With the improvement of China's digitalization level, online e-commerce platforms have directly connected suppliers with consumers. The proportion of online retail sales of physical goods in total retail sales of consumer goods has been increasing year by year, reaching 23.7% by 2020. The national online retail sales reached 1383,530 billion yuan, and the online retail sales of physical goods reached 1133,050 billion yuan.
Due to the overlap of profit models, online e-commerce platforms are squeezing out the living space of offline retail industries.However, against the backdrop of declining offline retail profits, membership-based supermarkets, a new business format, have grown against the odds. From 2017 to 2021, the scale of China's membership-based supermarket industry increased from $1.304 billion to $2.678 billion, driving traditional supermarkets towards transformation into membership-based ones.
Overview of the Membership-based Supermarket Industry
A membership supermarket is a large retail format that uses membership as the entry threshold for shopping. The target consumer group of membership supermarkets is the middle to high-income population in first- and second-tier cities in China. Supermarkets select high-value-for-money products globally, compress costs through business strategies such as bulk purchasing, operating their own brands, integrating warehousing and sales into one entity, and vertically integrating logistics operations upwards, and achieve profitability through membership fees and product price differentials.
The main features of membership-based supermarkets are as follows:
1) Large floor area.Member-based supermarkets typically have a single store area of over 14,000 square meters and are equipped with large parking lots;
2) The variety of goods is exquisite.The SKU of a single store typically does not exceed 5,000, with self-owned brands accounting for about 40%. The proportion of overseas products in different supermarkets ranges from 10% to 40%, and they are rapidly optimized and iterated with an annual turnover rate of 30% to 40%.
3) Chain operation.Member-based supermarket enterprises often compete around product cost-effectiveness. The business format requires large enterprises to operate through chains, providing efficient, high-quality, and relatively low-cost supply chains and logistics chains through the scale advantage of procurement costs and vertical integration capital accumulation, thereby gaining competitive advantages.
Compared to specialty supermarkets and hypermarkets, membership-based supermarkets mainly have four major characteristics:
1) High site selection requirements.Member-based supermarkets need to search for large areas with convenient transportation in the suburbs, which can be quite difficult;
2) The target customer group is clearer.The user group willing to pay membership fees can be targeted at the Chinese middle- to high-income group with high time costs and concentrated in first- and second-tier cities;
3) Products are updated faster.Supermarkets screen and update products based on market penetration rate as the main indicator, implementing the 'find people with goods' operational philosophy with low gross profit margins and high cost-effectiveness, truly centering around consumer needs.
4) Shorter operating hours.The short operating hours and efficient warehouse-style operation have led to a reduction in labor costs, streamlining expenses.
Comparison among membership supermarkets, specialty supermarkets, and hypermarkets
Data source: Analysis by Frost & Sullivan
The development process of the membership-based supermarket industry in China can be mainly divided into three stages:
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1996 to 2013: Initial phase
At the beginning of the formation of China's membership-based supermarket industry in the 20th century, the market was influenced by the rapidly developing market pattern in the United States and overestimated by many overseas supermarket chains operating high staff models.
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2014 to 2018: Adjustment Period
Limited by the Chinese consumer market and consumption concepts, membership-based supermarkets have experienced a brief boom followed by a 'shutter-down wave'. Only Sam's Club and Costco remain dominant, leveraging their large-scale advantages and mature operational experience. The digital wave has swept through, with opening stores testing the waters on the Tmall platform, Walmart's deep collaboration with JD.com, and the development of online business becoming an inevitable trend in the development of the membership-based supermarket industry.
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Since 2019: Competitive period
Kaikaike launched its JD.com flagship store as a test run, followed by an expansion offline. After the stores opened, they became popular on social media, generating a large amount of traffic and achieving significant profits. This demonstrated the market supply and demand gap in China's membership supermarket industry, reigniting the domestic membership supermarket sector. A large number of brands flocked into the market: Alibaba's first local membership supermarket, Hema; the young brand Fudi, known for fresh products; Carrefour, which transformed to embrace the downward trend of the hypermarket format; and the three traditional supermarket giants in the industry, Sam's Club, Costco, and Kaikaike. The competition in the industry is set to peak, and a fierce battle is about to begin.
