As consumer supply becomes increasingly diverse and excessive, category killers and discount store formats have rapidly emerged in China in recent years. Startups like Snack Busy, HotMaxx, Discount Niu, and Linshi Mofa have secured funding. Even without strong capital injection, they are entering a growth trajectory of scale expansion and sustained profitability due to robust demand and vast expansion space in lower-tier markets.
In the US and Japan, we know that discount chain giants like Costco, Aldi, Dollar General, and Don Quijote have grown. In China's current unprecedented consumer transition, can players with 10-billion or 100-billion-yuan market value emerge?
Recently, Chenrui Capital, through in-depth research on overseas discount chain retail formats, found that the snack food 'category killer' discount chain may be the most needed retail format in China's current snack market and the format closest to the essence of retail operations.
In Chenrui Capital's view, for 'category killers,' honing the three axes of supply chain, informatization, and digitalization to achieve an ideal single-store model and scalable replication is the key path to gaining competitive advantage and forming a growth flywheel and moat.
Snack discount chains are currently the retail format closest to the 'category killer' + 'dollar store' model in China, and the only modern retail format that can truly penetrate communities and small towns, ultimately producing 100-billion-yuan players.
This report is authorized by Wave New Consumption for first release, shared with entrepreneurs!
****The Past and Present of Discount Chains
1. Discount chains are the mainstream retail format in Europe and the US today
How does a typical American complete their daily shopping?
Take snack food as an example. A deep snack enthusiast, Jack, regularly visits discount supermarkets—he holds memberships at Walmart, Ralph's, Costco, and other discount supermarkets. Every two weeks, he typically chooses a rest day afternoon to drive over 30 minutes with his roommate for a big shopping trip, placing two 48-ounce containers of Breyers ice cream into a cart already filled with macaroni and beef—one large container lasts him at least a week, costing less than $5, with a 10% member discount.
More daily and varied needs are filled by Trader Joe's, a discount grocery store within a 15-minute drive, and Dollar General, a dollar store at the community corner.
He visits Trader Joe's every few days to buy semi-finished pizzas or Chinese dishes for dinner, and also grabs a few boxes of the store's own-brand cakes and yogurt, solving the next day's breakfast.
Dollar General is his daily stop because he can buy cheaper Blue Bell ice cream, six Gabriela cocoa pies for $1.75, and several packs of small-packaged Skittles and Bugles for $5...
The modern retail history of Europe and the US is a history of discount chains continuously 'conquering territory' and innovating, with snack food sales primarily completed through these channels.
In a broad sense, discount chain formats include comprehensive discount superstores like Target, warehouse clubs like Costco, category killers like Home Depot and Ross, discount groceries like Aldi and Trader Joe's, and community dollar stores.
Discount chain formats fully developed in Europe and the US from the 1960s to the 1990s, completing the transformation of traditional retail, and have become the mainstream retail format in Europe and the US.
This process reflects consumers' ultimate pursuit of 'more, faster, better, and cheaper,' driven by several factors:
- Rising household incomes lead to diverse and changing consumer demands;
- Mature supply chains enable a vast array of products, customized production, and declining supply costs;
- Flattened channel structures and the establishment of a unified national market allow retailers to organize sales efficiently and at low prices.
In recent years, different discount chain formats have developed differently. Due to widening class differences and polarization in Europe and the US, middle-class demand for food has trended toward health, freshness, and low-carbon, while low-income workers, under debt and cash flow pressure, prefer convenient, low-priced goods, reducing per-transaction spending while increasing purchase frequency.
These trends present opportunities for discount groceries and dollar stores, while challenging large discount superstores.
In recent years, Aldi and Dollar General have rapidly expanded their store counts in the US market, while Walmart has adopted an 'omnichannel strategy,' increasing e-commerce investment and closing some stores annually.
In fiscal 2021, Walmart's US capital expenditure of $7.8 billion included $5.7 billion for e-commerce, technology, and supply chain, $2 billion for store remodeling and renovation, and only $100 million for new store expansion. Meanwhile, Aldi and Dollar General opened over 100 and 900 stores respectively in the US, showing no signs of slowing expansion.
