David F. Miller Center For Retailing Education and Research International Retailing Education and Training (IRET)

Warrington College of Business Administration

Chaoshifa Supermarket

This interview summary was prepared by Elinore Fresh, Yi Pan, and Jennifer Xie under the supervision of Dr. Hyunjoo Oh. This was prepared to support the IRET Program at the David F. Miler Center for Retailing Education and research at the University of Florida. Support for the IRET Program was provided by a BIE Grant from the U.S. Department of Education.

Chaoshifa Chain Store Co., LTD http://www.bjcsf.com/index.html

Photographs: Video:

Interview Summary with Yanchuan Li, president of Beijing Chaoshifa Chain Store CO., LTD

General Description

Beijing Chaoshifa Chain Store Co., Ltd, formerly Beijing Haidian Non-staple Food Company (SOE), started in 1956 and was privatized in Oct, 1999. Its major retail formats include comprehensive supermarkets, food supermarkets, community convenience stores and open markets. Comprehensive supermarkets are supermarkets with an area from 43,000 square feet to 54,000 square feet, selling food and groceries. Food supermarkets sell food and are usually around 10,763 square feet to 32,300 square feet. Community convenience stores are from 1100 square feet to 3229 square feet in size. Open markets allow farmers to sell their products to the customers but are managed as supermarkets are. Company’s success can be attributed to its well-kept relationships with the customers. Chaoshifa has done a pretty good job at differentiating itself from the competitors by positioning as a community supermarket, while Wu-mart is more focused on the hypermarkets and Jinkelong is mainly for wholesale business. Convenience Stores Cold weather and consumer behaviors are the two major reasons that resulted in the slow development of the convenience stores in Beijing. Unlike Southern China, especially in Shanghai and Shenzhen, where people have various kinds of night life and stay up quite late, Beijing residents seldom go out after 8:00PM or 9:00PM. They might go out during the summer time but not in the winter. Beijing is a political center where people are proud of themselves being one member living in the capital city. Most people are lazy and not motivated to work, thus missing business opportunities. While Shanghai is the economic center of China and it opened up to the outside world earlier than Beijing. People are more willing to accept new ideas and adaptive to change on a faster pace. They are motivated to work and are better at seizing business opportunities. Take 7-Eleven for example, although 7-Eleven has been in Beijing for quite a while (2004) and Shanghai for a short time period (2009), Shanghai’s operation has been better and faster than BJ’s. Lianhua Quick, which is a successful convenience store operator in Shanghai, also opened convenience stores in Beijing and is struggling through the years. Chaoshifa convenience stores also sell vegetables, seafood, meat and fruit besides general merchandises provided in other convenience stores. 7-Eleven do not sell vegetables, but its lunch boxes are quite popular among consumers, which Chaoshifa is considering to launch as well.

“We do not have a deep understanding of our customers and we demand more institutions to do more deeper researches in the retail industry to help us to understand the customers” said the interviewee. AC Nielson has done quite a lot job on analyzing the consumers but such analysis were too superficial and too general and did not touch to the point. In 2003, the company’s former management team authorized another company to operate convenience stores under the brand name “Chaoshifa”. But the operation did not go well. Some stores were closed in 2005 and such failure damaged the brand image. Chaoshifa sued and won the case against it. Competitors Chaoshifa is positioned to be a community supermarket. Its target customers are females

between 30 to 50 years old who are family oriented. Wal-Mart attracts customers who are at

their 20’s or 30’s and own cars. “We do not want to compete with Wal-Mart about the variety

of the products we provided. We just wanted to focus on the communities and make our

customers satisfied. We focus on the food section, especially those which customers buy to

make dinner or lunch like vegetables, seafood, meat and fruit” said the interviewee.

Wu-Mart is better at operating hypermarkets. Their food markets and convenience stores are

mostly franchised. Chaoshifa’s advantage lies in its knowledge of consumer needs and its

community.

Major operation area Chaoshifa’s major operation area include Beijing, Chengde, Zhangjiajie and Xuanhua(Hebei province). As the company’s SOE background and started as early as in 1956, Chaoshifa has pretty good relationships with the customers and also store sites. With the competition became severe in recent years, it began to expand to 2nd and 3rd tier cities where the competition was less intense since 2003. It opened new stores if the store site was within 200 kilometers (124 miles) radius of the distribution center. Now it owns 9 stores in Zhangxuan (Zhangjiakou and Xuanhua) and 4 stores in Chengde. It took almost one year to open the first store in Zhangjiajie, 6 months of preparation before the first store opened in Chengde. Chaoshifa’s customer bases are quite different in these regions than in Beijing. For example, customers they serve in Zhangxuan are much elder than in BJ as young people usually go to bigger cities to study or work. Because of the colder weather, customers there prefer hotter food. Chengde is a place mixed with tourists and most customers are less price sensitive than their Beijing customers.

