Simplify the Complex: The Business Wisdom of Lelele Supermarket

In the fast-paced and ever-evolving business landscape of today, the pursuit of success often seems like navigating through a maze of complexities. Amidst the chaos of emerging technologies, fierce competition, and changing consumer demands, there is a timeless principle that stands out: simplicity. The story of Lelele, a hard discount chain supermarket from Changsha, Hunan, offers a profound insight into how simplicity can be the key to achieving remarkable business heights.

Lelele was founded in 2011, specializing in the hard discount model. By 2023, it had expanded to over 4,000 stores and boasted an annual revenue exceeding 40 billion yuan. As the discount industry gained momentum, Lelele's store count and sales volume witnessed an even more significant surge, earning it the reputation of the "pioneer of hard discount in China."

What makes Lelele truly fascinating are its numerous "counterintuitive" aspects. For instance, when it comes to store locations, they have a penchant for the second floor and basements, which are typically considered less desirable in the retail world. In Changsha, one of China's "Four Furnaces," their flagship store, spanning over 20,000 square meters, operates without a single air conditioner. Moreover, in an era where most supermarkets regard fresh produce as a crucial profit driver, Lelele has steadfastly refrained from offering it.

Curiosity piqued, I was fortunate enough to meet Zhang Liyao, the senior partner of Lelele, and Chen Zhengguo, its founder, through the introduction of Huang Biyun. In their office, a simple yet profound statement adorned the wall: "Do complex things simply and simple things earnestly." This phrase encapsulates the essence of Lelele's success.

One of the initial questions that came to mind was, with so many stores, why had I never noticed them? Zhang Liyao explained that aside from the headquarters in Changsha, most of Lelele's stores are located in the fourth and fifth-tier counties of various provinces, with a minimal presence in first and second-tier cities. This made me reflect on the phenomenon of perception in the business world. Just as many netizens and even some employees of Pinduoduo perceive it as having poor quality and a prevalence of counterfeits, while its target customers in the lower-tier markets find it to be a great value for money, it highlights the vast differences in business logics between urban and rural areas. We often tend to mistake our immediate surroundings as the entire world, which, to some extent, is a form of arrogance.

Lelele's storefronts might not be as eye-catching as those of Hema or ALDI. They have a somewhat "rustic" appearance, resembling rural farmers' markets rather than modern supermarkets. Many of their stores are indeed located in or near farmers' markets, and with a significant number situated on the second floor or in basements, they can easily go unnoticed by passersby.

So, why does Lelele prefer these seemingly less advantageous locations? Chen Zhengguo revealed that it is the result of over a decade of exploration and trial and error. Their business philosophy is centered around two core aspects: offering the cheapest products and targeting those who are most eager for low prices.

When it comes to finding the customers who value low prices the most, in the context of county-level business, farmers' markets are the epicenter. For urban white-collar workers, they might be more inclined to accept something as "good enough" and not go to great lengths to compare prices. However, the clientele in farmers' markets are different. They are willing to travel a few extra kilometers and compare multiple vendors to save a few cents. Other places with a similar price-sensitive customer base include areas near rural markets or beside primary and secondary schools.

Once they have identified this target group, Lelele focuses on providing the cheapest products. Their products are, on average, at least 30% cheaper than their competitors. For example, a bottle of Nongfu Spring that usually retails for 2 yuan is sold for 0.9 yuan at Lelele, and a 5-yuan bottle of Oriental Leaf is priced at 3.6 yuan. Their 2-liter bottle of Yuanqi Forest soda is sold for 6.9 yuan, compared to the usual price of 8.8 yuan elsewhere.

Achieving such low prices requires meticulous cost control in every aspect of the business. One of the ways they cut costs is through strategic location choices. Renting a second-floor or basement space can be significantly cheaper. For example, if the monthly rent for a ground-floor storefront is 3,000 yuan, the second floor might cost 2,000 yuan, and the basement could be as low as 1,500 yuan.

But what about the potential loss of foot traffic? Since Lelele targets price-sensitive customers who are already accustomed to comparing prices in places like farmers' markets, an extra flight of stairs is not a deterrent. Additionally, in small towns and villages, word-of-mouth spreads quickly. Once customers trust the low prices at Lelele, they will not only keep coming back but also recommend it to others, which is a stark contrast to the need for continuous customer acquisition and retention in big cities.

Another area where Lelele saves costs is in store construction. Their store expansion mainly involves two methods: renovating existing small stores run by local couples and taking over closed supermarkets.

When renovating small stores, they collaborate with the owners, leveraging their storefronts and integrating Lelele's supply chain system. These stores often have extremely low costs, especially when the building is the owner's self-built property, making the storefront cost almost negligible.

In the case of taking over new stores, instead of incurring high costs for design, decoration, and equipment purchase, they have found a unique solution: taking over failed supermarkets. For instance, their flagship store in Changsha, covering an area of 22,760 square meters, is equivalent to the size of three standard football fields. It was previously a closed Walmart store. This approach allows them to reuse the existing decoration, equipment, and even shelves, significantly reducing the renovation cost. Their internal calculations show that while the average renovation cost per square meter in the supermarket industry is between 1,200 and 1,500 yuan, Lelele manages to keep it at only 268 yuan per square meter.

