Editor's note: As the hottest retail format of 2023, hard discount has indeed attracted attention. New Distribution has always believed that the discount model will be one of the important retail models in the future. At the same time, we also note that "low price" is the most impactful competitive means in current retail competition, but the skill of "making money with low prices" is not easy to master. In a new business form, a large proportion of the first wave of pioneers often become martyrs. The purpose of this article is to remind brand owners, distributors, and discount store franchisees not to only see the opportunities of the hard discount trend, but also to be aware of its huge traps at this stage. Some discount franchisees can't hold on anymore "Does any friend want to run a discount store? If so, no need to find a location; I'll transfer my store directly to them." Mr. Li is an FMCG distributor in Xi'an. When visiting retail outlets, more than one discount store owner said the same thing to him. Some franchisees who joined in the first half of the year have already reached their limits. This is not an isolated case; it's happening all over the country. In fact, it's not just franchisees; some direct-operated stores of discount brands are also struggling. A regional leading hard discount brand recently held a meeting to study whether to raise retail prices to some extent to improve gross margins. There's no choice; they're losing too much. How much longer can they sustain the losses? No one knows. In recent years, the consumer goods industry has been bleak. After the new consumption wave receded, there have been almost no hot spots. The emergence of discount stores, with their surging sales curves, attracted consumer goods investment that had nowhere else to go. The hype from capital and media, and the store opening data increasing every minute, made discount stores the center of attention for a while. On Douyin short videos, every discount store seems packed with customers, as if business is booming. Such videos attract almost exclusively anxious middle-aged people, or cross-industry people selling houses or cars—all newcomers to the FMCG industry. But the battle-hardened FMCG brand owners and distributors, who have witnessed the madness of B2b and community group buying, mostly remain on the sidelines. "With a 15% gross margin on big single items, you attract all the surrounding foot traffic. Once the nearby supermarkets go out of business, all the business will be yours." Such a simple and unreliable business logic has successfully brainwashed wave after wave of fresh "leeks." Beneath the fiery surface, the hard discount track is in a state of chaos. Some are genuinely working on supply chain transformation, while others, under the banner of hard discount, are peddling anxiety and ruthlessly harvesting franchisees. Where did the franchisees' money go? A simple business formula: Daily gross profit of a store = Daily retail sales * Average daily gross margin. Generally, the retail gross margin of a small store cannot be less than 30%. Because your foot traffic is limited, the ceiling of daily retail sales is within reach, and if the gross margin is too low, you can't survive. Therefore, retail gross margin has always been one of the core indicators that stores care about most. The retail guide prices given by brand owners often provide considerable gross margins for retail terminals. Especially for lower-priced items, the gross margin of the guide price is higher. For example, Nongfu Spring's entry price is about 1 yuan per bottle, with a guide retail price of 2 yuan. Without such a value chain, retail terminals cannot survive. 1) The ideal and reality of the discount store logic The logic of discount stores is: use ultra-low prices on sensitive big single items to attract foot traffic, then use generic or private label products to increase gross margins. For example, Nongfu Spring, which consumers nationwide know has a retail price of 2 yuan, is sold at 1.2 yuan, effectively cutting the 50% gross margin down to 16%. This logic makes sense, but does it work? Or, does it work now? For instance, in the image above, Nongfu Spring at 1.2 yuan and C'estbon water at 1.2 yuan are both out of stock. Meanwhile, a high-margin spring water brand at 3.0 yuan hasn't sold a single bottle. Consumers are savvy; the 1.2 yuan Nongfu Spring is attractive, so they take it; the 3 yuan water, they don't want. The sugar-coated bullet no longer works; they take the sugar and send the bullet back. This model may still have some market in third- and fourth-tier cities, but it basically doesn't work in first- and second-tier markets. 2) High-cost low-price formats don't work If retail gross margin is halved, retail sales must at least double. In hard discount stores, this is still not enough. Because at the same time, the store experience cannot be poor, and operating costs are higher than traditional stores. Your lighting brightness must be several times that of peers, your location must be in the best foot traffic area, your renovation costs must be over 100,000 yuan, you need more staff than others, and you also have franchise fees, training fees, system usage fees... All told, a discount store's retail sales need to at least triple or quadruple to break even. What are you thinking? Do you think your store is the only one on the street? If retail were that simple, what would the "old hands" in the industry eat? 3) Bizarre retail pricing power Because Nongfu Spring is not interested in discount stores, and their own supply chain capabilities are insufficient, many discount brands have opened up the authority for stores to self-purchase. A snack discount store franchisee reported that this self-purchase is the most bizarre. Once you list a big single item, such as the very popular Nongfu's Oriental Leaf tea, you cannot run