Chaoshifa is planning to set up a distribution center in Xuanhua to penetrate to the Inner Mongolia area in the following 2 to 3 years but right now it only wants to concentrate on the operation of the current areas. Difference between private companies and SOEs Chaoshifa is now a private company with government background. Being a private company allows more flexibility and market-orientation in decision making. While being a state owned company, a decision has to go under a certain procedure before it is made, which will often miss the market opportunities. But the government has relaxed certain control on many SOEs in recent year, allowing the companies to make decisions on their own, but it still takes time to adjust. Self-Brand Chaoshifa now has 180 self-brand products out of 40,000 categories, which accounted for less than 1% of total sales. Self-brand was developed in recent years as a result of the declining margin, and still required time to develop. The major products of self-brand are dried vegetables and nuts. Morning Market (zaoshi) Chaoshifa originated a new retail format called morning market since 2007. The usual operation hour of a general supermarket is from 8:30AM to 9:30PM. During his (the interviewee) personal visit to the stores, he found out that many elderly people were doing morning exercises near the stores and it occurred to him that they could buy some vegetables after they finish exercising. So Chaoshifa opened a morning market which started from 6:30AM and ended in 8:30AM to give it a try. Consumers do not need to worry about the quality and quantity of the products in the store (sometimes the vendors in the open market will cut short on the quantity of the products by fixing the weighing machines) compared to the open market and the morning market is clean and clear. Such formats worked out so well that later Chaoshifa decided to expand to other 9 stores. Breakfasts are provided in several of the morning markets. Based on the success of the morning market, Chaoshifa opened an open market which allows the farmers to sell their products but are organized and managed in a supermarket way. It went so well that was later recognized by the National Commerce Bureau as a Model for open market. Later, the company opened 3 more open markets in Beijing. Franchise Chaoshifa began to franchise since 2010. The domestic legal and business environment has not been mature enough for franchise. The franchisees are usually private owners and sometimes they do not buy products from headquarter in order to keep their profit margin, which might reduce the quality of the products. Chaoshifa started franchise this year mainly because it had

received many applications. It has very strict regulations over franchisee like percentage of purchasing from the headquarters and daily inspections from the franchiser. Chaoshifa select those applicants based on the following considerations: store size should be Less than 5380 square feet; their distance to the distribution centers; their locations should be near the center of the community; education and experience of the franchisee and others. The relevant fees are based on the size of the stores. Purchasing Chaoshifa has two distribution centers, one for the packaged and dried products and one for

vegetables, meat, fruit and seafood. It has 74 vegetables production bases in China. The

company contracts with the farmers about what to grow each year and designate the quality

and quantity of the products and ways of growing the products.

Chaoshifa set up the distribution center for vegetables, meat and seafood since 1984. They

used to pick the vegetables from the field and have them processed in the distribution center.

Now as the National Business Bureau promoted the direct contact between farmers and

supermarkets, the company pick the products from the ground, pay cash at the site, process at

the site and distribute the products to stores, in order to ensuring the freshness of the

vegetables.

The company pays the farmers cash at site for the vegetables. Milk products can be on credit

for 1 to 2 days and clothing and fabrics can be on credit for 30 days.

Pricing

Chaoshifa’s purchasing prices varies according to different sources and locations of the

products. The purchasing team set up the price for each store. And there are variances of the

same product in different stores based on the company’s understanding of the surrounding

communities and customers. Stores do not have the right to adjust or change the price of items.

Chaoshifa sells products with high quality and sometimes with the high prices. Take meat for

example, it only sells premium meat, which is more than 10 Yuan per pound, compared to 4 to

5 Yuan per pound of average quality of meat.

Locations

Chaoshifa positions itself as a community supermarket because the car ownership in Beijing is

quite low and opening the stores around or inside the communities will provide most

conveniences for its customers. The size of the stores is based on the size of the community.

Usually when a real estate developer wanted to have a market in their community, Chaoshifa

and other supermarkets would file applications and negotiate the rent and price in that matter.

Promotion

Chaoshifa do not advertise on TVs or newspapers. Word of mouth is the best way to advertise

from the perspective of the managers. Its target customers are residents who are in the 1 mile

radius of the supermarket. It works on creating a closer tie to the customers. It published 4

books last year for the consumers regarding the healthy combination of food. And it also

provides teaching-on-site about how to cook for those consumers who are at their 20’s and

30’s especially during holidays because such generations do not know cooking skills and it

would be better for them to cook for their parents in holidays.

