The convenience store phenomenon
Taiwan’s convenience store operators continue to innovate and increase the number and range of products and services to their customers
By Mike Jewell
11,465. That, according to the Ministry of Economic Affairs (MOEA), was the total number of convenience stores (CVS) spread across Taiwan at the end of 2019. Put another way, there is one CVS for every 2,065 people, the second highest density anywhere in the world and the convenience store has embedded itself deeply in Taiwanese society.
With the opening of the first 7-11 in 1979, the retail environment in Taiwan embarked on a revolutionary transformation from traditional to modern trade that took Taiwan in the opposite direction to many other advanced markets and foreshadowed more recent developments elsewhere. Whereas the international trend was away from small, local stores and into consolidation with a reduced number of much larger, often out-of-town sites, Asian retailers and, in particular, those in Taiwan went for proliferation of outlets and the retention of the local community store concept. “Convenience stores swept the US and Japan after supermarkets were well established. But the opposite is true in Taiwan." Hsu Chung-jen, former head of President Chain Store Corp.
Alongside the convenience stores, Taiwan, of course, does have an established network of hypermarkets but, as discussed in a previous article, the fastest growing area of retailing is smaller, “hyperlocal” supermarkets, building on the CVS template of strength in numbers in order to meet shoppers’ desires for accessibility, convenience and good value.
From that start in 1979, the number of CVS outlets grew to 2,300 in the early 1990’s, across 13 different brands:
- 7-11 (800 stores)
- President Bakery (600) – managed separately in those days, later absorbed into 7-11
- Circle K (150) – later moved away from the US HQ and rebranded their English name to match the Chinese as OK Mart
- Family Mart (145)
- Wong Chai Chi (110)
- Niko Mart (85) – owned by Tai Sun Enterprises, grew to be #5 CVS chain, but then taken over by Family Mart
- I-Mei (75) – now a bakery/food store selling I-Mei’s own goods
- 70 Hi-Life (70) – owned by Kuang Chuan Dairy Company
- 70 J Young (70) – mainly in southern Taiwan
- 70 Big Egg (70) – in central and south
- 35 Chu Shui Chuan (35) – their parent food company later collapsed in some sort of scandal and now operates under a new name, but without the retail outlets
- AM-PM (27) - franchised from the US by Wei Chuan Foods, later taken over by Ting Hsin International
- Hsin Tung Yang (10) – now focused on their Taiwanese style bakery and other food
In the three decades since, the numbers of outlets have continued to grow, but the number of brands has shrunk, and the four leading chains now take up 96% of the sector:
- 7-11 – 47%,
- Family Mart – 29%
- Hi-Life – 12%
- OK Mart – 8%
CVS store numbers seemed to have reached a peak, with much slower growth in recent times, but then came a jump of almost 5% in 2019, the steepest rise for 14 years, so perhaps saturation point has not yet been reached, as the leading protagonists seek to gain a competitive advantage. Indeed, MOEA figures show that an additional 106 stores opened during Q1 this year, despite the onset of the coronavirus pandemic and a general downturn in consumer retail spending.
It is estimated that over 80% of Taiwanese use convenience stores and last year the sector accounted for 8.6% of total retail spending, with a turnover of NT$331 billion. And, in this year of enhanced caution about going out and mixing with others, the local convenience store has proved a real godsend, resulting in a 5% increase in revenue in Q1 2019, while total retail sales have slipped.
The government’s Fair Trade Commission report that shoppers visit a CVS outlet 130 times a year, on average, but why do consumers like the channel so much? Undoubtedly, the wide variety of services and products, along with the wide spread distribution and convenient access make them a very important part of Taiwanese society. An article in the Wall Street Journal quoted a professor from National Taiwan University (NTU), who noted: “People really hate walking here!”, so shoppers want to be able to buy as much as they can within a few footsteps. This is particularly key when so many consumers continue to shop very frequently, often picking up just one or two items each time in a brief moment of respite during their busy working days (Ministry of Labor statistics show that annual working hours in Taiwan are the fourth longest compared with all OECD countries and second only to Singapore within Asia). The CVS fits this need perfectly, offering a wide range of products, brands, and services around the clock. The result, however, is an average spend per purchase of just NT$83, meaning consumer flows through each store are critical to maintaining profitability.
Alongside these very functional considerations, there is perhaps a more emotional element to the success of the CVS channel as well. Some observers say the fascination dates back to the Taiwanese general store, the “mom-and-pop” store, which was a fixture of life before the island became a modern economic powerhouse. However, convenience stores have largely replaced these traditional outlets and conventional wisdom within the retail trade is that, as each new CVS opens, three or four mom-and-pop stores close. Professor Tseng Yen-fen from NTU told the Wall Street Journal that convenience stores have become focal points of their communities. "Convenience stores function as a community entrance. They are comparable to the village temple in days of yore."
It is well established, then, that the CVS channel plays an important role in the life of its local community, be it a residential or city/town centre neighbourhood, with a justifiable reputation for a dizzying array of products and services offered and transactions which can be completed.
