How Does the Overseas Discount Retail Format Navigate Economic Cycles?

Discount retail is essentially a continuous optimization of supply chain and operational capabilities. Relatively speaking, the development of soft discount depends on the surplus of upstream overstock, giving retailers less control over supply stability and quality; hard discount, centered on supply chain cost reduction, has stronger autonomy and broader development space. From 2008 to 2022, the compound annual growth rates of discount retail store markets in the US and Germany were 5.8% and 2.3%, respectively, while those of warehouse club markets in the US and Japan were 5.3% and 13.2%, all higher than the overall retail market growth, with penetration rates continuously rising. Among them, Germany's discount retail store penetration rate increased from 14.8% in 2008 to 15.5% in 2022, and the US warehouse club penetration rate rose from 3.5% to 4.4%. A review of discount retail formats and representative companies in Japan, Germany, and the US shows that discount retail formats often emerge during economic downturns, corresponding to consumer characteristics of price sensitivity and pursuit of cost-effectiveness, and when the economy returns to growth, representative overseas discount retail companies still have the momentum and resilience for growth, i.e., they have the ability to navigate economic cycles. Japan's Soft Discount Format In the 1990s, Japan experienced the collapse of the bubble economy and entered a period of economic recession, making consumers more price-sensitive. This situation triggered adjustments and transformations in the retail industry. Discount retail formats rose rapidly in the 1990s, with stores typically adopting low-cost operating models, reducing product costs through bulk purchasing and economies of scale, thereby offering consumers more competitive prices. After years of development, Seria, MUJI, and Don Quijote have become representative companies in the industry, and the discount retail format has demonstrated resilience and sustainability in navigating economic cycles. Under the dual influence of the external environment and consumption habits, Japan's discount retail industry emerged, with category completeness and international expansion as its main development lines. Mid-1970s: During Japan's bubble economy, discount stores began to emerge. In 1971, the first "Don Quijote" discount store was established in Tokyo, with founder Miyata Ichiro aiming to provide affordable goods to meet the needs of ordinary consumers. Don Quijote's model involves opening large stores in central urban areas, selling a wide variety of products including electronics, clothing, household goods, and food, offering consumers more competitive prices. 1980-1990: The discount store industry continued to develop. More discount stores appeared, including 100-yen stores like Daiso and Seria, offering various products all priced at 100 yen (excluding tax). These 100-yen stores quickly gained popularity among consumers and became shopping hotspots. 2000-2010: Discount stores continued to expand. Don Quijote opened more branches nationwide, further enhancing its brand awareness. Meanwhile, some traditional department stores also began establishing discount store branches to cope with changes in consumer shopping habits during the economic downturn. Over time, Japan's discount stores underwent digital transformation, offering more online shopping options and digital services. Discount stores also expanded their product categories, including sustainable products and imported goods, to meet the needs of diverse consumers. 2010 to present: Continuous development and internationalization period: Discount stores have become an important part of Japan's retail industry, attracting a wide range of consumer groups. Japanese discount stores meet the changing shopping needs of Japanese consumers with affordable prices, rich product selections, and diverse services. The "Zhuang Shuai Retail E-commerce Channel" selected three representative Japanese discount retail companies to review their development history and current status, further illustrating that the discount retail format has the ability to navigate cycles and development resilience. Japan's 100-yen Discount Leader: Seria Seria is Japan's second-largest 100-yen store, with a core focus on general merchandise. The company operates a wide range of categories, including food, cosmetics, daily necessities, hardware, kitchenware, and stationery, with a sales model primarily featuring products priced at 100 yen or less, including kitchenware, household goods, cosmetics, and stationery. Its target customer base covers consumers of all ages with differentiated needs, launching "Color the days," primarily targeting women aged 30-40. As of June 2023, Seria had a total of 1,961 stores