Introduction: Customers don't just like cheap prices; they like the feeling of getting a bargain. Discount retailers that tap into this precise need hold the key to success. Author: Wang Qingfeng | Reviewer: Wang Qiang | Layout: He Wen

Whether it's the barbecue in Zibo or tourism in Xi'an, despite the crowds, both convey a common signal: affordability. Although the pandemic is over, the wave of salary cuts and layoffs triggered by the economic downturn has forced people to budget carefully. During the Great Depression in the 1930s, the "lipstick effect" economic theory was first proposed. Specifically, during economic downturns, lipstick sales tend to rise sharply. In the U.S., lipstick is a cheap commodity; when incomes fall but demand remains, people opt for inexpensive purchases. History repeats itself—a century later, discount retail has emerged as a new force, and even after the pandemic, its popularity remains undiminished. What's the reason?

Changing Perceptions HotMaxx is a typical example in the discount retail industry. Founded in 2020, its predecessor was "Tuituigou," which specialized in the wholesale and retail of near-expiry food, connecting suppliers of near-expiry products with small distributors. Initially, HotMaxx aimed at clearing inventory. Founder Gu Xiaojian previously focused on online clearance of surplus stock. The original intention was simply to clear excess inventory. It is said that before the clearance sale, HotMaxx announced it in private group chats, and the next day, a queue of over a hundred people formed outside the store. Paris water at 4 yuan, blue tin cookies at over 10 yuan, and Evian at 2 yuan broke through many consumers' psychological barriers. This allowed HotMaxx's daily sales to surge from 1,500 yuan to 80,000 yuan in a single day. Why did HotMaxx become popular? Chen Haichao once pointed out that perception is the prerequisite for demand. In positioning between surplus stock and near-expiry products, HotMaxx shifted its focus to the latter. Of course, to achieve a direct hit, it must use big-brand products. The industry believes that the pricing of big-brand products is fixed in consumers' minds, and once a lower price appears, it attracts consumers immediately. If quality is not an issue, sales can be completed, and repeat purchases are likely. However, big-brand near-expiry products are not the core profit point for discount retail stores; their role is more about attracting traffic, and profitability requires other methods. Recently, when visiting a HotMaxx store in Sanlitun, Beijing, I found that based on the number of products on shelves, items with a shelf life of less than four months accounted for about 30%, mainly beverages and dairy products. The rest were mostly products with a shelf life of about half a year or just three months from production. According to insiders, the profit secret of discount stores is to use big-brand discounts to attract traffic and realize profits through second- and third-tier products. The reason is that these branded products are already low-priced in the market, and customers don't know the exact price. With some effort on price tags, coupled with the brand perception of big-name low prices, it's enough to guide customers to complete purchases while allowing merchants to earn considerable profits. Image source: HotMaxx official website

Rapid Expansion Someone once joked, "These days, more people eat snacks than take medicine." On reflection, it's not without reason. Looking closely, snack discount stores are now on the rise, with rapid store openings and a booming market worth tens of billions. Despite pandemic disruptions, snack discount stores have maintained rapid growth. According to Euromonitor data, China's leisure snack industry maintains steady growth, but the growth rate is gradually slowing. In 2022, the total market size was 734.2 billion yuan, with a CAGR of 7.1% from 2008 to 2022. It is expected that the CAGR from 2022 to 2027 will be 5.9%, reaching a market size of 976.5 billion yuan in 2027, approaching one trillion, but still lagging behind developed countries. Euromonitor data shows that in 2022, China's per capita leisure snack consumption volume/value was 14 kg/500 yuan, which is still at a relatively low level compared to developed countries like the U.S. and Japan, and the global average. Especially during the three-year pandemic, residents' frequency of going out was limited. With the advantages of high cost-performance and community-based locations, snack discount stores expanded rapidly against the trend. Industry analysis suggests that the rise of snack discount stores is driven by upgrades in channel efficiency and supply chain efficiency. The reason snack discount stores can ensure product prices are 20% to 30% lower than supermarkets and circulation channels while achieving single-store profitability and rapid expansion is mainly due to high cost-performance products, coupled with strong operational capabilities to ensure high sales per square meter, and strong supply chain capabilities to ensure extremely high cost-performance and reduce loss rates. Taking Snack Busy as an example, a 120-square-meter store can achieve daily sales of 13,000 yuan, while high-end snack collection store Bestore, with a 70-square-meter store, has daily sales of about 4,700 yuan. Snack Busy's sales per square meter is more than 1.5 times that of Bestore. Looking at Hi-Tech Go, 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 snacks, etc.), and plastic bags. The gross margin for its private brands is about 42%. According to the 2022 China Private Label Blue Ocean Strategy White Paper released by Daymon International Consulting, the gross margin for near-expiry discount stores is generally 30%-35%, while ordinary supermarkets have a gross margin of about 20%. With core competitiveness, China's snack discount store market is developing rapidly, and major capital has quickly poured into the discount retail industry. Many discount retail brands had already secured large-scale financing by 2021. It is understood that Hi-Tech Go has completed four rounds of financing, with investors including Star VC, JUE Capital, Blueprint Ventures, and Photon Capital; HotMaxx has completed five rounds of financing.

