01 The hard discount retail format is clearly in a window of opportunity given the current economic environment. A community hard discount supermarket chain named 'Discount Cow' has reportedly opened over 50 stores as of mid-July. According to its plans, the number of Discount Cow stores may exceed 1,000 in the next three years. In recent years, the industry has grown accustomed to grand claims about store openings. Not to mention 1,000 stores, it is not uncommon for companies and brands to announce plans to open 10,000 stores within one to three years, or even a million. However, without exception, these high-profile public plans often end up as empty promises. Of course, 'Discount Cow' is not just talking big; it has some capital backing. Recently, it completed a Series A+ financing of tens of millions of dollars, with leading investment institutions: XVC led the round, with Sequoia Capital China Seed Fund and ZhenFund following. 'Discount Cow' stated that this round of financing will be used for supply chain construction, proprietary system development, and store expansion. Prior to this, 'Discount Cow' had also received seed round investment from Jiacheng Capital. In the wave of new consumption, 'Discount Cow' is not a new face. It was established in July 2019 and had attempted to launch its first-generation store format in Beijing—a discount store for near-expiry products. However, after opening only 15 stores in one year and encountering procurement bottlenecks, it abandoned that model and pivoted to hard discount. Clearly, the setbacks in the Beijing market made it more cautious in subsequent choices, and the pivot did not prioritize Beijing. In 2021, 'Discount Cow' opened in Zhengzhou what it claims to be 'third-generation store formats'—24-hour hard discount supermarkets and community membership fresh food stores—benchmarked against community convenience stores, community supermarkets, and community fresh food stores. This marked the beginning of accelerated expansion. It sounds like a collection store format that wants to have it all. Regarding why it chose Henan to enter the hard discount market, 'Discount Cow' explains: first, Henan's dietary structure is relatively uniform, making replication easier; second, Henan is a populous province with high population density, offering a demographic dividend; third, industry competition is relatively weak; fourth, Henan is surrounded by the country's largest retail industry chain and logistics center. It sounds like a perfect logic. But on the other hand, the dietary structure of a single province is generally relatively uniform, with at most minor differences. From this perspective, most provinces have a high degree of replicability. As for the second point, the demographic dividend is also present in many Chinese provinces; it's a matter of opinion. The third point about industry competition does make some sense. However, the claim about Henan having the country's largest retail industry chain and logistics center is debatable. It depends on which aspects or indicators are compared. In terms of retail formats, logistics, manufacturing, and industry chain support, provinces like Jiangsu, Zhejiang, and Shanghai are equally strong, and in many aspects even superior. Of course, a company's expansion choices are always based on its own conditions and needs, which does not determine whether 'Discount Cow's' choice of Henan is right or wrong. Only time and the market will tell. It is understood that 'Discount Cow's' main store format covers an area of 150-180 square meters, operates 24 hours a day, and is positioned as a hard discount community supermarket. It carries around 800 SKUs, covering categories such as rice, flour, cooking oil, dairy products, instant food, snacks, baked goods, alcoholic beverages, daily necessities, etc., basically meeting the daily needs of community residents. For different products, 'Discount Cow' uses various procurement methods, including cash purchases, futures contracts to lock in goods, and direct procurement from first-tier suppliers and factories. Additionally, 'Discount Cow' has developed its own brand products such as rice and beer. In terms of pricing, according to relevant media reports, its prices for equivalent products are 20%-25% lower than those of street-side community stores and mom-and-pop shops. Unsurprisingly, the methodology hasn't changed; it still relies on being a 'price killer' to achieve breakthrough gains. From the product mix, the 'Discount Cow' store format without fresh produce should be benchmarked against convenience stores. The question is: can a standard product store attract customers solely by price without the product and service differentiation of convenience stores? And the format with fresh produce is benchmarked against community fresh food supermarkets. Then the question arises: will community fresh food stores, which have already fought multiple rounds against lower-priced community group buying, easily have their market share taken by 'Discount Cow'? This seems like a question that is not difficult to answer. Another issue is that, as understood, 'Discount Cow's' own brand products account for about 10% of sales, with no specific category restrictions; they will do it across all categories. Currently, all products are centrally warehoused and distributed. In procurement, goods are sourced 60% from distributors and 20%-30% from factories. Such a procurement and sales model is clearly a significant challenge to maintaining prices 20%-25% lower than mom-and-pop shops and street-side community stores over the long term.