Chaoshifa has more than 200,000 members and sometimes it will launch special day to treat

members by providing the special products like fruit from Hainan and Fujian. It is not in favor of

price cutting as a way to attract customers. If a customer buys the products over the amount of

68 Yuan on the opening day, he or she would qualify to be a member. Members can enjoy

special features like cash back or special service. For example, the company has organized

several trips to visit its suppliers (the vegetable production base and also meat processing

factories). It has been a win-win situation for every party. The consumers would understand the

freshness and cleanness of our suppliers and in turn trust the products and it also promotes the

brand awareness of the suppliers.

Chaoshifa has volunteer teams in each store to help the elderly people who stay alone, usually

5-10 families of each store. It cares a lot for the life of the elder people, and in return, those

customers are very loyal to our supermarkets. For example, during the renovation of our

Shuangyushu store, which closed for 2 months, some of their elderly customers just stop buying

and waited for the store to open.

Gift Cards

The government is not restricting the issuing of gift cards as it is several years ago. Gift cards

are really convenient for customers as they do not need to carry cash with them (Most Chinese

people are not used to bank cards and always take cash with them) and also no changes. The

great portion of the gift cards buyers are individuals and a small portion are government

departments. The gift cards are password protected and if lost, the remaining value can be

retrieved.

Compared to supermarkets, most of the gift cards issued by departments are bought by

government agencies, because the single item value is higher.

Customer Service

Chaoshifa focus on satisfying customers need and also kept good with the suppliers. It listened

to the feedback from the consumers. For example, the nuts it used to sell are packaged 2

pounds per serving which was too large for the shrinking family size. After hearing the

complaints of the customers, it contacted the suppliers and have the factory manufactured nuts

in half pound volume and the sales increased in turn.

80% of the customers are frequent shoppers to the supermarkets.

Take the Haidian district for example. Most of the residents there are highly educated

customers. As a result, they are more acceptable to new products. No more services are

needed there to guide the customers towards the products they want. Therefore, the store

provides more detailed service like panel for disabled, rest chairs for the elder people. Actually

a lot of their elder customers found the rest chairs a good place to talk to their old neighbors.

And there has been a cashier panel for elder people only.

Each year in March.15th or Oct 1st, the company would ask for the opinions of the customers

and sometimes conduct door to door interview. It has a department to analyze the predict

consumers needs to better serve the customers.

Chaoshifa also wanted to target 20-30 years old young customers as according to a recent data,

such proportion of customers is increasing. Customers who are at their 40’s to 50’s are focused

on the price of the products while customers who are at their 30’s and 40’s are more concerned

about fast shopping. The average shopping takes about 20 minutes in Chaoshifa and more than

1 hour for Wal-Mart and Carrefour. Young people who are at their 20’s care more about the

brand rather than the price. For example, they only purchase the chocolate under Ferrero.

As far as return policies goes, food and vegetables if returned will be destroyed at store;

groceries will be returned to the factory. When encountered a return, cashier will ask the on

duty manager to settle the disputes. Chaoshifa has store-manager meetings each month to

report such incidents to find out ways to improve services. It set aside 0.3% of revenue as

settlements for return and stolen products.

Laws and Regulations

Food Safety law issued in 2009 was a major one affecting the retail industry. And the law has

then been strictly reinforced. A lot of retailers do not pay attention to food safety in the old

days. The interviewee is the food safety chief in China retail association. Chaoshifa has been

very responsible in educating employees about food safety.

There has been a lack a protection for large store and small stores.24-hour operations are not

suitable for all retailers. In Japan, large stores have certain operation hours and days to leave

room for small stores. But in china, they are competing on the same scale. There has been low

loyalty among consumers. They will buy products from the stores which provide the cheapest

products. Take Haolingju convenience store for example, it benchmarked the price with

supermarkets. But convenience stores are serving for the customers who are mostly single and

focus on time and convenience, customers who are not price sensitive. But many retailers in

China did not have a clear idea about it.

Human Resource

Stores of 1100 square feet to 2200 square feet are equipped with 7 to 8 employees. Stores of

43,000 square feet to 54,000 square feet are equipped with 300 employees, including 30+

cashiers with 60 employees working on two shifts.

