With the rapid development of discount stores, China's retail market is undergoing a major transformation. The advantage of traditional supermarkets in "saving money" is overshadowed by discount stores. Traditional supermarkets offer periodic discounts on some items, while discount stores offer everyday low prices. Will traditional supermarkets be replaced? Opinions vary on this issue. Some believe that traditional supermarkets may be replaced in the future. For example, Hema CEO Hou Yi once stated that hard discount stores are not a bubble but real retail skill, and will replace hypermarkets in the future. Others say that low prices may disrupt the existing channel ecosystem, and the domestic premiumization process has never stopped, so discount stores lack long-term commercial potential. Of course, some believe that the two are not necessarily substitutes, and the future business model will be coexistence. Discount stores are the trend of the times Currently, China's discount store market is advancing rapidly but is still in its infancy, with a certain gap compared to the mature state of discount store markets abroad. Looking back at the development of discount stores globally, we find that in most countries, the discount format was born and developed against the backdrop of economic downturns. The more sluggish the economy, the better the opportunity for discount stores. This is true in both the United States and Japan. Japan's largest duty-free discount store, Don Quijote, was established in 1989 on the eve of the collapse of the bubble economy. In the United States, discount stores sprouted during World War II, rose after the war, and gradually matured in the 1960s. According to the "Statistical Communiqué of the People's Republic of China on the 2022 National Economic and Social Development" released by the National Bureau of Statistics, the total retail sales of consumer goods for the year was 43,973.3 billion yuan, a decrease of 0.2% from the previous year. China's economy is in a period of adjustment, shifting from high-speed growth to a slowdown. Coupled with the impact of the pandemic, changes in the domestic economic environment have led to changes in consumer demand and increased price sensitivity. According to the "2021 Young Consumer Behavior Survey" conducted by DT Finance and CBNData, young people have shown a trend of "wanting to return to the use value of goods and services." When answering "What factors do you consider most when purchasing goods?", 93% chose "needed in daily life," and nearly half chose "high cost-performance ratio," which are the top two factors influencing consumption decisions. In addition to the economic adjustment period and changes in consumer demand, as the economy and market develop to a certain extent, consumer attitudes also polarize, with consumers flocking to both low-end and high-end, while the mid-end is increasingly weakened. Multiple overlapping factors have led to the rapid development of high-cost-performance discount store formats in China. Data from the China Research Institute of Puhua shows that discount stores will be the fastest-growing format in the next 10 years, with a compound growth rate of 5.6%—far higher than hypermarkets' 2.5%, and even higher than convenience stores' 5.5%. Combining the transformation of the domestic market economy and consumer attitudes, as well as the development history of discount stores in developed countries, it can be predicted that discount stores may be a major trend in China now and in the future. Anxiety begins to spread To some extent, discount stores are the biggest threat to supermarkets because their categories and positioning overlap the most with supermarkets. And since the development of discount stores is a major trend, it means the impact on traditional supermarkets will be sustained. 1. Diversion of customers Initially, discount stores appeared to consumers in the form of "near-expiry" products, such as HotMaxx and Hi-TGO. Although customers were diverted, traditional supermarkets' advantage of good product quality completely outperformed discount stores, and their market position remained stable. However, today's discount store format is no longer dominated by soft discount near-expiry stores, but has begun to prevail with hard discount stores, such as Discount Niu and Aotle. The author visited a discount store last week and felt that not only were the product categories comprehensive and prices favorable, but most products were well-known brands with good shelf life. The traditional supermarket image of "more, good, and economical" is now overshadowed by discount stores. As a result, the most direct impact is that supermarket customer traffic is further diverted. Wu Jinhong, chairman of Ant Alliance, said: "The speed of opening low-price snack stores and their impact is like 'a plague of locusts passing through, leaving nothing green.' At the same time, it has a very significant impact on traditional supermarkets' snack, beverage, and milk sections. In some areas, supermarkets have already lost about 30% of their share." And as consumers' recognition of discount stores gradually increases, customer loss will continue to expand and spread. 