Friends familiar with Lao Tan know that since 2021, I have been involved in entrepreneurship and investment in the discount retail field, participating in the creation and investment of over ten various types of discount chain retail brands, including retail discount chains. I am both a participant and a witness to the industry.

Snack discount stores are one format of discount retail, targeting the general public with products mainly consisting of leisure snacks and beverages. This format has developed in the Chinese market for one to two decades, but has long remained obscure. Before 2022, it never attracted the attention of the industry, media, or capital markets. It was a very small industry with limited scale and influence.

However, in the past three years, this industry has undergone tremendous changes—from being ignored, to attracting attention, to now facing various criticisms and doubts from public opinion and the market—all in less than three years. Building an industry is easy, but destroying one can sometimes happen overnight.

Snack discount stores are at a crossroads: will they go left, building a high-rise overnight only to see it collapse the next night, or go right, adhering to long-termism, delivering good products and services, and following the essence of retail to build the industry higher and higher?

What is the discount retail we are discussing?

Currently, there seems to be no strict standard definition of discount retail in society, with each person having their own understanding, leading to many misunderstandings and biases. The discount retail discussed in this article refers to a retail format that provides customers with ultra-value-for-money products by extremely improving operational efficiency and reducing operating costs, rather than the common misconception that discount retail is just selling near-expiry or surplus goods.

Using the definition from "New Distribution": The core of discount retail is to sell good products cheaply, not simply to sell cheap products.

This is an excellent explanation.

When we unify our understanding of this definition, we realize that Sam's Club and Costco are also discount retail formats. They do not sell low-end goods but rather high-quality products that may not be well-known brands. This is a typical example of selling good products at low prices, though "low" is relative.

Head Snack Discount Store Companies Floor the Accelerator

Beware of Overturning!

Since 2022, snack discount stores have suddenly accelerated growth and development, with the overall industry and various companies' store opening speeds and scales sharply expanding. However, in reality, the industry's development speed has clearly exceeded a healthy range.

In the past few years, due to well-known reasons, many offline chain industries entered a mature and adjustment phase, releasing significant investment demand for offline stores. The snack discount industry timely absorbed a large amount of investment demand, and franchisees flocked in. Combined with the release of snack markets in some provinces and cities, this directly drove the explosion of the snack discount store format.

Various snack discount stores have floored the accelerator, expanding at a pace of 100 or even 200 stores per month.

This store opening speed far exceeds these companies' own operational capabilities, and the industry's overall store scale far exceeds the market's normal capacity to provide storefronts. As a result, crazy price hikes for storefronts and door-to-door store openings have begun to spread. This is actually very short-term behavior, and such a pace and method of opening stores will inevitably backfire on the companies themselves.

Why?

Think about it: in any city or region, the number of storefronts that can normally be produced each month and year that meet the requirements for snack discount stores is limited, and this needs to be adjusted through market mechanisms.

But when various snack discount stores, in order to expand rapidly, use various methods to urge, encourage, or even force franchisees to acquire storefronts at high prices, this permanently raises the operating costs of these stores. In some companies, expansion personnel collude with landlords to deliberately inflate transfer fees and rents.

Corruption and bribery also occur in this process. These behaviors will definitely affect the operational quality of these stores. Even if these stores have good short-term business after opening, as the supply of snack discount stores increases and daily sales return to normal levels, many stores will not be able to sustain operations.

Therefore, regarding the pace and speed of store openings, everyone should respect industry and market laws. In particular, leading companies have a responsibility to maintain and guide the healthy development of the industry, rather than disregarding franchisees' interests and treating them as pawns. This not only harms their own interests but also damages the industry's reputation and market credibility.

Malicious Price Wars in Snack Discount Stores

Harming the Enemy by a Thousand, Losing Eighteen Hundred Yourself!

What's worse, some companies, in order to grab territory, expand scale, and increase corporate valuation, have begun to use subsidies and other methods to engage in malicious price wars. From 8.8% discounts to 6.9% discounts, and even 4.9% discounts, selling far below cost, these price wars occur from time to time. This is no longer normal market competition but clearly illegal and non-compliant vicious competition.

