Discounting has become the dominant theme in retail, affecting both brands and channels.
As a process that squeezes out residual value from the value chain, discounting requires brands and channels to proactively operate with lower margins, manifesting at the consumer end as lower prices and better value for money.
In this process, the new round of brand-channel conflicts catalyzed by discounting has become an industry phenomenon that has persisted over the past year and will continue. Examples include the price disputes between JD.com and Haishi, Xinba and DeRUCCI, and Hema and Wangxiaolu.
Using the three typical stages of domestic retail-supplier relations as an observational lens, we have sorted out the operational choices brands made in corresponding historical periods, exploring the reasons behind the high-margin model and discussing how brands should respond in the new context of discounting.
It is still important to emphasize that, in essence, discounting is a counter-intuitive sales model. Merchants are naturally profit-seeking, especially during the rapid growth of the past decades. Stories like Walton-Mart changing its sign to Wal-Mart to save on electricity costs are, frankly, lacking in soil and necessity in such an environment.
Especially since this rapid growth has been mixed with extensive operational practices due to the times, and has been accompanied by shifts in development momentum across different social stages. In the transformation of consumption trends, former laggards may become leaders, while leaders' expansion may become historical baggage for the next transformation.
Therefore, for brands, the importance of keeping up with channel trends and staying in the game becomes more real.
Before 2010: Channel Dominance, Multi-level Distribution
Under the current discounting trend, the two simplest and most direct ways to reduce costs are: one, eliminating fees like entry fees and barcode fees in retail channels; two, bypassing intermediate multi-level distributors to source directly from the origin.
These two methods point to the cost structure that brands have carried since the rise of domestic retail. They were born with distinct characteristics of the times, played important roles, but have long been decayed.
The first domestic supermarket opened in January 1983 in Haidian, Beijing. It was only 200 square meters, sold only vegetables and meat, and was 5%-40% more expensive than the nearby wet market. Against the backdrop of the transition from a planned economy to a market economy, early supermarkets were mostly mom-and-pop stores operating as single units. Their management and operational methods were backward, product selection was limited, and even accounting was done with abacuses and ledgers.
The business model that later became mainstream in domestic retail came from Carrefour. Supermarkets charged various channel fees and promotional fees from suppliers, recorded them as backend revenue, and deliberately extended payment terms. Operating profit = purchase-sale price difference + backend revenue - operating costs, with backend revenue as the main component. On the product side, they adopted a Hi-Low pricing strategy, with initially high prices and promotions as the main driver of sales.
This business model reflected the strong bargaining power of retail channels in the era of channel dominance, facilitating rapid capital recovery during expansion. Additionally, the market environment at the time was dominated by small suppliers, and channel fees served as a screening and entry barrier. Consumers were also price-sensitive and easily attracted by promotions.
Ultimately, most domestic supermarkets chose the Carrefour model as a template for their supply and distribution systems, many of which persist to this day.
Channels learned from foreign channels, and brands learned from foreign brands. Marketing research circles believe that in 1982, Coca-Cola staff holding colorful balloons with the Coca-Cola logo promoted their products in major department stores in Beijing, offering a balloon or a pair of chopsticks with each bottle purchased. This was the first in-store promotion in China's modern market—although the shock it caused directly led to Coke being sold only to foreigners in China for nearly a year afterward.
Qicheng Capital has also mentioned that large brands like P&G pushed more SKU supply through extensive distribution to channels, using in-store promotions at regular prices. But this very complex system led to a particularly complex fee structure. For example, brands did a lot of work in product promotions, and even the promoters might be sent by the brand.
Not only did modern retail channels like supermarkets force higher prices due to fees, but brands that were built concurrently with retail channels (still using the beverage industry as an example: Jianlibao, which triggered the first wave of domestic beverages, was launched in 1984, and Wahaha, still in the first tier, was founded in 1987) also had to face the mom-and-pop stores that were growing faster and in greater numbers than supermarkets.
To enter these smaller retail terminals, brands relied on the power of distributors. The origin of the multi-level distribution system is the joint distribution system (liánxiāotǐ) established by Wahaha in 1994. This system was initially proposed as a new contractual relationship between producers and distributors.