2. Price impact Discount stores emphasize low-cost operations and ultimate cost-performance, and compared to traditional supermarkets, the model itself is advanced, bringing certain operational pressure to traditional supermarkets. First, in product procurement, discount stores abandon the various channel fees and payment terms that traditional supermarkets rely on. By cutting out intermediate links and using cash purchases, they reduce product purchase prices, making selling prices relatively favorable. Image source: HotMaxx official website Secondly, when discount stores develop to a certain stage, they will try to create private labels. For example, the parent company of Hi-TGO, Beijing Youpin Kuma Technology Co., Ltd., has registered private labels such as "Mutou Qiqi," "Qiang Xiaolu," "Yikole," "KASUREOO," "Chubensheng," and "Xiaoshi Wanxiang," covering several trademarks for food, daily chemicals, office supplies, and more. Private labels do not have the market premium of big brands, so their prices are low enough. In contrast, traditional supermarkets have relatively high overall prices, and as price wars intensify, it is unfavorable to their price system, sometimes even forcing them to sacrifice profits by offering loss-leading products to participate in low-price competition. In general, the anxiety of traditional supermarkets is gradually spreading. Unable to resist, seeking new ways out Long before the prevalence of discount stores, due to the combination of e-commerce development, pandemic impact, and the solidification of supermarket models, traditional supermarkets were already in decline. The economic downturn released the potential of discount stores, making it even more difficult for many supermarket companies. According to the announced 2023 performance reports or forecasts, compared with the dismal performance in 2022, many KA supermarkets improved slightly in the first half of 2023 but were still on the verge of losses. Better Life (Bugao) lost 360 million to 490 million yuan in the first half of 2023, a decrease of 1752.48% to 2349.22% compared to the same period last year, when it had a profit of 21.7854 million yuan. Renrenle lost 270 million to 310 million yuan in the first half of 2023, compared to a loss of 230 million yuan in the same period last year; net profit after deducting non-recurring items lost 275 million to 315 million yuan, compared to a loss of 254 million yuan in the same period last year. In order to find new ways out during the downturn, supermarkets have sniffed out opportunities within the challenges brought by discount stores and have begun to adopt strategies of transformation and integration, attempting to open distinctive discount stores. For example, Hema's Fresh Outlet attempts to open "quality discount stores" to promote Hema's penetration into lower-tier markets. According to analysis by Third Eye Retail, Hema Outlet's fresh discount store model has begun to take shape. Hema Outlet stores that have been open for more than 6 months have an average daily sales of nearly 150,000 yuan per store, basically achieving the "two 15 assessment indicators" (gross margin of 15%, daily sales of 150,000 yuan per store) set by Hema President Hou Yi. In addition to trying independent discount stores, some supermarkets have also opened discount sections within existing stores. For example, Pangdonglai launched a "wholesale market," setting aside a specific area in existing stores to sell selected categories at low prices, bringing consumers products with ultimate cost-performance. Based on its long-standing good reputation, Pangdonglai's attempt has also been widely recognized by consumers. For long-term development, supermarkets are actively seeking new ways out. Given this trend, will traditional supermarkets really be replaced by discount stores? Although consumers are more price-sensitive, the domestic premiumization process has never stopped, and the requirements for product quality continue to rise. It's just that consumers now have more channels to compare prices, and for products of the same quality, people naturally prefer lower prices. From the experience of social development, the rise of new formats will inevitably bring market impact, but it does not mean that traditional formats will be completely replaced; it also brings new opportunities and development space to the market. In Europe and the United States, the discount chain format was fully developed from the 1960s to the 1990s, but it did not completely devour the original hypermarket format; instead, multiple formats coexisted. Although each country's retail format has its uniqueness, the basic logic of business is universal. Traditional supermarkets and discount stores have different characteristics and advantages, targeting different audiences. Their coexistence in the market may be a long-term trend.