02 Another special feature of 'Discount Cow' is its 24-hour operation. It is reported that 'Discount Cow' is not completely unattended at night; instead, it uses self-developed systems and restocking logic to manage stores through remote customer service. This sounds high-tech, but when broken down, it's essentially saying: 'Look, we've done well in digitalization.' This is not new. Good digitalization can certainly help a company improve efficiency, but claiming it plays a decisive role in operations is an exaggeration. To give a simple example, in recent years, most new retail companies have been leaders in digitalization, but what's the other side? They have all caused waves in the retail industry, yet almost none have figured out a profitable model. This is an awkward reality. So, even if 'Discount Cow' has some accumulation in this regard, it is unlikely to have an advantage over those once-popular companies. Of course, Ma Xintong also believes that retail growth follows an efficiency logic. Essentially, consumers want better and cheaper supplies. 'If you are more efficient than others, consumers will choose you.' Regarding digitalization, Ma Xintong said that 'Discount Cow' will not spend a lot of money developing a system. He said that 'Discount Cow' does have digital technology, but it is a retail company and won't talk about technology and tech every day. 'Discount Cow's' digitalization is more about analyzing product structure and continuously improving terminal efficiency. Therefore, this is not the key point; the key point is operating at night. In the view of Ma Xintong, founder of 'Discount Cow', nighttime operation has several advantages: first, labor costs are lower, with an average of one person able to remotely manage dozens of stores; second, extending business hours helps attract new customer traffic; third, it allows for nighttime restocking of some products, improving store operational efficiency. 'Discount Cow's' target customer base is all people, hoping to cover 30% of the wallet spending of 80% of residents in a community. Ma Xintong said that in the morning, middle-aged and elderly people come to buy grains, oils, rice, and noodles; young people come after work to buy instant food and daily chemicals; children come after school to buy snacks. 'Discount Cow's' product structure covers the entire community population. All of this still seems flawless, with nearly perfect logic. However, the results on the ground still need time and can only be judged over time. In terms of store location, 'Discount Cow' basically covers all communities except high-end residential areas with particularly expensive rents. In Ma Xintong's words, 'We have now successfully run the township model and the county model, so as long as the rent-to-sales ratio is acceptable, we will rent. Our goal is to control rent within 5% of sales. As long as this standard is met, we will rent.' Ma Xintong said that from Beijing consumers to township consumers, the demand for stores is basically the same, with little deviation. 'Ling Shou' wonders where this conclusion comes from and what basis it has. Based on 'Ling Shou's' limited understanding, the needs of Beijing consumers and consumers in third- and fourth-tier cities and townships are quite different, whether in terms of stores, products, or services. Not to mention anything else, try putting Wahaha purified water in a Beijing store and see if anyone buys it. 'Discount Cow's' plan is to focus on maximizing density within Henan Province this year. In the future, while increasing density in the Zhengzhou metropolitan area, it will use the main 24-hour discount store format to penetrate other areas of Henan Province. It is reported that it has already completed the creation of model stores from townships to provincial capitals, and will next expand to six central provinces. Another point worth noting is that currently, besides directly operated stores, 'Discount Cow' has more franchise stores in the form of partnerships. The convenience store format is suitable for franchising, but if fresh produce is added, a big question mark is needed.
