Discount stores have become a highly watched retail format.
Rapid Development of Discount Formats
The discount format has been performing well in recent years.
First, the number of newly opened discount stores continues to increase; second, discount store brands have achieved impressive financing results, making them one of the few offline formats that still attract capital attention in recent years.
Just last year, brands such as lotgoo, Aotle, HitGoo, Xiaoxiang Life, and Discount Niu received financing. Among them, Aotle completed three rounds of financing within one year of its establishment. In February this year, Zhao Yiming received 150 million yuan in financing from Heiyi Capital.
According to public information from HotMaxx, its "future development" clearly states that its total number of stores will exceed 5,000 in the next three years.
Furthermore, from Aotle's growth trajectory, within less than two years of establishment, Aotle has opened nearly 200 directly operated stores nationwide, with an average store area of about 300 square meters and an average monthly revenue of over 2 million yuan per store.
In the first quarter of 2023, Aotle expanded beyond Sichuan and Chongqing, completing layouts in Shaanxi, Guizhou, and Hubei. In just half a month in late May, it opened dozens of stores in Xi'an, Guiyang, and Wuhan.
It is understood that before entering a new province, Aotle conducts detailed research and data analysis on local users. Among known data, 47.81% of respondents said they were already familiar with Aotle, and in Wuhan and Guiyang, familiarity reached 39% and 31%, respectively.
Geographically, Shaanxi, Guizhou, and Hubei are all adjacent to Sichuan and Chongqing, all within convenient intercity rapid economic circles. From a supply chain perspective, this can maximize supply chain efficiency while ensuring a closed-loop supply chain among provinces.
According to the author, this year, new stores opened by Aotle in other provinces will account for 70% of total new stores, and all new stores will continue the strategy of "open one store, succeed one store." In the future, Aotle will deeply cultivate the southwest region and expand from the southwest to the whole country, thereby forming momentum nationwide.
Another discount brand worth noting is Xunwushe, which started in Henan in 2020. By the first half of 2022, it had only about 40 stores, but changes began this year. Starting with 5 new stores in January, then over a dozen in February, and by March, the growth rate reached over 20 new stores per month. By April, Xunwushe was opening 30-50 new stores per month, with total stores approaching 200.
It is understood that since March this year, Xunwushe has gradually entered Hunan, Hubei, Shandong, Anhui, Shanxi, Shaanxi, and other places. In the plan of its founder Zhu Zhiyong, within the next five years, Xunwushe will reach 3,000 stores, covering Henan and its neighboring provinces. According to his observation, currently, in most provinces including Xinjiang, there are over a dozen discount store brands expanding simultaneously.
The development of Aotle and Xunwushe almost mirrors the development trajectory of the discount store industry. And in the first half of this year, discount snack stores also developed rapidly.
From a macro perspective, according to Nandu Information, following the deployment arrangements of the State Council, four national ministries and commissions held intensive discussions with over 70 enterprises, establishing communication mechanisms and roundtable meeting systems. On one hand, they aim to understand new situations and problems, boost confidence, and stabilize expectations; on the other hand, it also signals that China's economy is in a downward cycle.
In a sluggish economy, people's consumption concepts begin to change, tending toward cheaper, more cost-effective goods.
Discount stores, convenience stores, and outlet malls have also become highly watched retail formats.
Ambitious Discount Snack Stores
In the first half of the year, the number of investments and financing in snack discount stores increased compared to the same period last year, and the lower-tier markets have seen a "store opening wave" for snack brands, with Snack Busy and Zhao Yiming Snacks accelerating expansion.
Although the first-quarter financial reports of several domestic listed snack companies are generally not optimistic—Liangpin Shop's revenue was 2.385 billion yuan, down 18.94% year-on-year; Three Squirrels' revenue was 1.9 billion yuan, down 38.48%, the highest decline in the past five quarters; Qiaqia Food's revenue was 1.336 billion yuan, down 6.73%, with net profit down 14.35%; Lai Yifen's revenue was 1.212 billion yuan, down 7.8%, with net profit down 23.04%—on the other hand, discount snack collection stores (bulk snack stores) are surging.
Originating in Yichun City, Jiangxi Province, Zhao Yiming Snack Store opened its first snack store in 2019, opened franchising in October of the following year, and began expanding beyond Jiangxi into third- and fourth-tier cities and counties in Anhui, Guangdong, Guangxi, Fujian, and other provinces. As of April this year, its store count has exceeded 1,100.
