New in the neighbourhood

Cheap and cheerful: Aldi has a fresh formula for succeeding in China

Trader Joe’s has a reputation for bargain-priced booze, especially Charles Shaw wine, or “Two-Buck Chuck” (a reference to its original price of $2 a bottle).

Today the price for ‘chuck’ – which comes in multiple reds and whites – has gone up to about $4. But the range is still a hit with frugal customers at the US specialty grocer.

And when Aldi, the discount supermarket chain that owns Trader Joe’s, opened two pilot stores in Shanghai this month, the first thing that sold out was the cheap alcohol. So says Lanjing Caijing, a business news portal, which reported a run on the sparkling wine, priced at Rmb29 a bottle ($4.50), and German beer that costs Rmb3 a can.

The two shops in Shanghai – in Jing’an and Minhang District – are the retailer’s first bricks-and-mortar outlets in the country, although the privately-owned chain has been testing out the market via a virtual storefront on Alibaba’s Tmall platform since 2017.

The new stores are smaller formats than Aldi’s typical supermarkets, which the company describes as a nod to local shopping habits – where the preference is to visit multiple small shops per week.

It is also recognition of market conditions in China that are turning against the largest stores, says Huxiu. “For a long time, foreign retail giants like Walmart and Carrefour have kept the cost of goods low thanks to cheap rents and strong supply chain capabilities. With the development of e-commerce and the rising cost of land, that business model has slowly lost its edge in China,” it reports. “In the last few years, Walmart kept shutting down non-performing stores. In the first half of this year, it has already closed down more than 10 hypermarkets. Both are experimenting with smaller stores. Carrefour has even opened convenience stores.”

So how will Aldi try to set itself apart? One third of its merchandise is fresh food and ready meals, and about 80% of the branded goods are its own label, compared with 10-20% for equivalent foreign retailers.

Customers at its stores can pay for every product by scanning its barcode with their phones, so there’s less need for checkouts. Home delivery is also available within a 3km range.

Benchmarked against grocery prices online, Aldi is slightly more expensive, Huxiu says, although it is still cheaper than most convenience stores, as well as Hema, Alibaba’s AI-powered grocery chain.

Aldi’s expansion will put it head-to-head with Hema. Launched in 2016, Alibaba’s supermarket business now has about 150 stores and a turnover of Rmb14 billion. However, despite a strong start for its innovative business model, some industry observers are wary about its long-term prospects.

Hema shut its only store in Yunnan’s capital Kunming recently because of disappointing performance, Tencent News says, and another store in Suzhou closed in May. Sales per square metre in some first tier cities have been stronger, but less so in smaller, less wealthy ones.

“Many retailers believe that while Hema’s business model is efficient and innovative, it requires high population density and high income levels within three kilometres of its stores to be sustainable. That restricts the expansion of its model,” agrees TMT Post. “It is almost safe to conclude that Hema’s expansion in third- and lower-tier cities has officially failed.”

RT-Mart, one of the franchisees of the Alibaba-owned brand, revealed in its annual report that both of the Hema supermarkets that it operates in Hainan lost money in the second half of 2018 (admittedly the period immediately after they were launched) and another franchisee in Zhejiang reported a net loss of Rmb23 million in 2018.

Part of the challenge is that the overheads for Hema’s stores are higher than average because the shops are generally located in prime retail space in expensive residential areas.

Labour costs are also higher for staff working in a premium retail environment, and there is also the expense of fulfilling the delivery of orders made online.

Hema’s backers believe that the chain is going to be much more profitable as it reaches scale, especially as more of its customers transition from traditional shopping into an omnichannel experience.

In one survey of a group of stores earlier this year, a quarter of the customers had already become online-only shoppers, for instance.

In the meantime Alibaba seems to be slowing the flow of its investment in Hema. In the first quarter of this year, the e-commerce giant put in Rmb5.7 billion, compared with more than Rmb10 billion in each of the previous three quarters. However, it’s hardly likely that it will give up on Hema, which is the poster child for its much-vaunted advance into ‘new retail’, which combines online shopping with bricks-and-mortar stores.

Indeed, the Financial Times reported this week that Alibaba also has plans to hive off the unit into a standalone business.

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