Hard discounts in snack foods have made a strong start to the supply chain revolution, but the climax awaits large-scale breakthroughs in private labels by mainstream retailers. There is a time gap between the two; who will take the baton from snack food hard discounts? In 2024, emerging retailers leveraging white-label hard discounts may become the next highlight. Hard Discounts Will Not Stop Once the hard discount train starts, it will not stop until it becomes the standard in the business world. However, the stages and pace of sustained breakthroughs are hard to grasp. In Europe and the U.S., hard discounts originated during business cycle peaks, expanded rapidly during troughs, and eventually became a business model that transcends cycles. The development of hard discounts in China is timely. The 60-year history of hard discounts in the West may be condensed into about 10 years in China. Compared to the soft discounts that once prevailed in Chinese KA channels—small-scale, with petty favors—hard discounts go all the way, eliminating the clever but soft discount space of brand owners and directly forcing them to reveal their price bottom line. Compared to the internet's "money-burning" low-price model extended offline, hard discounts will turn such burning into a bottomless pit, making it unsustainable. Behind hard discounts is a supply chain revolution that affects all business systems. The supply chain revolution is the cause; hard discounts are the effect. This retailer-led revolution will impact contract manufacturers, brand owners, and distributors, improving supply chain efficiency to offer consumers extreme cost-performance. In this era of supply chain revolution, no business can remain unaffected; they can only choose to participate actively or be swept along. And since it is called a revolution, those who do not participate will be "revolutionized." 2023 is called the first year of the supply chain revolution (hard discounts), and it was hot in the snack food category. In the roughly 10-year cycle, will snack foods continue to be hot in 2024? Will other categories take over the baton? 2024 will be extremely critical. For the advancement of hard discounts in 2024, there are four key points:
First, snack food hard discounts enter the knockout stage.
Second, white-label hard discounts may be a new highlight.
Third, hard discounts gradually penetrate from the commercial fringe to the mainstream.
Fourth, when the "second shot" of the private label supply chain revolution is fired becomes key. Snack Food Hard Discounts Enter the Knockout Stage Snack foods fired the first shot of the supply chain revolution, which was both unexpected and reasonable. First, snack foods have high distribution margins and have traditionally been a major profit category for distributors and retailers. Using snack foods as a breakthrough for hard discounts indeed creates a huge price contrast. Without a significant price contrast, hard discounts would not be hard enough or hot enough. Second, snack foods are a long-tail category with few leading brands. Because it is a long-tail category, consumer brand loyalty is not strong. Direct supply from brand owners is relatively easy for long-tail categories. E-commerce breakthroughs also started with long-tail categories. Third, snack foods are a high-frequency category. There are many long-tail categories, such as groceries, condiments, and frozen foods, but few are as high-frequency as snack foods. China also has major snack food consumption provinces, such as the southwestern provinces, Hubei, and Jiangxi, providing a consumer base for market breakthroughs. These reasons determine that snack foods are indeed suitable for firing the first shot of hard discounts. However, it must also be recognized that it is very difficult for snack foods to be made into retailer private labels, and the overall scale of snack foods is limited. It is unrealistic to expect snack foods to sustain breakthroughs in the supply chain revolution. Therefore, snack foods are unlikely to continue playing a flagship role in the supply chain revolution, which is characterized by private labels. In my opinion, the leading enterprises in the snack food hard discount track have basically taken shape, and in 2024, market share will rapidly concentrate among the leaders. At the same time, it is possible that snack food hard discounts will extend to comprehensive discount tracks. In 2024, in the snack food hard discount track, there may be enough 2B news, such as mergers and acquisitions, but few 2C actions, because the space for snack food hard discounts has been largely released at once. Hard Discounts' Penetration from Fringe to Mainstream Is Uncertain The popularity of hard discounts is roughly related to three business events. First, the introduction and popularity of Costco and Sam's Club. These American hard discount models have indeed inspired some Chinese retail professionals, but they have few outlets and are concentrated in metropolises. So, mainstream Chinese retail may have been inspired but not acted, as these are whole-system transplants from abroad, making it difficult for Chinese retailers to learn from them. ALDI and Biedronka, which recently announced closure, only influenced some industry insiders without generating imitation. Second, Hema's hard discount model transformation. Whether it's Hema's "Mountain Moving Price" or its large-scale SKU reduction, as well as its private label share of up to 40%, these are standard actions of the supply chain revolution. Hema's "high-profile, low-price" actions have significant influence. Moreover, as a local Chinese enterprise, Hema can achieve standardized supply chain transformation, so local enterprises can too. Third, snack food hard discounts. This was the hottest business event of 2023. It was snack food hard discounts that fired the first shot of hard discounts. Because snack foods have sufficiently large distribution margins, the space for hard discounts is also large, and the franchise model has accelerated the expansion of snack food hard discounts, making it the most important marketing event in promoting hard discounts. But now it is hard to find categories with such high distribution margins and high consumption frequency as snack foods. Snack foods are an important source of retail profit for many wholesalers, distributors, and grocery stores, and even significantly impact supermarket margins. Therefore, it is no exaggeration to say that snack food hard discounts have the greatest impact on the supply chain revolution. What has been discussed above is still in the commercial fringe, not the mainstream. What does it mean to move from the fringe to the mainstream? I think three conditions must be met:
From a single category to full categories. Snack foods are just a single item; 2. From multinational demonstration to successful localization of Chinese business models;
From special formats to mainstream formats like hypermarkets and supermarkets. Currently, Le'erle and Jinbaibai can be considered emerging mainstream formats. As new stars in retail, they are also comprehensive formats. As benchmarks for white-label hard discounts, their performance in 2024 is worth watching. There are three major difficulties in hard discounts penetrating comprehensive mainstream formats. First, besides snack foods, it is hard to find more high-frequency long-tail categories. Therefore, the supply chain revolution must enter its core stage, namely retailer private labels. Only through private labels can most categories have huge hard discount space. Direct supply from brand owners cannot solve the discount space for most categories. Second, the difficulties of hypermarkets and supermarkets are not yet enough to force them to fight to the death. Self-revolution is hard, and so is the supply chain revolution. Although retail is struggling, it is not yet at the point where survival is impossible without a private label revolution. Third, retailers need new organizational systems and functions to do private labels. Private labels are not just changing labels; retailers must take on some functions previously performed by brand owners, such as product development, marketing, quality control, and logistics. This transformation is as difficult as changing roles from Party A to Party B in the supply chain system. When there is a lack of new categories to sustain the heat, and private labels require a longer cycle, hard discounts in 2024 may not have highlights like snack foods, but the accumulated energy before the private label explosion, as well as white-label hard discounts, may take over the baton. The Three Waves of the Supply Chain Revolution The big explosion of the supply chain revolution must be seen in the progress of private labels. Only private labels can provide the hard support for hard discounts. For consumers, hard discounts mean super cost-performance: same quality, lower price. Low prices come in many forms, but not all low prices are hard discounts. Money-burning low prices are not hard discounts, promotional prices are not, loss-leader pricing with big brands is not, and low prices for generic brands are not. Only long-term, sustainable high cost-performance is a hard discount. In the face of the supply chain revolution, low price is an ability that is hard to imitate, not a strategy that can be copied. When I proposed that snack food hard discounts were the first shot of the supply chain revolution, I had in mind the second and third shots. The supply chain revolution is divided into three stages, which I call the "three shots" of the supply chain revolution.
First shot: Direct supply from brand owners, bypassing distributors. This is the prelude. Second shot: Retailers find contract manufacturers to make private labels, bypassing brand owners. This is the climax.
Third shot: Retailers directly open factories, bypassing contract manufacturers. This is the peak. The "three shots" constitute the three waves of the supply chain revolution. From the above, the supply chain revolution is about bypassing three major supply chain links three times. First bypass distributors, then brand owners, thereby shortening the supply chain to improve efficiency and save costs, resulting in true hard discounts. In the face of such hard discounts, any low prices generated by burning money will become a bottomless pit, and any tricks with low prices are like child's play. Why does the supply chain revolution need "three shots"? See the following data: In the book "Procurement Management and Operational Practice" written by the PSCC Procurement and Supply Chain Experts team, it is mentioned that under normal circumstances, negotiating price reductions with suppliers can only bring 5%-10% cost savings; streamlining processes and transaction informatization can reduce management costs by an estimated 10%-20%; and 70%-85% of cost optimization space comes from technology R&D, marketing, and consumer services. The above data clearly shows how much discount space each bypassed supply chain link can bring. Without supply chain transformation, soft discounts can bring a 5%-8% discount space. Clearly, this is the price space for soft discounts. Bypassing the distributor link with direct supply from brand owners can bring a 10%-20% discount space. Still, the discount is not hard enough. Only when retailers do private labels can they bring a 70%-85% hard discount space. Only then is it a true hard discount. Different categories have different hard discount spaces at different stages of supply chain transformation. For long-tail categories, the discount space from direct brand supply is relatively large. Snack foods are an example. They can easily become hot in the short term. But in the FMCG field, long-tail categories are not many. Therefore, after snack foods, hard discounts lack new categories to enter. For categories with high industry concentration, the discount space from private labels is relatively large. Most FMCG products fall into this category, and overall supply chain transformation needs breakthroughs in these categories. According to media reports, Hema's private label share has exceeded 40%, with rapid progress. Based on this, I judge that building private labels is a matter of determination, not method. As for categories where retailers build their own factories, they