Opening discount stores has become the latest move by supermarkets. As retail market competition intensifies, coupled with diversion from other channels, business for supermarkets and hypermarkets is increasingly difficult, with declining revenue and losses becoming the norm. Finding a new remedy has become a necessity for supermarkets. In recent years, supermarkets have been experimenting with various new formats. Now, following warehouse clubs and membership stores, discount stores have become the new battlefield for supermarkets. On October 31, Hema released its latest plan of 'going upward, going downward, and going outward,' with Hema Outlets and Hema Neighbor primarily tasked with 'going downward,' aiming to cut product prices to half of hypermarkets through supply chain restructuring. Industry leaders often set the trend. Besides Hema, Yonghui, Jiajiayue, and others have successively entered the discount store arena, attempting to break through with lower prices. In the current economic downturn, low prices have become a consumer favorite, spurring the development of the discount store format. Earlier, discount stores for near-expiry food like HotMaxx and HiBuy expanded rapidly with low prices, and the entry of supermarkets has stirred the discount store market again. With more players entering, competition in discount stores is fierce, but the path is not smooth. The lower-tier market has always been a key target for players, but capturing a share is not easy. More importantly, a round of consolidation has already begun in the discount store sector. In March this year, the parent company of Prosperity Market, Shanghai Bengbeng Miao Technology Co., Ltd., claimed in a contract dispute over unpaid supplier loans that its business had stalled, had no cash flow, and was preparing to apply for bankruptcy. Behind this is a competition among supermarkets in supply chain and product strength. The uniqueness of discount stores lies in handling clearance goods; if not done well, it can easily damage a company's reputation. At this stage, most supermarkets are still feeling their way in the discount store format. Is this a new hope or another 'trial and error'? Time will soon tell.
01 Supermarkets Open Discount Stores One After Another If last year saw a wave of membership stores, now discount stores have become the new direction for supermarkets. These two distinct positioning strategies are both epitomes of supermarkets' self-rescue efforts. Recently, at the Hema New Zero-Supply Conference, Hema highlighted its discount store format, 'Hema Outlets.' Hema's Chief Merchandising Officer Zhao Jiayu revealed at the conference that Hema Outlets, along with Hema Fresh Stores and Hema X Membership Stores, are now listed among Hema's 'three carriages,' achieving year-on-year growth of 555%, 25%, and 247% respectively this year. As early as October last year, the first Hema Fresh Outlet store opened, focusing on near-expiry products from Hema Fresh, unsold fresh daily products, and products with minor damage during transportation. In other words, at that time, Hema Fresh Outlet was more like a near-expiry food store for Hema Fresh, playing an important role in clearing inventory for Hema Fresh. This year, Hema Fresh Outlet was officially upgraded to Hema Outlets, not only selling near-expiry goods but also following Hema's usual style by launching Hema Outlets private labels. The 'Hema Outlets' private labels currently include roughly three: Hema NB, Hema Linxuan, and Hema White Label. Hema Outlet store, image source: Dianping. At this new zero-supply conference, Hema CEO Hou Yi also disclosed operational data: after iteration, the Shanghai 'Hema Outlets' store, with 400 square meters, has a gross margin of 15% and daily sales of 150,000 yuan. Similarly, Wumart opened a discount store named 'Meitao' in Mentougou District, Beijing, mainly selling seasonal products from Wumart hypermarkets and products that will not be restocked after selling out, with near-expiry products accounting for 30%. The entry of industry giants has fully blown the discount store trend. Starting last year, retail e-commerce giant Suning announced its entry into discount stores, with its first store in Ma'anshan; Renrenle opened two membership discount stores in Shenzhen and Tianjin; in October of the same year, Jiajiayue also announced the opening of its first discount store in Weifang, Shandong. In addition, warehouse stores without membership fees are also seen by outsiders as more like discount warehouse stores. In May last year, Yonghui Warehouse Store opened in Fuzhou. Data shows that in the first half of last year, sales of Yonghui Warehouse Stores increased by 139% year-on-year, and average daily customer traffic per store increased by 136% year-on-year. In fact, given the weakness of the main hypermarket business, it is not surprising that supermarkets collectively opened discount stores. Hypermarkets have always strictly controlled near-expiry food, typically eliminating products that exceed the acceptable receipt date during the receiving process, but these products are not past their expiration date; they just cannot enter the hypermarket. This invisibly increases the pressure on hypermarket inventory and turnover. The discount store model precisely absorbs this inventory, thereby improving inventory turnover efficiency and reducing corporate losses. More importantly, the hypermarket business itself has entered a winter period, with declining revenue becoming a collective challenge for supermarkets. Among them, the environment supermarkets face is complex. Some product demand is diverted by online e-commerce platforms, while demand at the doorstep is diverted by convenience stores and community group buying. From the consumer side, with the tightening economic environment, consumer attitudes are shifting, with a significant trend toward cost-effectiveness and careful budgeting. Changes in consumer demand naturally also spur the development of new discount store formats. More and more supermarkets are testing the waters in the discount store field, but who can become China's version of 'Aldi' remains to be seen.
