In 2023, an unprecedented wave of discountization swept through China's retail industry. The 'price war' between Hema and Sam's Club intensified, while Metro and Costco announced expansion in China. Amid the trend of seeking affordable alternatives to big brands, Pinduoduo's market value surpassed Alibaba's, and white-label goods from 1688's industrial belt factories gained popularity among young consumers. In Shanghai, hard discount formats emerged, with Dingdong Outlets targeting community seniors and Aldi targeting middle-class consumers. The pressure from snack discount chains expanding aggressively also affected traditional snack brands, with Bestore announcing its largest price cut in 17 years and Three Squirrels responding with a 'high-end cost-performance' strategy. As the discount wave engulfs the retail industry, how should retailers, brands, and suppliers navigate this shift? After the trials of fresh e-commerce, community group buying, and unmanned retail, what disruption will discount retail bring to China's retail organization? Are we entering an era of comprehensive discounting?
How Will Discount Retail Reshape China's Existing Retail Organization?
When discussing the background of the discount retail era, there is a consensus in the industry: China has entered a buyer's market. What is a buyer's market? It means that as China's supply chain matures, there is an oversupply of consumer goods and sales channels, and the development of e-commerce and social platforms gives consumers transparent information to choose channels offering lower prices for similar products. As Qicheng Capital puts it, discountization is essentially acting as the consumer's agent, with retailers taking over from brands the tasks of product selection, promotion, and fulfillment. The comprehensive discountization of China's retail industry is based on the strong position of consumers due to oversupply, which will dominate the next cycle of retail in the long term.
Currently, the first to explode and the most crowded track is snack discount retail, which cuts into the vertical category of snacks, greatly compressing the distribution chain, running a business model with low gross margins and high turnover, and leveraging franchise and capital to achieve scale reach to consumers. Representative players include Snacks Busy, Zhao Yiming Snacks, Haoxianglai, and Snacks Youming. Hard discount supermarkets, which operate more daily necessities, have higher requirements for product selection and procurement, and need time to refine store formats and supply chains to meet the living needs of specific markets and customer groups. Players like HotMaxx, Aotle, and Aldi all target specific regional markets and customer groups, saturating store openings along their life trajectories.
Facing the rolling wave of discountization, local players with existing supply chain and store resources, such as Hema, Dingdong, Yonghui, Wumart, and Jiajiayue, have also initiated discount reforms. Their approaches to discount retail vary in weight: some open discount sections in existing stores, some create sub-brands to enter the track, some open diversified store formats like outlet stores targeting specific customer groups, and the more aggressive ones attempt to restructure the relationship between retailers and suppliers to achieve long-term 'discountization'.
At the same time, discounting is not absolute low prices. The consumer industry has shifted from the most talked-about cost-performance to quality-price ratio and heart-price ratio—consumers pursue low prices but do not lower their quality requirements, and they need sufficient reasons to spend. Therefore, stores like Sam's Club, Metro, and Costco are membership-based on the surface, but in essence, they are 'hard discount' with large packaging. Recently, they have also announced acceleration and expansion in the Chinese market. Sam's Club expects to open 6-7 new stores annually in the future, and Metro has announced the conversion of all 100 stores in China to membership stores.
So, what stage have the various discount retail forces reached? How do different discount retail forces understand discountization differently?
How Do Snack Discount, Hard Discount Supermarkets, and Supermarket Transformation Divide the Market?
1. Snack Discount Track: Rapid Expansion Targeting Lower-Tier Markets, Now Entering Industry Consolidation
Snack discount, as the fastest-growing discount retail track, has seen rapid market penetration in recent years due to the influx of cross-industry players and the leverage of capital and franchising. Local brands have monopolized regional market mindshare, and the industry has now entered the consolidation phase in the second half, with frequent mergers/acquisitions and store profitability needing improvement.
On one hand, the rapid development of snack discount is due to the resonance between supply and demand. During the three years of the pandemic, many leading snack discount brands accelerated expansion, and by 2022, the penetration rate of snack discount stores in the snack retail market had reached 4.5%.
