“Hard discount” is a direct translation from the English term, coined in the retail discipline to describe a retail model distinct from soft discount. The literal meaning is not easy to grasp. Simply put, the difference is that soft discount is a discount-oriented retail model that sells products cheaply through numerous operational tactics, such as selling near-expiry items, bundling discounts, and using special offers as traffic drivers. Hard discount, on the other hand, sells products at rock-bottom prices by cutting unnecessary expenses (explicit costs) and actions (implicit costs).
Counting from 1946, when Karl Albrecht and Theo Albrecht took over their family's small suburban store, the hard discount model has been around for 78 years. Counting from 1962, when Karl Albrecht renamed the store ALDI (Albrecht Discount), the systematic operation of hard discount has been 62 years. Frankly, a business model that has existed for six or seven decades has been dissected, studied, and emulated by countless practitioners and scholars, with many successful imitators. Hard discount has long had no secrets.
ALDI and a few of its imitators, excerpted from "Talking About Hard Discount Supermarkets That Can't Get 'Hard' in the Past Two Years"
It's just that this retail model was introduced to China around 2017, so it has only gradually become familiar to some domestic practitioners in the past two years. For those who want to learn more about hard discount, there are also public materials from two listed companies, Turkey's BIM and Mexico's Tiendas 3B, that can be consulted.
This time, let's talk about something else: the obstacles to hard discount's development in China.
Note: Whether it's a single-category discount like snacks or a full-category discount like supermarkets, the problems encountered are the same. The only difference is that the financial leverage that the model can mobilize varies, leading to differences in the difficulty of overcoming each stage's obstacles and the barriers built.
Let's start with the conclusion: As the hard discount model develops over time, the obstacles can be roughly summarized into three stages:
1) Industry enemy (industry chain resistance); 2) Peer competition (retail-side resistance); 3) Product capability building (self-limitation resistance).
Note: These three stages of resistance may overlap or occur at different times, with no strict time or stage division.
Hard discount is essentially a retail model. The root of retail lies in solving circulation efficiency, and one way to measure circulation efficiency is by looking at the product markup rate. In essence, hard discount is a hardcore approach that pushes the product markup rate to the theoretical limit in the circulation process.
Take food and beverages as an example. In the traditional distribution model, a product goes from the brand to distributors and then to the final retail end, with a markup rate often around 2x (clothing and cosmetics are even higher due to their circulation characteristics). Hard discount directly eliminates unreasonable brand premiums, intermediate multi-level distribution links (note: not all distribution links), and various redundant terminal costs, pushing the markup rate down to 1.3x, and some even go as low as 1.2x.
Using food and beverages as an example, the difference in circulation markup rates, excerpted from "Talking About Hard Discount Supermarkets That Can't Get Hard in the Past Two Years"
This leads to the first stage of resistance: touching the interests of industry chain participants, making enemies everywhere.
Originally, every link was making good money. When hard discount comes along, most (but not all) brand owners, distributors, and channel peers suffer losses, and some are even cleared out of the industry, cutting off many people's income. Touching the industry chain means going against players at all levels.
It's easy to imagine how many people don't want the hard discount model to develop well. Incidents of brand owners cutting supply, distributors reporting, and retail peers attacking have been common in the past year.
It's like 19th-century London, where the advent of the automobile threatened the entire horse-drawn carriage industry that dominated urban transport, triggering large-scale industry resistance.
The commercialization of innovation has always required an adaptation process.
Fortunately, truly effective innovation captures the key elements of things. Consumers vote with their wallets, and in this environment, they do benefit, so the industry has developed amidst重重阻力.
The way to overcome this stage's resistance is not difficult: use scale to speak, as channel scale brings absolute say.
When a regional market has sufficiently high retail penetration of discount systems, the industry chain undergoes a very interesting attitude shift. Channel peers and distributors realize they must change or be left behind, and they start trying various zero-batch distribution, supply alliances... Brand owners realize they must cooperate or be left behind, and they start offering differentiated, customized products, or even opening up OEM. The industry chain resistance disappears.
Seeing that discount snack stores have already passed this stage, discount supermarkets will generally face the same problem and cannot avoid it.
Note: However, full-category discount supermarkets, due to the complexity of their product mix, will find it harder to overcome this stage's resistance than vertical-category discount snack stores, and it will naturally take longer.