2. The Rise of 'Category Killers'
'Category killers' are retail stores focused on a single category, originating in the post-WWII US. Typical examples include Home Depot (home improvement), Ross (discount clothing), Toys 'R' Us (toys), CVS and Walgreens (pharmaceuticals), Whole Foods (organic food), and Staples (office supplies). The first 'category killer' was Toys 'R' Us, closely tied to the 'baby boom' of the 1950s and 1960s.
At that time, the US economy was booming, families and society were stable, and demand for toys from families with children grew significantly and became diverse, leading to the emergence of specialized toy stores.
Toys 'R' Us leveraged its extensive SKU count and purchasing volume to gain price and assortment advantages over supermarket toy sections and street-side boutiques—its first store in 1957 had 18,000 SKUs.
The emergence of 'category killers' in home improvement, clothing, etc., followed a similar logic to toys: stripping relatively low-frequency categories from supermarkets and traditional street stores, using price advantages, assortment advantages, and professional services to 'attack high-frequency with low-frequency.'
Organic food 'killers' rose through a different logic—creating a new concept and lifestyle through marketing, i.e., 'organic food,' supplemented by 'localized operations' and 'buyer culture' strategies, creating significant differentiation from supermarkets in operations.
These 'category killers' all grew into 10-billion-dollar giants around 2000, forcing giants like Walmart to continuously expand categories, enlarge store formats, and cultivate and integrate upstream supply chain resources.
3. The 'discount grocery' model originated in Europe and is a hard-discount version of supermarkets
The discount grocery format has a long history, with the most famous player, Aldi, originating in pre-WWII Germany, developing from a mom-and-pop store, initially operating a limited number of SKUs of long-shelf-life food, with small profits and quick turnover.
After WWII, this hard-discount model met the demand for good and cheap goods among impoverished West Germans, quickly becoming a national supermarket. By 1960, Aldi had 300 stores.
In 1967, Aldi began its international expansion, entering dozens of countries. During this process, two actions solidified its current global dominance in discount grocery chains:
- In 1976, Aldi entered the US market and acquired competitor Trader Joe's in 1979. Today, the two brands together have over 2,600 stores in the US, with Aldi still expanding at a rate of 100 stores per year;
- Continuously integrating upstream and building private labels. Now, Aldi's private label SKUs account for 90% of its assortment and 90% of sales. To date, Aldi has over 11,000 stores in 19 countries, with total sales exceeding $100 billion.
To some extent, discount groceries led by Aldi are the biggest threat to supermarkets and hypermarkets because their categories and positioning overlap most with supermarkets, but Aldi adopts a completely opposite model that has proven its competitiveness:
- Hard discount, small profits and quick turnover, extremely restrained on gross margins, and almost no promotions;
- Minimal SKUs, continuously selecting and replacing SKUs based on market demand, and selecting suppliers and products through a buyer system, laying the foundation for scale effects and operational efficiency. Aldi's single-store SKU is only 1,500-2,000, Trader Joe's 3,000-4,000, covering high-frequency categories like fresh produce, snacks, and daily necessities, but with restrained SKU counts per category. In contrast, Walmart has over 11,000 single-store SKUs;
- A very high private label ratio, establishing strong product brand recognition and competitive barriers, also providing room for pricing and cost optimization. Among these three points, the first two have remained unchanged for a century since its inception, while the third has continuously evolved, advancing steadily through decades of competition.
4. 'Dollar stores' are early 'category killers' for snacks and daily necessities, achieving 'community-level coverage'
'Category killers' dismantle traditional retail, while 'dollar stores' iterate on it. If 'category killers' solve 'more, better, cheaper' from the 'more, faster, better, cheaper' equation, and 'discount groceries' solve 'faster, better, cheaper,' then 'dollar stores' solve 'more, faster, cheaper.'
Currently, there are about 500 Trader Joe's and 2,000 Aldi stores in the US, but 'dollar stores' truly achieve 'community-level coverage'—with over 18,000 Dollar General and 16,000 Dollar Tree stores—meaning one dollar store for every 10,000 Americans.