There is significant room for efficiency improvement on the supply side. A FMCG distributor said that in markets like Hunan, Sichuan-Chongqing, and Jiangsu-Zhejiang, which have snack distribution centers, many snack discount brands find first-tier distributors, and some brands themselves are distributors, such as Tangchao. They have rich experience in selecting and purchasing snack categories, and with advantages like full-warehouse truck delivery to stores, cut-case display, low difficulty in assortment operations, and low labor costs, they have significant cost compression space.
The demand from lower-tier markets is strong. Snack discount stores target young people, middle-aged and elderly, and price-sensitive customers. They are rooted in regional markets, opening stores in third- and fourth-tier cities and even county towns, delivering a dimensionality reduction strike against traditional mom-and-pop stores with lower prices, higher turnover, and richer SKU counts. According to statistics, in terms of snack SKU numbers, leading snack discount brands typically have around 1,500-2,000, with Tangchao and Laopoda both exceeding 3,000, while traditional mom-and-pop stores have only 2,000-4,000 across all categories. The shelf turnover in discount snack stores is also significantly faster than in mom-and-pop stores; Haoxianglai updates 200 varieties monthly, and Snacks Youming launches 100 new varieties monthly.
On the other hand, as more players flood into the discount snack track, many brands have started franchising, using social capital to accelerate store openings, leading to oversaturation of store locations. For example, some regional markets are monopolized by local brands, and news of several snack discount stores opening on the same street is common. As market competition intensifies, snack discount quickly enters a consolidation period. Losers soon appear: 'Bengong Snack Research Society,' which focused on near-expiry food discounts, became a dishonest company; Chongqing local snack discount brand 'Zuishang Snacks' saw 30% of its stores close... To huddle together for warmth and resist market competition, mergers/acquisitions have become frequent, and increased industry concentration is the trend: Snacks Busy and Zhao Yiming strategically merged, and Wanchen Group acquired Laopoda. Currently, snack discount has formed clear competitive tiers: Snacks Busy and Zhao Yiming combined have 6,500 stores; Haoxianglai and Laopoda, backed by Wanchen Bio, have over 4,000 stores combined; followed by Snacks Youming with 2,500 stores and Tangchao with 1,500 stores.
Despite the rapid development of snack discount stores, snacks are essentially optional consumption with limited consumer stickiness. As the market evolves, it is inevitable that hard discount supermarkets, which operate more essential categories, will take the main stage in discount retail.
2. Hard Discount Supermarkets: Meeting the Daily Needs of Target Customers, with Store Locations Divided into Community and Business District
Hard discount supermarkets, which operate a wider and more essential range of categories, mainly aim to meet the living needs of different consumers, and have already formed a division between community stores and business district stores.
An industry analyst said that if a store is close to community traffic, a hard discount supermarket is essentially a convenience store without display or shelf fees, with similar characteristics such as SKU numbers and flexible store opening. However, in terms of product selection logic, hard discount supermarkets focus more on providing cost-effective products for consumers, streamlining SKU numbers to pick the most efficient categories across all channels, while convenience stores focus more on meeting changing consumer needs. Therefore, the category breadth and gross margin levels of hard discount supermarkets are lower than those of convenience stores.
Consequently, beyond snacks, what other daily necessities need to be added, how to differentiate from convenience stores, and whether to venture into fresh produce, frozen foods, and ready-to-eat items—which are more challenging in supply chain management—depend on different customer groups and store positioning.
Take Aldi, which has 50 stores in Shanghai, as an example. Positioned as a 'community canteen' for the middle class, meeting consumers' 'three meals a day' needs, its store area is generally 500-800 square meters, covering categories such as alcoholic beverages, bakery, fresh produce, dairy, ready-to-eat/ready-to-cook/packaged foods, personal care and household cleaning, and pet supplies. Moreover, Aldi's private label ratio is as high as 90%, allowing it to flexibly adjust product structure based on consumer needs. For instance, Aldi has about 500 SKUs that are seasonal or holiday-limited.
