Hongqi Chain’s Knack on Community Business


How big is the community business?

Many small redflags in the map of Chengdu seemed to have met before. Yes, that is the network of some chain giants, such as Suning, Gome, etc. 

Nevertheless, sitting in front of the reporter is the chairman of Hongqi Chain Cao Shiru, a forthright Sichuan lady, with a nickname: Hero Cao.

Cao Shiru, with keen business sense and courage, maximized the unnoticeable community supermarket, up to 4.957 billion of sales revenue in 2009. Currently, she intends to extend such experience into the community cinema. 

She said: “Our core competitiveness is the executive force. I focus on ideological and political education, so I integrate a high-efficient team.”

 “Previously, Hongqi Chain has been under development, so no attention was paid to the norm. But now we must lay more stress on the norm.” Cao Shiru said. 

1. Restructuring of Hongqi Chain

Cao Shiru had worked in the countryside. In 1972, she entered the state-owned enterprise Redflag Shopping Center with the post of bill management. Later, she had acted as foreman and director of Business Department. Thanks to her working ability and personality charm, she built a nationwide business network, which laid a solid foundation for her then supplier relation of Hongqi Chain.

In 1991, Redflag Shopping Center changed her department into a wholesale branch of Redflag Shopping Center, Cao Shiru acting as the manager. With the lapse of time, then retail market became relatively disordered. 

The deficiency of traffic and information communication and the rent-seeking space arising from the two-tier price system resulted in a flood of counterfeit and shoddy products and the distortion of product price. Moreover, most of retail terminals paid in arrears, which had been a headache for Cao Shiru. 

 “Then, my department was responsible for professional wholesale. Others got our goods without the ability of payment, so we failed to pay to the upstream manufacturers, which resulted in the chain debts.” Cao Shiru said. Once she made collections, the other side said in desperation: “Look! many people who are sitting here are asking for their salaries. We have not paid off for several months. What shall we do? Only a pile of shoes could be offset.” 

Disordered inner management of Redflag Shopping Center was contributed to her setting up a shop.

She said with an example: “In the original parent body (that is, Redflag Shopping Center), a dozen of divisions competed for nearly 1000 square meters, the same commodities were sold in the same market; in fact, it was a waste of resources.”

To a great extent, it was the epitome for the dilemma of then state-owned retail industry. 

 “Then state-owned retail enterprises were in the dock. Then retail industry failed to comply with the law of market economy; what’s worse, bureaucratism was relatively rampant.” Cao Shiru said. She was early aware of the evils arising from the failure to comply with the law of the market. In this case, an idea occurred to Cao Shiru who always seeks for opportunities initiatively, “We had a nationwide supplier network as well as such favorable conditions as storage, why didn’t we enter the communities and run the supermarkets towards the terminals?”

In 1996, the wholesale branch was converted into the first community supermarket in Liangjiaxiang Chengdu, with an area of less than 300 square meters and more than 4000 varieties of commodities. She renamed the store as “Hongqi Direct-selling Wholesale Market”, with view to telling the civilians that the commodities in this store were inexpensive, safe and convenient for purchase. 

 “Then Chengdu had no chain retail enterprise. Now that the civilians were inconvenient to buy something, and we had sufficient supply of goods, why didn’t we be close to the civilians to the greatest extent?” Cao Shiru said. It was my original idea for the chain community supermarket. In the first year, she opened 8 branch stores. In her words, “I feel pretty great!”

The locations of the stores were selected away from some golden zones. “Then, we had to build some stores at some ordinary places, for example, at the curbside, in the community, beside the factory. Or it was easy to meet with opposition by Redflag Shopping Center” she said. Over the next four years, more than 30 branch stores were opened in some communities away from the downtown area of Chengdu. 

As the saying goes that everything's hard in the beginning. Under the background of the planned economy, Cao Shiru’s practice in the marketization naturally incurred some strange eyes. 

For example, most of employees in the branch stores of Hongqi Chain no longer enjoyed the treatment of the workers in the state-owned enterprises. “Because they were some recruited laid-off workers, Redflag Shopping Center paid nothing to them. Their salaries were mainly paid by some accumulations, such as advertising, wholesale and rebates. They had lived amid scarcity.” Cao Shiru said with emotion.

