Recently, Hema Outlets has accelerated its store opening pace, and the author observed high foot traffic at its Shanghai stores, contrasting sharply with the quiet atmosphere of traditional supermarkets. Building on the initial success of the 'Mountain Moving Campaign' in mid-year, Hema announced a 'discounting' transformation in October. Meanwhile, traditional supermarkets are also launching discount pilots, such as Yonghui creating discount zones and Jining's Aikduo converting over 30 stores into discount outlets. Chinese retail players are increasingly recognizing the importance of 'low prices'. Online, Alibaba and JD.com are proactively returning to a low-price strategy in response to competition from Pinduoduo. Offline, physical stores are initiating a 'discounting' wave. Notably, these discounts are not for near-expiry or clearance items but for regular products at normal dates, which the industry calls 'hard discount'. On the demand side, the hard discount concept caters to customers' desire to save money in a slowing economy. On the supply side, discounting essentially involves systematic optimization of the supply chain and cost structure. As is well known, even in good economic times, retail industry profits are only 2-3%. Even if retailers pass all profits to customers, it's hard for customers to perceive it as a 'hard discount'. How can hard discount achieve sustainable low prices that customers can perceive? The answer lies in significant cost optimization on the supply side. The following three points can bring about sustainable and substantial reductions in distribution costs:
Reduced product transfer times: In the traditional retail distribution chain, products go from factory to wholesale, central warehouse, and several other transfer points before reaching store shelves. In discount stores, many product chains are shortened: after leaving the factory, products go directly to the retailer's warehouse and then to the store in one transfer. Each fewer transfer typically saves over 10% in costs.
High proportion of white-label products: White-label products are those with good quality but no media advertising costs, as opposed to branded products (good quality but high media advertising costs) and generic products (no media advertising costs but poor quality). Selling primarily white-label products is a key feature of hard discount. Whether it's a factory-owned brand without media advertising or a retailer's private label (retailers typically don't advertise private labels), as long as quality is good, they can be considered white-label. A product pool dominated by white-label products offers better value for money due to no advertising costs.
Significant optimization of retail costs: At the store level, hard discount greatly reduces selling costs through relatively remote but high-traffic low-rent locations, simple decoration, selling only standard products, and reducing service commitments to customers. Warehouse-style discounting takes this to the extreme.
The key to distinguishing hard discount from non-hard discount is whether the supply side is optimized. Near-expiry discounting, which lacks supply-side optimization, is generally called soft discount. Sam's Club and Costco, whose main products are delivered to stores in one transfer and are primarily private label (white-label), are hard discount stores.
There are three main types of hard discount models:
- Vertical category hard discount: Typical examples are snack collection stores like Snacks Busy and Love Snacks. They optimize the supply side for the snack category, creating absolute advantages in product variety and price compared to surrounding competitive formats (e.g., supermarket snack sections or mom-and-pop stores). For instance, supermarket snack sections typically have only a few hundred SKUs, while snack collection stores start at 1,000 SKUs. Supermarket snack products go through multiple transfers and markups, leading to higher prices, while snack collection stores primarily use one transfer and lower markup rates, giving them a clear price advantage. Category advantage is crucial: achieving a larger display (higher product variety) and lower prices in a specific category compared to reference scenarios is the key condition for vertical category hard discount to succeed.
Players like Guoquan and Pagoda have deeply optimized the supply side in specific categories while also making significant demand-side adjustments (e.g., Pagoda greatly improved fruit quality and service, while Guoquan better adapted frozen products for home hotpot scenarios). Through supply-side optimization, they achieved cost reductions, but demand-side quality improvements added extra costs, so overall they haven't left a deep impression of low prices. The author predicts that in the frozen category, community group buying will become the main force for hard discounting. The relationship between Guoquan and community group buying can be compared to that between Laiyifen and later snack collection stores. In the fruit sector, players that achieve one-transfer distribution of affordable fruits, including community group buying and Biaoguo Factory, will gain increasing market share.
Composite category hard discount: Taking the popular Tianjin Jinbaibai Warehouse Discount as an example, Jinbaibai offers three times the SKU count and 30% lower prices in three categories (snacks, alcoholic beverages, and tea). Its snack section has nearly 3,000 SKUs, double the 1,000 in snack collection stores, and further lowers unit prices through larger pack sizes. Its beverage section has 300 SKUs, while tobacco and liquor stores or supermarket beverage sections typically have no more than 100. Its tea section has over 100 SKUs, while specialized tea shops usually have only a few dozen. Since alcohol and tea have high markups, it's easy to achieve 30% or more discounts. Multiple advantageous categories attract more customers, reducing the cost of acquiring traffic. Offline, traffic acquisition costs are reflected in rent. General vertical category discount stores must be located in communities or commercial streets to get enough foot traffic, while Jinbaibai can afford remote (cheaper) locations. The author noticed that customers visiting Jinbaibai often travel specifically to shop there, which we call 'directed traffic'. Forming scale directed traffic is a key indicator of successful hard discount operations.
