Introduction: Hard discount is not a new model. Author | Ren Wenqing Andy Review | Gou Gou Layout | He Wen
Bulk snack stores, a name that sounds a bit odd, have become hot since last year. Some say this is one of the few 10-fold growth tracks in the consumer sector in the past two years. When you hear the word "track," you know it has caught the eye of capital. Indeed, in various places, especially in urban communities in southern provinces, and even in township streets, bulk snack stores of various brands are springing up rapidly, not unrelated to the push of capital.
Same direction is competition, opposite direction is contention. As a group, they are competing with supermarkets, convenience stores, and mom-and-pop shops for market share. But at the same time, Snack Busy, Snack Youming, Zhao Yiming Snacks, Love Snacks, Sugar Nest, Snack Youxuan, Haoxianglai, Laopo Daren... the list can be extended further, and they are accelerating their expansion, with mutual competition and battles about to erupt.
Why did bulk snack stores explode? Will they be a flash in the pan, or will they exist as a long-term format? What impact will they have on brand owners, distributors, and other retail formats? Today, I plan to use one article, through 5 keywords:
Bulk / Discount Category Chain Ant Market Multi-party Game Development Cycle
to explain clearly the logic behind the current hot bulk snack stores.
Bulk / Discount
First, what is bulk? To understand this concept from Japanese, remember three points: 1. Relatively low prices 2. Facing mass consumers 3. Relatively rich product selection If you have visited a bulk snack store, you should have a deeper perception of these three points. The core here is "relatively low prices," between normal retail prices and wholesale prices. Simply put, it's cheap. Cheap corresponds to another word: discount.
The essence of discount is cheapness. Discount retail has also been hot in the past two years. Selling tail goods, backlog inventory, and near-expiry products to achieve low prices is called soft discount; achieving low prices through centralized procurement, compressing the circulation chain, and improving operational efficiency is called hard discount. Bulk snacks are also called snack hard discount. Simply understand, bulk snack stores are a type of hard discount. This model can be traced back to Germany's ALDI (known as Oloche in the Chinese market). In 1913, it was just a small food store. In 1948, the Albrecht brothers took over their mother's store, and after a series of adjustments, it developed. The founding family has long occupied the position of Germany's richest. I worked in a German company for over a decade and traveled to Germany many times each year. ALDI is ubiquitous on German city streets, townships, and communities, selling groceries and daily necessities at good quality and low prices.
Image source: ALDI Oloche official website
Here, I'd like to specifically mention that when talking about bulk snacks, many people refer to America's Costco and Japan's Don Quijote as benchmarks. But these two differ from the traditional hard discount model. Although Costco is known for providing low-priced goods and large discounts, it is more often called a warehouse membership retail store, or a large discount warehouse store. Don Quijote is a discount retail chain that mainly sells various goods and groceries, with an extremely rich product range, more suitable to be called a "general merchandise discount store" or "discount department store." ALDI is a typical representative of traditional hard discount, characterized by limited product categories, low-price strategy, simple decoration, small to medium area, mainly non-famous or private label brands, and no value-added services. So when talking about bulk snacks, I prefer to use ALDI as a comparison because relatively speaking, it is more in line with the characteristics of the traditional hard discount model represented by ALDI.
The rise of major discount stores abroad has a common background: economic downturn, with greater demand from the public for more cost-effective goods. The emergence of various discount stores across China in the past two years actually has historical experience to follow. It's just that China's economy has not gone through the cycle that developed markets have, but it should be known that hard discount is a format verified over a long cycle, and in developed markets, more than 20% of retail formats are hard discount. So, hard discount is not a new model. Referring to the course of foreign markets, we can foresee that it will have long-term vitality. So specifically for bulk snacks, or snack hard discount? This is a bit interesting. To clarify this matter, we also need to talk about another thing—category chain.
Category Chain
In the past two years, everyone in the retail industry has been talking about one thing: hypermarkets are failing. Better Life and Renrenle have been losing money year after year, and since this year, Carrefour has been closing one store after another. Of course, not all supermarkets are like this, but overall, supermarkets are having a hard time.
Why are supermarkets failing? Here we must talk about the essence of retail. No matter how retail forms change, its essence remains the same: three words—cost, efficiency, experience. Hypermarkets and supermarkets, with their rich product selection, relatively low prices, and good shopping experience, became the mainstream consumer channel after 2000. Going to the supermarket was once a choice for a generation to pass their leisure time. But think carefully, how long has it been since you last went to a hypermarket or supermarket? A while ago, I happened to walk into a Yonghui supermarket, and I couldn't even remember when I was last there!