 “Up to the year 1999, the original Redflag Shopping Center began to limit my expansion. At that time, we have expanded our stores up to 30, and absorbed nearly 900 employees, including more than 40 employees from the original state-owned enterprises. At this time, not to advance is to go back. Only through reconstructing can the enterprise survive.” Cao Shiru said. Then, the profit and payment for goods of the supermarkets belonged to Redflag Shopping Center, so it was very common for the parent body to occupy the payment for goods.

Cao Shiru thought that, although she contacted with the suppliers, Redflag Shopping Center collected the payment for goods; once the capital chain was broken, she had to take such consequence. She has been on pin and needles for this. 

In the middle of the year 1999, she made a report for reconstructing, but Redflag Shopping Center disagreed. Finally, such report was approved by then competent authority. 

However, the condition for the restructuring was harsh. 

Hongqi Chain must assume the debts of Redflag Shopping Center up to 11.80 million yuan, and the settlement fees of more than 40 employees of state-owned enterprises.

Hu Yaoming had been working at Redflag Shopping Center in charge of management of the distribution center since 1981. “Many people, including our family members, didn’t understand us, and thought that we would lose our statuses and welfare as the employees of the state-owned enterprise if we followed Cao Shiru. But we had confidence in her characters and her responsibility for the employees and the suppliers. We did believe in her working ability.” Hu Yaoming said.

In June, 2000, Hongqi Chain completed the reconstructing. In fact, it was not easy. “Then, we had no assets, and our stores and warehouses were rented. Fortunately, our suppliers were willing to support me.” Cao Shiru said. It benefited from her relationship network and trust accumulated during her working in the business department and the wholesale branch.

Hu Yaoming knew that most of people were down on the independent Hongqi Chain. Some even said that, without the resources and relationship network of the state-owned enterprise, Hongqi Chain was doomed to closedown within half a year. 

2. D’Long and “Two Hongqis”

In fact, the operation of reconstructed Hongqi Chain was not better than that the pessimists predicted. However, Cao Shiru who had worked in the retail industry for 28 years and had keen business sense was fully confident. 

Cao Shiru recalled that, it was so hard to pay to the suppliers for the goods. Without any assets, we had to run through the turnover of the goods, so we had a big pressure. Sometimes, we paid to the suppliers for the goods with the delay of 2-3 months. 

How to run Hongqi Chain on the right track? It was a primary question for the reconstructed Hongqi. To enhance the inner management was one of the breakthrough points. 

 “Before the reconstructing, I had been stressing on the inner management, and attempted the computerized management. After the reconstructing, the first thing I did was to implement the computerized management and build the complete computer system.” Cao Shiru said. The development of enterprise could not do without scientific management, that is, managing the enterprise with modern management mode. Firstly, it was efficient. Secondly, it was transparent.

After standardizing the management, Hongqi Chain accelerated its expansion. 

Shortage of capital delayed the occupation of market. At that time, Cao Shiru used franchising mode, for example, running nearly 200 franchised stores in some remote areas and surrounding areas of Chengdu city. 

 “To the extent when Hongqi Chain has formed scale operation, I set up a special group to streamline these franchised stores, because some non-standard operations influenced our reputation.” Cao Shiru said. By the end of 2002, Hongqi Chain has achieved the sales volume of more than one billion. 

Enhancing hardware, accelerating expansion and seeking partners were “three stages” of then Hongqi Chain”. 

Since 2002, Hongqi Chain started to contact with some large-sized enterprises. In March 2003, D’Long International entrusted an intermediary agent to tender the olive branch to Hongqi Chain. At that time, D’Long was in its prime in the capital market. 

D’Long International’s legal representative Tang Wanli came to Cao Shiru’s office and listened to her introduction about Hongqi Chain and her theories of business management for more than 3 hours. 

In July 2003, both the sides started the cooperation, D’Long International holding 70% Hongqi Chain’s equities from Hongqi Chain’s 2 original shareholders, and Cao Shiru and another shareholder holding 15% Hongqi Chain’s equities respectively. 

 “Then, D’Long urged me tightly, and I also felt their sincerity, so I agreed to cooperate with D’Long. I really hoped that Hongqi Chain grew stronger and larger. In the beginning, I placed my high hope on D’Long.” Cao Shiru said. 