However, despite the almost universal coverage achieved by convenience stores, their extensive reach across the population and the regularity of shoppers’ visits, the sector is facing increasing twin threats from the expansion of hyperlocal supermarkets, such as PX Mart and Carrefour Market and the growth of e-commerce. The CVS landscape is intensely competitive and operates on tiny margins and this may be one of the principal reasons behind the extensive consolidation within the sector over the years.
At the same time, the industry has been hit both by changing social conditions and by more stringent employment legislation. Lower birth rates and an ageing population, coupled with amendments to the Labor Standards Law introduced in 2017, which increased the minimum wage and mandated a five-day workweek and paid overtime are leading to higher costs and labour shortages for retailers. An obvious result of these issues was the decision by 7-11 to reduce the 24-hour opening hours of some 400 of its stores in an effort to reduce costs.
The competition between the CVS brands places great emphasis on innovative strategies to take share from the opposition and to establish a distinctive image and brand differentiation in the minds of shoppers. Industry insiders have observed that Family Mart is aggressively challenging 7-11’s market leadership and is recognised by consumers as more professional and innovative than 7-11. However, in practical terms, these perceptions are not obviously translating into specific brand choices. Loyalty to one CVS chain is generally offset by store proximity, unless there are specific products or promotions exclusive to one chain. Nevertheless, innovation in the offer and the delivery of the offer is essential to stay ahead or to gain ground
“The company [7-11] will devote itself to "innovation" and strive to develop combination stores, unique products, and a digital platform.” Huang Jui-tien, general manager of President Chain Store Corp.
Technological advances and automation in this day and age present an obvious opportunity for innovation, although not all experiments in this direction have been successful up to this point.
In 2018, President opened its first two unmanned 24-hour “X-Stores” in Taipei. Facial recognition technology enabled “face in” entry to the store, with “face pay” and “face go” mechanisms for payment and checkout, coupled with smart voice interactivity, Internet of Things (IoT) systems, microwave ovens with scanners, and robot greeters and cleaners. In practice, though, the technology presented numerous operational problems and President opted to put the experiment on hold. The consensus within the industry is that the problems with X-Stores are twofold – firstly, the technology needs more development to function effectively and thereby minimise the level of human input needed to support the automated systems; secondly the upfront investment costs need to come down substantially to make X-Stores a viable proposition.
By contrast, Family Mart has chosen a different route, introducing “a dozen” digital technologies, that reduce the workload or assist service staff, rather than replacing them completely in a number of “concept stores”. One example is the cashless “My Famipay” app service that works with credit cards and allows users to make purchases by scanning the product and using the smart phone app. Customers can also scan QR codes for prices and additional information about a product rather than look for the price label.
As attention switches away from unmanned stores, the chains are looking instead at smart vending machines and mini-stores as a lower risk, cost-effective bridge between the outlets of today and the fully automated stores of the future. Vending machines are relatively cheap to install and maintain and are now smart enough to provide decent service, especially if there is a choice of cashless payments. Inventory can be controlled remotely through the internet so that sales data can be easily analysed. This follows the lead of Japan, which now has five million machines, one for every 23 people, in addition to its own extensive network of convenience stores, selling everything from live crabs to sake, porn, pet animals and umbrellas and generating US$60 billion in sales annually.
This strategy is especially attractive to Hi-Life and OK Mart, which are well behind 7-11 and Family Mart in terms of outlet numbers, since it allows them to build their presence quickly and relatively inexpensively. Each machine costs in the region of NT$300,000 to install, just one tenth of a full bricks-and-mortar store and the number of staff needed to support each one is also markedly lower.
7-11 has also come out and committed itself to introducing large numbers of vending machines and Family Mart is believed to be planning its own vending machine initiative.
The smart vending machines in use currently are not yet fully developed “smart” technology, but are being improved all the time and, once they are integrated into the Internet of Things, they will provide three new functions:
- They can accept all kinds of payment cards or mobile payments
- The storage temperature for the goods inside can be controlled at different levels
- Sales and inventory can be managed remotely via apps and the data collected can be analysed to predict future sales.
Innovating the CVS offer – encouraging customers to linger longer
Convenience stores’ primary function has been as an efficient, accessible source of “top-up” shopping, enabling purchasers to pick up one or two immediately needed items with the minimum of fuss. As stated earlier, this results in a lot of visits from each person, but each one lasts just a few minutes and the average spend is low.
In the face of increasing competition from the leading supermarket chains for grocery products (CVS has a 5.5% share of the packaged food market, compared with the 23.6% share of supermarkets, according to Kantar’s Worldpanel data), the CVS operators have looked in different directions to grow their revenues.
In the words of one industry expert, “Convenience stores need to squeeze out every dime from existing shoppers. They already reach a very high proportion of the population and their shopping frequency is high, so the challenge is how to attract these shoppers to stay longer and spend more?”