We don't go to supermarkets anymore, for a simple reason: the things we need to buy can be bought elsewhere. After the rise of the internet, it took away high-priced, high-margin categories like shoes, hats, clothing, and home appliances from supermarkets, and then various daily standard products. And internet shopping delivers to your door. Then community fresh food stores took away fresh products, and chain convenience stores allowed us to buy those immediate consumption items. Especially after three years of the pandemic, various physical stores deeply embedded in communities have shown increasing vitality.
People's consumption habits have changed. Now for mass consumption, time is the biggest cost, and convenience is the most important experience. Over the past decades of China's development, professional division of labor has become more mature, and the coordination of production, logistics, marketing, finance, etc., has greatly improved supply chain efficiency. Therefore, you will find that various community chain stores verticalized in a certain category are constantly emerging. Category chains, deeply embedded in communities, rely on efficient supply chains, create a better shopping experience, and provide consumers with more cost-effective products. For example, fresh food, fruits, dairy drinks, even meat, hotpot ingredients, etc., and of course, the snacks we talk about today.
From this perspective, bulk snack stores are actually a product of the superposition of the big trend of hard discount and the small trend of category chains. At the end of last year, the head brand of bulk snack stores, Snack Busy, had 2,000 stores. By June this year, it officially announced that the number of stores had reached 3,000. Other brands are also accelerating their expansion. Why are small snacks so favored by capital, triggering a wave of store openings for vertical category community chains? Data shows that in 2022, China's leisure snack market size exceeded 1.5 trillion yuan, with a compound annual growth rate of over 10%. Leisure snacks are not a small market. But snacks are a typical ant market. What does that mean?
Ant Market
According to the degree of brand concentration, consumer goods can be simply divided into two types. The first type is concentrated. The sales of the top three brands can account for 30%-50% or more of the market share. For example, in carbonated drinks, Coca-Cola and Pepsi together account for over 90% of the overall market. The second type we call dispersed. For example, leisure snacks. Although the overall scale exceeds one trillion, the combined share of head brands like Chacha, Liangpin Puzi, Lays, Baicaowei, Laiyifen, etc., does not exceed 5%. This is the so-called "ant market." The overall scale is huge, but the share of head brands is small, with many small and unknown brands existing. In this ant market, product innovation and iteration speed are quite fast, with many new products being popular for a while and then forgotten by consumers.
Where is this huge category sold? According to Euromonitor data, in 2022, leisure snack sales channels included supermarkets, mom-and-pop shops, e-commerce, hypermarkets, and convenience stores, accounting for 39.7%, 16.6%, 15.5%, 12.6%, and 7.7% respectively. Let's briefly look at this data. E-commerce at 15.5% ranks third. It's hard for its share to increase further. Why? Snacks tend to be impulse purchases rather than purposeful purchases. So-called impulse purchases mean I buy only when I see, touch, and taste. Impulse purchases happen offline. This is also why snack brands represented by Three Squirrels, which rose rapidly relying on internet traffic, have encountered growth bottlenecks in the past two years and are now striving to expand offline.
Supermarkets plus hypermarkets account for 52.3%, the largest sales channel for leisure snacks. Mom-and-pop shops rank second at 16.6%, and convenience stores at 7.7%. Bulk snack stores are grabbing share from these offline channels, but first and foremost, they are grabbing share from supermarkets and hypermarkets. Besides the logic we just mentioned that category chains deeply embedded in communities take away supermarket business, there is another more important reason—bulk snacks mainly deal in bulk items.
From packaging, leisure snacks can be divided into packaged and bulk. Packaged are standard products that can be scanned and checked out directly, while bulk items need to be weighed before checkout. Bulk snacks are a high-sales, high-margin category for supermarkets, and the same is true for bulk snack stores. Currently, bulk snack stores generally have 1,200-1,500 SKUs, of which 60%-70% are bulk items, including dried tofu vegetarian snacks, bread, seafood/meat snacks, nuts, dried fruit and preserves, etc.
Bulk snacks focus on low prices. According to the common standard, the average customer transaction value is around 40-50 yuan. To verify this number, I randomly selected some items in a bulk snack store, and when I felt it was almost a big bag, I gave it to the clerk to weigh and check out: 50.57 yuan.