Development History of China's Membership-based Supermarket Industry
Data source: Analysis by Frost & Sullivan
Member-based supermarket industry industrial chain
The upstream of the membership supermarket industry chain includes product suppliers, logistics providers, and e-commerce platforms. The midstream consists of membership supermarket enterprises, including traditional overseas membership supermarket companies such as Sam's Club, Walmart, and COSTCO, newly emerging local membership supermarket companies like Fudi and Hema Fresh, as well as hypermarkets like Carrefour that have transformed into membership supermarkets.
The downstream of the industrial chain is consumers. Consumers in membership-based supermarkets exhibit the following characteristics:
1) In terms of age, membership in membership-based supermarkets is mainly made up of middle-aged individuals.Among the consumer sample, those under 18 years old make up a minority, while the group aged 51-60 accounts for a relatively larger proportion. The membership ratio of members in membership-based supermarkets steadily increases with age, but it drops sharply in the group over 61 years old.
2) In terms of revenue, the main customer group for membership-based supermarket retail formats is the middle to high-income population.The proportion of members generally increases with the rise in income. Within the range of monthly income from 6,000 to 8,000 yuan, more than half of the members are included, and in the group with monthly income above 10,000 yuan, the proportion exceeds 60%. The middle and high-income group has higher time costs, a higher pursuit of quality of life, and lower price sensitivity. They are more compatible with the 'product selection' concept provided by membership supermarkets and thus become the target customers of the membership supermarket industry. People with lower monthly income tend to choose different brands at different times when purchasing membership cards and make horizontal comparisons of product cost performance; the group with higher monthly income often becomes a member of multiple supermarkets simultaneously.
3) In terms of shopping habits, the purchase of food and daily necessities remains the main demand for members when visiting the membership supermarket.Members who go shopping at supermarkets mainly purchase food items. Among all products, fresh produce and fruits and vegetables have the highest penetration rate, reaching 87.16%, followed by frozen foods with a penetration rate of 75.23%. The category with the lowest penetration rate is clothing and leather goods, accounting for only 6.42%.
Industrial Chain Map of China's Membership-based Supermarket Industry
Data source: Analysis by Frost & Sullivan
Market scale of membership-based supermarket industry
From 2016 to 2021, the scale of China's membership-based supermarket industry grew from $1.292 billion to $2.678 billion.Affected by the improvement in residents' living standards and the expansion of membership-based supermarket businesses in China, the membership-based supermarket industry in China has generally maintained a stable growth level except for the negative impact of the COVID-19 pandemic in 2020.
The main influencing factors on the current market scale of China's membership-based supermarket industry are the number of stores and brand promotion.The number of stores has achieved a breakthrough from zero to one in multiple regions. Meanwhile, self-media bloggers actively promote on platforms such as Rednote, driving the steady growth of market size in recent years.
During periods of intense competition, market scale growth may slow down.Since the opening of stores is mostly located in suburban areas of first- and second-tier cities, there will be fierce competition among stores with overlapping customer bases in the same coverage area. This could lead to the closure of weaker brands without differentiated features, resulting in a decline in market scale growth rate.
