Retail Business Review noted a typical phenomenon in 2023: hypermarkets had a tough time, but discount stores emerged as a new force, and warehouse membership clubs accelerated store openings. As 2023 draws to a close, China's retail industry is caught in a tide of low-price and discount competition. First, e-commerce platforms are waging a "low-price" war. This was evident during this year's Double 11, with major platforms all pushing "low prices." Jack Ma proposed a return to Taobao, suggesting the opportunity lies with Taobao rather than Tmall. JD.com also played the low-price card, launching channels like "100 Billion Subsidy." In the supermarket sector, leading players have joined the discount wave. Hema has vigorously promoted its discount transformation, with Hema Outlets accelerating store openings, and Dingdong Maicai also exploring outlet stores. German discount supermarket ALDI plans to continue opening hundreds of stores in China, with the potential for 500-600 stores in Shanghai alone. In the snack sector, discount snack stores have blossomed nationwide this year, with branded stores clustering. It's estimated that by 2025, the number of snack discount stores could reach 30,000. This has also spurred established snack players like Three Squirrels and Bestore to cut prices to survive. Another format is membership stores, where established players are accelerating openings. Sam's Club expects to open 6-7 new stores annually, and Hema X Membership stores have reached 10. Competition among membership stores is fierce, with the "price war" between Hema X and Sam's Club trending on social media this year. According to Kantar Worldpanel's "2023 China Shopper Report," China's FMCG sector saw moderate recovery in the first three quarters of 2023, with consumers increasingly interested in health, cost-effectiveness, and unique products. The report also noted that hypermarkets' market share continued to decline, with some chains even closing underperforming stores. However, warehouse membership clubs within the hypermarket format achieved strong growth of 58%, driven by increased shopper numbers and purchase frequency. "The rise of discount stores further proves that rational consumption dominates in the current consumer environment. The popularity of membership stores reflects strong demand for innovative, cost-effective, and private-label products. This poses greater challenges for traditional supermarkets. Competition in the retail market will intensify across the board next year."
Discount Stores: Will Become One of the Main Retail Formats From a consumer market perspective, consumers are increasingly rational, shifting from impulsive to rational consumption, with cost-effective products becoming the top choice. According to iResearch's "2023 China Consumer Insights White Paper," more consumers are adopting or approaching the quality of not being impulsive when purchasing. They give themselves a cooling-off period to carefully evaluate whether a product is worth buying from multiple dimensions, avoiding impulsive purchases. When a product exceeds their budget but truly matches their preferences, nearly 60% of consumers wait for a price drop, and 26% choose moderate consumption, paying for love. "For daily consumer goods, I used to buy whatever I liked without thinking, but now cost-effectiveness is the priority. Comparing prices across multiple platforms has become the norm," a typical office worker told us. Rising price sensitivity has driven the rapid development of the discount store market. According to a report by China Puhua Industrial Research Institute, the discount retail market size reached 1.62 trillion yuan in 2021, with a CAGR of 4% over the past five years, and is currently in an expansion phase. From the merchant side, to meet consumer demand for discounts, more supermarkets are venturing into discount stores. Take Hema as an example: in October this year, Hema began implementing a new procurement model, launching a "discount" transformation to enhance price competitiveness. Prices of over 5,000 products in Hema Fresh offline stores were reduced, with multiple categories offering "offline exclusive prices," generally lowering prices by 20%. Hema officially announced that this is not a short-term promotion but a long-term strategy, planned to cover over 350 stores nationwide. In the future, the discount reform will extend online. It's reported that Hema's "discount" approach primarily reduces costs through vertical supply chain construction. In the future, Hema's fresh products division (including aquatic, meat, poultry, eggs, fruits, vegetables) and finished products division will both undergo vertical supply chain construction. The fresh division will focus on bases, while the finished products division will focus on factories. Hema's Hou Yi emphasized that the discount business model is underpinned by vertical supply chains. "Our private brands and OEM/ODM procurement systems are all part of this model; we are prepared to completely abandon the original KA model." Moreover, Hema is vigorously developing its Outlets system, transitioning from soft discounts to hard discounts. Since entering in October 2021, Hema Outlets have penetrated more communities. In November this year, Hema revealed that Hema Outlets has over 60 stores in Shanghai and will soon reach 100. It's clear that Hema has stamped its label on the "discount" card. However, many players are following suit, with more supermarkets joining the discount wave. For example, Yonghui Superstores has added "authentic discount stores" in its stores nationwide and simultaneously set up discount sections on its online app/mini-program, offering surprise discounts on food and daily necessities. It is replicating and embedding this model extensively in its stores, which, while driving foot traffic, poses new challenges for long-term cost control. Wumart opened its first discount store "Meitao" in 2022; Pangdonglai also opened a "wholesale market." Additionally, Jiajiayue, Huaguan, Renrenle, and other supermarkets have explored discount store models. Recently, Dingdong Maicai launched "Dingdong Outlets," leveraging its existing supply chain and product development capabilities to test the community supermarket format. The author observes that the discount store format is not new; it has been validated in markets like Europe, America, and Japan. Discount stores have also been proven to be the ultimate competition in retail formats. For the Chinese market, it can be judged that discount stores are in the early stages of development, but the market size is expanding, consumer price sensitivity is increasing, and discount stores are ushering in a wave of growth.
