Discount stores are finding their advantage in lower-tier markets, where offline efficiency increases with descent. Some aggressive players have even opened 2,000 stores in a year.
"In the next couple of years, there will definitely be a batch of companies with ten thousand stores, not just one, but a batch."
Tan Zhiwang, partner at Wujie Innovation Capital, which has invested in over a dozen related brands, cannot even provide accurate growth figures for the rapid development of discount stores. "Growth is too fast to track; it changes every month."
Among his investments, some brands founded in December 2021 are expected to exceed 1,000 stores this year, others have opened 1,200 stores in a year, and some have achieved over 6 billion yuan in sales over several years. Some aggressive players have even opened 2,000 stores in a year.
Even so, Tan Zhiwang feels the pace is still too slow.
In first-tier cities, e-commerce is developed, prices are low, efficiency is extremely high, and rents are expensive. For discount stores focused on low prices, there is no suitable soil for growth. But in lower-tier markets, the advantages of offline stores become apparent; the lower the tier, the higher the efficiency, giving discount stores the opportunity to grow rapidly. "When most brands are expanding and making money, it must be a dividend period."
As one of the few offline formats still attracting capital attention in recent years, discount store brands have had impressive fundraising results.
In the first half of last year alone, four brands—lotgoo, Aotle, HitGoo, and Xiaoxiang Life—secured funding. Aotle completed three rounds of financing within a year of its founding. In August of the same year, Discount Niu completed a Series A+ round of tens of millions of dollars.
This is a significant counter-cyclical growth.
As the founder of Aldi, a discount store born during the severe economic recessions of the two World Wars, said, "The worse people's situation, the better our life."
Discount Stores Usher in Their Own Kondratieff Cycle
Scheduling an appointment with Zhu Zhiyong is not easy.
As the founder of Xunwushe, in the past week, he has been either on his way to the Investment Promotion Bureau, visiting three factories in an afternoon, or rushing to catch a flight.
The discount store brand, launched in Henan in 2020, had only about 40 stores by the first half of 2022. Changes began this year: from adding 5 stores per month in January, to over a dozen new stores in February, to more than 20 stores in March. By April, Xunwushe was opening 30-50 new stores per month, with total stores nearing 200.
Currently, over 20 stores are in preparation, and more than 100 stores are expected to boost sales during the first May Day holiday after the pandemic.
In Zhu Zhiyong's plan, within the next five years, Xunwushe will have 3,000 stores, covering Henan and neighboring provinces. He observes that in most provinces, including Xinjiang, over a dozen discount store brands are expanding simultaneously.
The development of Xunwushe almost mirrors the trajectory of the discount store industry.
The economic cycle determines the ups and downs of retail, and 2020 was a crucial turning point. According to Zhuang Shuai, an expert in retail e-commerce and founder of Bailian Consulting, the new consumption boom before 2020 was driven by market confidence in the future. When the economy stopped growing rapidly and market uncertainty increased, consumers began to demand high cost-performance products. This transition from prosperity to rationality has been experienced by the United States and Japan.
Large supermarkets have already begun to sharpen their knives.
At the 2022 Hema New Supply and Distribution Conference, Hema founder and CEO Hou Yi stated plans to open 100 discount stores in Shanghai. After validating the Hema Outlets profit model in Shanghai, he aims to expand nationwide, targeting one store per 50,000 people, with a projected total of 20,000 to 30,000 stores.
Warehouse stores are a key upgrade for Yonghui Superstores. It opened its first warehouse store in Fuzhou in May 2021 and reached 53 stores by the end of that year.
Wumart Supermarket has also started piloting discount stores. Its "Meitao" discount stores sell seasonal items and products being phased out from Wumart hypermarkets. Suning announced its entry into discount stores, with its first store in Ma'anshan and plans to open 100 stores in 2022. In August 2021, Renrenle opened two membership discount stores in Shenzhen and Tianjin. According to its financial report, by June 30, 2022, it had 10 membership discount stores.
Discount store brands are not to be outdone.
In September 2022, HitGoo publicly announced franchise recruitment for the first time, planning to exceed 1,000 stores by the end of 2023. Although HitGoo's stores are mainly in first- and second-tier cities, reports say it has completed preliminary plans for pilot projects in lower-tier cities.