The reasons bulk snacks achieve low prices are, one, bypassing distributors and sourcing directly from manufacturers, and two, compressing margins at each link. The headquarters retains about 10% gross margin, and the gross margin given to franchise stores is about 20%. Prices at all stores are strictly controlled by the headquarters; price increases are absolutely not allowed, and if there is a need for price reductions or promotions, strict approval from the headquarters is required.
For a long time, various fees such as entry fees, barcode fees, display fees, festival fees, and various "exorbitant taxes and levies," plus payment terms ranging from 60 days to half a year or even longer, have made suppliers to the supermarket system miserable. Bulk snack stores do not have these messy fees, and payment is very timely. Coupled with the rapidly expanding number of stores and soaring sales, bulk snack stores should be a very good channel for both brand owners and distributors. But the actual situation is more complex, involving a multi-party game.
Multi-party Game
Bulk items are the main category and profit source for bulk snack stores. But they cannot do without packaged items. Packaged items are basically dominated by well-known brands, including beverages. Their main role is to attract traffic and enhance consumers' perception of the store's grade and experience. For example, a bottle of bottled water with a normal retail price of 2 yuan is sold at a 40-50% discount in bulk snack stores, generally at 1.2 yuan, and some even as low as 0.9 yuan. Other branded packaged snacks are also cheaper than other channels, generally around 15-20%.
In the early days, brand owners were not optimistic about this new format, for a simple reason: they believed that relying on low prices was not sustainable, and the key was that it affected their price system. But distributors were different. As long as goods could move and payment was good, under sales pressure, distributors were willing to supply in various ways. In 2017, the head brand Snack Busy was established, and then many brands sprang up like mushrooms after rain. In the following two years, brand owners strictly controlled the problem of goods flowing and crossing regions. But on the one hand, sales were not large at the time; on the other hand, it was indeed impossible to control, and bulk snack stores could continue to sell branded goods at prices lower than the market.
In 2022, Snack Busy's sales reached 6.5 billion yuan, and this year it is expected to exceed 10 billion. Adding other snack systems, bulk snack stores have developed into a channel with a scale of about 20-30 billion yuan, and it is still growing rapidly. Bulk snack stores have become a channel that brand owners cannot ignore. Since last year, many head brands have begun to adjust their policies, hoping to stabilize the price system while riding on this rapidly growing channel, such as launching channel-exclusive specifications and co-branded products with bulk snack brands. Recently, I communicated with personnel from multiple brand owners and obtained information: establishing a dedicated department to handle this channel, or assigning this function to a specific department, has become a common practice.
Of course, there are also brands that embraced the bulk snack channel earlier. For example, Yanjin Puzi, in 2021, increased cooperation with bulk snack brands such as Snack Busy, Snack Youming, Dai Yonghong, and Haoxianglai. In 2022, Snack Busy surpassed Walmart and Better Life to become its largest customer. On July 7, the company released its semi-annual performance forecast, stating that in the first half of this year, its net profit attributable to listed companies was approximately 240-250 million yuan, a year-on-year increase of 86.29%-94.05%. Brands that have also benefited from the new channel include Ganyuan and Jinzai. Some brands that previously did not pay attention to this channel have begun to supply bulk snack stores directly. According to public information from multiple bulk snack brands, in the upstream supply chain, direct sourcing from brands accounts for 90%.
With the emergence of new channels, due to existing distribution patterns, payment terms, and other issues, bulk snack stores cannot achieve 100% direct sourcing, so a new role has emerged. Bulk snack stores call them service providers, acting as intermediaries in cooperation with brands. Unlike traditional distributors, they earn service fees rather than price differences.
In the game between bulk snack stores and brands, the former gradually takes the initiative. The reasons are: on the one hand, under stock competition, relaxing any channel is a gain for competitors and a loss for oneself. On the other hand, bulk snacks are developing rapidly, with much room for imagination in the future. Of course, the most fundamental reason lies with consumers. Consumers are the ultimate decision-makers in this multi-party game. The essence of retail lies in cost, efficiency, and experience. Efficient channels replace inefficient ones. If consumers are willing to choose, it has room to survive and grow.
You might wonder: bulk snack stores are indeed developing rapidly now, but in the past few years, we have seen many new channels emerge, such as community group buying and fresh food e-commerce. With capital adding fuel, after all the noise, they eventually fell silent. Will bulk snack stores be the same? This brings us to the last keyword—development cycle.