Market scale of China's membership-based supermarket industry
Data source: Analysis by Frost & Sullivan
Development Trend of Membership-based Supermarket Industry
1) Uniform layout
a) In economically developed cities of China, membership-based supermarket outlets are distributed more comprehensively. In the first quarter of 2021, the top ten cities in terms of total GDP on the Chinese mainland were Shanghai, Beijing, Shenzhen, Guangzhou, Chongqing, Suzhou, Chengdu, Hangzhou, Nanjing, and Wuhan. Except for Chongqing, membership-based supermarket outlets cover all nine cities.
b) Within a single high GDP city, membership-based supermarket outlets are relatively densely distributed. Taking Jiangsu as an example, in the first quarter of 2021, among the cities in Jiangsu ranked by GDP, Suzhou topped the list with a GDP of 1068.466 billion yuan, followed by Nanjing with a total GDP of 762.277 billion yuan. Nanjing has only one membership-based supermarket, while Suzhou has four membership-based supermarkets, making it the city with the most concentrated membership-based supermarkets.
c) In the Chinese membership-based supermarket industry, Sam's membership supermarkets have opened more outlets. Sam has 27 stores in China, while the second-largest membership store, Hema, has three stores in China.
In the future, in cities, the location of membership supermarkets will develop in small numbers towards the city center. Due to the entry of companies that originally mainly operated large-format retail stores into the membership supermarket market, more large-format stores near the city center may integrate membership business elements.
At the same time, to facilitate members' transportation and shorten the delivery time of online purchases to consumers, traditional membership supermarkets are also trying to open additional outlets in central areas; between cities, membership supermarkets of different brands are cultivating strong influence in different cities.The scale of membership-based supermarkets is also one of the main sources of their bargaining power with upstream suppliers.
Therefore, membership supermarkets with fewer stores may open additional outlets in other regions. By arranging them more densely, they can form a unique influence within specific areas and prevent other competitors from entering their geographical territory.
Image source: Internet
2) Distinctive Differentiation
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Differentiate the main products
The main selling point of membership-based supermarkets is the high cost-effectiveness of their products. On one hand, supermarkets enter the product production field to develop their own brands; on the other hand, supermarket buyers scour the globe for highly competitive products and negotiate the lowest prices with large orders.
i. Own-brand products: Own-brand products have a very high appeal. By eliminating large expenses such as transit of goods, supplier profits, and advertising marketing, even if the pricing is lower than the general market price for similar products, the gross profit margin is still positive. The product design entry points for each brand often differ: Sam's Club's Members' Mark is known for its alcoholic beverages, Costco's Kirkland focuses on nuts, and Hema's MAX starts with grains and rice. In terms of product innovation, Sam's and Costco's main products are roast chicken, beef rolls, and cookies, while Hema's MAX has tried to incorporate Chinese local elements by developing traditional Chinese foods such as dumplings and has negotiated with suppliers to create exclusive products for Hema's MAX that meet low-sugar, portable, and high-nutrition standards.As one of the factors attracting consumers, the differentiation in the characteristics of branded products can lead to a diversion of consumer groups, forming differentiated tracks.
ii. Other brand products: In terms of global shopping, 'unique items' and rapid updates are also the selection criteria for membership-based supermarkets. Sam's has an internal assessment mechanism for goods that includes annual, monthly, and weekly checks, conducting rapid evaluations and optimizing adjustments to products; Box Ma's store managers, keenly observing consumer needs, act as 'butlers' to find target products for consumers and divide product categories into three types in store management. As the essence of retail, goods and services establish corresponding brand identities, thereby determining the market's operational efficiency and market position.
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Diversified consumption scenarios
The biggest difference between offline shopping malls and online e-commerce platforms lies in the consumer experience that is primarily 'shopping around'. In terms of product display, membership-based supermarkets design consumption scenarios by concentrating products within the same scene. This not only enriches consumers' shopping experience but also stimulates their desire to shop.
i. Sam has set up various scenarios in his flagship store located in Shanghai, including the Sam Kitchen, Sam Cloud Home VR, Sam Health Center, exquisite camping area, indoor skiing area, and more. In the VR Lab experience center, consumers can experience cutting-edge VR technology, which is available at a market price of up to 110 yuan per hour during holidays; in the exquisite camping area, consumers can view different types of camping equipment and tents, and experience unique lifestyles.
ii. McDonald's adopts the design concept of 'family shopping'. In addition to daily necessities, the store also includes a children's playground, a café, and a luxury goods section, making it convenient for families traveling with children to play and for companions to wait.
iii. Hema Membership stores put a lot of effort into membership services. When members visit the store, in addition to high-quality products, they can enjoy membership benefits such as pet services, high-end clothing washing and care services, and car refueling. At the same time, Hema Membership is applicable to different terminals under 'Hema System' to gain consumer goodwill.
