Rapid expansion to achieve economies of scale early is particularly important for expiring food stores.

Featured on CCTV News and continuously followed by the industry, the expiring food store format has recently officially moved from niche enthusiasm to mainstream visibility.

There is already much data providing a direct view of the market size for expiring goods. According to CCTV News, in 2020, the market size for expiring food was over 10 billion yuan. Data from iiMedia Research shows that in 2020, the total output value of China's snack industry exceeded 3 trillion yuan, and estimating with a 3% inventory clearance rate, the expiring food industry scale also exceeds 100 billion yuan. Due to the significant proportion of associated purchases and impulse consumption in shopping scenarios, physical stores that can be browsed are the most ideal sales scenario for expiring food. Since 2019, expiring food discount stores have become a "wealth code" for some franchisees, purchasing goods at 1-3% of the original price and selling at 2-5%, with profit margins reaching 30-50%. Although prices in the stores are low, profits are actually quite high. As the market size and store value have been gradually explored, capital has begun to notice this relatively traditional offline business. Within two months, three offline expiring food store brands received financing; and the current leading player, HotMaxx, received capital injection as early as 2019, gaining a certain scale advantage ahead of time. Offline expiring food store brands also need capital support. Supply chain and site selection are the only two competitive barriers for expiring food stores currently. This means that rapid expansion to achieve economies of scale early is much more important for expiring food stores than for convenience stores and supermarkets.

