A supermarket David defeats Goliath in small-town China, outracing the times

With only a dozen stores in the Central city of Xuchang, Pang Donglai has become a modern legend for standing up to a flood of hypermarkets and online grocers

Key Takeaways:

• The Pang Donglai chain is successfully challenging China’s supermarket establishment, as well as its crowded field of online grocers
• Known for its “triple-win” philosophy, the regional chain’s success looks like a modern David and Goliath story in the country’s ultra-competitive grocery market

By Lau Chi Hang

“We won all our battles but lost to the times. And when the times abandon you, they don’t even bother saying goodbye,” lamented Huang Ming-Tuan, chairman of Sun Art Retail Group Ltd. (6808.HK), whose RT-Mart chain was once a king of the hill in China’s huge but hotly contested supermarket sector.

The rise of online shopping has pushed aside such former giants, leaving their shopping carts far emptier than they were back in their heyday just a decade ago. Carrefour, once a leader in the pack, has closed 140 Chinese stores in recent years, as its French owner sold the chain to a local company. RT-Mart closed 13 stores last year alone, while Britain’s Tesco has abandoned the China market completely.

While other big supermarkets get hammered by changing shopping patterns, one small regional chain in the city of Xuchang of Central China’s Henan province is rising up against the times. Its stores are always full and it’s quite profitable, attracting top brass from much better-known giants like Yonghui (601933.SH) to stop in for visits and seek assistance in reforming their own shops.

So, who is this new kid creating such a stir on the China supermarket block? Its name is Pang Donglai. Despite that uninspired moniker, which is a nickname for its founder referring to his girth, this chain boasts a model that goes beyond any Business 101 textbook. It’s received high praise from China tech celebrity Lei Jun, co-founder of smartphone sensation Xiaomi, who calls it a game changer on China’s retail scene. Alibaba founder and e-commerce pioneer Jack Ma has also credited Pang Donglai with triggering a new round of thinking among Chinese retailers.

A founder’s golden touch

Pang Donglai’s success owes to its founder Yu Donglai. Born to a poor family in Xuchang, Yu was forced to eke out a living from an early age. He started with menial jobs and was even detained three times for illegal cigarette trading. He once earned 100,000 yuan for his efforts, only to end up 300,000 yuan in debt due to his overeagerness for quick profits.

Such ups-and-downs taught Yu the importance of integrity and diligence when it comes to work. In 1995, he opened a grocery shop in Xuchang that would later become Pang Donglai. With a promise to always carry authentic goods and a motto of “genuine goods for genuine hearts,” the little store grew rapidly. Pang Donglai had 13 stores last year, earning a profit of 140 million yuan on over 10 billion yuan ($1.41 billion) in business.

The chain’s success comes from a simple formula of providing customers with an experience that goes well beyond their expectation. Yu executes the concept at two levels, starting with the shopping environment. Pang Donglai stores all feel clean and comfortable, with goods attractively arranged. They do away with displays of unpopular goods that traditional supermarkets use to generate extra placement fees from product makers, but otherwise do nothing but crowd the shopping space.

A second element that’s more unique to Pang Donglai is the many leisure and service stations throughout each store. Those include self-service drinking machines on every floor, and free power banks for people to recharge their smartphones. Refrigerator cases feature gloves for people to handle cold merchandise more comfortably, while reading glasses are available for the elderly and nursery rooms for customers with children. Even pets get the royal treatment with their own special self-service holding areas.

Equally impressive, the chain allows customers to return goods if they’re not satisfied, and even offers rewards to encourage complaints over problematic goods. When one customer recently complained that salmon sashimi being offered was also on sale the previous day, Pang Donglai immediately removed all such products and gave the customer 100,000 yuan as a reward after verifying the complaint.

Triple-win philosophy

In addition to the attentive service, Yu is also known for his good treatment of employees, understanding that happy employees make happy customers. Such a virtuous cycle ultimately leads to a triple-win situation where store owners, workers and customers are all happy.

Such philosophy differs from a more traditional Chinese model where employers expect workers to be helpful, hardworking, and sacrificing for their companies, even if they never get anything back beyond basic salaries. With such expectation, many employers often ask staff to work overtime and treat them like commodities without ever sharing in the company’s success.

To the contrary, Yu pays his employees much better than the market average. Even janitors can make 4,800 yuan per month, or well above the regional average wage of 3,500 yuan. Yu also shares most of his profits with employees and emphasizes work-life balance by forbidding overtime work and closing stores every Tuesday to ensure no one puts in seven-day weeks. This year the chain even added 10 days of special leave for use by employees in times of bad moods, though supervisors must still approve.

While some say the approach shows Pang Donglai’s benevolence, others dismiss it as pretentious. Either way, its unusual practices have made Pang Donglai a hot topic of national discussion. People go out of their way to visit the chain, and frequent news reports and online discussion have brought Yu and his chain huge free publicity. Without spending a penny on promotion, this regional supermarket has inadvertently become table talk across China.

Pang Donglai paradox

Though proud of its success, Pang Donglai still faces certain dilemmas. As the saying goes, no one can have it all and there is no free lunch. While its unique business model generously shares profits with both employees and customers, its operating costs are naturally far higher than the industry average. After all, more profit for others means less for Pang Donglai and its owner.

Furthermore, Pang Donglai has only achieved success in a smaller Chinese city. It’s far from clear whether it could compete in bigger metropolises like Beijing and Shangahi, where rent alone would be far higher. That may partly explain why the chain has never tried to expand beyond its home base so far, especially to larger markets with stiffer competition.

Given its success has been limited to a small market, and the high costs of its business model, it remains to be seen if Pang Donglai might ever attract big outside investment or go public, even as it wins plaudits from observers. That could become a paradox for the company by scaring off such big investors with the potential to turn the chain’s customer-winning but limited profit formula into a national story.

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