HotMaxx's official website shows it currently has 250 stores across 10 cities. In its "Future Development" section, it clearly states that its total store count will exceed 5,000 in the next three years.
According to data shared by Cai Jingzhong, founding partner of Wujie Innovation Capital, snack discount store brand Snack Busy had 2,000 stores in 2022, with annual sales exceeding 5 billion yuan; Snack Preferred now has around 1,000 stores.
Behind the ambitious expansion, technology support is needed.
For new discount store brands that add over a thousand stores annually, managing this exponential growth is a huge challenge. The pandemic and the rapid development of live-streaming e-commerce led to breakthrough growth in retail SaaS services in 2020, laying a solid foundation for managing thousands or tens of thousands of stores.
"For discount stores, this is their Kondratieff cycle," Zhuang Shuai told TMTPost. On one hand, consumers' overall spending habits are becoming more rational, greatly benefiting the discount store market. On the other hand, same-city delivery has significantly expanded the coverage of discount stores, allowing offline stores that previously only served a 5-10 km radius to reach users farther away. "Discount stores are at a critical juncture where technology, economy, and consumer sentiment are all favorable."
The Logic Behind Low Prices
A pack of Nayuki tea priced at 6-7 yuan is marked at 1.9 yuan; near-expiry Haitian soy sauce and vinegar are sold at half price; even fresh Haitian soy sauce can be marked at 60-70% of the original price...
The attractive low prices are the hallmark of discount stores. Behind maintaining low prices is a supply chain operation capability different from traditional supermarkets.
In Xunwushe's product structure, 80% are fixed standardized products, including private label brands and products sourced directly from manufacturers or distributors. The remaining 20% are non-fixed categories such as near-expiry surplus stock.
On this basis, Xunwushe allocates products to each store based on the sales proportion of each product category. This determines the operational efficiency of the entire supply chain. Zhu Zhiyong emphasized to TMTPost, "Only by matching this product structure well can supply chain efficiency keep up."
Once products are in place, the right store format must be matched.
Among Xunwushe's three store formats—commercial district stores, campus stores, and community stores—commercial district stores are undoubtedly the main force. After all, commercial districts gather the most consumption-capable people in a city.
Campus stores generally have good profits. As the future main consumers, the post-95s and post-00s are more impulsive, with high-frequency rigid demand for snacks, beverages, beauty and skincare products, and samples of big brands, which form an important part of the campus store product structure.
Community stores have the lowest efficiency among the three formats, but due to higher user stickiness, overall sales are relatively stable.
According to TMTPost, all Xunwushe stores are currently profitable.
This has attracted a large number of franchise inquiries. In March, there were 1,500 inquiries; by April, this number had risen to about 2,000. However, Zhu Zhiyong keeps the approval rate at around 5%-10%. "We still need to ensure our store closure rate."
"Every day you have to stack and load goods; opening a discount store is actually a tough job." Besides not being too old, Zhu Zhiyong requires partners to have sufficient recognition of the discount store model. This is an industry still in its early stages and constantly changing, requiring operators to have clear thinking and fast learning ability.
Since March this year, Xunwushe has gradually entered Hunan, Hubei, Shandong, Anhui, Shanxi, Shaanxi, and other regions. They don't pick cities but locations within cities. "As long as the numbers work, even opening in a town is fine."
Why Can't Traditional Supermarkets Do Discount Stores?
The large-scale expansion of discount stores actually subverts the traditional supermarket model. After all, China's traditional wholesale and retail channels are extremely complex.
For traditional supermarkets, selling goods is not the main way to make money. The primary profit source is channel fees: entry fees, display fees, promotion fees, anniversary fees... As one of the main channels for products to gain consumer attention, the real target customers of supermarkets are not ordinary consumers but the vast number of suppliers.
Store leasing is another major profit source for supermarkets. Large supermarkets can often rent an entire floor of a mall at a low price—50,000 square meters, with 10,000 for the supermarket and 40,000 subleased to various small shops.
There are also many bulk channels. Foreign manufacturers may pay a deposit but fail to pay the balance, or even default on the entire order. As long as a wholesaler is willing to accept the goods, manufacturers can sell them to channel distributors at below factory prices.