Once past this layer of resistance, a discount system can be said to have a truly stable business foundation. Of course, more problems follow.
This is also a very realistic problem in the second stage: direct competition among peers, endless competition.
China's business environment has always been relatively harsh. When a business is profitable, it quickly attracts a swarm of people. The advantage is that it can quickly mature a new industry chain; the disadvantage is that forced maturity means excessive competition and resource waste in the process.
Take the real situation in discount snack stores last year: at an intersection, stores opened face-to-face, competing for business. Competition was comprehensive, from site selection, product pricing, to store operations.
Note: They even engaged in price wars and vicious competition. Although no one could kill the other, the fighting was indeed fierce. Fortunately, the State Administration for Market Regulation intervened and mediated the matter.
In one region, face-to-face competitors Haolailai and Zhao Yiming & In another region, face-to-face competitors Tiaoma Wholesale and Yipin Wholesale
In terms of the process, this kind of competition is truly exhausting. Unlike high-margin businesses like tea drinks, where five milk tea shops on one street can each thrive, hard discount's low margins mean profits must be squeezed from every detail.
How detailed? For example, considering how to arrange products on shelves to save labor and time in stocking and organizing...
And it's not just competition among new players; even established players are forced to transform and join, cutting their own prices to start discount transformation.
But dialectically, this kind of competition is overall more beneficial than harmful.
First, it proves that stores can still make money even in face-to-face competition (otherwise, why would they do it? Everyone is in business to make money, not to fight to the death). The market capacity is not that narrow; it's just that the first-store dividend quickly disappears.
Second, this competition activates the catfish effect, raising the average business capability of practitioners across the board. To survive, many players start thinking about "snacks+", new models, or even supply chain efficiency, fostering the industry's self-iteration ability.
Third, competition brings high traffic and industry attention, leveraging the spread of the hard discount concept within the industry, thereby accelerating coverage of more consumers and bringing more benefits.
On one hand, rapidly developing and expanding; on the other, facing face-to-face competition from peers. This is the true picture of the current development of the hard discount industry.
Frankly, this places very high demands on the organizational development and alignment of any retail enterprise.
But after enduring a few years like this, the hard discount systems that survive will have considerable competitiveness and business barriers.
Once the hard times are over, the next consideration is how to live well.
This leads to a more challenging development obstacle: extending capabilities from retail layout to private label products.
Hard discount systems have built their own channels, are so close to consumers, understand them so well, and can see many product innovation opportunities. It would be a pity not to fill commercial gaps with private label products.
Moreover, conventional retail businesses maintain net profit margins of 2-3% year-round. Improving profit margins through private label development is a proven path.
So it's only a matter of time before hard discount systems get involved in private label development.
But willingness is one thing; capability is another.
The biggest difficulty lies in overcoming the difference in mindset: retail pursues efficiency, while products pursue meeting user needs. Efficiency is about cost optimization, paying attention to details, and doing big things with small money; meeting user needs is about ultimate experience, not hesitating to spend big money to optimize product details, pursuing the ultimate under limited conditions. The two have an inherent contradiction.
So it's not easy for retail enterprises to grow product capabilities on top of their existing business framework.
Frankly, if one of these two things can be done to the extreme, it's already an excellent company. If both can be done successfully, it's likely an outstanding company.
Refer to the well-known hard discount giants: Aldi's private label share is >80%, Lidl's private label share is >80%, Trader Joe's private label share is >80%...
But currently, Chinese hard discount enterprises have not yet reached this stage, so it's unknown what answers they will give the market.
But it's foreseeable that the time for hard discount systems to focus on private label products will not be far off.
It's not hard to imagine that the FMCG industry will undergo another major change at that time. Because this is not only a challenge for discount retailers but also a huge challenge for brand owners.
They will suddenly find that after developing along the brand path for so many years, their downstream retail terminals are also starting to compete with them for shelf space.
How to coexist and co-create is something that needs adaptation.
But one thing is certain: the prelude to hard discounting has already begun in China's retail industry, and the trend of industry transformation is irreversible. The problems and obstacles that need to be faced will all be encountered.
How to grasp the rhythm and focus on solving key problems at each stage is what hard discount enterprises need to pay most attention to.