The struggle facing big-box supermarkets in China

(By Caixin journalists Ding Yi and Sun Yanran)

China's big-box supermarkets are running into trouble.

Carrefour China, once the country's largest foreign supermarket chain with nearly 260 stores in 2017, had less than 150 stores remaining at the end of last year. In Beijing, it is currently down to running one of its last outlets, with shoppers taking to social media last month to post photos of rows of empty shelves and refrigerators.

Financial trouble is also reflected in the first-half results of China's 13 publicly traded supermarket operators, among which five reported year-on-year losses while three posted revenue declines despite making a profit, according to their earnings reports.

In the first three quarters of this year, retail sales at China's supermarkets decreased by 0.4% year-on-year even though nationwide retail sales of consumer goods increased by 6.8%, according to data from the National Bureau of Statistics (NBS) released 18 October.

By comparison, online retail sales rose by 11.6%, while retail sales at major convenience stores, professional stores, specialty stores and department stores all registered single-digit growth, NBS data showed.

A broader depression has been weighing on the country's supermarket sector, especially for big-box retailers that are fighting the rising tide of competition from online shopping platforms and smaller physical stores. This comes even as Covid-19 controls, which at times severely limited people from purchasing goods in physical stores, were lifted late last year.

Over the past several years, China's e-commerce giants have made big investments in supermarket chains as they try to marry online and physical retail resources as part of their "new retail" strategies.

One eye-popping transaction was made by Alibaba Group Holding Ltd., which in 2017 spent HK$22.4 billion (US$2.9 billion) to acquire 36.16% of Sun Art Retail Group Ltd., China's leading supermarket operator known for running the RT-Mart chain.

As part of the deal, Alibaba said at the time that it would use its "new retail" ecosystem to help Sun Art expedite its digitalisation, integrate its online and offline operations, and improve its order fulfillment efficiency.

Six months after the deal's announcement, RT-Mart completed a digital makeover that allowed a quarter of its then-400 stores to gain access to Alibaba's supply-chain management and electronic payment tools. It also began to offer a one-hour delivery service for orders placed within a three-kilometre radius.

In 2020, Alibaba raised its stake in Sun Art to about 72% in a $3.6 billion deal that would consolidate the supermarket operator into its financial statements.

However, the big bet on Sun Art did not meet expectations. In the fiscal year ending 31 March 2023, Sun Art generated 83.7 billion RMB (US$11.4 billion) in revenue, down from 88.1 billion RMB in fiscal 2022 and 124.6 billion RMB in the fifteen months ending 31 March 2021, according to company filings.

Following a nearly 740 million RMB-loss in fiscal 2022, the company logged 109 million RMB in net profit attributable to shareholders in fiscal 2023, due largely to its efforts in cutting marketing and administration expenses, company data showed.

The key to turning Sun Art's business around is to enhance the value of goods sold at its stores, and RT-Mart has not completely solved the problems associated with its supply chains in the past two years, retail industry veteran Wan Deqian said.

During a conference with suppliers in April, Sun Art CEO Lin Xiaohai announced a goal of having 10% of total goods sold at its stores to be exclusive and differentiated products by the end of fiscal 2024, as part of a plan to optimise its supply chains.

Sun Art's rival, Yonghui Superstores Co. Ltd., which is 10% controlled by e-commerce titan JD.com Inc., is a Chinese supermarket chain that has invested heavily in digitalisation. Apart from selling goods on the JD.com platform, the company has developed its own digital retail system, part of digitalisation efforts that helped boost operational efficiency and contributed to cutting 642 million RMB in expenses from the same period in 2022, according to Yonghui's half year report. The firm has also tapped Tencent Holdings Ltd. to strengthen its cloud-based retail capabilities.

In the first six months of this year, Yonghui's online sales increased by 4.4% year-on-year to 7.9 billion RMB. That accounts for 18.7% of its total revenue, which reached 42 billion RMB, though this was still down 13.8% from a year ago.

These numbers show that Yonghui's nascent digital deployment plan hasn't yet been able to help the firm offset declining sales in its brick-and-mortar stores.

Digitalisation has, to some extent, changed the role of supermarkets to warehouses, which has forced operators to think about readjusting their cost structure that is pivotal to making profits, Wan said.

In 2022, Yonghui and RT-Mart were China's second and third largest supermarket chain by sales, with the top spot going to Walmart, according to a ranking list published in June by the China Chain Store & Franchise Association.

Meanwhile, in recent years, smaller neighborhood retail stores have sprung up and attracted the attention of institutional investors.

Big-box stores have gone through their full cycle from rapid development to decline as of 2020, with the next two decades expected to be the era of neighborhood retail stores, which have advantages in cost control, operational efficiency and specialisation in a single product category, Victor Zhang, a co-founder of GenBridge Capital, told Caixin. The venture capital firm has invested in a number of such stores such as fresh food chain Qiandama and snack chain Lingshi Henmang.

At the same time, the need of manufacturers to clear their inventories has led to the rise of discount retail stores, which typically sell products nearing expiry at lower prices.

In 2021, the value of China's so-called near-expired goods market grew to 31.8 billion RMB, with the figure expected to surpass 40 billion RMB in 2025, according to a report by Shanghai Securities Co. Ltd. in July 2022.

Given the bright prospects of discount retail, supermarket chains have begun dipping a toe into this market segment. For example, Alibaba's grocery chain Freshippo has listed its Aolai stores - which are smaller in scale and offer discounted near-expired products - as one of its future development priorities.

For some regional supermarket chains, strengthening partnerships is the approach they've adopted. Baotinghui, an alliance of regional supermarket operators established in 2008, has lowered its membership threshold to expand its market influence and organised its member companies to conduct centralised procurement in exchange for getting discounts from suppliers, a partner of the alliance told Caixin.

This article was first published by Caixin Global as "In Depth: The Struggle Facing Big-Box Supermarkets in China". Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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