The myriad of ancillary services available, beyond the traditional staple lines of tobacco, ready-to-drink (RTD) beverages, grocery and basic consumer goods have been a key feature of the CVS offer for a number of years, but the retailers are constantly looking to expand their range and boxed meals, sandwiches and hot food have become a mainstay of sales.
One of the most significant innovations was the introduction of seating areas, to allow customers to sit down in the store and consume their meals, snacks, and drinks, while reading or relaxing, alone or with friends. This has resulted in them becoming popular hangouts, for everyone from suited businesspeople conducting meetings, to students siphoning off the free Wi-Fi to watch soap operas, to late night clubbers taking a breather to find their second wind. One committed customer told the Wall Street Journal: “Unlike coffee shops, they won't shoo you away if you stay too long!"
Equally, these seating areas serve as a local meeting place for older residents or as a place where people can sit down alone without feeling awkward or out of place.
As these in-store areas have become more popular, both 7-11 and Family Mart have sought to increase the floor space of many of their outlets, in order to accommodate more eat-in/drink-in customers.
Fresh coffee and bakery products are integral components of the in-store experience and, according to AmCham, 7-11’s in-house City Café sold 320 million cups of coffee in 2017, generating around 8% of total sales for 7-11.
Family Mart’s own coffee shop, Let’s Café, sold 100 million cups of coffee in 2017, contributing over 5% to total sales.
Bakery products have also been growing rapidly as an accompaniment to coffee and 7-11 offers over 70 different products, including packaged breads, pastries, and even freshly baked breads, as well as Mister Donut donuts in some stores. Family Mart has got in on the act, too, investing in its own bakery in 2018, to offer over 20 kinds of Japanese-style breads, toasts, and pastries. Both chains have seen their bakery sales grow by 20-30% in recent years.
The introduction of seating areas has led to the ongoing upgrading of the in-store environment and a gradual move away from a uniform appearance.
An example of the new approach is 7-11’s store in Hengshan Village in Hsinchu, with its “sakura” theme, where customers inside the store can watch the small trains of the Neiwan branch line zigzagging past cherry trees in full bloom during flower season.
The Changyeh 7-11 in Taoyuan has a green interior, designed to project an atmosphere of leisure and tranquillity and, in its first month, recorded 20% growth in both customers and sales.
As of late March 2019, 933 of 7-Eleven’s outlets had been renovated with characteristic layouts. The number is projected to hit 1,150 by the end of this year.
Family Mart has devised various themes for store designs, as forests, spontaneity, and a coffee-shop style to offer customers a richer experience, with a unique character for each store, to encourage people to patronise it not just for shopping but also to enjoy the atmosphere.
Innovating the CVS offer – the rise of the “combination store”
A more recent innovation is the “combination store”, where the convenience store is co-located with other businesses, usually through alliances with other companies. 7-11 launched the biggest complex store in December 2018 with three times more selling space than a normal convenience store and the inclusion of five other types of store – a book shop, a coffee shop, a bakery, a confectionery shop and a pharmacy.
Family Mart launched a counter inside one of its outlets to sell fried chicken from bb.q Chicken, South Korea’s largest fried-chicken brand and has expanded the coverage to several more outlets. Since 2015, Family Mart has opened 19 such combination stores, specialising in such offerings as fresh produce, fish, and meat, non-prescription pharmaceuticals, and Yoshinoya-brand Japanese beef rice.
Family Mart has also joined hands with the Hotai Leasing Corp. to offer car-rental service, through 270 outlets. After booking the service by mobile app, customers get their rental car from one of the vehicles parked in front of the convenience store. When the car is returned – at any time of the day or night – the fee, calculated on an hourly basis, is paid by EasyCard.
Meanwhile 7-11 has partnered with Being Fit gym in Taipei so customers can work out before going downstairs for refreshments. Use of the gym is paid for with icash each time, without need for an annual fee.
Innovating the CVS offer – embracing e-commerce
The Covid-19 pandemic has given a huge boost to e-commerce, with consumers preferring to buy online and thereby reduce their risk of contracting illness. E-commerce is generally expected to grow to around one third of consumer goods sales from its present level of 8-10%. This represents a challenge for CVS operators, but also an opportunity, one which they are clearly embracing, as evidenced by the 25% rise in online CVS sales in the first quarter of this year, compared to a 4.7% year-on-year rise in sales through physical stores (according to the MOEA).
The CVS chains are creating digital platforms and partnering with other companies to provide a wide range of online purchasing opportunities, then making use of their extensive networks of outlets to serve as convenient pick-up points for customers, thereby enhancing their own product range and aligning with shoppers’ changing lifestyles.
Over the past 40 years, the convenience store has become an indispensable feature of Taiwanese daily life and has revolutionised shopping behaviour. The intense competition between the leading players has placed a premium on innovation that has resulted in regular and often seismic shifts in the nature of the stores and the offer. Looking ahead, it is fair to assume that this will continue to be the case, as the retailers continue to experiment with their mix of products, services and store formats, each seeking to serve the customer better and build a stronger connection with their shopper base.