China’s major supermarkets are struggling. Carrefour has closed over 140 stores, leaving just four remaining, while Tesco has exited entirely. Walmart’s Sam’s Club, a successful membership chain, stands out and has prompted a strategic rethink for the company.
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 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 don’t have to, given the ubiquity of wet markets and quick e-commerce options.
Despite its size and distance from China’s major cities, Pangdonglai has significantly impacted the industry, with smaller chains adopting its model. According to a source who spoke anonymously, Walmart’s Chinese executives are also studying it.
In the boldest move yet, China’s second-largest hypermarket, Yonghui Superstores, has started to remodel its business after its tiny rival. The retail juggernaut has tapped Pangdonglai’s founder and CEO, 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.
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The privately owned chain is “a proven example that with the right model, the right consumer-centric approach, supermarkets in China can get back in shape,” said Allen Zhang, managing director and partner at Boston Consulting Group in Shanghai.
Wider aisles, bigger smiles
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 are produced 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 RMB4.6 billion ($852.7 million) last year, making the China Chain Store and 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. However, 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 RMB500,000 per person annually 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. Some product displays were chosen based on brand commissions rather than what shoppers wanted.
Over 100 employees from other provinces have been sent to Zhengzhou and neighbouring Xuchang, a city of four million. Xuchang has become an unlikely tourist destination as Pangdonglai’s products go viral on Chinese social media. These employees study Pangdonglai’s operations and corporate culture, prioritising customer and employee satisfaction.
Supermarket shake-up
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Yonghui hopes sales at its Zhengzhou store will eventually double under the new approach and is shutting down or overhauling hundreds of other underperforming locations. According to people familiar with the companies’ interactions, Yu doesn’t charge Yonghui for his advice, mainly to thank Chairman Xuansong Zhang, who helped Yu build Pangdonglai’s operations after its founding.
Yonghui and Pangdonglai declined requests for comment on their partnership. Yu was travelling and unavailable for an interview with Bloomberg. Walmart didn’t immediately respond to a request for comment about studying Pangdonglai’s model.
In interviews, Yu is a vibrant personality whose language often includes spiritual references. He focuses less on supermarket operations and more on promoting the values he believes China’s supermarkets should embrace. Yu has likened assisting other retailers to guiding animals onto Noah’s Ark and has authored books on his business and life philosophy.
Despite the buzz surrounding his stores, Pangdonglai remains untested on a larger scale. Success in a few smaller Chinese cities differs greatly from managing hundreds of megastores nationwide. Additionally, Pangdonglai enjoys more freedom than listed companies like Yonghui, which may restrict how many of its practices larger chains can adopt, said Jason Yu, managing director of Kantar Worldpanel Greater China, which monitors spending behaviour.
He added: “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?” 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 who 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 60 miles (96.5km) from Zhengzhou to stock up on house-brand items. “Other places don’t feel like here,” she said. “People can trust the quality, which makes one feel more at ease than other places.” — Additional reporting by Shirley Zhao