Encountering Bottlenecks However, even with capital favor, the development of discount retail is not achieved overnight. Some analyses point out that discount retail products are not a new concept; they are mostly inventory from distributors, with the main advantage being high cost-performance. According to a report by iiMedia Consulting, the market size of discount retail food reached 31.8 billion yuan in 2021, and it is expected to maintain a growth rate of 6%, exceeding 40 billion yuan by 2025. However, haste makes waste. After rapid expansion, the discount retail industry has entered a bottleneck period.

First, food safety risks brought by expansion. When browsing the Black Cat Complaint platform, I found that multiple HotMaxx stores have been complained about by consumers for issues such as spoiled beverages and foreign objects in food.

Second, supply chain difficulties. According to insiders, it is difficult to obtain truly big-brand near-expiry products because low prices for near-expiry items may damage brand image pricing. Only new consumer brands or second- and third-tier brands can be obtained, and these brands do not have pricing power in consumers' minds. For example, would you choose a one-yuan Coca-Cola or a one-yuan unknown beverage? Remember, consumers don't like cheap prices; they like the feeling of getting a bargain. In addition, although price is the biggest competitive advantage of discount retail food, some consumers have bluntly said, "Discount stores are cheap, but the taste often doesn't meet expectations," which also reflects the problems of discount retail products. According to industry insiders, discounted products are often overproduced or inventory backlog from distributors. The food industry itself is very complex, from resource integration to product distribution. A brand has many agents, and these discounted products are distributed across different sales stores. How to collect and screen these products involves uncertainty, coupled with unstable supply channels, which has caused rapidly growing discount retailers to decline. In August 2020, Prosperity Market focused on near-expiry food and quickly opened over 20 stores in a year, securing two rounds of financing. But now, Prosperity Market has gone bankrupt, which is regrettable. It is reported that Prosperity Market planned to develop more than 60 stores in 2022 and expected to open over 1,000 stores nationwide by 2023. In its November 2021 investment promotion announcement, Prosperity Market also revealed an IPO plan. However, this dream was not realized. Since March 2022, Prosperity Market has become a defendant in more than 20 civil cases, involving contract disputes, warehousing contract disputes, franchise rights disputes, etc. Before that, its parent company, Shanghai Bengbeng Miao Technology Co., Ltd., was listed as a dishonest person subject to enforcement, and its founder Fan Zhifeng was also restricted from high consumption.