Another brand, "Snack Youming," since its first store after a full brand upgrade in April 2021, had opened over 1,200 stores in the southwest, south, and central China by March 2023, and plans to expand to 16,000 stores by 2026.
With the rapid expansion of snack collection stores, posts like "5 snack collection stores at one intersection," "Snack collection stores are opening in clusters in my hometown," and "Several snack collection stores have recently opened in my hometown; they're everywhere" are often seen on social platforms like Xiaohongshu.
In the capital market, financing news for snack collection stores also emerges from time to time. In February this year, "Zhao Yiming" secured 150 million yuan in financing from Heiyi Capital and Liangpin Shop; brands like "Snack Busy," "Snack Youming," "Love Snacks," and "Snack Girl" have all received financing.
According to the official websites of various brands, as of June 25, Snack Busy has exceeded 3,000 stores nationwide, opening an average of 4 stores per day; Snack Youming has exceeded 1,500 stores nationwide, with over 200 new stores per month... It is understood that as of the end of 2022, the total number of domestic snack bulk stores was about 13,000. Huachuang Securities' research report estimates that the number of stores could reach 30,000 by 2025.
Clearly, discount snack chain brands are in the "enclosure" stage.
According to a person in charge of a hard discount chain enterprise in Hunan, snack stores are a type of discount format. Once the snack discount model is proven, you can "discount everything."
In the view of this person in charge, the current selling point of snack stores to attract consumers is mainly price, not products. This is the prototype of a discount store. The difference is that the current discounts in snack stores come from headquarters subsidies, price differences of second- and third-tier brands, and the scale advantage of centralized procurement. However, industry insiders say that a true hard discount chain should reduce costs to gain profit margin.
It is worth mentioning that discount snack stores in the track have also started a "price war" on top of low prices, becoming a magic weapon for brand traffic.
"The discounts have changed several times in three days," a consumer told a media reporter. "This month, Zhao Yiming offered a 5.9% discount. Snack Busy saw it and made new posters overnight announcing a 5.8% discount. On July 4, Zhao Yiming also got tough and offered a 5.5% discount."
The consumer said that the two stores are adjacent and have been increasing discounts since last month. By the morning of July 5, some shelves in Zhao Yiming's snack store were sold out, and a small truck outside the store was loaded with empty cardboard boxes.
Clearly, offering discounts on top of low prices has become a major means of attracting customers for many merchants.
In addition to the "hot" discount snack track, in the first half of this year, outlet discount stores emerged across many parts of the country, becoming a rare bright spot in the retail track.
Outstanding Outlets
According to data, Beijing Yansha Outlets, the pioneer of China's outlet retail industry, saw sales surge by 3.8 times; in January this year, Beijing Capital Outlets set its best sales record in a decade, with monthly sales exceeding 400 million yuan, a sales increase of 31%; Shenzhen Yitian Holiday Outlets saw sales increase by 20.81% year-on-year, and foot traffic increase by 18.6% year-on-year.
The "Outlet Stock and Increment Research" report released by Winshang.com also shows that in 2022, outlets reached a "turning point," beginning to surpass shopping centers. A total of 26 new outlet projects opened throughout the year, covering 2.94 million square meters, the highest growth number in history.
In the first decade after entering China, outlets developed with difficulty.
From 2002 to 2010, the number of outlets opened in China was very small, and the market size was far from comparable to the booming department store format and rapidly developing shopping centers at the time. Outlets only existed as a channel for brand retailers to handle inventory.
It wasn't until 2016 that outlets entered a "golden period."
According to official data from Outlets Leader, 30 outlet projects opened nationwide in 2016, and 29 in 2017, forming a blowout growth. This growth trend made outlet chain brands such as Bailian, Sasseur, Capital, Shanshan, and RDM stand out. However, starting from 2018, new projects decreased year by year, dropping to 14 by 2021.
During the subsequent 2017-2021 period, outlets were again unable to compete with shopping centers and clearly lost their luster. It wasn't until 2022 that the outlet format exploded again.
The logic behind the outlet explosion shares many similarities with the reasons why discount grocery stores represented by ALDI, community ten-yuan stores, and hundred-yuan stores are favored. Behind it is more of the "discount" trend under economic downturn.
On one hand, it helps brands and distributors solve inventory problems; on the other hand, it provides consumers with the cost-effective products they need.
Many investment institutions believe that the reason for this "discount store" explosion is attributed to the impact of the pandemic over the past three years and changes in the domestic economic environment, which have caused significant changes in consumer purchasing behavior and habits. When deciding to consume, "cost-effectiveness" has become the most important consideration.