The establishment of the joint distribution system meant an increase in the brand's bargaining power over distributors, with the cooperation basis being that everyone makes money. To achieve this, Wahaha also formulated a strict distribution system: distributors in each province were divided into first, second, and third-level wholesalers, each level supplied and managed by the previous level, with corresponding sales prices and regions. Price gouging or cross-region sales were prohibited, with penalties such as cancellation of distribution rights and confiscation of deposits.
Thus, Wahaha ensured its own cash flow and, based on profit distribution and distributor fission, wove a nationwide distributor network that eventually covered millions of retail terminals of various sizes. This system gave the brand enormous returns over a long period and demonstrated strong sales capabilities. For example, Wahaha's Future Cola at its peak could compete with Coca-Cola and Pepsi for a third of the market.
But the other side of the coin is that the multi-level distribution system requires significant human and capital investment.
According to Nongfu Spring's prospectus, by 2020, out of 19,000 full-time employees, 11,000 were engaged in sales and marketing, and the company had nearly 4,500 first-level distributors. If all levels of distributors are counted, the number of people directly involved in Nongfu Spring sales might be on the same order as Meituan delivery riders.
Only when labor costs are low enough and sales profits are sufficient to support distribution at all levels, and only for large enterprises and brands capable of building, managing, and controlling a massive marketing team, can this deep distribution network be successfully woven.
But this deep distribution network has also been accompanying the giants from their growth period to maturity, and over the long years, it has become decayed and bloated.
From today's perspective, the traditional circulation through multi-level distributors is inherently less efficient than new channels, filled with inaccurate ordering, repeated new product launches, and a large number of ineffective promotions. In recent years, the explicit (wages) and implicit (social security compliance, etc.) labor costs of the human-wave tactic have been increasing, making it increasingly unable to meet current cost structure requirements.
2010-2020 Period: DTC Rise, Dividends Continuously Shift
As mentioned above, before 2010, offline channels had always developed rapidly but evolved slowly. Carrefour-style chain supermarkets and mom-and-pop stores relying on multi-level distribution jointly gave rise to high-priced terminal products.
On the other hand, starting in 2011 with the popularization of mobile payments, China's unique e-commerce forces rose rapidly, impacting offline retail for decades.
By 2012, JD.com and Suning engaged in a war of words on Weibo, kicking off an e-commerce price war and attracting huge public attention, establishing the mindset that "online is cheaper than offline."
Compared to offline retail, online platforms had advantages in unlimited shelf supply, cost structure (rent, labor), and relative advantages in logistics, payment, and review systems, forming a systematic low-price advantage. The online penetration rate of some categories increased rapidly, with JD.com overwhelming GOME and Tmall overwhelming shopping malls, creating a crushing态势 for a period.
This also opened a window of opportunity for internet-native brands founded during this period. Without considering the complex offline retail-supplier relationships and regional expansion rhythms, selling online directly to a broader consumer base via DTC was undoubtedly a more efficient way.
It was also during this period that first-generation Taobao brands like Three Squirrels, Handu Yishe, and Qigege rose.
Huachuang Securities once used Three Squirrels as the most typical Taobao brand, dividing its development stages before 2020. The first stage relied on traffic to scale up and harvest e-commerce dividends, quickly becoming the online industry leader: in 2012, it participated in Tmall Double 11 for the first time and won first place in food category GMV, and continued to win for several years (2012-2016 was also a period of rapid growth for Taobao users). The second and third stages up to 2019 were the latter half of dividend release, with revenue and net profit declining (customer acquisition cost in 2016 was already 4.5 times that of 2012). Three Squirrels began to expand categories (new products, beverage category) and move offline (franchise small stores).
The explicit dividends of major e-commerce platforms began to peak in 2015, and online-offline competition entered a relatively stable phase. By 2017 and 2018, internet giants like Alibaba and Tencent had begun to invest heavily in offline physical retail and lay out the new retail landscape.
Localized traffic dividends still occurred from time to time, from the official account dividend, to Xiaohongshu's massive KOL/KOC traffic, to Douyin and Kuaishou live e-commerce, still giving birth to brands like Perfect Diary that were popular for a while.
But traffic dividends are destined to be temporary. After a large number of practitioners and capital gathered in a short time, the original value depression was quickly filled, and the dividend quickly disappeared.
