Hard Discount: Is Low Price a Tactic or a Strategy?

Low price is an operating tactic, not a strategy.

As hard discount expands in China, is low price a temporary tactic or a long-term strategy? How do brand owners and discount-chain operators view the model? What is changing in the market, and where will hard discount go next?

This article is adapted from a roundtable held at the first China FMCG Hard Discount Conference on December 6, 2023. Participants included Luo Jinzhou, general manager of sales headquarters and the South China operating center at Chacha Food; Chen Zhengguo, chairman of Leerle Commercial Chain; Zhang Jiao, associate director of go-to-market at PepsiCo Foods; Shi Jianwei, founder of Jinbaibai; and Chen Siting, CEO of New Distribution.

Should Brands Embrace or Resist Discount Channels?

Chen Siting: Discount retail has become extremely popular, built around the proposition of good products at low prices. From a brand owner's perspective, what is the real attitude toward discount pricing?

Luo Jinzhou: I have always believed that a brand's first responsibility is to follow consumer choice and serve consumers well. Wherever consumers shop, a brand should connect with that channel.

I see discount pricing through four points.

First, we will embrace the channel while maintaining appropriate price controls. The consumer is the ultimate customer of the brand. Whether we work through discount retail or a traditional distributor channel, we pay close attention to how value is allocated across the price chain. We manage the pricing requirements of each part so that one channel does not damage another.

Second, low price is never absolute; it always has a reference point. Consumers may compare the offer with its previous price or with a competitor. Ultimately, the meaning of the price depends on the company's positioning and consumer demand.

Third, when consumers ask for a low price, they do not merely want something cheap. They want to feel that they received a bargain. The feeling is based on their existing understanding of the brand and its price. The purchase gives them a sense of advantage and emotional satisfaction.

Fourth, Chacha operates according to three principles: customer value, open cooperation, and continuous innovation. We remain open to the discount channel and continue to explore new solutions, including loose-weight sunflower seeds and potato chips. But open cooperation must not come at the expense of customer value.

Zhang Jiao: My own view is that retail prices operate in a free market and are very difficult for an outside party to control.

Low prices are not new. Looking back ten years or more—from hypermarkets to conventional e-commerce and then new-retail e-commerce—almost every new business model entered the market by using low prices to gain adoption quickly.

PepsiCo Foods develops a corresponding solution and strategy for every new business model.

A snack discount chain cannot be managed as if it were simply one more customer. It is a new channel. Every channel serves a particular consumer group and set of consumption occasions. PepsiCo Foods responds to those characteristics across the entire organization, from upstream supply chain to marketing and sales.

Chen Siting: Both Chacha and PepsiCo are open to discount channels while maintaining management controls. When a brand works with hard discount, where does the traditional distributor sit, and how can its share of value be protected?

Luo Jinzhou: We work directly with large snack discount chains and manage them centrally so that the product and price systems remain stable across channels.

On price, a product with the same specification and weight is priced in the snack discount channel at the same level as the promotional price in the conventional market. It should not disrupt the broader market price.

On products, the assortments are differentiated. The snack channel primarily uses loose-weight formats, while conventional channels primarily use fixed packs. We also develop products specifically for snack discount through a dedicated supply chain.

Zhang Jiao: The pressure on traditional distributors has been particularly visible this year. Industry reports suggest that many have lost 20 to 30 percent of their market share.

That is a test for distributors, but it is also an opportunity to improve their overall capabilities.

PepsiCo focuses on two things:

First, we enable distributors and help them improve operating capability, efficiency, and confidence. That includes using the strengths of their current portfolio to expand the market and increasing output per store.

Second, we provide distributors with product solutions. Products developed for discount channels are also made available to distributors.

How Discount Chains See the Market Change

Chen Siting: We have mainly discussed the brand-owner view. Let us now turn to the two discount-chain operators.

Discount retail has existed in China for a long time, but it accelerated sharply over the previous two years. How did brand attitudes toward discount stores change during that period?

Chen Zhengguo: Leerle began operating discount stores in 2013. The experience is clear: manufacturers have both loved and hated discount stores. They love the sales volume and hate the risk of disrupting the price system.

With snack stores growing so rapidly in recent years, manufacturers began to understand hard discount differently. Many now support the format and design dedicated solutions around its characteristics.

To put it directly, many leading brands once reached us largely through diverted goods, and manufacturers constantly challenged the business. Today, we connect with factories and cooperate directly with manufacturers. They have accepted the format.

Shi Jianwei: The relationship with a brand is still a negotiation, but through that process we have also built a group of brands willing to cooperate for mutual benefit.