Dollar General originated before WWII and went public in 1968. Early Dollar General was essentially a 'category killer' for snacks and daily necessities in lower-tier markets, and has since developed categories like beauty, health products, household items, and seasonal goods.
It primarily targets low- to middle-income communities, with 80% of products priced under $5, yet gross margins have remained above 30% for years, and same-store sales have risen for 31 consecutive years. Compared to 'discount groceries,' 'dollar stores' are a completely different format:
Smaller store formats (typically 600-700 square meters), more diverse items (over 10,000 SKUs per store, with extremely rich snack categories), fewer private label products, and almost no fresh produce.
Looking at the development history of discount retail in Europe and the US, we see various distinct formats, positions, store types, and business models, with each major sub-segment converging on a typical 'duopoly' competitive landscape.
For snack food, the most relevant are discount superstores and 'dollar stores.' The development history of 'dollar stores' has important reference significance for China's snack food retail format.
****China's Current Snack Market Urgently Needs 'Category Killer' Discount Chain Formats
1. Snack 'category killers' are the pioneers of China's current discount chain new business models
Even before the e-commerce era, China's earliest batch of 'category killers'—book, home furnishing, and electronics chains—had matured with high coverage.
In books, there was Xinhua Bookstore, the largest state-owned bookstore; in furniture, there were chains like Haomeijia, Red Star Macalline, Easyhome, and Moon Star; in 3C electronics, there were Gome, Suning, Cyber, Hongtu Sanbao, and Wuxing. Their development logic was similar to their European and American counterparts.
The rise of e-commerce dealt a huge blow to bookstores and 3C electronics stores—the first wave came from online book retailers Dangdang and Amazon China, and the second from JD.com and Taobao.
For these low-frequency durable goods, consumers are not sensitive to waiting time, and e-commerce has advantages in 'more, better, cheaper.'
Around 2015, 'new retail' became a trend, with Yonghui Life, Super Species, Hema Fresh, and other 'new retail' supermarkets emerging from mature players and being highly anticipated.
They can roughly benchmark against European and American 'discount groceries,' but compared to their overseas counterparts, China's 'new retail' is positioned relatively high-end, with lower integration of upstream supply chains and lower private label ratios, essentially reflecting an incomplete transformation of supermarkets.
According to listed company announcements and related news reports, Yonghui currently has the highest private label ratio, with over 1,800 private label SKUs; Hema Fresh's private label ratio is about 20%.
In recent years, community discount chain supermarkets like Aotle have emerged, which can be seen as another attempt at the 'discount grocery' model.
Some media have compared it to China's Aldi, but there are slight differences—Aotle has relatively fewer SKUs per store, almost no fresh produce, a private label ratio of only 20%, and clearance goods account for 20% of SKUs, making it more of a transitional state between Aldi and Dollar General, but with essential differences from both.
Meanwhile, high-frequency, FMCG-like products have been spun off from supermarkets to form 'category killer' formats.
These categories first included milk powder and maternal and child products (Kidswant, Aiyingshi, Leyou, etc., entering high-growth periods from 2012 to 2015), then single-category fresh produce like meat and fruits/vegetables (Qian Da Ma, Fresh Legend, Yipin Fresh, Pagoda, etc., rising alongside new retail), then beauty (recently emerging players like Harma, KKV, etc.), and finally snack foods represented by Snack Busy, Linshi Mofa, and Snack Youming.
The snack food 'category killer' discount chain format emerged later, but has strong community scenario attributes and FMCG attributes, and is currently thriving.
Currently, China's snack discount retail has two main types of players: one is near-expiry food supermarkets represented by HotMaxx and Hi-Tego, positioned in urban business districts, initially focusing on low-priced near-expiry food but gradually increasing the proportion of regular products; the other is collection stores represented by Snack Busy, Linshi Mofa, and Snack Youming, positioned in lower-tier market communities. Both types are growing rapidly and have recently received substantial funding.
Compared to the 'new retail' that emerged earlier, their exploration of discount chains is a new path, not starting from fresh produce, private label, or large stores, and can benchmark against the European and American 'category killer' + 'dollar store' model.
