01 Almost all hard discount stores succeed through simplicity and scale. Germany's Aldi is a typical representative of hard discount, dominating the market through simplicity and scale. In contrast, discount stores in China are diverse, with some even running 'cutting leeks' (scamming) projects under the guise of discount stores. In the view of Hu Chunlong, an investor at M31 Capital, most current discount store projects are overly focused on individual consumption scenarios. The sourcing and product organization are basically centered around categories like leisure snacks and internet-famous products, and they even engage in same-city lifestyle advertising or, if not, they still receive some support from same-city lifestyle traffic. This doesn't resemble a community-based format. "We believe that a community-oriented discount store is more suitable for the current domestic market," Hu Chunlong told Lingshou. A purely community discount store can serve residents' three-meal needs and also satisfy some consumers' leisure-related needs, with the richness of scenarios gradually increasing. "The product category structure should ideally look exactly like a hypermarket, a typical grocery store format," Hu Chunlong further described such a discount store: a standard discount store is a 'grocery store' that has been open for over a decade and can continue to operate. It meets the most basic needs of surrounding community residents, with relatively stable products but excellent prices and cost-effectiveness. "The overall consumption efficiency is very high," Hu Chunlong emphasized to Lingshou. "Consumers don't have much to browse, but they clearly know what they want. The store is like a warehouse for the community's inherent products. Residents come here and won't be ripped off or fooled." This is what a typical discount store looks like. In fact, judging from M31 Capital's investment in Jingxiaohe, its supported format is quite clear. According to Tianyancha data, in July 2021, Jingxiaohe completed a Series B financing round with investors M31 Capital and Hejing Capital; in December 2020, the Series A round was invested by Zhongding Capital and Dongfang Chuangtou. Founded in January 2018, Jingxiaohe Trading is a grocery discount chain retailer and one of the earliest in China to introduce and implement the German ALDI model. This differs from many discount store types that have emerged in recent years. Currently, many discount stores on the market have to search for relatively undesirable goods, some add near-expiry products and stray goods, and even goods with short-term price fluctuations. Actually, these are still acceptable, but some 'discount stores' even rely on same-city lifestyle advertising to gain traffic, which basically doesn't look like a standard discount store. Undoubtedly, such discount stores will face greater risks in the future. Meanwhile, the rise of the discount store format in China over the past two years also has more complex reasons.

02 The economic downturn has to some extent spurred the rise of the discount store format. Many foreign cases prove that during economic downturns, many retail brands emerged: Japan's business supermarkets and discount supermarkets rose during economic downturns, such as MUJI and Don Quijote as representatives of discount retail; Germany's ALDI and LIDL (also known as 'poor people's supermarkets') are similar. Chen Liping, a professor at Capital University of Economics and Business, proposed a clear viewpoint as early as 2019: the future development of China's retail industry will definitely be an era where low-price retail prevails. First, China's economy has actually passed its peak and is starting to decline, as is residents' income. Ten years later, China will enter an aging stage, and income reduction is a certain process. "This society has a huge demand for low cost and low prices." Second, the fundamental proposition for China's retail future lies in how to achieve a commercial revolution through product development and private brands. Chen Liping stated that China's retail industry has now begun to enter an era of promoting format innovation through product revolution, driving the entire retail revolution with low prices and professional quality in physical stores. In fact, many domestic discount store brands have also focused on private brands. Taking HotMaxx as an example, the store's product structure is 70% food and 30% daily chemicals. Among them, private label products account for 20%-30%, mainly covering nuts, daily chemicals (toothpicks, dental floss, napkins, braised food, etc.), and plastic bags. The gross margin for their private brands is about 42%. Regardless of the stage of their private brand development, such a considerable gross margin is at least a direction. The first person in China to publicly declare that 'discount stores are the future' is Wang Wei, founder of Fresh Legend. As early as 2017, Wang Wei proposed that discount stores are the future and will overtake hypermarkets. Under his leadership, Fresh Legend's private brand products now account for over 50%. For private label products, price and quality inherently conflict, so a balance must be sought. Therefore, many discount stores, to achieve cost-effectiveness, reduce distribution links, directly find source manufacturers, propose 'production standards', and thus achieve 'optimal price and highest quality'. Wang Wei emphasized that the essence of a discount store is not cheapness, nor beauty or variety, but simplicity and scale. "Simplicity brings efficiency, and scale under density has more advantages. In summary, it's the lowest comprehensive cost and higher efficiency." This is almost the logic that all successful discount stores cannot escape. This is also the main reason why some domestic discount stores open franchising shortly after establishment: to quickly achieve scale.