Subsequent online competition still revolves around traffic costs, marketing investment, and sustainable operations. These fixed costs are essentially no different from the channel fees and promotional fees of offline retail. Moreover, online brands, while paying channel fees to e-commerce platforms, face even more naked, undifferentiated competition from a massive number of peers without geographical restrictions.
Online brands began to seek new operational transformations.
Still taking the snack industry as an example, Bestore, one of the online big three, proposed a premiumization strategy in 2019 to escape the quagmire of low-price homogenized price wars in e-commerce, aiming for high quality, high appearance, and high experience. Some measures now being reflected upon, such as requiring beautiful appearance, uniform size, and high-grade nuts that must be sourced from abroad but do not meet any essential consumer needs, are products of this strategy.
Going offline was another mainstream choice, but it was also a huge challenge for internet brands without an offline foundation.
Traditional channels still account for the majority of offline sales, but as new entrants, they undoubtedly need to spend more time and capital costs. After all, even powerful brands like Genki Forest initially resisted.
Building self-operated offline DTC channels is not easy either. Perfecting the single-store model is an eternal topic: how to choose location, rent, labor, pricing, and later expansion rhythm and model. These are entirely different system capabilities. The offline attempts of internet brands like Three Squirrels and Perfect Diary were initially not successful.
Of course, on the other side, so-called native offline DTC brands (more often recognized as channel brands) that appeared earlier than Taobao brands did continue to expand offline in the form of category killers.
In the snack track, Laiyifen, Bestore, and Laoban Daren all originated before 2010. These snack specialty stores offer thousands of SKUs, and since their competitors are still supermarkets and hypermarkets, their business models are also built on high margins.
In nature, the channel attributes of such offline DTC brands have already outweighed their brand attributes. Whether it's long-cycle capital costs, turnover costs, or labor costs offline, they no longer possess the flexibility of brand sales and face more channel issues. For example, when the offline value depression shifts, and prime locations move from shopping malls and subway entrances to community stores, asset-heavy channel brands find it difficult to transform smoothly.
Therefore, when third-party snack discount channels rose rapidly, Bestore, which had balanced online and offline DTC attributes, felt somewhat dragged down by its own weight. In contrast, Yanjin Shop, which overtook on the curve, benefited from having no self-operated store burden and the advantage of its own factory production compared to other snack brands' OEM production.
Combined with actively and deeply embracing the transformation of new snack discount channels, Yanjin Shop's current market value is about 14 billion yuan, more than 6 billion yuan higher than Bestore and Three Squirrels' approximately 8 billion yuan. In 2020, when Bestore was first listed and at its peak, its market value was more than 10 billion yuan higher than Yanjin Shop's.
In fact, strictly speaking, domestic enterprises have not yet undergone a complete economic cycle test. Even Yanjin Shop today is reflecting on the problems of overly dispersed SKUs leading to low scale effects and high management costs. After all, when money is easy to earn, it's also easy to spend. In the current context of consumption contraction, the real test may have just begun.
Since 2020: Channel Self-Rescue, Further Brand Reshuffling
Back to the present, since 2022, both online and offline, low prices and discounting have become the only keywords.
Offline, Hema announced a comprehensive transformation to a discount-oriented business model. Aldi reiterated its goal of bringing consumers sufficiently competitive prices. Pupu Supermarket recently reported that its 2024 market focus will be to fully embrace hard discounting and achieve annual sales of 5 billion yuan for its private label products.
It is worth noting that the representative channels mentioned above, plus several heavyweight membership players, are already the advanced productive forces in the offline retail context—middle-class supermarkets. They can leverage their offline layout and the quality人群 they attract to hold high-value channel positions, leverage better supplier resources to develop customized private label products, focusing on cost-effectiveness rather than absolute low prices.
Those that must unconditionally offer low prices are the more numerous budget supermarkets. They have also begun to try eliminating channel fees and connecting directly with manufacturers to remove intermediate costs, hoping to increase revenue and reduce expenses. Some vertical stores, represented by snack discount stores, also focus on the vast space of chain stores in lower-tier markets, thus following an absolute low-price route.