2. China's current snack market needs 'category killer' discount store formats
The time for the outbreak of snack 'category killer' discount chains has arrived. In 2021, China's per capita GDP reached $12,551, approaching the 'high-income country' threshold. Benchmarking against the retail development history of mature markets like Europe, the US, and Japan, we find that formats like 'category killers' and 'dollar stores' flourished precisely during this period.
Looking at the current market characteristics of China's snack food, all preconditions are in place:
1) Consumer demand has become diverse and changeable, with higher requirements for item richness and the pace of new product introduction and replacement.
We see that OEM-branded brands like Bestore and Three Squirrels have repeatedly introduced accelerating new product R&D and launches as their primary strategy in listed company performance reports, reflecting their attention to changes in terminal demand.
2) Supply chain maturity. Driven by demand, more and more snack manufacturers and brands are continuously developing new products that are good and cheap, or new flavor series of existing products, and 'breaking down' products that were mainly single large packages into small packages and grab bags.
3) Channel flattening and maturation. Some national and regional snack food markets have gradually risen, represented by the 'two bridges' markets—Changsha Gaoqiao Market and Wuxi Jinqiao Market.
In these markets, snack food was not the main focus in the past, but has now become the main force. Gaoqiao Market's annual snack food sales reach 10 billion yuan, while Jinqiao Market is growing rapidly, becoming a wholesale center for various 'internet-famous' snacks, achieving rapid turnover through a flattened channel structure of 'factory—Jinqiao Market—WeChat resellers—consumers.'
Therefore, the emergence of snack 'category killer' discount chain formats is an inevitable trend.
3. Snack 'category killer' discount chain formats have clear advantages over other formats
According to Euromonitor, China's snack consumption channel structure has undergone significant changes, with traditional channels like supermarkets declining and e-commerce dividends peaking. (Note: Euromonitor data is rigorous, so coverage of new formats like discount stores actually lags behind their real development; the actual 'discount store' penetration rate should be between 0.5% and 1%.) How do snack 'category killers' gain competitive advantages over supermarkets, convenience stores, OEM brands, and snack e-commerce?
As discussed above, the killer features of 'category killer' discount chains lie in their price advantages, rich item variety, and fast pace of new product introduction and replacement. Various formats have their inherent or acquired differences and pain points, giving snack 'category killer' discount chains opportunities:
1) Hypermarkets and supermarkets are still the mainstream snack sales channels, but their share is declining year by year—from 58% in 2016 to 53% in 2021.
The main problems with hypermarkets and supermarkets are their cumbersome fees for placement, barcodes, promotions, and payment terms, which place a heavy burden on brands, especially new brands. Therefore, supermarket pricing is generally 15%-25% higher than discount chains, but the overall gross margin for food is often only around 15%. Supermarkets have gradually failed to meet consumers' new demands for snacks.
Although supermarket channels still account for half of the snack food sales channels, we predict that the share of supermarket channels will continue to decline in the future:
First, the profit model of supermarket channels urgently needs restructuring, returning to the true essence of retail.
As mentioned above, the past profit model of supermarket channels was essentially a 'second landlord' model, relying on stores, good locations, and traffic to charge upstream suppliers various fees, joint operation rental income, and rebates, which appear as other business income in financial statements.
According to annual reports of listed supermarket companies, the proportion of other business income to total operating income for most companies exceeds their net profit margin, meaning that without this income, the gross margin from main business would be insufficient to cover period expenses for most companies.
In the past, most supermarket companies did not truly study products, consumers, or deeply integrate supply chains. For this reason, once offline traffic declines marginally, supermarket companies struggle to resist online shocks and are replaced by new 'second landlords' (online traffic platforms).
Conversely, category killer formats that deeply cultivate offline, through deep research on products, consumers, and supply chains, continuously explore the essence of retail, providing consumers with products that meet their needs and offer high cost-performance.
Second, due to a lack of deep research and responsive action on consumers, products, and supply chains.
For the specific category of snack food, most supermarket channels still sell snacks in large packages, with low efficiency in product innovation, and a severe lack of buyer genes and culture.