-01- The Value of Offline Stores

The simultaneous boom in offline and online business for expiring goods can be attributed to the accidental black swan of the pandemic and the inevitable development of Chinese consumer brands. First, the accidental factor: last year's sluggish physical retail led to excess inventory accumulation for offline supermarkets and brands, creating a stronger demand for clearing expiring goods. Second, the "involution" of consumer brands has led to a burst of new products. In recent years, consumer brands have been launching new products at an increasingly fast pace. Seasonal and holiday limited editions have become important means for brands to stimulate consumers' attention, while various novel and niche flavors have also become ways for brands to gain traffic on social media. Channels favored by young people, such as convenience stores, have become the preferred channels for brands to test new products. However, mainstream chain convenience stores replace more than 20% of their products weekly. Products that do not meet sales expectations are returned to suppliers, and brands continue to research and launch new products for testing, leading to a large accumulation of non-mature products in suppliers' hands. It is foreseeable that under the macro influence of economy and society, competition among consumer brands will continue to intensify in the next decade. As new products in mainstream channels increase, the supply for discount stores will also increase, and consumers accustomed to shopping at discount stores will continue to grow. Before the emergence of offline expiring discount store brands, there were three sales channels for expiring goods: online stores, supermarket clearance sections, and mom-and-pop shops. However, none of these three channels truly solve the pain point of clearing excess inventory for suppliers, nor do they match the shopping needs of expiring food consumers. First, online stores. The common online channels for expiring food purchases, Taobao and Pinduoduo, operate on a search-based purchase mechanism, meaning consumers first have a relatively clear purchase need, such as wanting to eat a certain brand of cookies, then search for "XX cookies" and "expiring" keywords to get purchase links. But this means that in e-commerce channels, the most searched items are still popular products from well-known brands. Truly in need of clearance, niche imported brands and new domestic brands often end up as freebies with mainstream products. Supermarket clearance sections, on the other hand, are limited by shelf space, resulting in insufficient category variety and discount depth; moreover, to avoid high loss rates from expiring goods, large supermarkets often prohibit goods with more than half, or even one-third, of their shelf life remaining from entering. As for mom-and-pop shops, most expiring goods are still sold at regular prices, so sometimes expired food can be bought in street-side shops, with the source being expiring food warehouses. Offline discount stores, to some extent, solve the above problems. Taking HotMaxx as an example, its stores are over 100 square meters, and nearly 80% of the food categories are imported goods and small domestic brands, including popular items like Xiaolongkan and Daily Dark Chocolate. On the supply side, they precisely connect with brands that have clearance pain points. More importantly, in offline discount stores, consumers are in a state of impulse consumption, with the vast majority of goods purchased as associated purchases. When entering the store, most consumers do not have a clear shopping goal; seeing novel, unfamiliar niche brands, they are willing to try them, after all, a few yuan does not constitute a significant decision cost. This makes it easy for consumers to accept products that might otherwise be slow-moving in supermarkets due to poor taste or lack of good shelf placement. Therefore, the value of offline expiring goods discount stores cannot be replaced by any other current channel. Previously, many industry insiders compared these offline discount store brands to Germany's discount supermarket ALDI, but there are fundamental differences between the two. ALDI, like COSTCO and Walmart, achieves lower retail prices by maximizing vertical supply chain optimization and reducing costs through measures like streamlining staff. In contrast, current Chinese discount store brands are still enjoying a dividend period of information asymmetry, and at present, they are essentially doing simple wholesale business. -02- Intensifying Competition Currently, the first tier of offline expiring food discount stores is HotMaxx, with over 150 stores nationwide and four rounds of financing completed; the second tier includes Boom Boom Mart, Elephant Life, and Shihui Bang, each with around ten stores and one round of financing; there are also regional players like Haoxingfu, Deyi Yanghang, Dongluo Xisou, and Linqi Bushou. The entry of capital, on one hand, shows the market's optimism for the expiring food track, and on the other hand, means that offline competition for expiring discount stores will intensify. HotMaxx, which focuses on high-traffic areas and white-collar clusters for site selection, has made a move this year: transforming its original managed franchise model, where the headquarters operated everything and franchisees only provided capital, into a model with lower franchise fees and franchisees responsible for daily operations. According to a franchisee, in 2020, HotMaxx's franchise fee was over 800,000 yuan. Once paid, all subsequent site selection, decoration, stocking, hiring, training, and operations were handled by the headquarters, with franchisees only collecting profits. But after the Chinese New Year in 2021, the new model charges 360,000 yuan in franchise fees, with the headquarters responsible for site selection and decoration, as well as subsequent product selection and supply, while franchisees handle daily operations themselves. On one hand, this is a way to transfer operational risks to franchisees. On the other hand, transferring operations to franchisees while lowering the franchise threshold can accelerate brand expansion. According to a leaked HotMaxx business plan, HotMaxx plans to open 800 stores in 2021, with 500 stores profitable. This means that this year alone, HotMaxx must open at least 650 more stores. This pace, in the physical retail industry, is even faster than convenience stores and community fresh food stores. For consumers, the advantage of offline expiring goods stores is low prices; prices that break through imagination are the biggest, almost the only, motivation for consumers to enter the store. In other words, discount stores do not have a category that strongly captures consumer mindshare like convenience store fresh food or Hema's private label brands. The core competitiveness of discount stores is diverse and stable supply sources and as low prices as possible. Such high-quality supply sources tend to favor brands with large pickup volumes. A supplier of imported Japanese and Korean food told 36Kr Future Consumption that their imported expiring goods are usually bought in whole boxes by chain customers before even reaching the warehouse, leaving only the leftovers from chain customers' clearance for small shops like Taobao stores, with extremely uncertain prices and delivery times. This means that for offline discount stores, which rely solely on high-quality supply sources, whether they can achieve economies of scale early is key to the development of future chain brands. At the same time, offline expiring discount stores also need to maintain good sell-through rates. Taking the Sanlitun HotMaxx store as an example, products on shelves typically have a shelf life of no more than one week, while popular items need restocking every three days or even more frequently. Occupying high-quality locations early is also a reason why current offline discount stores need to expand rapidly. Unlike other supermarkets or convenience stores, expiring discount stores have greater uncertainty in product categories and quantities, making the model of reverse-customizing popular categories based on consumer demand to maintain high turnover rates, as used by other stores, largely inapplicable in expiring stores. Or rather, in the short term, China's expiring goods discount stores will not enter a more refined level of competition; high turnover rates still come from high foot traffic. Different brands have different definitions of high-quality locations. HotMaxx focuses on industrial parks; Boom Boom Mart targets shopping malls and commercial streets; while Elephant Life and Shihui Bang focus on community stores. But regardless of the format, all need to achieve scale as quickly as possible while the market is not yet saturated. Source: 36Kr Future Consumption (WeChat ID: lslb168) Author: Zhao Xiaomi Tips will be paid 400-2000 yuan upon adoption.