Several points: Traditional supermarkets are transforming, with mature product supply chains and logistics systems; discount stores must also meet increasingly diverse demands. Discount stores are beginning to focus on online-offline integration to enhance brand exposure, while online channels provide greater market coverage. Local discount merchants are rising. Some local discount merchants are gradually emerging in the market by continuously improving services and optimizing product structures. Through localized operations and understanding of local consumer needs, they have gained certain competitive advantages.
Currently, besides traditional supermarkets exploring or developing discount models, many niche discount stores are also rapidly rising. Examples include Haote Mai and Hi-Top, which focus on clearance goods; snack discount players like Haoxianglai, Snacks are Busy, and Snacks Youming. Take Haote Mai as an example. Since opening its first store in April 2020, Haote Mai has grown to 720 stores in just a few years. Each year, 100,000 SKUs enter its warehouses. Final pricing is entirely determined by AI, which can set prices based on predicted product turnover rates and current category gaps in stores. "I don't think innovation is a failure, because we've found that products that don't sell well in traditional channels sell exceptionally well at Haote Mai. So channels like Haote Mai are needed to help digest these products," said founder Zhang Ning. The author believes discount stores will continue to expand rapidly. Through cost-effectiveness advantages, the discount store model can gather a significant portion of specific consumer groups. It is also moving towards differentiation and innovative products. Discount stores will gradually become one of the mainstream formats. However, building a discount retail business is not easy. For example, it tests retailers' vertical supply chain capabilities. To fully integrate the entire supply chain, a sufficient base of store numbers and turnover capabilities is required to gain bargaining power in the supply chain.
Membership Stores: High-Speed Opening Period, Market Far from Saturated Let's discuss the second format: membership stores. A current phenomenon is that traditional hypermarkets are in dire straits, with major chains closing stores, while membership stores are experiencing a boom in openings. Costco has opened 5 stores in mainland China: Shanghai Minhang, Shanghai Pudong, Suzhou, Ningbo, and Hangzhou, with a Shenzhen store opening in January next year. Adding the Nanjing store, Costco will have 7 stores by mid-next year. Its old rival Sam's Club is opening stores even faster. Walmart China's WeChat account recently revealed that Sam's Club currently has 46 stores in China and expects to open 6-7 new stores annually. Sam's Club has maintained its competitive advantage in the market, with stores in 25 cities nationwide. Sam's Club China President Andrew Miles previously stated that Sam's Club is developing well in China, with positive member feedback, giving it great confidence in future growth. Today, the membership store model is accelerating in China. Sam's Club, Metro, and Costco are speeding up, while Hema X Membership Stores, FUDI, and RT-Mart's M Membership Stores have also joined the race. According to RT-Mart's interim results for fiscal year 2024, as of September 30, 2023, RT-Mart had 485 hypermarkets, 19 mid-sized supermarkets, and 1 M membership store. Among them, M Membership Store opened its first store in Yangzhou in April this year, with nearly 100,000 paid members by the end of the reporting period. In the second half of fiscal 2024, two self-owned stores in Nanjing and Changzhou will be converted into M membership stores. RT-Mart's Lin Xiaohai stated that they will open more than 15 M membership stores within three years. "For the membership store model, I didn't set profit targets for the team in the first year, only two indicators: member count and renewal rate. In fact, we don't plan to make a profit from the membership store model within three years." Membership-based supermarket Metro has also opened 24 membership stores in less than two years, with nearly 5 million members, and paid member growth exceeded 50% last year. It continues to evaluate market conditions in various Chinese cities to expand membership stores opportunistically. Hema X Membership Stores, a representative domestic player, has reached 10 stores in Beijing, Shanghai, Nanjing, Suzhou, and other cities. Hema X's first store opened in Shanghai in October 2020, and within three years, it has nearly 3 million paid users. According to iiMedia Research data, the warehouse membership supermarket market size in China has remained above 200 billion yuan from 2012 to 2022, with a 10.1% year-on-year increase in 2022, reaching 335.0 billion yuan, and is expected to reach 387.8 billion yuan in 2024. The industry is expected to continue growing driven by numerous market participants. Where will the next competition be? We believe from several points: first, supply chain. Membership stores have few SKUs, typically around 4,000, with very few SKUs per category. 5%-10% of product types must meet the needs of the vast majority of members. Therefore, the selection of each product is a strong test for procurement. "Going upstream in the supply chain is very difficult. It requires coordination among multiple upstream suppliers. But the advantage is that as exclusive products, they enhance member value, which is unique. For suppliers, once a product becomes a hit, sales are very stable," a retail supplier we consulted said. Sam's Club focuses on specific single products, and procurement is not simply about introducing products but also using member insights, its own experience, and cooperation with suppliers to launch new products. Costco also adopts a strategy of ultra-low SKU + scale procurement + strict selection, keeping only 2-3 cost-effective products on shelves. By optimizing SKUs to the extreme, it gains competitive advantages through bulk purchasing. Another key point: previously, membership stores relied heavily on offline stores, but now instant retail is also a competitive chip. According to our observations, instant consumption has become a major trend, testing merchants' cloud warehouse density and their own or third-party instant delivery capabilities. Of course, membership stores ultimately serve members, and performance is measured by member metrics. The race for market share among membership stores will intensify over the next 2-3 years, with overall member numbers surging in the short term. For membership store operators, improving member repurchase rates and loyalty will be hard indicators.