In contrast, snack category killer discount stores primarily use open shelves and bulk weighing, with small packages as the main packaging form, allowing consumers to buy small quantities of many varieties, with richer SKU and brand counts, and a stronger sense of everyday life, fitting community scenarios well.
2) Convenience stores' current main battlefield is fresh food, solving three meals for office workers, with snacks more as a 'cross-selling' strategy. Convenience stores have limited space, and after fresh food takes up significant space, the SKU space left for snacks is limited.
Additionally, convenience store product prices are higher, as consumers cede some bargaining power for 'convenience.' But for high-frequency snack enthusiasts, the smaller selection and higher prices are enough to make them give up.
In fact, in China's current convenience store format, without mature central kitchen systems supporting fresh food/boxed meal businesses, almost all are mired in losses.
They walk a tightrope between low product turnover and high product prices, struggling to balance, and with many convenience stores' locations, rising labor and rent pressures, the single-store model has been difficult to run through and optimize.
3) Brands like Bestore, Laiyifen, and Three Squirrels are trapped in the 'OEM' model, passive in product innovation and pricing, with the model's ceiling becoming apparent.
'OEM' snack brands are a 'Chinese characteristic' under specific market opportunities—once Chinese local snack brands were weak and fragmented, with various small workshops competing inefficiently, giving them opportunities to coordinate some supply chains.
On the channel side, due to the failure to form a unified national market, channel structures were primitive and complex. These brands that opened their own stores or operated online had independent channel advantages, enabling rapid distribution.
However, with the growth of national bestsellers, the rise of unified wholesale centers, and consumers' higher demands for item richness and cost-performance, these brands' space has been gradually squeezed.
More importantly, these companies are essentially brand companies (channel-based brand companies), while snack category killer discount stores are essentially channel companies. The business philosophies and underlying logic of brand companies and channel companies are different.
As analyzed in our previous articles, historical experience tells us, both domestically and internationally:
In the snack food track, production-based brands may have more vitality and development space than channel-based brands (and this depends on specific sub-categories; for many sub-categories, the brand's ceiling may not be high). Channel-based brand companies may be squeezed from both sides, facing pressure from production-based brands and new channel formats, ultimately failing to build either a channel or a brand.
4) E-commerce's natural disadvantage is its difficulty in meeting snack consumers' impulsive, immediate, and experiential needs.
Physical stores offer 'what you see is what you get,' and consumers' purchase decisions receive positive feedback loops during 'browsing,' with conversion rates as high as 30%-50%. Meanwhile, online traffic dividends are peaking, and high marketing costs have become a heavy burden for brands. In 2021, online sales of snack food in China accounted for about 14.7%, almost flat year-on-year.
For snack players, the internet may be an important arena for new brands to 'expose and break circles' and old brands to 'maintain presence,' but the main battlefield determining survival is offline channels.
From an economic model perspective, the core indicator of whether a category can form a profitable model online is the gross profit per order.
Based on our past observations of many categories, considering fulfillment costs and marketing expenses, if the gross profit per order is below 8-10 yuan, it is almost impossible to form sustainable profitability online.
For the snack category, considering that the average order value is not very high, and community scenarios have advantages in rent and labor costs compared to online and offline business districts,
plus the characteristics of snacks—impulsive, unplanned, and purposeful (what you see is what you get, and community scenarios are closer to consumers)—and FMCG attributes (conducive to high-frequency repurchase), we believe the development prospects of snack category killer discount stores in community scenarios closer to consumers are very promising!
****Investment Thoughts on the Snack Industry's 'Category Killer' Discount Chain Format
1. Supply chain and digital capabilities will be the key to success for 'category killer' discount chains
'Retail is detail.' Looking at the history of retail format changes over hundreds of years, both domestically and internationally, this holds true. Retail is an ancient industry; there is nothing new under the sun. No matter how traffic shifts, technology evolves, or marketing changes, the essence of retail remains unchanged.