in Japan, including 1,922 directly operated stores and 39 franchise stores. In its early development, Seria adopted a strategy of both directly operated and franchise stores, leading to rapid store expansion. In 2015, the company shifted its operational focus to directly operated stores, with the franchise store scale continuously shrinking, but the overall store scale continued to grow steadily. In 2007, the company opened "Color the days" specialty stores, with directly operated stores featuring "Color the days" specialty products designed to target female customers, and their proportion has been increasing. SPA Model: MUJI MUJI is a Japanese brand registered and operated by Ryohin Keikaku Co., Ltd., with its name meaning "no-name quality goods." Since its birth in 1980, MUJI has focused on three principles: material selection, process simplification, and packaging simplification, creating unadorned, high-quality products that emphasize simplicity, environmental friendliness, and human-centric design. MUJI's product manufacturing aims to select materials that consider the global environment and producers, eliminate waste in all processes, and provide what customers truly need in the form they truly need. In terms of categories, MUJI has a wide range of products, mainly daily necessities such as clothing, household goods, and food; In terms of quantity, all are self-operated and private label, with SKU numbers lower than other discount/affordable retail stores; In terms of brand positioning, MUJI follows a mass-market, affordable route in Japan, with product prices about 50-60% of domestic prices; In terms of store location, stores in Japan are often located in common places with lower costs. Additionally, MUJI Japan collaborates with various offline retail formats, including convenience stores and large supermarkets, to sell its products. The SPA model is a sales form that integrates product planning, production, and retail, effectively connecting customers and production, with the primary goal of meeting consumer needs. Through innovative supply methods and supply chain integration and management, it achieves rapid market response. The SPA model is essentially an advanced supply chain management philosophy, with rapid response and accurate supply as its core. The difficulties in implementing the SPA model lie in: control over private brands; consumer insight capabilities; and rapid supply chain capabilities. As of the end of the second quarter of 2023, including licensed stores, MUJI had a total of 1,275 stores worldwide, an increase of 87 stores from the end of the previous quarter. In overseas markets, 47 new stores were added in mainland China, Hong Kong, Thailand, Malaysia, and other regions, further expanding its global store network. In that quarter, operating revenue was 495.699 billion yen, up 13.7% year-on-year; operating profit was 42.469 billion yen, up 87.3%; fixed profit was 43.326 billion yen, up 79.5%; net profit attributable to the parent company was 33.57 billion yen, up 79.4%. Soft Discount Model: Don Quijote Don Quijote is a comprehensive discount store offering everything from daily necessities to branded products, providing customers with a fresh and exciting shopping experience. Founded in 1978, Don Quijote adopts a fully directly operated, large-store model with store areas exceeding 3,000 square meters, featuring tens of thousands of SKUs densely displayed, and a mixed sales model of 30% low-priced overstock and 70% regular-priced discounts, creating a type of discount retail that suited Japanese consumer habits at the time. Don Quijote combines multiple "identities" such as convenience store, discount store, duty-free shop, and second-hand goods store, covering categories such as drugstore items, food, alcoholic beverages, toys and gifts, household goods, clothing and bags, and small appliances, with most stores offering over 40,000 product types. Don Quijote expanded rapidly in Japan in the 1990s, becoming a representative company in soft discount retail. Soft discount products come from overstock and near-expiry items, with supply chain instability being a major pain point. The company addresses this model's issues with distinctive displays and a large number of SKUs. Typically, a 1,000-square-meter Don Quijote store contains 45,000 SKUs, with store features including "compressed dense displays," exaggerated hand-drawn posters forming a POP flood, and looping cheerful music, providing customers with a "treasure hunting" fresh shopping experience. Additionally, most Japanese retail stores close at 8-9 PM, but Don Quijote operates 24 hours, capturing nighttime economy consumers. Through organic growth and mergers and acquisitions, Don Quijote actively seizes external opportunities while maintaining its unique business model, driving rapid expansion. In 2007, Don Quijote