The Underlying Logic Behind the Discount Store Boom Hard discount is not new, so why did it explode in 2023? Who is making money and who is losing in the hard discount model that emphasizes quality, low prices, and no tricks? After B2B and community group buying ended in chaos, will hard discount enter the same fate in 2024? Is it worth manufacturers embracing hard discount? To answer these questions, we must first understand the essence of hard discount, why it exists, and why it became popular. This is not a theoretical question; understanding it is crucial. The first thing we need to understand is that the essence of goods is transaction, and the essence of transaction is price comparison. Therefore, price is the most important attribute of goods; without price, there is no transaction. If we look through history, we find that since the advent of goods, price has been one of the most important and effective weapons in commercial warfare, and price wars have never ceased. During the Spring and Autumn Period, the famous "Mulberry Planting Ruins the State" was a high-level price war between states, and Guan Zhong became the ancestor of trade wars in history. Guan Zhong of Qi promoted a trend of wearing silk in society and purchased silk in large quantities at high prices, causing the price of silk in Lu to rise severalfold. The Duke of Lu was delighted and heavily subsidized mulberry planting, and the people destroyed their grain fields to plant mulberries, neglecting food production, leading to a significant reduction in grain output. At this point, Guan Zhong issued strict orders: first, not to buy silk from Lu, and second, not to sell grain to Lu privately. Lu suffered a great famine, grain prices rose a hundredfold, and gold and silver flowed into Qi, crippling Lu's national strength and military. Lu became a vassal of Qi, and Qi achieved dominance without fighting. From the story of "Mulberry Planting Ruins the State," we can discover a pattern: as long as there is an imbalance between supply and demand, there will be price wars; the greater the imbalance, the fiercer the price war. Conversely, if a proactive price war is fought well, it can trigger a major supply-demand imbalance for the opponent. Today, the global economic supply-demand imbalance has triggered sustained high-intensity trade wars. The severe supply-demand imbalance in China's FMCG market has contributed to Pinduoduo's success and has also sparked a series of retail model innovations centered on "price" in traditional channels in recent years. This is why hard discount has always existed but only became a major trend this year.
Discount Stores Are Still in the Capital Game Few Are Making Money "Price war" is not just about "low prices," but in the context of China's FMCG competition, what we usually mean by "price war" often refers to "low-price competition." Among all forms of price wars, hard discount is the simplest, most direct, and brutally effective. Abandoning various tricks like discounts, memberships, and clearance sales, hard discount uses the single move of "genuine products at low prices" to precisely hit the anxious consumer mindset. But the biggest contradiction in hard discount currently is that while it wins consumers through naked prices, it generally fails to make money. Having traffic but not making money seems to be repeating the cycle of community group buying. Therefore, we judge that most hard discount stores are still in the "capital game" stage. As for making money, we'll have to wait and see. Community group buying's capital sources were mainly internet giants and venture capital, but hard discount stores' "capital" sources include not only investment but also franchisees. Whether it's snack discount stores or hard discount supermarkets, the main model is franchising. Headquarters operate a few directly-owned stores to refine the model and supply chain capabilities. The booming store business attracts a large number of middle-aged people who are anxious about employment and have entrepreneurial impulses to join as franchisees. On one hand, hard discount hits the anxious consumer mindset due to income decline; on the other hand, the whole-store franchising model, which includes integrated output of brand, design, and supply chain, attracts many anxious FMCG distributors and startup individuals. Through a large amount of social entrepreneurial investment, the hard discount model has spread quickly and lightly across third- and fourth-tier cities nationwide. Starting in 2022, venture capital with nowhere to go in the consumer goods sector flooded into the hard discount track, greatly accelerating and catalyzing its development. The "hard discount" game has been set up, but the general lack of profitability remains a major flaw. This lack of profitability is not necessarily at the headquarters level but rather that franchise stores generally do not make money. According to our market research, over 85% of discount stores, whether snack discount or discount supermarkets, have almost no profit or profit so low it's negligible. "Genuine products at low prices" is the most useful trick. But the characteristic of a trick is that it often looks simple and easy to master, but those who can truly master it are one in ten thousand. The logic of making money in hard discount is also clear: the sales structure is "low-price brand products to attract traffic + private label for profit"; the product mix is 1000+ SKUs with high volume and fast turnover; the supply chain from factory to store is extremely short, with national procurement and short payment terms, seeking low prices. The core of this logic is supply chain transformation: use all means to shorten links, reduce costs, and improve efficiency. But in China's FMCG market, any transformation at the supply chain level is fraught with challenges, requiring sufficient courage, wisdom, time, and patience.