02 Low-Price Selling: Supermarkets Bet 'Half Their Lives' on Lower-Tier Markets Like many business formats, discount stores are also imported. Exploring the origin of discount stores, they were born in the post-World War II European market environment of recovery. The more depressed the economy, the more popular discount stores become. According to data from iiMedia Research, in 2021, the market size of China's discount retail industry reached 1.62 trillion yuan, a year-on-year increase of 2.12%, with a compound annual growth rate of 4% over the past five years, currently in an expansion phase. It is necessary to distinguish here that there are two different models of discount store formats: one is soft discount, and the other is hard discount. The former refers to achieving low prices through clearance goods and near-expiry food, which is the recently popular concept of near-expiry, such as Japan's Don Quijote and China's HotMaxx. The latter refers to supermarkets achieving lower purchase prices than hypermarkets through streamlined SKUs and operational costs, leveraging scale advantages upstream to achieve economies of scale, such as Germany's Aldi. Regardless of the model, in essence, discount stores compete for market share through low prices. This also means that supermarkets are eyeing the more potential lower-tier markets behind discount stores. Rushing to the 'outside the Fifth Ring Road,' the most anxious is Hema. In September this year, Hema CEO Hou Yi issued an internal letter announcing that Hema, established seven years ago, completed its latest organizational structure upgrade. Among them, the Hema NB Business Unit (Hema Neighbor, Hema Outlets) is personally led by Hou Yi, showing Hema's emphasis on lower-tier markets. Hou Yi revealed at the Hema New Zero-Supply Conference that Hema has opened more than 50 Outlet stores nationwide, 'In Shanghai, we have opened more than 10 discount stores, and by the end of this year, we will open 100 discount stores in Shanghai.' Image source: Hema Outlets Dianping store. However, with less than two months until the end of the year, from 10 to 100, Hema faces significant difficulty in achieving its goal. Looking back, from Hema Mini, Hema Neighbor to Hema Outlets, Hema has been trying to penetrate lower-tier markets, but so far, Hema is still constantly trial-and-error, even failing repeatedly. Take Hema Neighbor as an example: in less than three months, Hema Neighbor opened 400 stores nationwide. But since the end of last year, it was reported to have begun closing stations and withdrawing from multiple cities. Looking at the entire retail market, no player has not eyed the 'fat meat' of lower-tier markets, but paths differ. The most intuitive manifestation is in storefronts. As mentioned above, Jiajiayue's first discount store has a business area of nearly 3,000 square meters, equipped with more than 5,000 SKUs, basically covering all categories of a hypermarket. On the other hand, Hema Outlets stores are only 400 square meters, covering more than 1,000 SKUs. In addition, Wumart's discount store is only about 80 square meters, located at the exit passage of Wumart's existing hypermarket. Besides differences in store size, these Chinese 'disciples' of Aldi all focus on reducing SKUs and lowering operating costs. In short, to give consumers lower prices, it is nothing more than using scale to get lower purchase prices from the source and reducing store losses and operating costs. For example, Hema Outlets often opens in the outer ring of cities, suburbs, and lower-tier markets; Huaguan's discount store products are simply packaged and displayed in warehouse form. Admittedly, from the perspective of market growth rate and scale, the growth of stores entering through the discount store market is indeed fierce. In the middle of this year, the China Chain Store & Franchise Association released the '2021 China Supermarket Top 100,' in which discount store HotMaxx, with annual revenue of 1.7 billion yuan and 401 stores, appeared on the list for the first time, ranking 63rd, with sales growth of 618.2% and store growth of 264.5%, the fastest growth. But market growth is one thing; competing for lower-tier markets in market competition is another. Even if supermarkets tout cost-effectiveness, they still have to compete with online e-commerce platforms and community group buying, and attracting consumers is not easy. More critically, it is also very difficult for companies like Hema and Jiajiayue to capture lower-tier markets through low-priced fresh produce. According to Analysys statistics, in 2020, more than 70% of fresh e-commerce consumers came from first-tier and new first-tier cities, with 40.9% from first-tier cities and 28.9% from new first-tier cities, with a significant increase in the proportion of first-tier city consumers. Now, the original near-expiry food discount stores have already begun elimination rounds this year, with players like Prosperity Market being the first to exit. And for supermarkets like Hema, which already struggle with profitability, betting half their lives on lower-tier markets still carries significant risk.