From the demand side, the current socio-economic environment has driven consumers to prefer shopping at discount stores like outlets to save money. The rising youth unemployment rate, the significant decline in economic data, and consumers' defensive savings behavior have all stimulated demand in the discount retail market to some extent.
Looking back at the growth of outlets, it is not difficult to find that when they appeared in the 1970s, it was also the "worst" period for the U.S. economy—the Middle East oil crisis pushed the world economy into a "stagflation" period. After the bubble economy burst, consumption returned to rationality, cost-effectiveness became the king of retail, and outlets met the consumption needs of the American middle class at that stage.
In the early stages of outlets, their main function was to digest inventory, but later they gradually developed into an ecosystem. Brands achieve greater sales and market coverage through outlets, and third-party institutions specialize in product supply and sales for outlets. Digesting inventory is only one of the reasons for the existence of outlets.
From the perspective of the Chinese market, China is a manufacturing powerhouse, accounting for 30% of global industrial added value, which also causes differences between China's retail industry and other countries. The easy availability of products and fragmented distribution channels are its prominent features.
Therefore, the development, operation, and marketing of outlets in China will also differ from the U.S., Japan, and European markets.
Reluctant Transformers and Vanished Internet Celebrities
Embracing the discount format and actively seeking change also involves helpless choices. Yipin Fresh Food is a very typical case.
Yipin Fresh Food, which had received investment from Tencent and Today Capital, decided this year to abandon fresh food stores and embrace discount stores. Yipin Fresh Food changed from its original fresh food stores to Yipin Wholesale Department, with the slogan "One piece is also wholesale."
In the view of industry insiders, the rustic Yipin Wholesale Department is not the result of Yipin Fresh Food's proactive change, but a forced choice.
It is understood that Yipin has only been established for about ten years, and its positioning has changed several times. In the fiercely competitive fresh food industry, it chose to expand nationwide, with stores once reaching over 1,500 at its peak, but the rapid development resulted in service and product quality not keeping up.
On Dianping, a search by New Retail Business Review for Yipin Fresh Food stores in Shanghai revealed many negative reviews—mainly focusing on poor service attitude and stale fresh products.
Since this year, capital has become more cautious about fresh food investment. Yipin Fresh Food, whose last financing round was in 2021, must consider survival issues.
In this regard, industry insiders say that this transformation to a wholesale department is intended to attract customers with cheap goods, achieve rapid sales, and thereby gain supplier supply and support. However, excessive price wars are basically "killing a thousand enemies at the cost of eight hundred of your own."
In addition to Yipin Fresh Food's reluctant transformation, the discount brand Prosperity Market, established in 2020, experienced a brief period of glory and then fell rapidly in less than two years, with a speed that is also surprising.
In March 2021, Prosperity Market announced its first financing from Challenger Capital, founded by Tang Binsen, the founder of Genki Forest, with an amount of tens of millions of yuan. In addition, undisclosed financing included an angel round from Yimo Capital at its inception.
Financing and the endorsement of big-name products made Prosperity Market extremely popular for a time.
Within one year of establishment, Prosperity Market opened over 20 stores, with revenue exceeding 150 million yuan. Founder Fan Zhifeng planned to develop over 60 stores in 2022 and expected to exceed 1,000 stores nationwide by 2023. He once aspired to make Prosperity Market China's Don Quijote.
In the November 2021 investment promotion announcement, Prosperity Market even revealed an IPO plan, stating that after listing, the company would repurchase the first 50 franchise stores at three times the three-year franchise deposit and one-time goods deposit.
However, before franchisees could see the IPO, Prosperity Market was rumored to be seeking a sale in the second half of 2021. In July 2022, in a first-instance judgment regarding a "sales contract," the defendant, Shanghai Bengbengmiao Technology Co., Ltd., stated, "Because the business has stalled and there is no cash flow, the defendant is preparing to apply for bankruptcy." In less than two years, Prosperity Market was about to end its short life.
Simply put, the pandemic popularized near-expiry food, and near-expiry food in turn popularized discount stores.
On the consumer side, a series of layoffs and salary cuts have made young people's consumption intentions more conservative. Taking advantage of big-brand near-expiry products not only allows them to buy a sense of luxury with less money but also satisfies consumers' psychology of "getting a bargain." Therefore, discount stores quickly accumulated a large number of young consumers.