Similarly close to community traffic but targeting middle-aged and elderly customers are players like Hema and Dingdong, which have accumulated supply chain resources in fresh produce, prepared dishes, and bakery. The community outlet stores launched by Hema and Dingdong have store areas of about 300-500 square meters. Hema Outlets mainly offer near-expiry, surplus, and transport-damaged goods, as well as private label NB products, while Dingdong Outlets use the same supply chain system as Dingdong Maicai, achieving lower prices through direct sourcing and larger packaging specifications.
It can be seen that the core divergence among different community discount supermarket positioning lies in whether different target customers have time to shop and cook, their different acceptance of packaged foods, prepared dishes, and fresh produce, and the resulting lifestyle differences.
An investor expressed a similar view: as consumption stratification becomes evident in China, opening discount stores around the essential categories and life trajectories of a specific customer group offers immense growth potential. For example, HotMaxx, Aotle, and Xunwushe prefer to open stores in high-traffic business districts, but HotMaxx and Xunwushe focus more on young people, with categories concentrated in snacks and daily chemicals; Aotle focuses on the living needs of women aged 20-40, so its product structure consists of snacks and beverages, beauty and skincare (including samples), general merchandise, and maternal and baby products. Even if they want to venture into frozen foods, fresh fruits and vegetables, and grain and oil products—categories that are more difficult to manage—Aotle has opened upgraded store formats to test the waters. It is worth mentioning that Aldi, targeting the middle class, has half of its stores in communities and half in shopping centers and commercial projects.
This also means that hard discount supermarkets operating a wider range of categories need to thoroughly understand local consumer habits, refine local store formats and supply chains, and then radiate to surrounding markets.
3. Supermarket Transformation: Exploring New Discount Formats, Low-Cost Trial and Error, and Divergence in Restructuring Retailer-Supplier Relations
Facing the blazing fire of snack discount and hard discount supermarket tracks, players with supply chain and store resources, such as Yonghui, Hema, Wumart, Jiajiayue, and Yipin Fresh, have also initiated discount reforms. In addition to creating sub-brands to enter the snack discount track and opening community outlet stores, similar to peers, they have also explored new discount format possibilities.
One type of discount format is opening store-in-store/discount sections, selecting specific categories to sell at extremely low prices, such as Yonghui's genuine discount store and Pangdonglai's 'wholesale market'. The advantage of this approach is that store-in-store creates a consumer spectacle that attracts traffic, and starting from existing stores means low trial-and-error costs and fast replication. The limitation is that the game relationship with upstream suppliers does not fundamentally change. For example, Yonghui's discount sections in stores cover a wide range of categories, including snacks and beverages, rice, flour, oil, beauty and skincare, and daily necessities. They use data systems to analyze product performance and flexibly adjust the discount product pool and discount rates, which accelerates product turnover and improves operational efficiency. Another example is Pangdonglai, which has deep accumulation in fresh produce self-purchasing, prepared dishes, and cooked food self-production. Its wholesale market selects seasonal products with self-purchasing advantages, such as durian and lychee, labels the purchase price, and sells at an extremely low markup rate (close to wholesale price), but basically makes no profit, serving more to attract traffic and enhance customer goodwill.
A more profound type, currently led by Hema, is the comprehensive discount transformation of its main format, Hema Fresh stores. Launching the 'Move the Mountain' price war, announcing price cuts of 20% on over 5,000 products, launching 'Move the Mountain Beef,' and closing the paid membership application portal... To achieve true 'price competitive advantage' and narrow the gap with international traditional retail giants, Hema has made bold adjustments and innovations to its main format.
This includes efforts to restructure retailer-supplier relations. In hindsight, Hema's various price cuts and SKU eliminations, despite causing supplier dissatisfaction, have indeed been well received by consumers. According to Hema's disclosed data, one of the hit products in the 'Move the Mountain' price war, the thousand-layer durian cake, saw sales increase 26 times in Shanghai, and during the war, Hema's app weekly DAU increased by 13.3%. To extend the price reduction strategy to more categories, it is necessary to return to what Hou Yi emphasized: 'differentiated product competition, vertical supply chain, and extreme operational costs.' The restructuring of retailer-supplier relations is imperative.