03 Currently, there is no national-scale hard discount store in China; most are exploring regional markets. Even if some cross-regional discount stores appear, their scale is not large, and their actual operating conditions have never been disclosed. Some discount store brands even start national expansion before their business model is proven. Especially in the past year or two, the rise of the discount store format and capital influx have made this track mixed. So much so that some investors can't stand it and give friendly reminders to franchisees: franchisees should stay clear-headed and clearly know what the discount store brand they are joining is actually doing at the business essence level. An investor privately said, "It's a bit unethical to cut leeks under the guise of discount stores." Various types of discount stores are blooming across regions, but some well-known discount store brands have also started national expansion. In August this year, near-expiry food brand HotMaxx planned to open nationwide franchising, requiring franchisees to invest at least 200,000 to 800,000 yuan in startup capital. From HotMaxx's franchising model, there are currently cooperative operation (self-operated) and supply models. The former is brand empowerment, and the latter is open supply chain. According to Beijing Business Today, HotMaxx's cooperative operation (self-operated) investment costs an initial investment of about 800,000 to 1 million yuan, including 200,000 yuan for initial stocking, 100,000 yuan deposit, 21,800 yuan/year resource usage fee, plus training fees, service fees, etc. Rental, labor costs, warehousing, and logistics are borne by the franchisee. At the same time, HotMaxx has certain requirements for franchisee stores: the store location must be in areas with relatively concentrated foot traffic, such as shopping malls, near subways, or near universities, with an area of over 150 square meters and a street frontage of over 6 meters. In September, Hi-Tech Go co-founder Zhao Peng first publicly announced Hi-Tech Go's franchising plans, with three cooperation models: brand authorization, store-with-franchise, and independent operation. Currently, Hi-Tech Go has nearly 200 stores in over ten cities. In Hi-Tech Go's franchise manual, franchisees need to bear costs including rent, property management fees, promotion fees, store anniversary fees, employee salaries, insurance, holiday benefits, and bonuses; a one-time brand authorization fee of 60,000 yuan for three years; goods deposit, and decoration fees. After the above investments, franchisees receive a share of 25%-28% of monthly sales. Both HotMaxx and Hi-Tech Go hope to quickly scale through franchising. But in reality, franchising is not that easy. Cai Jingzhong, founding partner of Wujie Innovation Capital, told Lingshou that only formats with relatively simple models and low operational requirements are suitable for rapid franchising. At the same time, Cai emphasized that a realistic business model must be grown, not pieced together. Because from birth to maturity, it needs continuous trial and error in the market to finally take shape. "If a brand and store type wants everything, the more complex and comprehensive it is, the harder it will be to implement," Cai said. "If the business model is too perfect, operational difficulty is high, making it hard to find such franchisee resources, and rapid expansion is naturally limited." In fact, HotMaxx and Hi-Tech Go are both well-known and sizable companies in the market. But there are too many brands that have exhausted themselves by running too fast. Even those business models proven in regional markets have stumbled due to rapid expansion and had to contract. Let alone those brands that expand nationally without validating their business model in regional markets. Hu Chunlong said that the discount store format is difficult to franchise; the typical gross margin for discount stores is around 15 points. From a franchising system perspective, current domestic conventional franchising systems are hard to support. Because discount stores are a long-term business requiring a cultivation period, even in the short term, store cultivation takes time. For most discount format enterprises, "the first core element is to be able to make money in the current capital market environment, or to be able to sustain and survive," Hu said. Hu gave an example: for discount store brands currently operating more than 30 stores, if they are still losing money, whether 5 points or over 10 points, it's hard to move forward because the current capital market environment doesn't support such practices. "First find a viable business model or single-store model, carefully study the boundaries and extensions of the store. Entrepreneurs need to spend a lot of time researching and experimenting," Hu said. Discount stores are a trend, but they may also be a trap hidden under flowers. Franchisees should be careful!

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