In this equity transfer, Cao Shiru fully showed her courage and her resolution to be stronger and larger. “D’Long asked for holding, and I still acted as chairman and general manager. I felt no change, so I agreed.” Cao Shiru said. I was the soul of the enterprise irreplaceablly. 

According to her original idea, D’Long at least supported Hongqi Chain in management team and capital, but things went athwart. 

Soon, D’Long dispatched a 6-person team to Hongqi Chain. In her words, then Hongqi Chain had provided the best conditions as far as possible. Unexpectedly, such team was totally a poor one regardless of high quality. This team destroyed the normal operation of Hongqi Chain. For example, according to D’Long’s plan, Hongqi Chain was to develop several large- and medium-sized supermarkets in Chengdu in the coming years, which totally went against Hongqi’s principle of stable development. 

Then, D’Long asked for reciprocal guarantee between Hongqi Chain and another affiliated enterprise, with the guarantee amount of 50 million yuan, which was rejected by Cao Shiru firmly. “I put forward my reason that I knew my enterprise but could not know the opposite. I spoke to corporate cadres. In fact, it was obviously to exploit the loopholes of national financial system.” she said. Because the reciprocal guarantee was rejected by Cao Shiru, it had become a big headache for D’Long. Cao Shiru said: “I then felt that D’Long wanted to control this enterprise. One the one hand, D’Long controlled the cash flow. On the other hand, D’Long wanted to do other things. As a result, D’Long found that I was not the one to let things drift and to be controlled easily.”

In fact, after D’Long paid for the first-phase equity acquisition and completed the change of industrial and commercial registration, it went nowhere. According to the agreement, the agreement for the equity transfer was valid after paying for the second-phase and third-phase equity acquisition. With the outbreak of D’Long’s crisis, D’Long failed to perform the contract totally, so Cao Shiru tried every means to take back D’Long’s equities. 

Soon, original parent body - Redflag Shopping Center was also in trouble. 

 “In 2005, Redflag Shopping Center incurred debts up to 80 million yuan insolvently. Some old employees found me and hoped that I was able to take over Redflag Shopping Center.” Cao Shiru said. 

Then Redflag Shopping Center was chaotic in its inner management. For Hongqi Chain, it was not a good thing. “Redflag Shopping Center opened three branch stores, but the civilians wrongly viewed them as the same Hongqi. Coexistence of “two Hongqis” was her headache.” Cao Shiru said. If Redflag Shopping Center did some non-standard things, others would think that Hongqi did such things. For example, the consumer bought the goods in Redflag Shopping Center, but returned purchase in Hongqi Chain. 

Another background was that, since 2005, multinational retailers, such as Wal-Mart, New World Department Store, etc., were accelerating their expansion into the second-tier and third-tier cities. Foreign-funded retail industry and other domestic retail giants entered Chengdu to compete for the retail market, which brought Hongqi Chain the feeling of “two-front war”. 

Therefore, Cao Shiru was determined to solve the difficulty of the two Hongqis, so that Hongqi could deal with drastic market competition. 

Then, Redflag Shopping Center’s valuable asset only remained a stagnant business building in Yanshikou, Chengdu. Cao Shiru took over all, including more than 80 million yuan debts. 

 “Reconstructed Redflag Shopping Center since 2002 had more than 500 employees, among whom the employees who were willing to enter Hongqi Chain could be re-employed through training.” Cao Shiru said. In September 2005, Redflag Shopping Center was re-opened, with a part of stores positioning as the sales point of Sichuan local specialties, with an area of 1000 square meters, with daily sales volume of nearly one million yuan at the peak time and 200,000-300,000 yuan at the normal time. The rest area was rented. The upper floors of the building were used for Hongqi Hotel and Hongqi Theatre. 

After solving the difficulties of D’Long and “Two Hongqis”, Hongqi Chain entered a period of sound development and started to make profit. Since 2007, Hongqi Chain increased its annual sales up to 30%. “Currently, we open 100 new stores each year.” Cao Shiru said. 

During that period, Cao Shiru laid more stress on standardizing the development of the franchised stores. Since 2005, the original department responsible for the franchising converted its responsibility into streamlining the franchised stores. “We will no longer renew the contract with the non-standard stores. Moreover, we have purchased 6 franchised stores.” Cao Shiru said. If the operator in a remote place has strong responsibility and operation capacity, we still select the operator as our franchiser. 