03 Ma Xintong, born in 1994, is a serial entrepreneur in the community, retail, and brand sectors. Before 'Discount Cow', he worked on projects such as He Pan Agriculture and the community group buying 'Xiaoqule'. In 2016, community group buying was at its peak. That year, Ma Xintong heard in Changsha about the rise of community group buying models in the Changsha and Wuhan areas. He joined Gejia Network to manage the national Xiaoqule business and named it 'Xiaoqule'. In November 2018, Xiaoqule received a $108 million Series A financing, the largest single financing in community group buying at that time. By the end of November 2018, Xiaoqule had covered 15 provinces, nearly 30 cities, and more than 5,800 communities. The company had over 300 employees and 8,700 community leaders (group leaders). The total SKU count across cities exceeded 3,000, with daily orders exceeding 100,000 nationwide, and the peak daily order volume in a single city reaching 70,000. In 2019, in a media interview, Ma Xintong said he hoped to redefine the landscape of local life services such as FMCG, fresh produce, and fruits and vegetables through community group buying. 'The logic behind Xiaoqule is to move down to physical stores, possibly by opening stores, but for now, we will quickly sort out the logic of community group buying.' Unfortunately, it ultimately failed to win. In the past two years, as discount stores have become one of the directions for retail companies to develop, alongside convenience stores and warehouse membership stores, Ma Xintong has become a player again. This time, his choice of direction should be correct. According to the '2022-2027 China Discount Store Industry Market Deep Research and Investment Strategy Forecast Report' by Zhongyan Puhua Research Institute, discount stores will be the fastest-growing format in the next 10 years, with a compound growth rate of 5.6%, higher than hypermarkets' 2.5% and convenience stores' 5.5%. In fact, since 2020, discount stores for near-expiry products have attracted many young consumers due to their low-price strategy. According to a report by iiMedia Research, the market size of near-expiry food reached 31.8 billion yuan in 2021, and is expected to maintain a growth rate of 6%, exceeding 40 billion yuan by 2025. As the market continues to expand, many competitors are rushing to enter. According to incomplete statistics, in less than two years, the near-expiry discount store chain Hi Tag Go has opened more than 200 physical stores nationwide; Hot Maxx has expanded to more than 20 cities including Beijing, Shanghai, Guangzhou, and Shenzhen, with over 500 stores; the discount supermarket Xiaoxiang Life, which started in Nanjing, has expanded to Yangzhou, Changzhou, Lianyungang, and other places, with over 70 stores; the discount supermarket chain Aotele entered Chengdu and opened 10 stores in less than 3 months, and attracted many people to check in after entering the Chongqing market; Ai Zhe Kou continues to promote in its home base of Tianjin... Suddenly, the discount store format is booming. Many traditional supermarkets have also begun to enter the discount store market, increasing their efforts: Suning.com's Yizhekou small store opened at the beginning of this year, claiming it will start franchising after the Spring Festival holiday, with Ma'anshan as the main battlefield, simultaneously developing the Jiangsu, Zhejiang, and Shanghai markets, and planning to open 100 stores in 2022. In addition to Suning, companies including Jiajiayue, Huaguan, Renrenle, and Hema have also laid out discount store formats. Capital has also continued to invest in this market in the past two years: Hot Maxx, Hi Tag Go, Xiaoxiang Life, Haoshiqi, Shuaishuaimai, Ai Zhe Kou, and Shihuibang have all received 1 to 5 rounds of financing, mostly concentrated in 2021 and the first half of 2022. However, the industry still faces the pain point of unstable supply chains. In the industry, some are increasing their layout, while others are forced to exit or transform. A while ago, the parent company of the near-expiry discount store Boom Boom Mart, Shanghai Bengbeng Miao Technology Co., Ltd. (hereinafter referred to as Bengbeng Miao Technology), which had received tens of millions in financing, revealed that its 'business has stalled, there is no cash flow, and it is preparing to apply for bankruptcy.' An industry insider told 'Ling Shou' that under the trend, some people want to make quick money, but discount stores are also physical retail. It is a business that requires long-term investment and sustained stable operation, not an easy business. In addition, the difficulty of supply chain integration in the discount store format, coupled with increased logistics costs under the pandemic, further weakens its profit margins. Obviously, the selling point of discount stores is low prices, so operations place higher demands on supply chain and procurement personnel. How to reduce costs in operations and create more room for price reductions is actually a higher threshold than traditional retail. Currently, the rapid popularity of hard discount is more driven by capital, and it is foreseeable that it may end in chaos. However, under the dual influence of the new economic normal and the pandemic, 'cheap and good' will be a trend, which is an opportunity for the discount store format. But for most players, opportunities are not necessarily chances; they are more likely to be traps covered with flowers. Source: Ling Shou (ID: lingshouke) Author: Qingshan