---
title: "Exclusive Analysis: Prospects of Different Hard Discount Models in China in the Wake of Bied's Closure"
description: "On December 23, 2023, Bied Supermarket announced its suspension of operations from December 22, 2023, and closed its mini-program mall and official website. This article, an exclusive contribution to New Distribution by Qi Te, a partner at Zhengxuan Capital who has long studied hard discount development in China, analyzes the prospects of different hard discount models in China, arguing that Bied's closure was an investor's stop-loss decision rather than proof that the hard discount model fails in China."
author: "戚特"
publisher: "New Distribution"
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published: "2024-02-21"
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# Exclusive Analysis: Prospects of Different Hard Discount Models in China in the Wake of Bied's Closure

> On December 23, 2023, Bied Supermarket announced its suspension of operations from December 22, 2023, and closed its mini-program mall and official website. This article, an exclusive contribution to New Distribution by Qi Te, a partner at Zhengxuan Capital who has long studied hard discount development in China, analyzes the prospects of different hard discount models in China, arguing that Bied's closure was an investor's stop-loss decision rather than proof that the hard discount model fails in China.

Editor's note: On December 23, 2023, Bied Supermarket issued a notice announcing that it would suspend operations from December 22, 2023, and simultaneously closed its mini-program mall and official website. The closure of Bied has drawn widespread industry attention, especially at a time when hard discount is on the rise in China. There have been many reports and analyses about Bied, but is it really true, as some media outlets claim, that the hard discount model doesn't work in China? What implications does Bied's case have for the development of hard discount in China? This article is an exclusive contribution to New Distribution by Qi Te, a partner at Zhengxuan Capital who has long studied hard discount development in China, providing an exclusive analysis: Prospects of Different Hard Discount Models in China in the Wake of Bied's Closure.

From October 2016, when Philipp opened the first store in Shanghai, to now, about seven years later, Bied's hard discount practice in China has officially come to an end. However, Philipp had actually left Shanghai as early as 2021, and Bied's new investor was Argan Capital, a mid-market buyout fund from the UK. The team at Argan Capital had previously managed the BIM investment case and achieved substantial returns. After establishing the new fund Argan Capital, they set their sights on China. Since Philipp had laid a good foundation, Argan Capital believed that Bied could replicate the story of incubating BIM in Turkey. But things didn't go as planned. Bied's various metrics—store opening speed, ramp-up data, store profit margins—didn't meet basic requirements. At the same time, Bied was adjusted from a peak of 200 stores to 150 stores. Clearly, Bied's hard discount model in China fell far short of Argan Capital's expectations. Therefore, starting from the first half of last year, Argan Capital commissioned investment banks to find new buyers, but without success. Eventually, at the end of the year, they decided to cease operations and exit the Chinese market. It is understood that Argan Capital has now fully returned to its home investment market in Europe.

First, regarding Bied's cessation of operations, several basic concepts need to be clarified. First, Bied's cessation is not, as many media outlets claim, evidence that the hard discount model doesn't work in China. On the contrary, based on Bied's store data, at least half of its stores were profitable, and with gradual ramp-up and time for adjustment, the proportion of profitable stores could have increased further. However, Bied's model did have a relatively long ramp-up period. Second, Bied's cessation is a stop-loss action by an investment institution. Any institution, if its investment doesn't meet expectations, is likely to stop losses in a timely manner. Especially considering that Bied was Argan Capital's first investment in China, the complexity of China's retail industry far exceeded Argan Capital's imagination. Combined with the pandemic factor, from any perspective, this investment in Bied could not meet Argan Capital's expected returns within a certain period. It is very normal to choose to exit if you can't endure the losses or feel the cycle is too long; after all, not every company is Hema. Third, whether Bied suffered from local maladjustment is a question of "a white horse is not a horse." Indeed, if Bied, as a foreign enterprise, failed in retail in China, anyone could label it as "local maladjustment." But I would ask: if some local enterprises that adopted almost the same model as Bied were to fail one day, would the media label them as "local maladjustment" or "the hard discount model doesn't work in China"? In reality, no retailer completely copies past experience without innovating. Bied's local innovation has actually been practiced in the past two years. When problems arise, we need to deconstruct, analyze, and review the problems, rather than simply and crudely "labeling" them. I believe Bied can indeed give us at least two insights:

First, when doing hard discount in China, everyone must lower their expectations; this won't be a fast process. Having been in this industry for 3-4 years, even today you'll find that many companies that are doing well still have very small store networks, only at the scale of dozens of stores. To be honest, this pace of store opening and growth is unacceptable to any investment institution. The entire industry's growth rate has returned to the level of the chain supermarket industry 20 years ago. The reason is that, currently, hard discount still requires a direct-operated store model, and we estimate that this model needs to reach 500 to 1,000 stores before the scale effect of profitability kicks in. From another perspective, for community-based discount models that offer franchising, the franchise model is not particularly attractive. At least compared to early snack stores, there is no category dividend period, and the ramp-up period is relatively long.