Moreover, through years of development, Cao Shiru firmly believes that benefit is derived from management instead of scale. In her business concept, the sound management must be strict with strong executive force. 

The management includes two aspects: soft management and hard management. For example, Hongqi Chain’s suppliers may log in to inquire sale and storage of their own products in each store, and replenish supply of goods to Hongqi Chain actively. 

 “This can guarantee the transparence of management, and prevent employees’ illegal behaviors.” Cao Shiru said. In this way, we build mutual trust with the suppliers. 

In “soft management”, she lays more stress on the ideological education. Currently, Hongqi Chain has owned nearly 700 party members from only 3 ones in the beginning, and Cao Shiru has acted as the secretary of the party committee. Although the treatment in Hongqi is not the highest in the same industry, the cohesive force in Hongqi is the strongest. 

3. For “Hongqi”s Purity

Up to now, Hongqi Chain has owned 938 direct-sale stores, among which above 70% ones are distributed in Chengdu, Deyang, Neijiang, Mianzhu, etc. Hongqi’s rapid development attracted great attention from social capitals. 

In 2009, the accounting firm auditing for Hongqi Chain advised Cao Shiru to be a listing company. “What are the reasons for being the listing company? What are the advantages for being the listing company? In truth, I didn’t figure it out at that time.” Cao Shiru said. 

However, I soon accepted the accounting firm’s advice. The great development of the enterprise can’t do without the financing through the company listing. It is time for Hongqi Chain to be the listing company. Subsequently, accountant, lawyer, broker, etc. came in. 

Up to last June, the whole institution and teams run normally. At this time, Cao Shiru was upset. “I thought that Hongqi was not ready for being the listing company.” As a result, all the preparations for the company listing were suspended. 

 “I felt that I was not ready for the state of development after being the listing company.” Cao Shiru said. Firstly, if Hongqi Chain needed high-speed expansion, the management team was not well-reserved. Secondly, then Hongqi Chain could maintain stable expansion with the monthly profit, nearly10 million yuan. 

Nevertheless, two things soon changed her mind. 

At the end of last year, some managerial personnel with the background of the retail industry contacted with Cao Shiru and hoped to join in Hongqi Chain. “After they entered Hongqi Chain, I placed them in some important posts according to their personal abilities. Currently, they have done very well.” The management team brought her confidence. 

Another thing was the admission of new strategic investors. 

In fact, since 2007, with the booming of the capital market, some domestic and overseas equity investors, such as Goldman Sachs, Morgan Stanley, etc., contacted with Hongqi Chain, and hoped to be Hongqi Chain’s shareholders, but Cao Shiru refused. 

According to some institutions, the retail industry in Midwest China is facing some great opportunities. 

According to Minsheng Securities’s report on the retail industry, in terms of the growth rate of economy and the total retail sales of consumer goods, during “the 11th Five-Year Plan”, the growth rate in Midwest China is quicker than that in the eastern coastal areas, the growth rate in the second-tier cities is quicker than that in the first-tier cities. Such tendency will be sustained during “the 12th Five-Year Plan”. “The 12th Five-Year Plan” will boost the transfer of the labor intensive industry towards the Midwest China. Expansion of regional employment and acceleration of urbanization will boost the rapid growth of regional economy and consumption.

In Cao Shiru’s opinion, the word “Hongqi” determines that its partner should not be an overseas-funded enterprise, that is, Hongqi Chain should not be a Sino-foreign joint venture. It is a matter of principle. She always wants to develop Hongqi Chain into a pure national brand. “If Hongqi Chain is controlled by foreign-funded institutions, I could do nothing about it”. 

Secondly, for the state-owned investment institution, she thinks that the state-owned system, without the flexibility of privately-owned enterprise, needs to consider too much factors. The retail is a strongly-competitive industry. I fear that the inflexibility of the system will bring the enterprise the development bottleneck. 