In the past year, the aforementioned malicious price wars have occurred frequently and continuously, not only arousing consumer doubts but also attracting the attention of relevant government departments. Some companies attempt to achieve short-term interests through malicious price wars, but in reality, is it possible for any large-scale company to be eliminated by a competitor through price wars? This is unlikely.

We see that the snack discount store industry is still in its infancy. Whether in terms of category structure, online-offline integration, logistics and distribution, private brands, or supply chain transformation, it is still in the early stages. From the initial stage to a more extreme efficiency stage, there are many aspects that need iteration and innovation, rather than simply making a fuss over prices.

This kind of vicious competition is pushing the industry into an abyss. Malicious price competition will harm customers, franchisees, manufacturers, and even the chain brand owners themselves, leading to losses that outweigh gains. If malicious price wars trigger government industry regulation or stricter policy controls, it will only raise the overall operating costs of the industry, and ultimately, all companies and practitioners in the industry will suffer.

All Industry Participants

Must Build the Industry Together; There Is Still a Long Way to Go

Despite over a decade of development and being in an explosive phase, from a longer-term perspective, the snack discount store format is still in its infancy.

Some companies believe that completing the land grab will establish a solid leading position and competitive advantage, but this is not the case. Today's scale does not represent future scale, and today's temporary scale leadership does not mean having core competitive advantages.

Snack discount stores need to continuously improve product structure innovation and further enhance logistics efficiency. The current logistics cost ratio is relatively high among various discount store formats. More effort is needed to improve product quality and cost-effectiveness. The current proportion of low-end products is too high; prices are low, but quality is insufficient.

These aspects require great effort from all snack discount store companies to improve and enhance, and it is not something that can be done overnight. At the same time, in the future, snack discount stores will definitely be online-offline integrated retail enterprises, not only doing well in offline retail but also incorporating community group buying, video live streaming, and instant purchase businesses.

The front-end and back-end gross margins of snack discount store companies are currently around 30 percentage points, which is significantly higher—by more than 10 percentage points—compared to some other discount store formats. This is a very critical issue for snack discount stores. Excessively high gross margins mean that the price competitiveness of this format is actually not strong, and these improvements require continuous optimization by all companies in the industry.

Snack discount stores are currently still in the simple land-grabbing stage. If the dimensions of category structure, vertical supply chain, and online-offline integration are not well done, today's scale leadership does not represent future scale leadership. The entire format still needs multiple rounds of qualitative iteration.

For example, in the iteration from print media to internet media, we are still just at the portal website stage, still in the graphic internet era, with video streaming media later. Innovation is not yet complete, and the current leadership is only temporary. We need to take a longer-term perspective to view today's state and stage, as well as the achievements made.

Unfortunately, the main players in the industry are still simply and crudely fighting price wars and using scale advantages to pressure upstream manufacturers for lower prices. This is not a healthy development approach and is not conducive to the growth of the industry. While we see explosive industry growth, we must also pay attention to whether the overall efficiency of the industry has improved, whether operational links have been optimized, and whether customer value has been better created.

Final Thoughts

After more than three years of participation, I have great confidence and expectations for the snack discount format, but the industry has also encountered problems at this stage, with many pitfalls that could push the industry into a very bad situation.

We call on all enterprises in the snack discount field to compete healthily, focus more energy on products, operations, and format innovation, and redirect the mindset of price wars towards better meeting customer needs. Only when everyone builds the industry together will the industry be better.

On December 6-7, 2023, "New Distribution" will hold the first China FMCG Hard Discount Conference in Zhengzhou.

At that time, hard discount chain brand entrepreneurs, executives of leading FMCG brands, outstanding national distributors of FMCG, traditional retail enterprises, as well as service providers and research experts, will gather in Zhengzhou to discuss the supply chain revolution brought by hard discount and long-term development trends and opportunities.

If you are also interested in hard discount, you can scan the QR code to add customer service WeChat, consult the details of the hard discount conference, and join the [Hard Discount] themed community to discuss the development trends and opportunities of hard discount together.