Second, regarding private label products, everyone must have a clear understanding: private label is a competitive strategy, not a necessary action. Private label doesn't necessarily equate to discount. Private label is an inevitable result of seeking product differentiation after a company reaches a certain scale, not a process. Prematurely pursuing private label for the sake of private label will only erode your cash flow.

So, what are the prospects for different hard discount models in China? First, I'd like to take this opportunity to give three sentences to all entrepreneurs in the hard discount industry:

> **1. Discounting is a historical process; you must bet decisively.**
> **2. China's discount retail format will never be dominated by a single model; insisting on the path that keeps you alive is the right path.**
> **3. Don't be afraid. No one in China has the right answer in the discount industry, but the right answer may emerge from those with "unconventional" and "rebellious" thinking.**

Below, I will analyze the prospects of different hard discount formats in China. Currently, domestic hard discount entrepreneurial teams are flourishing, but if we distinguish them, overall, we can differentiate based on two major dimensions.

**I. Product (Assortment)**

From the perspective of assortment, one important distinguishing factor is whether they operate fresh produce. By "operating fresh produce," I mean managing fresh products with the SKU count and specifications of a small supermarket's fresh section. Currently, the only ones capable of simultaneously operating a fresh section and a discount section are Xi'an's Jingxiaohe and Shanbu, also in Xi'an, which has a very similar model. I also see opportunities for some comprehensive supermarkets in their transformation towards discounting, because traditional supermarkets have experience in fresh operations. If they lower operating standards in the fresh section, operate with streamlined SKUs, and combine that with a discount model in the non-fresh section, I believe there will be good opportunities.

**II. Place (Location)**

Another distinguishing method is location choice. Currently, the main distinction is whether to open stores in communities or in business districts or shopping malls.

**Opening stores in shopping malls is a very clever approach.** First, you use the mall's traffic for customer acquisition. Second, you don't need to operate fresh produce; you can add beauty products, which generate relatively good gross margins. Therefore, this model can scale relatively quickly. It can also be franchised because the profit effect comes faster, making it more attractive to franchisees. However, this model also has limitations. First, the number of stores is limited by site selection. Second, it is more affected by category dividend periods, especially the dividend period for discounted beauty products. Based on the logic of business district and mall stores, the trend is gradually downward. Therefore, I've seen some models of this type experiencing same-store sales declines because they rely on category dividends and mall traffic.

**The other choice is to open stores in communities, where you also face two options: with or without fresh produce.** If you operate fresh produce, positioning as a community supermarket, the area needs to be 300-400 square meters. But to be honest, this is not easy because you need to combine two composite formats, ensuring that your fresh section is more competitive than supermarkets and wet markets, and your discount section is more competitive than discount formats. This is very difficult. On one hand, the requirements for the team are very high. On the other hand, we always say that retail is very dependent on timing and location, especially location. Therefore, the community fresh + discount format will not achieve the same results in every region. We currently believe that northern regions are more suitable for this format. Here are several reasons:

**First, the commercial competition environment in the north is more relaxed.** Many northern cities don't have the complex commercial formats found in southern cities, such as convenience stores, discount stores, supermarkets, and hypermarkets. Many northern cities only have basic supermarkets and hypermarkets, and at night, they are in a semi-curfew state, which is quite different from the nighttime economy in the south. So the competitive environment is relatively better.

**Second, the climate in the north is colder than in the south, so there is a general habit of stocking up on goods.** In fact, the Chinese people's consumption habits generally don't involve stocking up, but northerners do more due to climate reasons.

**Third, dietary habits differ. The further south you go in China, the higher the demand for fresh ingredients.** The demand for fresh SKUs in the diet is very high, so you'll find that the number and density of wet markets in the south are much higher than in the north. Therefore, I've observed that many hard discount models in southern regions are not as good as those in the north. In many southern regions, it's difficult for store data to exceed 10,000 (in monthly sales), but many northern stores can exceed that.