I see the profit structure of product circulation this way: the brand owner should earn the profit appropriate to its role, and retailers and distributors should earn the profit appropriate to theirs. We do not want every product to be sold by breaking its established price.

All parties should maintain the market together. While offering consumers products with greater value, the industry must return to value itself.

The entire industry is removing inefficiency. Discount is a major trend. Brand owners and distributors alike are learning to embrace the change.

Low Price Is an Operating Tactic

Chen Siting: For a discount retailer, is discounting an operating tactic or a development strategy?

Chen Zhengguo: From Leerle's perspective, discounting is simply an operating tactic.

Brand is the first element of our business, and we hold brands to a high standard. For sunflower seeds, we want Chacha; for potato chips, Lay's. The product must come from a brand whose quality is assured.

Low price is only an operating tactic. We use part of our own profit to subsidize the consumer. The products and brands remain strong; we simply accept a lower share of the value to meet consumer needs.

Shi Jianwei: I have always believed that genuinely low prices are one of the core capabilities of a hard-discount company. But a retailer cannot guarantee that every product is the absolute lowest-priced offer in the market. We can provide only relative price advantage.

I agree with Chen: low price is an operating tactic, not a strategy.

Chen Siting: The phrase “low price” needs quotation marks around it.

Sometimes the ability to launch a price war is itself a capability. Only a strong supply chain can use a price war to generate profit and gain market share.

If the supply chain is weak but the company treats low price as its strategy, it will lose money and may eventually fail.

Behind low prices are a powerful supply chain and extreme operating efficiency.

Returning to Fundamentals: Where Will Hard Discount Go?

Chen Siting: Hard discount is one channel among many in an increasingly fragmented market.

The specific participants and formats will vary according to each company's strategy. Some will operate bulk snack stores, some discount supermarkets, and others integrated warehouse-store discount formats.

Whatever formats emerge, the direction clearly contains real growth. What expectations should brand owners establish for the channel?

Zhang Jiao: At its core, a snack discount store is not entirely different from a traditional distributor.

The conventional distribution path runs from brand owner to distributor, then retailer, and finally consumer.

The snack discount path runs from brand owner to platform, then directly operated or franchised store, and finally consumer.

There are nevertheless important differences. A snack discount chain is more platform-based and corporate. Its trade terms and level of digitalization are also different.

Most importantly, a snack discount chain needs a powerful supply chain. That is one of its advantages over a traditional distributor.

Compared with conventional retailers, snack discount stores may also have advantages in store design, location, and assortment.

Their weakness is cost. A business that combines low prices with high costs cannot operate sustainably.

The investment required for an individual discount store is still relatively high. Even in some town markets, an outlet may require RMB 600,000 to RMB 800,000.

If operators can bring those costs down, the model can be sustainable.

Discount formats have existed for at least five years and in some cases much longer. Capital merely accelerated their scaling.

The business model itself is not especially complicated. Overall, I believe it is workable.

For PepsiCo Foods, this is an important channel. We will mobilize resources to embrace it, while also considering our traditional offline business and providing the corresponding solutions.

Luo Jinzhou: I would frame Chacha's response in three areas:

Products: create complete differentiation from conventional channels and develop dedicated products.

Organization: establish a dedicated working group to resolve issues in the snack discount channel, including issues affecting distributors.

Supply chain: build a nationwide footprint and connect point to point, with efficiency as the priority.

Overall, we are actively embracing the channel.

What Should Distributors Do?

Chen Siting: No distributor is sitting on this panel, but closer cooperation between manufacturers and hard-discount chains will certainly affect them. Under this operating pressure, what should distributors do?

Luo Jinzhou: Chacha's relationship with distributors is relatively stable. Our advice is to cultivate markets more deeply.

Customer traffic is moving closer to neighborhoods. Distributors need to develop more neighborhood business and serve community stores, fruit shops, tobacco and alcohol shops, milk shops, and other outlet types.

They should build deeper coverage around the community and develop every relevant outlet, not only the traditional ones.

Chen Zhengguo: Distributors will undergo major change over the next three to five years. Based on the assets and product advantages they have accumulated, they can transform into warehousing, delivery, and supply-chain businesses.

Zhang Jiao: Distributors do not need to be pessimistic. A new business model appears every few years, but distributors have continued to exist.

Most distributors possess distinctive capabilities, including local market control and outlet service.

We want to help them digitize internal operations and improve team management. The number of stores may decrease, but if output per store rises, there is still room for high-quality market growth.

Shi Jianwei: Distributors should reduce reliance on secondary wholesalers and transform into service providers. They need to improve the entire chain from product selection through warehousing, logistics, and after-sales service.

They can also redesign their warehouses and participate directly in the hard-discount market.