Image source: Internet
Driving factors of the membership-based supermarket industry
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Driving Viewpoint One: General Economic Growth in Chinese Society
1) The middle-income population in China has expanded. In June 2021, the 'International Consumption Center Cities: Theory, Policy and Practice' report released by the Development Research Center of the State Council showed that China has formed a middle-income consumer group of over 450 million people; the total annual retail sales of consumer goods in Beijing and Shanghai have approached 1.5 trillion yuan, and the consumption scale in more than a dozen cities in China has exceeded 500 billion yuan. The expansion of this population provides a foundation for the market expansion of membership-based supermarket industries.
2) The per capita GDP level in some cities in China has entered the growth phase of membership-based stores. According to a report released by the China Council for the Promotion of International Trade (CCPIT) Research Institute in 2014, based on the development experience of retail formats around the world, a per capita GDP of about $10,000 is the growth period for warehouse stores and shopping centers. According to People's Daily, China's per capita GDP for the whole year 2019 jumped above the new level of $10,000 for the first time. The seventh national census shows that by 2020, more than 100 cities in China had per capita GDP exceeding $10,000. In 19 cities, the per capita GDP reached over $20,000. Society provides conditions for the growth of warehouse membership stores.
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Driving point 2: Chinese white-collar workers have little free time
1) With the rapid development of the Chinese economy and the swift changes in the world pattern, fast-paced life is accompanied by corporate cultures represented by '996' and '007'. It has become a common phenomenon for Chinese white-collar workers to work overtime, and the reduction of individual leisure time and spare energy is an inevitable trend.
2) The '2019 China Labor Statistics Yearbook' shows that the average weekly working hours of urban employed people have remained stable at over 40 hours per week of legal working hours. The weekly working hours of unit leaders reach 47.8 hours, reflecting that urban white-collar workers often work overtime for longer periods. In 2020, Baidu Boiling Point released the '2020 Annual Knowledge Hotwords List', among which the top 10 terms related to work include 'involution', '715 workweek', ' workplacePUA', and 'flexible' work, depicting the current state of people's tired workloads and anxious competitive psychology.
3) With increased working hours, rising per capita levels, and reduced leisure time, the middle to high-income group is no longer willing to spend too much energy on shopping for goods. Membership-based stores stand out by offering high-value-for-money products, saving members time.
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Driving Viewpoint 3: China's Transportation Infrastructure Development
1) With the improvement of China's social and economic level, the travel demand of the Chinese population has increased, which has attracted great attention from the central government. A series of policies have been promulgated, and through financial allocations, China's road traffic construction has been effectively promoted, achieving a significant increase in road mileage.
2) Since the start of recording the mileage of roads in operation in 2013, the road mileage has grown rapidly. As of September 2021, the national motor vehicle ownership reached 390 million vehicles. The construction of road traffic and the rise in national motor vehicle ownership have provided transportation convenience for Chinese citizens to drive to membership supermarkets located in suburban areas for shopping, which is conducive to the development of China's membership supermarket industry.
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Driving Viewpoint 4: Profit Decline in Traditional Chinese Supermarkets
On June 7, 2021, China Chain Operation Society released '2020 Industry Basic Situation and Top 100 Chain Stores Survey': For the first time since the association began statistics in 1997, the overall sales scale of the top 100 chains showed negative growth.
2) In the face of the impact of online e-commerce, the profitability of offline traditional retail stores represented by hypermarkets has generally declined. However, membership-based supermarket formats have seized the opportunity to compete with online e-commerce by virtue of their carefully managed supply chain and significant cost-effectiveness of their products.