are relatively few and can be ignored for now. Breakthroughs in private labels involve internal interests, organizational functions, coordination between headquarters and stores, and coordination between commercial flow and logistics. These cannot be solved without strong determination. White-Label Hard Discounts May Be a Highlight Based on the above analysis, several conclusions can be drawn: First, in 2024, hard discounts lack category highlights. After snack food hard discounts, it is hard for new categories to take over and create highlights. Without new highlights, the market lacks momentum. Second, fringe formats will continue to impact, and white-label hard discounts may be the highlight of 2024. Without new categories to take over, no major moves from mainstream formats, and private label breakthroughs taking time, the most likely to take over the baton are white-label hard discounts from emerging enterprises. Fringe formats lack scale, so they cannot negotiate with well-known brand owners (direct supply) nor afford private labels. But in recent years, the prosperity of Chinese manufacturing has given birth to a new model: the white-label model. Whether it's regional community group buying that is performing well or innovative retail enterprises claiming hard discounts, most have achieved good results through the "big brand low price + white-label hard discount" model. Le'erle and Jinbaibai roughly fall into this category. What is a white label? A white label is not a well-known brand, nor a retailer's private label. Currently, white labels have several sources: First, long-tail categories. Except for a few brands, long-tail categories are mainly white labels. They used to radiate through wholesale markets without core distributors. Snack foods are now entering hard discounts as white labels; besides that, condiments and frozen foods are also examples. Second, fresh produce. Fresh produce used to have long supply chains, especially suitable for supply chain transformation. Third, low-end standard products. For example, in the dairy sector, a batch of emerging dairy companies have adopted direct supply models. Fourth, daily necessities. Daily necessities have never had big brands and used to be wholesale. Now there is no barrier to direct supply.
Fifth, online brands entering offline. From e-commerce to offline direct supply, this can be a transition for online brands to go offline. At the same time, the price system conflict between e-commerce and direct supply is not that great. White-label hard discounts are currently a good model for extending from snack foods to comprehensive categories, and also a good transitional model before private labels rise. White-label hard discounts indeed have a huge price contrast because white labels have no marketing costs and adopt factory-direct supply. As long as retailers are strict in product selection and solve quality control issues, with big brand low prices attracting traffic, it is possible to solve the quality endorsement problem. By the way, because snack foods are a long-tail category, the early participants in snack food hard discounts were mostly white labels, and only later did many well-known brand owners passively participate. Before the private label explosion, white-label hard discounts breaking through first may be another major phenomenon-level business event after the e-commerce white-label explosion. The e-commerce white-label explosion was mainly because e-commerce solved two consumer concerns about buying white labels: first, "seven-day unconditional return" resolved worries; second, user review systems resolved quality and credibility perceptions. With the precedent of e-commerce white labels, perhaps China's supply chain transformation will take a different path from Europe and the U.S. Third, private labels are in the preparation stage before the explosion. Breakthroughs in comprehensive mainstream format supply chain transformation mainly depend on whether private labels take shape. For private label breakthroughs, method is not the issue; determination is key. When mainstream formats will make up their minds is hard to predict. Perhaps a breakthrough by a few iconic enterprises will trigger imitation. Or, the continued downturn in retail may force the industry to fight to the death. Whether or not there are major events in the supply chain revolution in 2024, the revolution is already on the string. Method is not the issue, benchmarks are not the issue; the determination of mainstream retail formats is key. In 2024, even if there is no big explosion in supply chain transformation, it is preparing for one. On March 15, in Chengdu, the "Second China FMCG Hard Discount Conference" will be held, where discount retail founders, brand executives, distributor owners, traditional retail enterprises, and industry research experts will gather to focus on core hard discount issues and examine new directions, new thinking, and new opportunities in the discount era. We look forward to your arrival! On March 16, a closed-door meeting on hard discounts will be held: Hard Discount Models and Operations, with one-on-one discussions with expert teachers, sharing experiences, and discussing dividend opportunities in the hard discount era! During the three-day conference, centered on the theme "Supply Chain Revolution," in addition to the Second Hard Discount Conference, there will also be a main forum, a China FMCG Distributor Conference, more than ten sub-forums and closed-door exchange meetings, and the first major debut of the [Extreme Supply Chain] Brand Factory Direct Procurement Fair, which will meet with thousands of FMCG brand owners, distributors, retail transformers, and industry service providers from across the country in Chengdu, for continuous brainstorming, to jointly discuss the challenges and opportunities, changes and solutions in the era of supply chain revolution. In this era of supply chain revolution, a new business era will be born. I hope every participant will still have a place in this wave, and I believe this will be a conference worth attending! For business cooperation, please contact: 🔺Scan code for ticket consultation🔺