If big brand products at low prices attract traffic but trigger backlash from major brands, what about procurement instability?
If private label or white-label products ensure low prices but not quality, what then?
If brand products at low prices attract customers, but they only take advantage of the deals and don't buy white-label products, what then? After analysis, we can conclude that the logic of hard discount is essentially no different from Walmart's "Everyday Low Prices," but because it aims to push price tactics to the extreme, the difficulty is greatly increased. Hard discount's low price is just a means, not a capability. The real core capability of hard discount is being able to set prices extremely low while still making money, enabling franchisees to profit, and sustaining profitability. Why hasn't there been a wave of store closures yet? First, because it's riding the wave, with venture capital and social capital pouring in, and the large number of new store openings offsets the noise of closures; second, store investments typically last at least a year before considering transfer or closure, and many discount stores haven't yet reached the critical one-year mark. 2024 will be the year of life or death for snack discount stores. Who will survive, who will thrive, who will fade away, and who can develop the core capability of "making money with low prices"?
The Right Posture for Manufacturers to Deal with Hard Discount Let me first state my view. In an era of involution, if your product doesn't have the appeal of "Eastern Leaf" (a popular tea brand), you have no choice but to actively participate in the involution. "We've done everything we can; the only option left is a price war." As the only high-growth offline retail channel, hard discount is a channel that most FMCG manufacturers in the involution must face and try to embrace. "Involution" is the basic tone of this era, but whether we can "involution" with skill, profit, and quality is what we really need to study. In the face of the rise of hard discount, we agree that FMCG manufacturers should actively research, boldly innovate, control risks, and proactively try. Here are a few immature suggestions for your reference. As a distributor, if there is profit and payment is cash on delivery or credit terms not exceeding 7 days with controllable total amount, you can proactively cooperate with hard discount stores to gain sales growth, digest inventory and task pressure, but you should communicate with the brand in advance. At the same time, if the distributor has local store location resources and supply chain procurement advantages, you can try franchising a few stores to accumulate experience and ensure profitable operations. As a brand, strict enforcement and control of the price system for major products is essential. Even if prices are chaotic, they must be controlled within the discount store channel and must not spread to all channels. You can explore limited-time and limited-quantity cooperation with discount stores. In addition, some strong brands with powerful product R&D and production capabilities can explore co-creation and co-branded exclusive products with discount stores for mutual benefit. For example, Qiaomama Foods, a leading pudding brand, used "co-creation competition" with "Mrs. Lao" to develop exclusive products for them, achieving good sales and profit growth. Of course, the above are immature suggestions for manufacturers and distributors with growth anxiety; those without such anxiety need not consider them. Looking to the future, as long as the supply-demand imbalance in China's FMCG market remains, product homogenization continues, and consumer income polarization persists, the trend of retail transformation centered on price will not change. Therefore, whether you are a brand, distributor, or hard discount brand, before starting a price war, you must think clearly: Why are you fighting the price war? What makes you think you can win? Can the price war bring you true victory?
On December 5-7, the "New Ecology • Hard Growth - The First China FMCG Hard Discount Conference" hosted by New Distribution will be held at the Hilton Zhengzhou Hotel. At that time, over 1,000 brand owners, distributors, and hard discount brands from across the country will gather to discuss the trends and healthy development of the hard discount model, study how to co-create value within a certain value system, and connect with growth opportunities for 2024. Two roundtable dialogues: 1. "Is low price a strategy or a tactic?" 2. "Can hard discount eliminate intermediaries and brands?" These will allow hard discount operators and brand executives to engage in in-depth dialogue and discussion. There will also be 2 forums and 1 closed-door private sharing session, directly addressing the core issues of most concern to upstream and downstream in the industry chain. If you are interested in learning and exchanging ideas, you can scan the QR code to add our customer service WeChat, inquire about 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.