Comprehensive category hard discount: This involves selecting high-demand items across many categories, optimizing the supply chain to improve quality and lower prices. Sam's Club and Costco follow this route, with many domestic followers like Hema Outlets. The author believes that creating advantages in a few categories is more suitable for China's physical retail context than comprehensive category advantages, for two main reasons: First, optimizing thousands of large single items is much harder than optimizing a small category. Sam's and Costco took decades to achieve this, and Hema invested massive capital to optimize the products needed for Hema Outlets. Small and medium retailers simply can't afford this game. In contrast, snack collection stores have been optimized by startup teams with relatively small investments. Additionally, only sufficiently high optimization levels can generate enough directed traffic, which is why Sam's and Costco can open stores in remote locations, while domestic players only dare to open in communities. Second, Chinese consumer demand is far more fragmented than Western consumers. This means that in some categories, Sam's and Costco cannot create advantages in the short term. For example, staple liquor—foreigners find it hard to understand why China has so many baijiu brands. In practice, retailers focusing on category advantages generally have better profitability and growth rates than those pursuing comprehensive category advantages.
Selling white-label products to reduce brand premiums and shortening supply chains to reduce transfer times—we call this the 'Double Reduction Movement' in retail. This movement occurred in Western retail and is now unfolding across China. However, the evolution paths differ. In the West, the Double Reduction is an intra-enterprise movement, where large retailers complete supply chain optimization through private labels, upstream control, and distribution process improvements. In today's China, the Double Reduction is a social movement, mainly manifested as follows:
Many enterprises in the distribution chain participate: manufacturers proactively produce white-label products and cooperate with multiple distribution channels, while retailers extensively seek partnerships with white-label manufacturers.
Supply chain companies like Biaoguo optimize a large number of fruits for one-transfer delivery to stores.
Livestream e-commerce hosts sell an increasing proportion of white-label products.
Community group buying also sells large volumes of white-label products and achieves single-transfer distribution for more items.
Since community group buying is more efficient at optimizing large single items than physical stores, the author believes that optimizing large single items in comprehensive categories is more reasonably accomplished through community group buying. Currently, capital-backed group buying platforms lack the ability to sell white-label products, while local group buying platforms have this capability but overall momentum is still small. However, we can clearly see that local group buying platforms are accelerating the accumulation of large single items. If we view Chinese retail as a whole, using community group buying to replicate and optimize the large single items of Sam's and Costco, and using category collection stores for category optimization, would be the most efficient approach.
Can small and medium retailers evolve into hard discount on their own? After snack collection stores emerged, supermarket snack sections were hit hard. Some supermarkets converted their snack sections to resemble snack collection stores, but sales still didn't improve. Hard discount is not just a sales format improvement; it's also supply chain optimization. Local supermarkets relying on local suppliers cannot form the supply chain needed for snack collection stores. Retailers in lower-tier markets, including those with annual sales under 1 billion yuan, lack the financial and sales capabilities to complete discount transformation and must combine with external forces. Larger retailers have the capability, but changing mindsets is not easy and requires strong determination. Yonghui created a discount zone, but the procurement chain for these discounted items is no different from other items, so this move cannot be called true hard discount. Leveraging external expertise and supply chains to assist physical retailers in hard discount transformation is a huge market. Teacher Lian Jie's team transformed a store under the Supply and Marketing Cooperative into a hard discount store in October this year. After reopening, its labor productivity indicator became the highest in the entire system, and they are now accelerating the transformation of more stores.
The supply chain revolution brought by hard discount has begun. What impact will it have? The author predicts the following main impacts:
1. Brand premiums will be squeezed, and relying on brands to win easily will become history. 2. Distributor space will be squeezed, especially second- and third-tier distributors. 3. The speed of generating new, good products will greatly accelerate, rapidly enhancing the international competitiveness of Chinese products and helping Chinese retail enterprises go global.
The traditional chain is deconstructing, and a new ecosystem will emerge.
New Distribution will hold the 2023 China FMCG Hard Discount Conference in Zhengzhou from December 5-7, 2023, bringing together hard discount chain brand entrepreneurs, FMCG head brand executives, outstanding national distributors, traditional retail enterprises, as well as service providers and research experts:
1. Create a platform for hard discount practitioners to share insights, experiences, and conduct in-depth exchanges. 2. Provide multi-dimensional perspectives to thoroughly explain the underlying logic, practical cases, long-term trends, and opportunities of hard discount. 3. Create opportunities for in-depth dialogue and precise matching among different roles in the industry chain.
Authors: Lian Jie, New Distribution Hard Discount Research Consultant; Shangguan Yiyi, Independent Retail Analyst.