03 Can Discount Stores Stop the Losses for Supermarkets? From warehouse clubs and membership stores to discount stores, behind the frequent shifts in direction by supermarkets is their continuous losses and the overall industry's downturn. Recently, listed supermarket companies have successively released their 2022 third-quarter reports, with losses still being the main predicament for each company. Yonghui Superstores' third-quarter revenue this year was 22.175 billion yuan, a year-on-year decrease of 3.62%; net loss attributable to the parent was 775 million yuan, narrowing losses by 320 million yuan compared to the same period last year. Over a longer period, Yonghui Superstores' net loss attributable to the parent in the first three quarters reached 887 million yuan; on the other hand, supermarket chain brand Jingkelong's third-quarter revenue was 7.652 billion yuan, a year-on-year decrease of 9.84%; net loss attributable to owners of the parent was 60.599 million yuan, with losses continuing to expand. In addition, after independence, Hema must bear its own profits and losses, which increases profitability pressure. This year, Hema CEO Hou Yi also clearly stated that Hema will 'tighten its belt and enter a difficult entrepreneurial stage.' Regarding losses, many retail companies attribute them to intense competition in the retail industry, diversion from other channels, and the impact of the epidemic on operations in some key regions. The intuitive manifestation is that fewer people are willing to visit supermarkets. The China Chain Store & Franchise Association has a set of data: in 2019, the average number of people visiting a supermarket per day was 2,414, but this number dropped to 2,030 in 2020. Whether it's front warehouses, community group buying, local delivery, or neighborhood fresh supermarkets, consumers can buy the same products as supermarkets in the most convenient way, even at more favorable prices, so it is expected that supermarkets are being neglected. In 2020, the total sales of the top 100 domestic chain retail enterprises were 2.4 trillion yuan, a year-on-year decrease of 7.2%, the first decline since statistics began in 1997. However, the supermarket track is already so competitive; can the discount store model become a new remedy for supermarkets? The economic downturn has unleashed the potential of discount stores, but most supermarkets are still in the trial and exploration stage for this format. In essence, Chinese supermarket discount stores and near-expiry food stores seem no different, still selling clearance and near-expiry products that major hypermarkets need to handle. This is also why when discussing discount stores, outsiders are more willing to equate them with near-expiry food stores. Industry players all understand that to break this image of discount stores, low prices alone are not enough; the key lies in brand power and product strength. Taking Hema and Jiajiayue as examples, both have put their own private-label products in their discount stores, attempting to cultivate consumer loyalty through private labels. For merchants, the biggest advantage of private labels is that companies can control costs from the source, making products more cost-effective. According to the 2022 China Private Label Blue Ocean Strategy White Paper released by Daymon International Consulting, although private-label products are priced lower than third-party brand products, their gross margin is generally around 50%, much higher than the 20% gross margin of manufacturer brands. Hou Yi stated at the recent new zero-supply conference that the essence of retail competition is product competition, 'Today, more and more people choose Hema, not because Hema's delivery speed is faster, but because Hema's product differentiation capability is getting stronger.' But on the other hand, the supply chain management of discount stores cannot be ignored. As is well known, the biggest pain point of near-expiry food stores is the instability of supply sources. Unstable upstream supply leads to downstream consumers not being able to buy the low-priced products they want, affecting consumer experience. Generally, near-expiry food is often closer to the expiration date, and insufficient supply of hot-selling products and accumulation of unpopular products have led to food safety issues for some near-expiry products. In July this year, HotMaxx was fined 7,000 yuan for selling expired chocolate. At the same time, incidents of arbitrarily changing expiration dates, damaged packaging, and counterfeit products have repeatedly occurred in the industry. Even leading players are like this, and near-expiry food stores have already begun a round of consolidation. Also in July, the parent company of discount store brand Prosperity Market, Shanghai Bengbeng Miao Technology Co., Ltd., stated in a contract dispute lawsuit with a supplier this year that because its business had stalled and had no cash flow, it was preparing to apply for bankruptcy. In the final analysis, it is still a supply chain problem. The supply chain of the food industry is inherently complex, and extending to near-expiry products, a batch of goods goes through several transfers before reaching the store, so the stability of supply sources can be imagined. In contrast, backed by hypermarkets, these supermarket discount stores have natural advantages. At this time, with stable supply sources, what discount stores need to do is ensure product quality. After all, selling low-priced products in discount stores does not mean low-quality products, but providing low-priced, high-quality products. Whether it's membership stores, warehouse stores, or discount stores, they are all ideas for supermarkets to save themselves. At a time when the retail industry is undergoing structural changes, supermarkets that are continuously losing money can only keep searching for remedies. Now, how to operate discount stores and achieve sustained growth will be another major test for supermarkets.
Source: Lianxian Insight (ID: lxinsight) Author: Wang Huiying