Development Cycle
Any new thing will go through a cycle, roughly divided into stages: germination, growth, maturity, and decline. What stage are bulk snack stores in now? If we make a simple division, 2010-2017 can be considered the germination period; 2017-2023 is the accelerated growth period. The earliest bulk snack stores can be traced back to Laopo Daren, established in Zhejiang in 2010, including later Sugar Nest in Fujian, etc. They can be said to be the pioneers of China's bulk snack stores. In the early days, although they ran this model successfully, they were more confined to a corner, as a form of regional innovative retail. It wasn't until 2017 that Snack Busy was established. Hunan people really have a knack for retail innovation, and with their bold and enterprising style, they quickly attracted more people to join this field and gradually spread it in southern provinces and cities. In the bulk snack industry, Hunan people occupy more than half of the country. Besides Hunan's local Snack Busy, Love Snacks, Snack Youxuan, Dai Yonghong, etc., the founder of Snack Youming, headquartered in Sichuan, is also from Hunan.
Since 2022, bulk snacks have gradually become hot, which is inseparable from the participation of capital, media, and franchisees. Many bulk snack store brands received investment from capital parties as soon as they were established. With the rapid development of this format, news of financing continued to emerge, and dense media reports accelerated the industry's breakout. Of course, franchisees are also an important role. During the three years of the pandemic, business was hard. Many physical store owners in fields like clothing and maternal and child products were seeking transformation, and bulk snack stores became one of the few rapidly growing formats. Coupled with the fact that early franchisees did make money, franchising bulk snack stores became a choice for many.
Starting at the end of 2022, several head brands began to develop across provinces, and the market landscape changed rapidly. The industry has already advanced from the stage of replacing different industries to the stage of same-industry competition. With accelerated expansion, the incremental market is compressed, market friction intensifies, and price wars on the C-end have already started in many places. Any new thing will go through a process from germination and development, to bubble burst after expectation inflation, and then to steady development. It can be foreseen that in the next 2-3 years, the industry will experience a stage of market clearing. The support of funds, supply chain efficiency, product selection ability, and refined operation level are the keys to determining competitive capability. As long as head brands do not make major strategic mistakes, they will survive, but many small and medium players in the regions will inevitably face merger or bankruptcy and closure.
What impact do the exploding bulk snack stores have on the upstream and downstream of the industry?
First, regarding brand owners. No matter how competition develops, bulk snacks as a channel will continue to exist, and its share will grow. Brand owners will definitely pay more and more attention, but how to balance the overall market is a problem. Through OEM to reduce costs, making channel-customized models, co-branded models, etc., will become choices for many brands. Some unknown white-label brands may rise relying on this channel.
Second, regarding distributors. Bulk snacks have a fatal impact on leisure food distributors because what it erodes is exactly the share you have in supermarkets, convenience stores, and circulation. Recently, I learned that in some southern regions, leisure food distributors' sales in the first half of the year fell by about 40%. In some northern regions, bulk snack stores have just appeared, and the selling price of some snack products in stores is even equivalent to the distributor's purchase price. Supermarket customers are already asking distributors to lower prices, and a chill is sweeping toward distributors. Distributors need to think about how to respond. I will write a separate article to discuss this topic.
Third, regarding the snack stores themselves. Snack stores will definitely evolve. A snack store itself is a brand. With consumer demand and data feedback, it will definitely launch private labels in the future. In fact, this is something some head bulk snack stores are already doing. In addition, bulk snack stores are "convenience + snacks," and "convenience" is the basis for thinking about the evolution of this format. Snacks are impulse purchases, not rigid demand. As competition intensifies, snack stores now focus on snacks, but in the future, they will operate across categories, becoming "snacks +."
Final Thoughts
Hard discount is the trend, and bulk snacks are accelerating development. Due to space limitations, this article cannot cover all related topics. In the future, New Distribution will publish a series of articles on snack stores and hard discount, providing readers with the latest development information and unique industry insights. At the same time, we have established a community with the theme of [Snacks / Discount], sharing the latest information on the development of bulk snacks and hard discount formats, discussing topics such as the development trends of hard discount, what the challenges are, and where the opportunities lie. If you are interested in such topics, you can add WeChat to join the community.
Author Introduction: Ren Wenqing, Dean of New Distribution Digital Research Institute, FMCG industry analyst, columnist for bC Integration, with research fields including channel digitalization, distributor business growth, and new retail in FMCG.