"Discount goods in China won't be expensive; not only are they profitable, but their profit margins may even be higher than genuine products." These complex channels are the foundation for discount stores to survive. This is a completely different operating model from traditional supermarkets. In Zhuang Shuai's view, discount stores make money by selling goods because those goods are simply too cheap.
But the emergence of discount stores has changed the operational logic of traditional channels. Their profit model is selling goods, and their main job is to procure these goods scattered across channels, greatly shortening the originally complex and lengthy distribution process. Yet this seemingly simple model is something traditional supermarket brands cannot learn.
In the eyes of traditional supermarket practitioners, goods are never in short supply. If one supplier won't provide promotional fees, they simply switch to another. In this process, the supermarket firmly holds the upper hand.
Discount stores are different. If they don't secure this batch of low-priced goods, the supplier will give them to another brand. In Zhuang Shuai's view, "Some things in the genes cannot be changed; work habits and thinking will hinder rapid development."
"What is the core capability for doing discount stores? You must abandon many traditional supermarket tactics, even do the opposite." When evaluating discount store startup teams, Tan Zhiwang hopes they are familiar enough with certain retail categories. In his view, the capabilities needed for discount stores are completely different from those for supermarkets. Retail is about serving customers; you just need to think from the customer's perspective. Experience is not that important.
To build supply chain management capability, Zhu Zhiyong split the supply chain into three core departments: product, procurement, and warehousing and distribution.
The product department is responsible for insights, understanding the hottest products online and offline, knowing product prices and gross margins, and determining appropriate discount prices for users. The procurement department executes the product department's needs, searching for products nationwide and even globally. The warehousing and distribution department ensures products are delivered to stores nationwide in the most efficient way, guaranteeing supply.
Opening 20 stores this month, 30 next month, then 50 a month—each step is a process of iteration, updating, and building standards and systems from scratch with his team. There is no ready-made experience to learn from, and industry experts have yet to emerge. "The entire industry is still in the pioneering stage."
Compared with Abroad, the Domestic Market Is More Complex
In China, few overseas discount stores have captured the national market. The lukewarm Chinese outlet industry is a typical example.
As a typical imported concept, outlets have been developing in China for 21 years. Throughout their long history, the development models of outlets in developed countries like Europe and the US have been the main reference for Chinese outlet operators.
Chinese outlets mainly sell apparel, primarily foreign brands. This has led to a lack of supply chain advantages, no brand advantages, and no pricing power. Coupled with more developed e-commerce and a higher proportion of counterfeit goods, the survival space for outlets has been greatly squeezed.
"Domestic discount stores are completely different from overseas discount stores." Although the logic is similar, store formats, site selection, and product structures are entirely different. While many people mention Germany's Aldi or Japan's Don Quijote when talking about discount stores, Tan Zhiwang believes these overseas models cannot be copied. Compared with Europe and Japan, China's business environment is far more complex.
If the domestic market is divided by consumption capacity and habits, there are fundamental differences between first-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen, and cities below second-tier. Nan Cheng Xiang, known as the "god of sales per square meter" in Beijing, might not survive in Jinan. This is why Tan Zhiwang finds that many formats thriving in first-tier cities are likely to fail in second- and third-tier cities.
A deeper reason behind this is that China has a very diverse and complex user structure.
In Japan, most people's consumption habits and capacities fall within the same range, making it difficult to evolve multiple formats. In China, in addition to dividing people by city tiers, there are differences in consumption capacity and preferences, and each segment is large enough. This means one format cannot solve everyone's problems.
Even so, Tan Zhiwang finds it difficult to accurately categorize different types of discount stores; this is still an early-stage market.
Chinese people need to explore their own path.
"E-commerce is unlikely to have a crushing impact on offline stores." In Zhu Zhiyong's view, online and offline each have advantages in terms of people and products. Moreover, offline stores can also embrace online channels. Community group buying, Douyin local life services, and live streaming are all areas Xunwushe will explore in the future. "Just embrace it; there's no need to fear it."
The tide is quietly changing, and this is a challenge to the traditional retail model. Change, innovation, and the challenge of new models to old ones are eternal market themes. For China, a business entity with enormous scale and complex structure, who can seize the lead in the race and reach the peak still needs to be tested by the market and time.