This business also attracted internet retail giants. In October 2021, Hema Fresh quietly opened a fresh food outlet store in Shanghai, with products mostly being fresh perishables or near-expiry food; three months later, Suning's first discount supermarket opened in Ma'anshan, announcing it would expand to Jiangsu, Zhejiang, and Shanghai, and planned to open 100 stores in 2022.
The frenzy continued. In May 2022, Chengdu-based Linshi Mofa received nearly 10 million yuan in angel round financing. Linshi Mofa was founded in 2021, and founder Feng Hui was formerly a strategic partner of Yonghui Yunchuang, with years of chain operation management experience. Within just two months of establishment, Linshi Mofa opened nearly 10 stores in Chengdu, Sichuan, with current single-store SKU of 1,000-1,500.
In addition, in June 2022, "Xiaoxiang Life," a new discount retailer from Jiangsu, completed a Series A financing of tens of millions of yuan, with investors including Hongli Venture Capital, Qingsong Fund, and Xida Capital; in the same month, Xianfeng K2VC, starVC, Gaorong Capital, angel investor Wang Gang, and Lantu Venture Capital invested in the Pre-A round of another emerging brand, "HitGoo."
At the same time, discount chain stores have surged in a short period.
The "Exciting" Discount
The more discounts, the more excited consumers become.
From the perspective of consumer changes, from previously fearing pitfalls, they have now begun to choose several brands and embrace discount stores.
"30 grass eggs cost only 15.9 yuan at Hema Outlet," "A bottle of Schwarzkopf shampoo originally priced at over 70 yuan costs only 30-something yuan at HotMaxx."
Many netizens say that entering discount stores has already started a trend of stocking up: "It's so cheap; I'm worried there might not be stock next time."
For "market-goers" who have a Hema Outlet near their homes, they have decisively abandoned the market, which is cheap, fresh, and most importantly, allows picking and choosing, and switched to the more cost-effective vegetables at Hema Outlet.
According to consumers, Hema Outlet now offers online delivery services in some residential areas. During the promotion period, the first order is free shipping, with the fastest delivery within one hour. Even after the promotion period ends, the delivery fee is only 3 yuan per order, with an additional 2 yuan for orders over 5KG.
In this regard, whether the popularity of discounts means consumption downgrading has also sparked industry discussion.
In the view of Pei Liang, president of the China Chain Store & Franchise Association, this is not necessarily the case.
He believes that in many cases, on one hand, the popularity of discounts is the market's self-regulating function at work, the optimization and self-healing of the existing market, and a means for advantageous enterprises to eliminate weak ones; on the other hand, there are also pathological discounts in the market, such as capital-subsidized prices, which, like dumping, disrupt normal market competition and are not conducive to the healthy development of the industry.
Pei Liang believes that more discounts are good for consumers and not necessarily bad for operators. He has the following logical viewpoints:
First, discounts make operations more efficient. Germany's retail industry is the most efficiency-oriented. Discount stores represented by Aldi dominate Germany's FMCG market. These discount stores have done a lot in cost reduction and efficiency improvement, lowering prices to the minimum, and consumers are rational and embrace this approach.
Second, some discounts are the most intuitive manifestation of value regression. Taking the clothing industry as an example, the markup rate of local clothing brands is generally around 8 times, while international fast fashion brands generally have a markup rate of only 3 times. High markup rates are to satisfy the profit distribution of the lengthy clothing sales chain, reflecting backward production methods at the price end.
Department stores and specialty stores have been discounting all along, which is actually a return to reasonable prices. The dilemma of "no discount, no sales" will also prompt operators to reflect and reform, deconstruct the current clothing distribution system, and establish a more efficient distribution system.
Third, discounting is a fault-tolerant mechanism. Product production supply and demand cannot be perfectly matched; products may be out of stock or accumulate. Digesting inventory can reduce business losses and avoid waste of social resources. When overstock occurs, it can be sold at discounts through online channels like Pinduoduo and Vipshop, or in outlets, various discount stores, and near-expiry food stores. It can also be donated as surplus food, like Walmart and Jianfu Convenience Stores do.
As Pei Liang said, "Price advantages must be built on efficient supply chains and store operations, lean cost control, and continuous product innovation capabilities. Relying only on the concept of 'discount stores' as a gimmick will quickly fail."
Real "cost-effectiveness," supply chain and operational efficiency are the core competitiveness of discount stores.
Some say that the worse the economy, the more favored discount stores are. Is that so?