Korea, in terms of average sales revenues, operating areas and numbers of customers. Having said that, some CVS operators have a strong regional presence. In partic-ular, CVSs in Guangdong and Shanghai are very concentrated, and competition is fierce.

Over recent years, smaller-sized CVSs have made rapid gains over traditional retailing channels amid rising operating costs. Indeed, such costs have been escalating over the past few years, with no sign of slowing. Compared with a large super-market, running a CVS incurs less risk; the latter requires a

lower investment outlay and bears lower day-to-day operating costs. Moreover, as consumers increasingly seek “shopping convenience”, the CVS format is likely to attract more custom-ers and foot traffic. Besides, the growing popularity of online retailing has transformed the role of the CVS in China, from merely selling grocery items to serving as the pick-up point for online orders. Looking forward, the CVS format is set to play a stronger role in reshaping China’s retailing landscape. CVS operators will provide more value-added services and products targetting specific groups of consumers, such as elderly people or consumers seeking healthy, on-the-go lifestyles. Kantar Re-tail expects sales in the CVS sector to grow at 15% compound annual growth rate (CAGR) through 2016, but the store count will decelerate to 11% CAGR , indicating CVS operators are more rational in planning new store openings.

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