We believe the essence of retail is still how to use the most cost-effective products, the best consumer experience, and the highest efficiency to achieve the 'thrilling leap' of products to consumers. Retail remains a 'small profits, quick turnover' industry driven by scale and efficiency, with supply chain management and refined management as the eternal core themes and competitiveness.
Since the 'killer features' of 'category killer' chain discount formats lie in their item and price advantages, only enterprises that sharpen these two 'killer features' enough can stand out in industry competition.
The key to obtaining item and price advantages lies in supply chain capability. For the same goods, sourcing directly from factories/brands, through provincial agents, from wholesale markets, or through local distributors—each channel has different unit prices, minimum order quantities, procurement contract cycles, return and exchange policies, payment terms, and settlement methods.
Overall, direct sourcing from manufacturers is the ideal procurement method and the path to 'hard discount.' Supply chain capability determines the pricing level and gross margin space of discount chains.
Gaining competitive advantage is only the first step; deepening and expanding the advantage to form a growth flywheel and moat is the maturity of core competitiveness.
For chain discount formats, optimizing the single-store model and scalable replication are two important propositions. We believe the key lies in digitalization and informatization, which are also effective ways and solutions to improve and optimize supply chain management and refined management in the new era.
Digitalization and informatization are prerequisites for standardized operations, and modern retail cannot do without information systems. Informatization plays an all-round role in product management, operations management, standardized store operations, investment promotion and marketing, new store site selection, and franchisee management and supervision. Managers of modern discount chain enterprises should have the ability to drive strategy and management with data.
Store-level inventory ERP, front-end user and product data capture, mid-platform logistics and warehousing data, back-end analysis systems—the automation level and sensitivity of the systems themselves, and the synergy and connectivity between systems, are all important topics in digitalization and informatization.
For snack discount chain projects in the startup and early stages, supply chain and informatization capabilities come more from the team's own know-how and resources; for players in the growth and maturity stages, continuously iterating competitive strategies and innovation are the source of competitive advantage.
2. China's discount chain retail industry can also produce players with 100-billion-yuan revenue scale
China's snack food market has reached a trillion-yuan scale, with a compound annual growth rate fluctuating between 5% and 9%, and categories like braised snacks, nuts, and pastries growing at over 10%. This is a large, fragmented track full of new opportunities and rapidly maturing.
In this large track, the overall scale of snack 'category killer' discount chain enterprises is still small, with a low share. Main players include Snack Busy, Linshi Mofa, Snack Youxuan, Suowei, Dai Yonghong, Laopo Daren, Snack Girl, Lian Ta Snack, Xiaozui Snack, Snack Henhai, Snack Workshop, Snack Youming, etc.
Among them, Laopo Daren developed earliest, deeply cultivating the Zhejiang market for years and establishing brand recognition locally. Snack Busy has the largest scale, leveraging favorable conditions in Hunan to develop hundreds of stores. Linshi Mofa was established latest and developed fastest, opening nearly 10 stores in Sichuan within just 2 months and achieving a record of daily sales exceeding 100,000 yuan per store...
This is an industry that is constantly trial-and-erroring, iterating, and growing wildly every day and every hour. Cross-province and cross-region expansion and fierce competition have not yet truly begun, and talking about the 'endgame' and ceiling seems far away—but the drums of war have already reached the ears of the most sensitive practitioners and investors from afar.
As mentioned above, snack discount chains are the format closest to the 'category killer' + 'dollar store' hybrid model in China's current market, and the format that can truly penetrate communities and small towns.
If calculated based on one store supporting a community of about 20,000 people, the Chinese market can accommodate 60,000-70,000 stores. If the 'duopoly' model applies, the ultimate single winner might open over 30,000 stores nationwide—this would form an annual revenue scale of 100 billion yuan.
Standing in the current reality, this new format has already demonstrated its feasibility and superiority in regional markets. We may expect that one or several players will rapidly iterate, expand, and horizontally broaden their categories, continuously diluting the market share of supermarkets, convenience stores, and OEM brands, growing into China's Dollar General/Dollar Tree—perhaps even more successful than them.
Source: Wave New Consumption (ID: lcxinxiaofei) Authors: Hu Weibo, Shi Yao
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