The Changsha flagship store might seem chaotic and even somewhat dilapidated, with old tiles, shelves, and in some areas, just a cement floor. But this is a deliberate choice. After all, the goods in the store are the real assets that can be returned to the manufacturer or sold at a discount in case of business difficulties. In contrast, decoration, signage, chandeliers, and tiles are non-recoverable expenses, better considered as "consumables" rather than assets.

Another remarkable aspect of the Changsha store is that it has no air conditioning. Given that Changsha is known for its sweltering summers, this might seem unthinkable. However, when Lelele took over the store, the previous tenant had removed all valuable electrical equipment, including air conditioners. Instead of installing new ones, they opted for large fans and circulating water air coolers, which not only keep the indoor environment tolerable but also save hundreds of thousands of yuan in annual electricity costs.

Lelele also has unique strategies in other aspects of operations. For example, they use large shelves that are 2.25 meters tall. While in most modern supermarkets, low shelves are the norm to enhance the shopping experience, Lelele's approach is different. The top layer of their shelves serves as a warehouse. In the traditional supermarket model, a significant portion of the cost is dedicated to a separate warehouse. By integrating the warehouse into the shelves, Lelele reduces the need for a dedicated storage area and simplifies the replenishment process. Employees can simply climb a ladder to move products from the top to the lower levels.

If the top layer of the shelves is not enough, they simply stack the goods within the store. This gives the store a somewhat chaotic appearance, with shelves, products, and boxes piled up closely together. But this is in line with their cost-saving strategy. Since the rent for the store is already paid, the more goods they can store, the lower the cost per item. As a result, Lelele's stores function as both retail shelves and wholesale warehouses. Among their 18 cash registers, 12 are dedicated to wholesale transactions, catering to small business owners such as nearby food stalls and barbecue joints, who account for 60% - 65% of their total sales volume.

In addition to these operational strategies, Lelele also differs from its competitors in product selection. They have chosen not to offer fresh produce, which is currently considered a lucrative segment in the supermarket industry.

Fresh produce comes with several challenges. It is non-standardized, with variations in quality even within the same type of product. The high rate of spoilage and the difficulty in transportation also add to the complexity. While some new retail brands like Hema have managed to succeed in this area by leveraging strong supply chain management capabilities, Lelele has decided to stay away from it.

Chen Zhengguo explained that although fresh produce can be profitable, it requires a significant amount of energy and cost to manage. Lelele's strength lies in simplifying complex matters to the extreme. Instead of venturing into an area they are not proficient in, they focus on what they do best.

If customers need to buy fresh produce, they can simply go downstairs to the farmers' market, where they can find a wide variety of fresh and affordable options. This way, Lelele consciously sacrifices this potentially profitable segment to maintain its focus on providing the cheapest non-perishable products.

When it comes to managing standard products, Lelele's approach is straightforward: reducing middlemen and increasing inventory turnover.

In the traditional distribution system for packaged goods, a product like mineral water goes through multiple levels of distribution, from the manufacturer to regional distributors, then to provincial, municipal, and county-level distributors before reaching the retail stores. Each level of distribution adds a certain percentage of profit, resulting in a final retail price that is often 60% or even double the factory price.

Lelele cuts through this complex system by directly collaborating with provincial or at most municipal distributors and delivering the products directly to its stores, eliminating the intermediate steps. This not only reduces costs by over 30% but also benefits the distributors. In an era of overproduction, Lelele's large sales volume and strict cost control enable it to achieve high shipment volumes, solving the distributors' problem of selling large quantities of goods. Additionally, Lelele minimizes its own warehouse construction and instead uses the distributors' warehouses, further reducing operational costs.

In terms of inventory turnover, Lelele sets extremely high standards. While traditional supermarkets typically have an inventory turnover period of over 60 days, Lelele manages to achieve an average of 25 days, and for food products, it can be as short as 8 days. Higher turnover means more profit with the same amount of capital and goods.

During my conversation with Zhang Liyao, I asked about the common problems among grassroots retail store owners in China. He shared his observation that the most difficult thing to change is the mindset of the store owners.

He has encountered numerous county-level convenience stores where the prices are 40% higher than those at Lelele, and in some cases, the purchase price of these stores is even higher than Lelele's retail price. Many store owners do not even realize that this is an issue. They often rely on the first distributor who comes to their door, choosing products based on the rebate rather than actively seeking better sources. Moreover, they might invest a large amount of money in opening a supermarket but only earn a meager profit, taking years to recoup their investment, yet remain oblivious to the risks.

These store owners often overestimate the advantage of their location and the loyalty of their local customers, underestimating the impact of e-commerce and price competition. However, the business landscape has changed, and in today's highly competitive environment, success requires paying attention to details and squeezing every bit of profit.

Lelele's story teaches us that simplicity is not just about doing things in an easy way; it is about making wise choices and sacrifices. By clearly defining their goals and being willing to let go of things that do not align with those goals, Lelele has achieved remarkable success. They sacrificed prime locations for lower rent, a wide range of product categories for a focus on standard products, and a comfortable shopping environment for lower costs. Their management understands that these are the necessary costs of achieving their vision of providing the cheapest products to price-sensitive customers.

In conclusion, in a world filled with complexity, Lelele's example serves as a beacon of wisdom. We should all strive to simplify the complex, to focus on our core goals, and to make the necessary trade-offs. By doing so, we can navigate the challenges of the business world and achieve our own version of success.