Purchasing white-label products does not require retailers to master systematic capabilities such as in-depth product research, supply chain quality management experience, suitable organizational and talent systems, and long-term communication and trust building with consumers. Therefore, for budget supermarkets with lower operational levels and snack discount vertical stores still in early development, it is the most efficient way to implement discounting.
As Chen Liping mentioned at a recent Hema supplier conference, in 2023, farmers' markets, wholesale markets, and white-label markets were crowded with supermarket buyers looking for low-price supply.
But for white-label products to enter mainstream channels, besides the small quality gap due to strong manufacturing capabilities, guaranteed sales volume is also an important factor.
As Pan Jinju, founding partner of Kuanzhai Venture Capital, put it: when the sell-through of a single SKU is high enough to completely bypass the intermediate product system and brand, and directly customize upstream, quality and cost can approach that of a brand—brands still need channels to reach consumers, and at that point, the value of white-label surpasses that of the brand.
Indeed, if sales volume cannot reach a certain scale, the cost and efficiency advantages that brands rely on cease to exist, and product cost-effectiveness will lose out. In fact, this model also applies to private labels: only with sufficient terminal sales can the upfront costs related to product design, development, and sales be covered.
Hema's announcement to eliminate up to 64% of SKUs in its discount adjustment, using wide categories and narrow depth as the core category planning idea, can also be seen as a manifestation of concentrating sales.
Channels now prefer high-quality suppliers with supply chain foundations and cost advantages, as well as certain innovation and production capabilities and strategic development potential. These suppliers can often be regarded as super supply chain enterprises.
In an era when channel dominance is long past and sales channels are so fragmented, strong channels can still attract these suppliers to cooperate to some extent by leveraging their advantageous positions.
But not all channels have strong capabilities. Relatively weak channels need to cede more rights and status in the retail-supplier relationship.
For example, snack discount chains, which have also reached the stage of building private labels but still need to grow as new channels, saw star company Snack Busy Group accept over 1 billion yuan in financing from suppliers Haoxiangni and Yanjin Shop. Yanjin Shop also stated that in the past, brands and channels started together, and brands had little say in front of channels like supermarkets, but the emergence of new channels gives brands more opportunities.
But it is destined that more brands will be impacted by discounting. As Weng Yinuo, founding partner of Hongzhang Investment, mentioned in "The Future of New Retail," channel support for private label traffic will help consumers develop brand awareness for a certain cost-effective category, creating a huge cognitive gap between private labels and first brands, and the two "collude" to drive out competitors.
The first to be driven out will definitely be weak brands with obvious shortcomings in product differentiation, supply chain capabilities, price control capabilities, and channel management capabilities, especially OEM brands.
Marketing expert and associate professor at Zhengzhou University, Liu Chunxiong, also believes that there will be three typical price bands in the future: first, the hard discount price band, which will be occupied by retailers' private labels, and the survival space for brands will soon disappear; second, the mass famous brand price band, which will be occupied by super large single products of well-known international and domestic brands; third, the high-end and luxury price band, which is limited in scale but high in added value, and this price band will be the most active stage for brands in the future.
Brands should not compete on price but should raise prices to open up the high-end market. This may seem counterintuitive, but the logic behind it is still related to scale.
As mentioned earlier, whether white-label or private label, they need guaranteed backend sales to cover production and development costs, so they can only target the mass market and cannot meet niche consumer needs.
This leaves room for brands to create niche products with clear differentiation that meet specific consumer demands and thus have high added value. Taking the dairy industry as an example, as an industry without core technical barriers and heavily dependent on source pastures, channel trust can easily shift, making it a key category for retailers to develop private labels.
This situation in the dairy industry has actually already occurred in Japan. In response, veteran dairy giant Meiji chose to develop clearly differentiated products such as milk with different flavors or particularly high protein content. These products have relatively small audiences, making them unprofitable for private labels, but differentiation allows for high premiums. In early 2023, Meiji Group also mentioned that it would continue to expand its sales regions and production in China, especially product lines with high added value.
Every brand wants to be the strong brand that stays on the shelf. As we said at the beginning of this article, discounting is a process of squeezing out residual value from the value chain. From high margins to low margins is like squeezing water from a sponge: the first to be squeezed out are the parts closest to the pressure point and with larger pores. When the simple things are done, it's time to show real strength.
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