Membership, discount stores gain momentum

In China's retail sector, both high-end membership clubs and value-driven discount stores are experiencing heightened popularity among urban consumers.

The "2023 Top 100 Supermarkets in China" report from the China Chain Store & Franchise Association, released on July 23, revealed that the top 100 supermarket chains collectively generated 868 billion yuan ($121.5 billion) in sales in 2023.

This marks a year-on-year decline of 7.3 percent in sales. Store numbers also fell 16.2 percent to now stand at some 23,800 outlets.

Despite these declines, Walmart China retained its position at the top, with 2023 sales amounting to 120.2 billion yuan, accounting for 14 percent of total revenue among the top 100 supermarket chains.

Yonghui Superstores and RT-Mart (China) Investment Co Ltd followed, securing the second and third positions.

The report highlighted a notable uptick in sales and store counts for membership and discount retailers in first and second-tier cities.

Membership-driven chains like Walmart Inc's Sam's Club, Costco and Fudi have shown significant growth. Meanwhile, of the top 100 supermarket chains, 44 reported year-on-year sales increases, with 27 stores located in lower-tier, or smaller cities, including Dazhang Group from Henan province, Xinyulou from Hebei province and Beauty Group from Northeast China.

In terms of store numbers, 33 chains expanded their footprint, 20 maintained their existing counts and 47 experienced reductions.

The 2023 report underscored that despite the overall downturn, key segments such as membership and discount stores are thriving, reflecting a shifting consumer preference towards value and exclusivity in the retail landscape.

Walmart China, which covers business formats of both its Walmart supermarkets and hypermarkets — as well as Sam's Club — has solidified its top position in the Chinese retail sector.

The company ascended from fourth place in 2019 to first in 2021, maintaining that lead through 2023.China Resources Vanguard, which led the rankings in 2019, fell to third place in 2020 and then to fourth in 2021, remaining there until now.

Over the past four years, Walmart has been the sole top 10 supermarket chain to report consistent annual growth.

Walmart Inc's first-quarter earnings report indicated a 10.7 percent increase in international net sales, driven by its operations in Mexico and China.

However, Walmart China's overall performance has not been buoyed by its hypermarket segment, which is undergoing contraction and restructuring, including significant store closures in China. Over the past two years, Walmart has shuttered nearly 60 stores in China, with at least 17 closures reported in the first half of this year alone, according to Southern Metropolis Daily.

In contrast, Sam's Club, Walmart's membership-only warehouse chain, continues to expand rapidly and attract middle-class consumers. The chain now operates 48 stores in China and plans to open an additional six locations this year. In 2023, Sam's Club's sales exceeded 80 billion yuan in China, according to Beijing Business Today.

Douglas McMillon, Walmart Inc's president and CEO, highlighted the growth in Sam's Club during the first quarter fiscal year 2025 earnings call in May, saying that e-commerce — particularly its one-hour delivery services in China — had surged to 55 million orders, reflecting strong demand for convenience during Chinese New Year. McMillon added that Sam's Club has seen significant success with a business model that includes dark stores — miniature warehouse-like spaces where online orders can be packed for pickup or delivery — which enhance market reach and delivery efficiency, contributing to a notable improvement in profitability.

He also said that Sam's Club China saw a 25 percent increase in member numbers, with rising rates of both new memberships and renewals during the quarter.

Between 2018 and 2022, Sam's Club contributed over 60 percent of Walmart China's 29 billion yuan growth. This impressive performance has inspired many retailers to emulate its model, particularly as post-pandemic consumers prioritize value for money, according to retail industry news portal Lingshouke.

Membership stores have become a pivotal transformation strategy for traditional retail businesses in China, with many conventional supermarkets now exploring the membership model.

Sam's Club sees its appeal in its product selection and global supply chain advantages. Although it offers about 4,000 stock keeping units, Sam's Club curates its product range to ensure high-quality options for its members. Its quality control has built reputation and trust for the retailer, leading to a membership renewal rate exceeding 80 percent, the company said.

Additionally, Sam's Club benefits from its assortment of private label products, which enhances profitability and creates a selective membership base.

Just as Sam's Club, discount retailer ALDI has gained traction among value-conscious consumers and is boosted by its private label products as well.

Founded in Germany in 1913, ALDI now operates over 10,000 stores across more than 10 countries. The company entered the Chinese mainland market in 2019, opening its first pilot stores in Shanghai. Over the past five years, the number of ALDI stores in Shanghai has risen to 53.

ALDI, known for its approach to private labels, features 13 key private labels, with private label products accounting for 90 percent of its inventory. This focus on private labels allows ALDI to offer a wide range of daily necessities at competitive prices, aligning with the growing consumer preference for value.

Founder of Beijing-based market research company Bailian Consulting Zhuang Shuai said that achieving lower prices and better services in retail requires centralization and scaling.

"In China's retail landscape, its major giants face a collection of fragmented regional players. Market concentration significantly benefits private labels, allowing them to scale rapidly," Zhuang said.

NielsenIQ China's "2023 China Consumer Insights and 2024 Outlook" report revealed that, as of July 2022, 37 percent of consumers intended to alter their consumption habits to find better prices.

In this context, ALDI's strategy stands out. The German retailer limits its SKUs to fewer than 2,000, with about 1,500 dedicated to essential items and the remainder to seasonal and holiday products. Its "Super Value" series, featured on its app, includes eight categories, with half focusing on fresh produce such as fruits, vegetables, meat, eggs, dairy and seafood.

This focused SKU approach enhances procurement efficiency compared to traditional hypermarkets, which typically carry 10,000-20,000 SKUs.

ALDI's efforts to achieve a high private label ratio, at around 90 percent, surpass that of Costco and Sam's Club. Additionally, over 80 percent of ALDI's suppliers are local, with this figure expected to rise.

Its minimalist model also extends to staffing. Each store employs eight to 10 people, with no more than four on duty at any time.

"This streamlined approach not only reduces operational costs, but also aligns with the growing consumer preference for cost-effective retail options," said Zhuang.

As consumer spending increasingly gravitates towards value-focused channels, ALDI's minimalist and private label-centric model positions it as a rising competitor in China's dynamic retail market, said Zhuang.