Restructuring retailer-supplier relations is not about standing against suppliers—finding lower-cost supply chains through bidding can only solve immediate problems. A more ideal situation is that under many retail categories, there are one or two potential hit products with sufficient production capacity demand, allowing retailers to contract factory production lines or even motivate companies to jointly invest/build factories, compressing costs through scale production. Hema's four strategic products in East China stores—croissants, white toast, Hokkaido toast, and mochi—combine cost-effectiveness and quality. For example, a 240-gram pack of toast sells for only 6.9 yuan, which is the result of a joint venture with bakery chain Dad's Sugar to establish Kunshan Sugar Box Factory, saving on raw materials, startup, and logistics costs through scale production. However, hit products require time and luck, and finding bold suppliers to contract production lines for different categories is not an overnight task.
Always staying attuned to the latest consumer needs, selecting and continuously optimizing SKUs based on the principle of 'wide categories, narrow brands,' is the only way to achieve 'low price and high quality.' This is also the purpose behind Hema's reduction of SKUs from 5,000 to over 2,000, introducing 800 new products, and achieving a dynamic balance of 2,000-3,000 SKUs.
The Future of Discount Retail Is a Long Marathon
Behind the changes in retail formats is the pursuit of the ultimate essence of 'more, faster, better, and cheaper.' As China enters a buyer's market with oversupply, discount retail has evolved along the path of meeting consumers' 'fast, good, and economical' needs: selecting SKU numbers under the principle of 'wide categories, narrow brands,' opening stores closer to target customers, and compressing supply chain and store costs to the extreme... Among these, snack discount has simpler supply chain management and store assortment, making it easy to replicate, but consumer stickiness is limited; hard discount supermarkets target specific customer groups, with slower replication across regions, but strong repurchase stickiness; supermarket transformation is a longer process, requiring supplier cooperation and truly skilled product selection and procurement talent. Under the trend of comprehensive discountization in China's retail industry, three core issues need to be addressed:
1. Product Selection: To develop a wide-category discount format, how to streamline SKU numbers, how many brands to choose under each category, and how to achieve dynamic adjustment of product structure, the core is related to the customer group positioning of each discount store. For example, with around 2,000 SKUs, Aotle and Aldi have vastly different category structures. The former focuses on maternal and baby, pet, beauty, and skincare to solve the living needs of young women and young housewives, while the latter focuses on bakery, dairy, and alcoholic beverages to provide affordable canteens for Shanghai's middle class. Similarly, in dynamically adjusting product structure, Aldi has about 500 seasonal and holiday products under 2,000 SKUs, and Hema has introduced 800 new products to achieve a dynamic balance of 2,000-3,000 SKUs. Compared to Aldi, Hema stores are larger and have a higher proportion of business district locations, so it is difficult to cut SKU numbers very low, and there needs to be more focus on core versus non-core categories.
2. Supply Chain Transformation and Private Label Development: The extent of participation in upstream supply chains and the proportion of private label development are related to the track and format traffic. In the snack track, there are not many famous big brands, but many miscellaneous brands. Optimizing distribution efficiency and quickly scaling up are key, so the degree of upstream supply chain transformation and private label development is the lowest. Hard discount supermarkets, which open stores targeting specific customer groups' living needs, have higher frequency and stickiness than snack consumption, requiring regional market store format and local supply chain refinement, with a higher proportion of private labels. Supermarket transformation, leveraging the traffic advantage of existing stores, has more motivation and voice to push supply chain transformation and develop private labels.
3. How to Accelerate the Growth Flywheel: Different tracks have different priorities. Due to the overly rapid and saturated opening of snack discount stores, hand-to-hand combat with peers and competition for traffic with convenience stores and mom-and-pop stores are inevitable. The industry will reshuffle, concentration will increase, and the key industry watershed is when snack discount stores transition to wider-category hard discount supermarkets. The growth flywheel of hard discount supermarkets is slower, but they have stronger stickiness to specific regional markets and customer groups, and once momentum builds, their barriers are superior to snack discount. For traditional supermarkets like Hema, reforming retailer-supplier relations is a protracted war, competing on who can last longer. Regardless, the discount era of China's retail industry has arrived, and we will wait and see how the industry further differentiates.