acquired Nagasakiya. In 2008, it established MEGA Don Quijote targeting family customers; it successively acquired shares in UNY supermarkets under the parent company of FamilyMart, actively expanding overseas business. As of December 31, 2023, it had 723 stores globally, including 619 in Japan and 104 overseas. Against Japan's economic and social backdrop, the soft discount model has developed better. The hard discount model found it difficult to achieve significant scale in Japan at the time, mainly due to consumption culture, social attributes, and the challenge of insufficient vertical supply capacity for brands. The flourishing of the soft discount model in Japan is mainly driven by changes in industry supply and demand sides and other factors. On the demand side, the post-bubble economy in Japan created more demand for low-priced goods. On the supply side, strict management of convenience store channels led to many new products being removed from shelves in a short time, becoming overstock; consumer goods brands continuously launched new products and seasonal limited editions to drive revenue growth, leading to market overstock; shorter product life cycles accelerated iteration; this provided ample supply for the soft discount model, fostering the flourishing of soft discount companies represented by Don Quijote. The US Hard Discount Format Warehouse Clubs The business model of discount retail originated in the United States, with various mainstream formats emerging successively, including mom-and-pop stores, mail order, chain stores, department stores, supermarket models, discount malls, membership malls, and e-commerce platforms, maintaining resilience through several retail revolutions. The US discount retail industry was born during the Great Depression and thrived during economic slowdowns. Birth period (1900-1945): In the late 19th century, US clothing companies began selling surplus or overstock products to employees and consumers at discounts, called "Outlet Stores"; during the Great Depression of 1930, factory outlet stores emerged to handle surging inventory; after World War II, discount retail stores appeared in large numbers, and in 1956, TJX was founded; during the 1970 oil crisis, with economic stagflation, discount retailers expanded rapidly. Expansion period (1946-2000): In 1974, discount retailer Kmart opened stores in all 48 contiguous US states; in 1980, the first enclosed outlet mall was established in the US; in the 1990s, outlet industry retail sales reached $14 billion. Maturity and consolidation period (2000 to present): Against the backdrop of the financial crisis, consumer purchasing power declined, and discount retail companies attracted consumers by offering low-priced goods, accelerating expansion. During the 2008 subprime mortgage crisis, US outlet retail sales reached $20.3 billion; in 2008, the world entered a new deleveraging and de-stocking cycle, and TJX fully surpassed Macy's; in 2010, there were 355 outlet malls globally; in 2019, the US closed 5,300 traditional retail stores and added 2,100 discount retail stores. Costco: Anchoring the cost-effective consumption needs of the American middle class, featuring a warehouse membership system. Costco originated from Price Club in 1976 and was founded in Seattle, Washington, in 1983. Against the backdrop of US economic stagflation, rising unemployment, and weakened willingness for quality consumption, high-cost-performance warehouse membership stores represented by Costco emerged to serve the middle class. Costco stores are located in suburban areas away from city centers with convenient transportation, thereby reducing rent and decoration costs; centralized procurement leverages economies of scale to lower purchasing costs, and large packaging achieves ultra-low prices, fitting American families' driving-based bulk low-price shopping model. Costco eliminates wholesale distribution links, with 30% of goods shipped directly from manufacturers to stores and 70% transported to warehouse transfer stations, using cross-docking management to eliminate warehousing steps, directly from receiving to shipping, controlling the entire flow time within 24 hours, saving circulation costs and improving circulation efficiency. Costco is currently the second-largest retailer in the US, the seventh-largest globally, and the largest chain membership warehouse club in the US. In 2023, revenue reached $242.29 billion, with net profit of $6.292 billion. As of fiscal year 2023, Costco had 861 warehouse clubs, including 591 in the US, 107 in Canada, 163 in international markets, and only 19 in China. Numerator data shows that in 2021, Costco members' average annual income reached $125,000, while US Census data shows that the median annual household income in the US in 2019 was only $62,800. As of the end of 2023, Costco's member renewal