out of stock; if you do, you're fined. Oriental Leaf is out of stock everywhere, and you finally manage to buy it from a distributor or wholesaler at the regular price of 3.6 yuan per bottle. The manufacturer's guide retail price is 5 yuan, but in the discount store system, you can only sell it at 4.2 yuan, earning only 14%. The franchisee said that the headquarters doesn't care about the purchase price, but the headquarters system sets a retail price of 4.2 yuan, and the franchisee has no right to modify it. What kind of strange operation is this? Under such operations, what kind of discount store can avoid losing money? We have always emphasized that the long-term logic of discount retail is valid. But many of the current incredible operations of discount chains are already a money-raising campaign under the banner of hard discount. In this wave, the ones being harvested are rarely brand owners and distributors; the vast majority are outsiders. True and false revolutionaries in the supply chain Every discount store brand tells a story of supply chain revolution. In the eyes of the storytellers, traditional brand owners and distributors are conservative, backward, and inefficient, while they are the revolutionaries of the supply chain, naturally standing on the correct side of history. 1) False revolutionaries in the supply chain Those who shout revolution every day are often speculators, not true revolutionaries. Most of them have no real supply chain experience. Many community group buying entrepreneurs have simply changed their appearance to become trendsetters in discount retail. Since FMCG manufacturers, who have rich experience in dealing with such tactics, are hard to fool, they use video platforms to harvest a wave of outsiders. The speculators don't understand supply chains or quality control, and few have even visited major brands to learn. They try to sell their private label products by "killing" big single items, but they don't have real quality control capabilities. Are the low-priced products they have processed in various places truly up to standard? Are all ingredients fully labeled? Are there non-compliant additives? They don't know, and they don't really care; they only care about price. Once the industry hits a scandal, their first reaction is to shift blame to the processing plants, and if they can't cover it up, they just close down. As for the franchisees, who cares? After all, they themselves haven't lost money. 2) True revolutionaries in the supply chain I don't deny the trend at all: discount retail will definitely become one of the important channels in the future, and high-quality, low-priced private label products will also become an important profit support for discount retail. But the winners are likely not the false revolutionaries at this stage. True supply chain revolutionaries are not entirely competition-oriented, but value-oriented. They will truly put in the hard work, winning competition by reducing links, improving efficiency, and ensuring quality. Similarly, they will value the contribution and profitability of every role in the industry chain, and they will not be indifferent to the survival of franchisees. They will truly respect the strong capabilities of brand companies in product R&D, production, and quality control, and they will also respect the contributions and achievements of brand owners and distributors in brand promotion and market cultivation. From price suicide to forming a "new ecosystem" of symbiotic win-win in the industry chain, this is the path that discount retail must take. This path is the way out for the current various discount formats. Distributors: Pay attention to payment risks during the Spring Festival This is an era of oversupply, and most manufacturers have sales pressure, which is the soil for the hard discount model to survive. Brand owners generally do not directly supply discount stores; they often supply through authorized distributors. But the products are usually shipped directly from the factory, so the distributor is purely a fund advance party, serving as a risk isolation wall for the manufacturer, with only a thin gross margin of 3 to 5 percentage points. Our market research found that in cooperation with hard discount stores, distributors' capital risks are accumulating. Previously, hard discount stores paid very quickly to get better prices, usually within 5-7 days. But now, many discount brands have delayed actual payment terms to about 15 days, citing reasons such as "payment queue" or "financial process standardization." Next, the Spring Festival peak season will arrive, and many discount brands will likely extend actual payment terms to 30 days, or even more than 45 days, citing "too much business during the peak season," "too busy," or "in the queue." Moreover, many discount store purchase contracts also stipulate that during the cooperation period, supply cannot be interrupted; if interrupted, fines are imposed, which further increases the supply volume during the peak season. The cumulative supply volume over a Spring Festival peak season can be terrifying. If normal 7-day settlement requires 500,000 yuan in advance funds, then with a 45-day payment term and doubled sales during the Spring Festival, the distributor's advance funds would exceed 6 million yuan. This huge risk is completely unbearable for distributors. There have been lessons like this. When Miss Fresh suddenly went bankrupt, according to incomplete statistics, distributors nationwide bore more than one billion yuan in bad debts. The hard discount format is still in a melee, with an unstable landscape. A large portion will definitely fall within the next year, but we just don't know who will fall. For the hard discount format, what distributors should do most now is to abandon naivety, control risks, and never have too much moral confidence in business.