At the end of 2009, Jiuding Capital and “SMEs Board First Stock” NHU began to contact with Hongqi Chain respectively, and reached the investment agreement in the first half of this year. Cao Shiru disclosed that total investment of the two investors reached 330 million yuan, holding the shares of more than 10%. The investment volume announced by Jiuding Capital was 150 million yuan. In May 2010, Chengdu Hongqi Chain Co., Ltd. was established, and Cao Shiru acted as chairman and general manager. 

 “I think that they are very professional and down-to-earth, and are identified with Hongqi’s culture and my team, so I accept them.” Cao Shiru said. Next year, new stores in the community supermarket will reach 200-300. 

With the admission of venture investment, the company listing is taken into consideration again. After the Spring Festival this year, all the preparations for the company listing continued. 

Cao Shiru thinks that Chengdu is building the garden city to realize urban-rural integration, and various communities are on the increase, so Hongqi Chain will continue the route of the community supermarket. 

Macroscopically, the supermarket will benefit from the structural adjustment. “The adjustment of urbanization and income distribution will increase the consumption of residents, especially low-income residents on necessities, thus promoting the development of the supermarket industry.” A retail industry analyst from China Merchants Securities said. 

Since this year, Hongqi Chain has begun the adjustment of the development strategy. 

At the end of September this year, Hongqi Chain is to open 6 Hongqi 24-Hour Convenience Stores along Chengdu Subway Line 1. According to Hongqi Chain’s plan, the 24-Hour Convenience Stores are arranged as far as possible in the stores with relatively-strong night consumption ability in the downtown area, and the number of the stores is possibly up to 50. 

 “In reality, the night life in Chengdu, after all, is not as good as that in Beijing, Shanghai, etc., so it is not necessary to run for 24 hours, most of stores need to adjust the closing time to 24:00.” Cao Shiru said. 

The hypermarket is also Cao Shiru’s next conception. 

Up till now, Hongqi Chain has purchased 2 hypermarket stores. She thinks that, thanks to the change of the pattern of the retail industry, without the hypermarket, it is doomed to fall behind. 

Moreover, the group purchase is very popular now, with a relatively-high proportion. Although Hongqi Chain has realized on-line shopping early, but such channel determines the necessity of the hypermarket. Cao Shiru said, “Or the customers take the coupons to purchase rice and oil in Hongqi Chain, how much do they consume? Who is willing to purchase sauce through on-line shopping?”

She thought that the community supermarket store is too small to perform a big promotion, while the hypermarket is easier to perform sales promotion. 

 “So we must break through the bottleneck of the hypermarket. I do believe that Hongqi Chain is certain to compete with the overseas-funded enterprise. If we never break through, Hongqi Chain never realizes its great development.” Cao Shiru said. 

 “The admission of new investors will accelerate our development. We are to build the third logistics distribution center.” Cao Shiru said. For the prevailing trans-regional operation of the retail industry, she holds different views. 

Currently, Hongqi Chain has no trans-provincial development plan. Its target is to be a regional leading enterprise. “The trans-provincial management will be in trouble. If the trans-provincial management is out of balance, it is very easy to form various spheres of influence. Finally, Hongqi Chain loses its united essential management.” Cao Shiru said.

In 2003, then Hongqi Chain opened a first provincial trans-regional store in Neijiang. Thanks to chain operation, the price of commodities should be kept the same. As a matter of fact, the cost of Neijiang’s branch store got increased sharply. 

Cao Shiru disclosed that, with the increase of stores in Deyang, Mianzhu, Neijiang, etc., the cost got reduced slightly. The overall benefit in such regions is not as good as that in Chengdu, but it is no problem to maintain normal operation. 

In the interview, Cao Shiru was not willing to talk about “factors of success”. In her opinion, whether chain or other industries, the most important thing is the starting point, that is, “to hold the mindset of serving the people and avoiding unemployment of employees”. Such starting point will make you work hard happily.”

Xie Yu is a senior store manager in Hongqi Chain. In 2000 when she laid off from a state-owned enterprise, she came to Hongqi Chain. 80% Hongqi’s ordinary employees are vulnerable groups, such as laid-off workers, peasant-worker, etc.

 “We provide our ordinary employees with ‘five social insurances and one housing fund’, and 80% managerial personnel are promoted from the grass-roots units.” Xie Yu said. 

As far as the standardization of chain operation is concerned, there are 8,000 varieties for above 500m2 branch stores and nearly 3,000 varieties for 100m2 branch stores; moreover, placement of goods shelf and commodities on the goods shelf should be specified uniformly. 