rate was 92.7% in the US and Canada and 90.4% globally, with most members renewing within six months of membership expiration. As of the end of 2023, there were 32.3 million executive members, accounting for 45.4% of paid members. Executive members' sales penetration accounted for approximately 72.8% of global net sales in 2023. Perfect Price's research compared four major membership store brands: Costco, Sam's Club, Walmart, and Whole Foods, with Costco having the highest average transaction value at $136 (approximately RMB 937), 1.68 times that of Sam's Club, 2.47 times Walmart, and 2.52 times Whole Foods. Sam's Club: Walmart's high-end membership store As Walmart's high-end membership store, Sam's Club has independent branding, procurement, logistics, and sales systems, operating separately from Walmart's other businesses, with revenue and operating profit accounted for separately and listed separately in financial reports. This model helps Sam's Club better meet consumers' pursuit of high quality, low prices, and excellent service while maintaining its independence and professional development. Since 2007, Sam's Club's revenue and profit shares have been relatively stable, maintaining ranges of 11%-12% and 6-8%, respectively, with an upward trend in recent years. Sam's Club's success is inseparable from Walmart's strong brand support and deep retail experience. At the same time, Sam's Club's improving performance contributes increasingly to parent company Walmart's results. In 2023, Walmart Sam's Club achieved sales of RMB 80 billion in China, up 21.21% year-on-year, with offline accounting for 53%, a remarkable performance. Walmart is positioned to meet the daily shopping needs of the general public, pursuing a complete product range and affordable prices; Sam's Club focuses more on providing high-quality, low-priced goods and services, mainly targeting middle-class families and high-spending consumers, with more professional and refined business strategies. Compared with other Walmart divisions, Sam's Club has lower gross margins and lower operating expenses as a percentage of net sales. Its emergence is mainly due to increasingly fierce competition in the retail market, requiring Walmart to find new growth points to maintain its leading position: Sam's Club offers higher-quality, lower-priced goods and services, attracting more consumers while enhancing Walmart's brand image and market share. Comparing fiscal year 2023 and 2024 financial reports, Sam's Club's share of Walmart's revenue increased from 12.84% in FY2023 to 13.8% in FY2024, with revenue rising from $73.556 billion to $84.345 billion. Sam's Club's performance in China has become the locomotive driving Walmart. Sam's Club's revenue mainly comes from merchandise sales (over 90%), with the remainder from membership fees and value-added service fees. In Sam's Club's profits, merchandise sales profit accounts for 70%, with a relatively high profit margin of around 15%. To enter Sam's Club, one must first apply for a regular membership card at RMB 260/year or an executive membership card at RMB 680/year. Public data shows that Sam's Club has over 5 million members in China, with per-member average spending of RMB 13,000 in 2023. From the data, Sam's Club members are all "wealthy," with an annual renewal rate of over 60%. Currently, Sam's Club has 870 stores in 4 countries globally: 600 in the US, 171 in Mexico, 51 in Brazil, and 48 in China. Sam's Club targets the mid-to-high-end market, achieving sustained profitability and growth by improving operational efficiency and reducing costs. The US retail industry effectively controls product costs through efficient supply chain management and procurement strategies, thereby offering competitive prices to consumers. This price advantage not only attracts a large number of consumers but also makes the US retail industry competitive globally. The US retail industry is primarily characterized by large-scale chain stores. Chains like Costco, Walmart, and Sam's Club optimize procurement, inventory, and sales processes through standardized and scaled operations, reducing operating costs and improving operational efficiency. With the rapid development of e-commerce, leading discount retail companies are also actively expanding online sales channels by building e-commerce platforms, providing online shopping experiences, and complementing offline physical stores. Combined with cost advantages, excellent operational management capabilities, brand recognition, and reputation, these factors drive leading discount retail companies to achieve sustained growth. Germany's Community Hard Discount Format From 1900 to 1960, Germany experienced three economic recessions. After World War I and World War II, economic downturn characterized Germany's post-war economy, which also gave rise to the hard discount