The payment for cashiers and those who work in stores are around 2,400 RMB (350 dollars)

including insurance, which is around 1,000+ after tax. It is undeniable that the payment was low

but the company wants to promote a “family culture” like brothers and sisters, rather than

parents and children. Chaoshifa increased the salaries each year as the performance of the

company was increasing. The interviewee claimed that the management level salary is lower

than average compared to the industry but the cashiers’ salary is above average compared to

the industry. It might have something to do with the company’s state owned background. As

traditional influence, everyone should be paid the same at the SOE. And the pay should also

leverage other manager’s payment at other SOEs. It held entertainment activities where

employees can compete on singing, dancing. It held scholarships for the children of the

employees, those who were admitted to the universities would be awarded with 2,000 RMB

(290 dollars) and 1,500 for colleges(220 dollars). And employees are deeply attached to the

company and care for others. For example, once a child of the employee was seriously sick and

the company held a donation which amounted to 300,000 RMB (44,120 dollars).

Level of satisfaction-employees-suppliers-customers-shareholders-government. Employees are

the ones that company wants to satisfy most. Recently the company is considering building

apartments and rent them to the employees. The employees might have the option to

purchase the apartment after 20 year service in the company.

Shelf Arrangements

The 3rd and 4th level of the shelf is where the best-sold products are placed. The shelf design

and placement are controlled by headquarter who have a clear knowledge of the consumer

base around each store. The purchasing team is mainly in charge of shelf placement. The store

level will just follow the instruction and simply execute. And headquarter will inspect each store

to find out whether the orders are executed. We do not place the products based on the fee

the suppliers paid. Coke designed a really nice coke shelf for us and wanted to have it displayed

in the store but the company refused. “We want to arrange the shelf according to the most-

wanted products of that region based on our knowledge of the customers not by how much the

suppliers pay for us” said the interviewee. And that explains the low profit margin of the

company.

The company also rent certain counters to individuals who provide sewing services or sell small

accessories for girls, but not much.

Retail Industry

In 1995, the interviewee was sent to Japan study the operations of retail stores by the country

as one member of the executives in the retail industry. And the business mode then was to

have standardized stores in every site. The model turned out to be unsuccessful at the late

1990s as the difference in consumer behavior and economic development in different districts.

And in the early 2000s, there has been a trend to learn what Europe and America is doing.

“Now we are doing business in our own way. We are exploring our business model. It is wrong

to simply copy whatever Japan, Europe or America is doing as our conditions differ dramatically”

said the interviewee.

Pictures of Chaoshifa

Description: Entrance to the headquarters of Chaoshifa.

Description: Storefront of a Chaoshifa Supermarket in the Summer of 2010.

Description: Sometimes there are promotions like these in front of Chaoshifa stores.

Description: Storefront of the same Chaoshifa Supermarket in May 2011.

Description: Store hours: 7:30am – 9:30pm. Chaoshifa’s store hours are usually 2 hours earlier

than other supermarket retailers. The small caption underneath the “21:30” sign indicates that

the store will close at 10:00pm on the weekends and during the summer.

Description: Store advertisements showing what is on sale.

Description: Chaoshifa posts important health and food related information for their

customers. For example, one line warns customers to not eat tofu and honey together as it may

cause deafness.

Description: The green banner reveals where the vegetables originated from. Chaoshifa picks

and collects fresh vegetables from local farms.

Description: Vegetables and fruits section.

Description: This section sells packaged fruits. Packaged fruits are always more expensive than

the unpackaged fruits because packaged fruits are cleaner.

Description: Milk section. Milk is always paper packaged and not plastic packaged in China.

Description: This section sells shampoo, conditioner, body wash, and laundry detergent.

Description: Meat section. There are different types of meat and the customers can just grab what

they want.

Description: Meat section. The employee will cut the meat based on the needs of the customer.

Description: This section sells chicken. Black-skinned chicken is common in China and it is

usually used to make soups.

Description: This section sells seafood.

Description: Cafeteria in the supermarket. They sell Peking duck which is a popular dish in

Beijing.

Description: This section sells different types of cakes, buns, and bread.

Description: This section makes popular pan fried snacks.

Description: This section sells roasted chicken and other oven made snacks.

Description: This section sells name brand candy. This brand of candy has a long history in China.

Description: This section sells tea. In addition to the common green tea and black tea, they also

sell flower tea. Tea is a very common drink for Chinese people in the summer.

Left side: Customers can purchase unpackaged rice.

Right side: Customers can purchase packaged rice.

Description: Chaoshifa also sells small electronics such as rice cookers, microwaves, and

pressure cookers.

Description: Chaoshifa also sells refrigerators. The refrigerator on the left is a very small

refrigerator. The rest of the refrigerators are considered normal size.

Description: It is common for supermarkets to sell slippers and sandals as Chinese people wear

slippers and sandals at home.

Description: This is a store display for the Dragon Boat (Duanwu) Festival.

Right: This is a display of zongzi. Zongzi is a traditional Dragon Boat Festival food.