So, what should be done in southern regions? **In southern regions with developed wet market formats and more concentrated communities, a more practical way for hard discount is to open stores next to wet markets, focusing on non-fresh products as a supplement to the wet market format.** I've always thought this model is more realistic because Chinese consumers are accustomed to cross-format shopping, buying vegetables at the wet market and daily necessities at the supermarket. For example, one case I often mention to founders is JHC, a community discount format in Hong Kong. It mainly focuses on some electrical appliances and kitchenware, but it's the mature community discount format I've seen so far in areas with relatively high GDP per capita and consumption attributes similar to southern China.

You'll notice that we've discussed two of the retail 4Ps: Product and Place. But there are two other Ps that I believe are overlooked in the current market, yet all entrepreneurs need to think about.

**I. Promotion**

From day one, hard discount practice has emphasized no promotion. Its methodology relies entirely on natural word-of-mouth from community residents or customers discovering the store while shopping and then gradually making repeat purchases. Therefore, in the traditional hard discount model, promotional expenses are nearly zero because you need to extremely compress store operating costs. However, my view is that **when doing retail in China, don't confine yourself to a box. The Chinese market has dispersed traffic, and online and offline are almost borderless, which is completely different from the European market. If you can do private domain traffic and use clever ways to capture online traffic, why would you stick only to street traffic in the community?** For example, does hard discount need digitalization? Is a membership system necessary? Take Don Quijote's membership system as an example: the majica membership card currently contributes 30% of the group's revenue, but its recharge rebate rate is only 1%. So whether this business is worthwhile, everyone can calculate for themselves.

**II. Price**

Currently, all hard discount companies default to the EDLP (Everyday Low Price) pricing strategy. But can I combine EDLP with high-low pricing? Can I combine other high-margin formats on top of hard discount's EDLP? Because hard discount stores have narrow product selection, and if you also abandon fresh produce, the customer traffic the store can capture is limited. Additionally, with low gross margins, the store model has very little room for adjustment. In summary, current market models have more exploration in location and assortment, while future directions include further refinement in location and assortment, as well as significant exploration space in online, private domain, pricing, and combined formats. This depends on entrepreneurs' unconventional innovation capabilities.

Finally, let me return to the two sentences I mentioned earlier. **First, discounting is a historical process; you must bet decisively.** Overall, we believe that the penetration rate of hard discount formats in China will be between 10-20% in the long run. Of course, this ratio could be higher, but it depends on whether more excellent founders can explore innovative formats that suit national conditions. **Second, don't be afraid. No one in China has the right answer in the discount industry, but the right answer may emerge from those with "unconventional" and "rebellious" thinking.** In the past, we may have taken Aldi as our teacher, but today, when doing hard discount in China, we need to break some blind beliefs in concepts. Copying Western models, we've already seen many problems:

> 1. Stores based on community have a single revenue source and require a long ramp-up period, but if you use such low gross margins to do online, you clearly can't make the numbers work.
> 2. Doing fresh produce is death, but not doing fresh produce means insufficient store revenue.
> 3. Long ramp-up period, long payback period, so only direct operation is possible.
> 4. Blindly engaging in private label at too early a stage.

**On March 15, in Chengdu, the "Second China FMCG Hard Discount Conference" will be held. At that time, discount retail founders, brand executives, distributor bosses, traditional retail enterprises, and industry research experts will gather to focus on core hard discount issues, examining new directions, new thinking, and new opportunities in the era of discounting. We look forward to your arrival!**

On March 14, a closed-door meeting on hard discount will be held: Hard Discount Models and Operations, with one-on-one dialogues and discussions with expert teachers, sharing experiences, and discussing dividend opportunities in the hard discount era!

During the three-day conference, centered on the theme "Supply Chain Revolution," in addition to the Second Hard Discount Conference, there will also be a main forum, a China FMCG Distributor Conference, more than ten sub-forums and closed-door exchange meetings, and the first major debut of the [Extreme Supply Chain] Brand Factory Direct Sourcing Fair. We will meet in Chengdu with thousands of FMCG brand owners, distributors, retail transformers, and industry service providers from across the country, continuing to brainstorm and discuss the challenges and opportunities, changes and solutions in the era of supply chain revolution.

In this era of supply chain revolution, a new business era will be born. I hope every participant will still have a place in this wave. I believe this will be a conference worth attending! For business cooperation, please contact:

**🔺Scan the QR code for ticket inquiries🔺**


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