format. After World War I (1914-1918), Germany's per capita GDP plummeted, and industrial production fell back to levels of the late 19th century. In 1923, the "wage-price double spiral" led to hyperinflation; the same year, Germany introduced currency reform, achieving currency stability; By 1926, the German economy had basically recovered to pre-war levels. Due to "large-scale distortions" in the international market and global protectionism, world economic growth was generally weak after World War I. From 1924 to 1929, known as Germany's "Golden Twenties," political and economic development was relatively stable. In 1924, Germany agreed to the Allies' Dawes Plan, which played an important role in post-war German economic recovery, stabilizing the currency and enriching goods. From 1929 to 1932, the US Great Depression caused a worldwide economic crisis, hindering Germany's economic recovery. Huge reparations hindered Germany's development, coupled with the Wall Street crash and tight bank credit; In 1932, German industrial output fell about 40% from 1929, total exports decreased by 69.1%, total imports decreased by 70.8%, and national gold reserves plummeted by 80%. The unemployment rate peaked at about 44% in 1932. On the demand side, Germany experienced three economic recessions and two world wars, leading to weak consumer confidence, a tendency to pursue rapid recovery, and an overall consumption trend favoring low-priced durable goods. Discount retail stores, focusing on selling good products at low prices, quickly gained popularity among the people. On the supply side, economic crises and wars reduced supply capacity and limited working capital, restricting rapid recovery of the retail industry. Discount retail mainly focused on basic products like food and clothing, which could develop faster during barren times. Based on Germany's economic recession in the first half of the 20th century and the general increase in practical needs, the discount retail industry developed rapidly, with representative examples being the hard discount models of ALDI and LIDL. ALDI: Selected SKUs + Private Label Model + Efficient Operations ALDI was founded in 1913, originally a grocery store, later developing with a positioning as a "supermarket for the poor," and is now one of the world's largest food retailers. ALDI's development has three stages: 1913-1948: Mainly small retail stores. 1948-1960: Transition to discount supermarkets. In 1960, it had 300 stores with annual turnover of about 90 million Deutsche Marks. 1960 to present: Gradual global expansion. In 1962, it was reorganized, and the first food supermarket named ALDI was born in Dortmund, Germany. ALDI means "cheap discount store operated by the Albrecht family." In 1968, ALDI began global expansion. According to German media Supermarket Inside, ALDI's global sales in 2023 increased by 8.7% year-on-year to a record €112 billion (approximately RMB 881.5 billion). In China, it has over 50 stores, all in Shanghai, with a pace of about 10 new stores per year. ALDI has stood for a century, with the key being its ability to offer quality products at the best prices, maintaining a low-price strategy while ensuring high product quality. First, low personnel costs and high sales per square meter An ALDI store typically has only 3-5 employees, and customers need to bag their own groceries and rent shopping carts. ALDI stores are usually only 500-600 square meters, with sales per square meter far exceeding competitors, close to $13,000 per square meter, 2-3 times that of Walmart. Second, clear target customer positioning ALDI has locked its target customers as price-sensitive groups during its main establishment and development, selling cheap and quality goods. Third, selected SKUs ALDI has only about 1,500-1,800 SKUs, while the retail industry average is about 14,000 SKUs. According to the ALDI mini-program, as of February 17, 2024, ALDI's "Super Value" series includes 70 products covering 8 categories, half of which are fresh produce (fruits, vegetables, meat, eggs, dairy, and aquatic products), showing that ALDI achieves scale procurement and lower purchasing costs through selected SKUs. Fourth, private label products account for 90%, with high inventory turnover ALDI believes that most branded products make customers pay extra for brand marketing, so it eliminates middlemen through private labels. ALDI's gross margin is below 15%, and its inventory turnover is 5 times that of Walmart. ALDI chooses to cooperate directly with local suppliers to sell private labels at lower prices, offering products of similar quality. All products in the "Super Value" series are ALDI's private labels. Fifth, global procurement ALDI has higher bargaining power, significantly reducing purchasing costs; ALDI uses a strategy of establishing global OEM factories to lower