4. “Bursting” into Community Cinema

Inconvenience of seeing a movie and expensiveness of cinema ticket are two major reasons for Cao Shiru to run the cinema. Essentially, it is an extension of thinking the commercial development from the perspective of the civilians. 

One day in summer of the year 2009, Cao Shiru who rarely enters cinema was free and at leisure, and invited one of her friends to see a movie. As a result, she was told that the movie she wanted to see has been off-line early.

 “I think that any movie that the audiences want to see should be seen in the cinema at any time.” Cao Shiru, who knows a little about the movie industry, was surprised at the high price of the cinema ticket, up to 50 yuan, even 100 yuan.

Her habit of watching the news also brought Cao Shiru some inspirations about movie.

The frequent news report that the box office revenue of a hot movie broke through 100 million yuan always touched Cao Shiru’s nerves. Then, she knew a little about the composition of income behind the box office, so she asked her friends for details. 

Taking 100 million yuan box office as an example, if the ticket price is computed by 100 yuan, there are 1,000,000 movie viewers. “So little movie viewers, 100 million yuan box office, it is not unusual. I think that it is not worth boasting.” Cao Shiru said.

She calculated in other way. If the ticket price is 20 yuan, and 100 million out of 1.3 billion people enter the cinemas, the box office revenue is 2 billion yuan. Then, an idea to bring movies into communities has occurred to her, but it was merely a simple calculation, without any in-depth thought about its business logic.

Facts have proved that opportunities are always for those who are fond of thinking. 

In March this year, on an awarding ceremony held by Chengdu’s local media, Cao Shiru and Han Sanping chairman of China Film Group Corporation exchanged their business cards, without any in-depth conversation. 

In May, when Han Sanping came to Chengdu again, they had an opportunity of further contact. Then, Cao Shiru took out a map with the signs of Hongqi branch stores to Han Sanping. She thought that a thousand of chain stores were just a good platform for the community cinemas. Once the cinemas go well, the cinema and the neighboring supermarket can benefit from each other in the customer flow. In this meeting, both fit in easily with each other. 

On June 20th, Hongqi Cinemas and China Film Stellar Theater Chain affiliated to China Film Group Corporation signed the strategic cooperation agreement with the contract term of 10 years, China Film Group Corporation providing the staff training and film source. Subsequently, both made the preparations busily. 

However, not all the stores can be built the cinemas. There are two major restraining factors: floor height and area. 

 “Some of stores have no enough floor height and too small area. The area is at least nearly 2000m2. I couldn’t run the cinema instead of the store. No more than 10 stores out of current stores can meet such conditions, but we will select the proper new location for new store.” Cao Shiru said. For example, we have spent 28 million yuan in more than 1700m2 store: 300m2-500m2 for the supermarket and the rest for the cinema.

On October 13th, Hongqi Chain Convenient Digital Cinema First Community Cinema - Hongqi Cinemas (Chaoyang) was officially opened with the ticket price of 15-35 yuan. Next year, Hongqi Cinemas is to build 50-100 halls. 

Moreover, Hongqi Cinemas is to cooperate with Sichuan TV Station to shoot a 30-episode legendary and historical teleplay – Jinsha. This teleplay, with two dynasties of the ancient Shu State - Jinsha and Yufu as its historical background, artistically reproduces the historic features of Sanxingdui civilization and Jinsha civilization of the ancient Shu State. Cao Shiru acted a part in the teleplay.

Xie Yu told the reporter that the supermarket that he works is promoting, that is, giving the customers cinema coupon according to amount of shopping. “Upon opening, if you make a purchase over 50 yuan, we will give a 5-yuan cinema coupon. The price of the cinema ticket is originally lower than that in the counterparts.”

In Cao Shiru’s opinion, to enter the movie industry, it is a commercial behavior as well as her hobby. 

 “It is of great significance for you to realize what you want. With rich imagination, I am writing screenplay in my free time. Now, we have had a music movie screenplay reflecting the love story of Liangshan minorities. We will shoot the screenplay into a movie as soon as possible. Moreover, I am conceiving a screenplay on modern commercial war, and want to shoot it into a movie.” Cao Shiru said.