China’s mega-grocers turn to an upstart to win back shoppers

CHINA’S biggest supermarkets are struggling to survive.

France’s Carrefour has shut more than 140 mainland stores, leaving just four remaining outlets, and the UK’s Tesco has exited entirely. Traffic-driving membership chain Sam’s Club is a bright light for Walmart, which has had to rethink its China strategy. Last year, four out of five of China’s leading hypermarkets saw up to double-digit sales declines.

An unlikely chain has bucked the trend: Pangdonglai, with just a dozen or so stores in the heartland province of Henan, whose residents’ disposable income is less than one-third of their peers in Shanghai. The grocer has established the supermarket as a place that Chinese shoppers want to go – even if they do not have to, given the ubiquity of wet markets and quick e-commerce options.

Despite its size and distance from China’s most important cities, Pangdonglai’s influence has percolated through the industry, with smaller chains adopting its model. Walmart’s Chinese executives are studying it, according to a source familiar with the discussions who spoke on condition of anonymity.

In the boldest move yet, China’s second-largest hypermarket Yonghui Superstores has started to remodel its business after its tiny rival’s. The retail juggernaut has tapped Pangdonglai’s founder and chief executive officer Yu Donglai to revamp its strategy after three years of losses.

Early signs are positive: One of its marts in the Henan capital of Zhengzhou reopened in June as a near-mirror image of Pangdonglai, with its style of customer-friendly service and shelves stocked with the smaller chain’s branded goods. Sales have since jumped tenfold, with crowds and an occasional fight breaking out amid the scramble for products.

The privately owned chain is “a proven example that with the right model, the right consumer-centric approach, that it’s possible for supermarkets in China to get back in shape”, said Allen Zhang, managing director and partner at Boston Consulting Group in Shanghai.

Unlike some Chinese supermarket aisles that can be cramped and chaotic, Pangdonglai’s are wider and breezy. Customer services include free cell phone chargers, magnifying glasses on carts for seniors to check labels and a rest area for pets whose owners are browsing. Hygiene is a priority: Ready-to-purchase fish swim in spotless tanks and produce goes through pesticide tests. Sleekly packaged items under the house-branded DL label sell everything from laundry detergent and granola to craft beer.

Pangdonglai had estimated sales of 4.6 billion yuan (S$851 million) last year, making the China Chain Store & Franchise Association’s list of the country’s top 100 supermarkets for the first time.

Yonghui’s experiment reflects an industry that’s become enamoured with Yu and his contrarian strategy in a time of price wars: Charge more for higher-quality products and nicer stores to draw in customers hoping to shop their economic blues away. But it remains to be seen if the model can be scaled up successfully for chains that operate thousands of outlets across a vast country with differing regional tastes and consumer expectations.

Supermarket executives are travelling to Xuchang, the chain’s headquarters, to find out how it’s managed to defy an economic slump dragging down almost everybody else in the sector. Some are shelling out 500,000 yuan per person per year for seminars where the 58-year-old is a lecturer.

An executive from consultancy Kearney and former chief operating officer of Alibaba Group Holding’s grocery arm Freshippo discussed Pangdonglai’s strategy at a retail roundtable in Shanghai in July. Freshippo reportedly sent questionnaires to its customers in Zhengzhou, soliciting opinions on Yonghui’s remodelled store.

Yonghui, a partner of e-commerce giant JD.com, has seen years of losses after peaking at US$13 billion in annual revenue in 2020. As the company focused on expansion rather than customer experience, opening more than 1,000 stores in five years, customers grew wary of the increasingly cheap, lower-quality items it offered, with some product displays chosen based on commissions paid by brands – rather than on what shoppers wanted.

Now, it’s sent more than 100 employees from other provinces to Zhengzhou and neighbouring Xuchang, a city of four million that’s become an unlikely tourist destination as Pangdonglai’s products go viral on Chinese social media, to study its operations – and a corporate culture that prioritises both customer and employee satisfaction.

Yonghui hopes sales at its Zhengzhou store will eventually double under the new apporach, and is shutting down or overhauling hundreds of other underperforming locations. Yu does not charge Yonghui for his advice, mainly as a way to thank chairman Xuansong Zhang – who helped Yu build Pangdonglai’s operations after its founding, according to sources familiar with the interactions between the companies.

Yonghui and Pangdonglai declined requests for comment on their partnership. Yu was travelling and unavailable for an interview with Bloomberg. Walmart did not immediately respond to a request for comment about studying Pangdonglai’s model.

Yu is a colourful character whose language is peppered with spiritual references: Less about supermarket operations and more about the values he peddles and wants China’s supermarkets to adopt. He’s compared helping other retailers to herding animals onto Noah’s Ark, and written books on his philosophy for business and life.

Despite the hype around his stores, Pangdonglai remains unproven on a larger scale, with its success in a handful of smaller Chinese cities a far different proposition than operating hundreds of megastores across the country. And it has more freedom than listed firms such as Yonghui, potentially limiting how many of its practices bigger chains can adopt, said Jason Yu, managing director of Kantar Worldpanel Greater China, which tracks spending behaviour.

“It’s hard to pick a single business model that can apply everywhere and win customers. If a Pangdonglai store moved to Shanghai today, would Sam’s Club’s frequent shoppers turn to it?” he said. Pangdonglai’s influence “could drive short-term traffic right after the stores it helps reshape open, but it’s still hard to tell if the frenzy can last long”.

That’s not stopping the previously unheralded Xuchang – boosted by influencers posting videos from Pangdonglai’s aisles – from becoming an unlikely tourist destination for people coming to shop its products. At a branch in the city this month, a math teacher who asked to be identified by her surname Li travelled some 97 kilometres from Zhengzhou just to stock up on house-brand items.

“Other places don’t feel like here,” she said. “People can trust the quality, and that definitely makes one feel more at ease than other places.” BLOOMBERG