procurement costs. Sixth, low-cost site selection Most outlets are located in residential areas, university dormitory areas, and small towns with lower rents; stores generally have simple decoration and fewer shelves, reducing decoration costs to some extent. Seventh, efficient distribution and high turnover speed Product sales are precisely calculated, with minimal inventory in each branch, fast product turnover, and low interest costs from capital occupation. Eighth, saving marketing expenses No news department, no PR department, no market research, and minimal advertising investment. ALDI converts its low operating and procurement cost advantages into low selling prices, benefiting customers, winning them over with good quality and low prices, thereby building strong brand loyalty, achieving sustained rapid development while obtaining stable profits. LIDL: Low Procurement Costs + Low Operating Costs, Focused on the Discount Retail Market. LIDL was founded in 1930 and began focusing on the discount market in 1977. The first LIDL store was established in 1973, initially imitating ALDI's operating methods, with the strategy "if it doesn't sell, remove it," so LIDL's product elimination rate is quite fast. To save costs, store areas are kept as small as possible. As business expanded, LIDL gradually entered other European countries and regions, and officially entered the Chinese market in 2017, opening a store on Tmall, but soon withdrew from the Chinese market for economic reasons, mainly because it abandoned its usual low-price route and attempted to shift to a mid-to-high-end route without quickly establishing its own characteristics. In recent years, LIDL has increased the overlap of its business in the UK and Europe, with store numbers steadily increasing. In 2019, LIDL's revenue was $123.25 billion, with each store approximately 3,300 square meters, about 12,200 stores globally, and sales per square meter of approximately $3,061.35. LIDL is known as Europe's largest supermarket for the poor, the world's third-largest food and grocery retailer, and the world's fourth-largest chain retailer. LIDL's main business model is similar to ALDI's, adopting low procurement and operating costs, focusing on a hard discount operating model: First, shelf layout for customer convenience LIDL's aisles are much wider than normal supermarkets, and most products favored by consumers are displayed in the first aisle for easy access; Second, online and offline advancement Among Germany's most popular e-commerce platforms, LIDL, which started and developed with physical stores, entered the top ten. Third, using private labels to develop new customer groups In recent years, LIDL has introduced a large number of vegetarian and organic foods, launched a 2030 environmental development policy, mentioning that private label packaging must be recyclable, and sugar/salt content in private label products will be reduced by 20% to ensure customer health, expanding new customer groups; Fourth, enhancing customer loyalty with membership programs LIDL officially launched its membership system Lidl Plus in 2020, a necessary strategy to enhance customer loyalty. Fifth, marketing strategies targeting young people In recent years, LIDL's strategy has gradually adjusted, using creative and youthful brand strategies to improve young people's favorability, such as launching trendy shoes in LIDL colors to attract young people's attention. Germany's hard discount retail representatives ALDI and LIDL started against the backdrop of economic depression and still shine during economic stability and growth periods. With an Engel coefficient below 20% and per capita GDP exceeding $10,000, the "supermarket for the poor" still maintains steady sales growth. Conclusion From global discount stores and warehouse clubs, it can be seen that they all exhibit high company concentration, mainly due to the "stronger get stronger" effect under scale advantages, with increasing concentration as a development trend. From a social environment perspective, with consumers becoming increasingly cautious in spending and the trend toward high quality and cost-effectiveness, the demand side provides fertile ground for the rapid development of discount retail. In summary, in China's current environment, the hard discount model has more advantages and broader development space. The core of the hard discount model lies in continuous optimization of the supply side to maintain low gross margins and high turnover rates, providing sustained low prices. This requires companies to have streamlined supply chains, a high proportion of private labels to improve profit margins, and simplified offline operating costs. All these capabilities require companies to have strong scale effects, so high concentration is an inevitable trend in the development of the discount retail format.