Third, the track is crowded, and competition is fierce. It is obvious that since the pandemic has improved, product turnover has gradually returned to normal. In addition, after learning from the lesson of large-scale unsold goods, brands and manufacturers will inevitably focus on improving digital management capabilities, and the scale of surplus goods may not be as large as in the early days of near-expiry discount stores. At the same time, the explosion of the near-expiry discount track has attracted many players, making competition more intense. For example, Hi-Tech Go has opened a franchise model with existing stores, providing support in data intelligence, product supply chain, logistics, etc. Meanwhile, HotMaxx is not to be outdone and subsequently announced franchising. It is reported that HotMaxx has opened over 500 stores, and various HotMaxx discount retail supermarkets have made consumers in many cities across the country feel the low cost of living in the post-pandemic era, sparking a nationwide trend of discount consumption. However, according to my understanding, HotMaxx franchisees need to invest at least 200,000 to 800,000 yuan in startup capital. But with this level of startup capital, franchisees may find it difficult to achieve profitability because gross profit may not even cover expenses. In addition, there is an important point: too many cooks spoil the broth. Facing such a crowded track, the industry believes that near-expiry food is a special industry. When income is impacted, consumers are willing to choose cost-effective near-expiry food, but as the economy recovers, the market for near-expiry food may shrink. Therefore, it is not wise for so many companies to choose to expand at this time. After visiting Beijing Chaoyang He Shenghui, I noticed that on the second basement floor alone, there are several similar stores like Kule Chaowan, Hi-Tech Go, and KKV. From scarce to ubiquitous, the unique value of discount retail has been exhausted.

Insights and Inspiration From a stunning debut to a sharp decline, what lessons does the ups and downs of discount retail stores leave for the industry? In my opinion, we can think about it from the following three aspects:

First, the core of retail is sell-through. Only when products can turn over quickly can development be ensured, especially for discount retail stores, which have higher requirements for product turnover efficiency. It should be noted that discount store products are not essential; consumers generally do not actively seek them out. Therefore, choosing a location close to the target audience is the first choice. One principle to pay special attention to is to shorten the distance between the store location and customers as much as possible, especially considering the types of surrounding stores and whether the foot traffic is large enough.

Second, to ensure supply, retail discount stores may consider the following methods: 1. Reduce single dependence and establish cooperative relationships with multiple suppliers. Remember, don't put all your eggs in one basket. Therefore, never let a single supplier's problem become a procurement risk. 2. Learn to share profits for win-win outcomes. Don't always try to swallow all the profits and push costs onto the other party; this is a major taboo in supply chain management. As competition in the retail market intensifies, only when the entire chain retail supply chain runs smoothly can all links achieve win-win results. This requires effectively improving the relationship between retailers and suppliers, establishing long-term stable strategic partnerships. 3. Choose an appropriate location to establish a distribution center. It should be known that the distribution center is the intersection of commercial flow, logistics, information flow, and capital flow for chain retail enterprises, and is a key facility for their normal operation. This requires stores to form a considerable scale of demand, thereby enabling them to strive for the greatest possible price concessions from suppliers.

Finally, and most importantly, how to gain a place in the crowded track? Industry insiders believe that in a homogeneous market, to cope with fierce market competition, enterprises should, on the basis of thorough investigation of the target market and changes in consumer demand, formulate strategies different from competitors in terms of product, price, distribution, and promotion, to achieve the goal of establishing comparative competitive advantages and gaining competitive initiative. For example, establish stable cooperative relationships with big brands. Understand that big brands can survive long-term for a reason. This is because big brands are often equivalent to quality. Consumers buy branded products more for the assurance they provide. The "retail wheel theory" was first proposed by Malcolm McNair. This theory points out that a revolutionary business format enters a market with a low-cost, low-price strategy, then attracts imitators, leading to competition. The competition from successors forces the pioneer to seek differentiation. The pioneer's differentiation either pursues scale or improves service, resulting in increased costs. After costs rise, it faces the entry of new low-price formats. This is one of the inherent basic laws of retail competition.

Final Thoughts Some say the breakout of discount retail stores is a disguised downgrade in consumption, but more accurately, it is the formation of rational consumption concepts among consumers. Discount retail is not a new thing; the pandemic just accelerated its development. According to iiMedia Consulting data, the market size of near-expiry food is expected to reach 40.1 billion yuan by 2025. However, on this rapidly rising track, many brands have exited due to poor management. The reasons are nothing more than the difficulty in supply and low profitability of discount retail products. How to better solve these problems is the fundamental issue for sustainable industry development. Industry analysis suggests that after rapid growth and explosion, a "shakeout period" in the discount retail industry is inevitable. When the frenzy fades, players who grew up on the near-expiry concept must maintain their unique attributes to become the ultimate winners.

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