In June, one afternoon, a friend requested to add me on WeChat. After I accepted, a message quickly popped up on the screen: "Distributors are having a very tough time now, especially those of us handling big brands; it feels like we can't go on. I hope you can guide us on how to hold on and get out of this predicament." I was curious—who would send such a message right away? So I started chatting with him. It turned out he was a distributor in a county-level city in Hubei, mainly dealing in leisure food, representing first-tier brands like Lay's, Alpenliebe, Yanjin Shop, and Strong Group. 60-70% of his business came from supermarkets. Although business had been sluggish before, it was still manageable. But this year, his operations suffered a huge impact. He told me that his main client, a local supermarket chain, had seen a 50% decline in sales. Why? Because snack discount stores had opened in his market! "In the first half of the year, they were opening stores crazily; now there are about 50 or so, and more chains are coming in. I've never had such a hard time doing business... I might not survive this year..."
Snack stores are mainly located in residential communities, directly affecting a radius of 1-1.5 kilometers, and can cause a 30-40% decline in sales of related categories in nearby supermarkets and mom-and-pop stores. A little over a year ago, this topic wasn't widely discussed. But since this year, when talking to distributors about current business, snack stores have become an unavoidable topic. Behind this is the explosive growth of snack discount stores. According to our preliminary statistics, in 2021, there were about 2,500 snack discount stores nationwide, with sales under 10 billion yuan. In 2022, there were 8,000-10,000 stores, with sales around 30 billion yuan. By the end of 2023, it's estimated that the number of stores nationwide will be between 22,000 and 25,000, with sales reaching 70-80 billion yuan. Such terrifying growth has had a huge impact on the local distribution system. Roughly estimated, there are about 200,000 FMCG distributors in China supplying various traditional retail outlets, and they are now facing a "life-or-death race."
Over the past period, New Distribution has conducted intensive research in several cities, having in-depth exchanges with founders and investors of leading snack chain enterprises, snack store franchisees, staff, consumers, as well as brand owners and distributors from various regions. Snack hard discount has integrated distribution and retail. Coupled with overcapacity in upstream factories that must find outlets, it's like a mudslide on a mountain, overwhelming the winding mountain road of traditional distribution and rushing straight down to the valley. This will have a systemic impact, stirring the entire chain, and the local supply chain will accelerate its evolution. Some will feel more pain, while others haven't felt it yet, because it's a gradual transmission process.
Why do I say this? In this article, I will systematically elaborate from three aspects:
- Multi-dimensional perspective: Will snack hard discount be a flash in the pan?
- Model breakdown: How does snack hard discount take away business?
- Challenges and opportunities: How should distributors respond to the change?
Multi-dimensional Perspective
Some say snack stores now rely on capital and expand everywhere. Burning capital can't last. Will snack hard discount really be a flash in the pan? My answer is—no. Let me explain from three aspects:
First, the emergence and development of snack hard discount. In just two years, sales have grown 7-8 times. How did snack stores appear and suddenly grow to such a scale? If we simply divide it, 2010-2017 can be considered the budding period of snack hard discount; 2017-2023 is the industry's accelerated growth period. In 2010, Mrs. Lao (老婆大人) was founded in Zhejiang, sparking a wave of imitators, but most of them died. Although they had figured out the model early on, they stayed in their own region, making it a regional business. In 2017, Snack Busy (零食很忙) was founded. Hunan people are indeed innovative in retail, and with their bold and adventurous style, they quickly attracted more people to this field, expanding in southern provinces. By 2022, this format had completely exploded. Now, the major players are all racing to expand, and there are many small brands in various places. There's a lot of information online about this, so I won't go into detail. Let me mention a detail: In the early days when Mrs. Lao was doing well, investors discovered them and wanted to invest, but they said they didn't need it because it was a profitable business with excellent cash flow. Many people compare it to various model innovations in recent years, such as Retail Link, New Channel, community group buying, etc., and say that snack hard discount is just capital burning money, impossible to sustain, and will eventually be a flash in the pan. But one thing to note: snack stores are not new; they've been around for 13 years since 2010, and their business model has long been proven successful. It's only in the past two years that they've been favored by capital, leading to explosive growth. Capital may cause bubbles and various messes, but snack hard discount itself is not a new thing created by burning capital.
Second, from the perspective of changes in business formats under economic cycles. In the past few decades, China has been developing rapidly and hasn't experienced the cycles that developed markets have gone through, but the laws of cycles always exist. We should study foreign hard discount formats to reflect on our current situation. When talking about hard discount, we can't avoid Germany's ALDI. In 1913, it was just a small food store. In 1948, the Albrecht brothers took over their mother's store, and after a series of adjustments, it developed. The founding family has long held the position of Germany's richest. To understand ALDI's model, you can look at this book: The author once served as a member of ALDI's management committee, and this book is almost the only one globally that deeply discusses ALDI's model and methods. Last month, I went to Chongqing to see Tiaoma (条马), which is truly following ALDI's approach. As soon as you enter, you can feel the complete German style. The core of hard discount lies in: low gross margin, high turnover. Its manifestations are: limited SKUs, simple decoration, medium-small area, low prices, private labels, and no value-added services. ALDI deals in food and daily necessities, which are daily necessities for purposeful consumption, while snacks are impulse purchases. The nature of the category determines different terminal forms, but they are consistent in pursuing low gross margin and high turnover. The rise of discount stores abroad has a common background: economic downturn, and greater demand for cost-effective products. In the European market, over 20% of retail is hard discount, and it's a retail format with long-term vitality—China's development is just beginning.
Third, from the logic of business itself. No matter how retail forms change, its essence remains the same: three words—cost, efficiency, and experience. With the development of internet technology, changes in generations, and the impact of the three-year pandemic, people's consumption habits have changed. For mass consumption today, besides valuing cost-effectiveness, time is the biggest cost, and convenience is the most important experience. Over the past few decades, China's professional division of labor has become more mature, and supply chain efficiency has greatly improved. Category chains, going deep into communities, rely on efficient supply chains to create a better shopping experience and provide consumers with more cost-effective products. It can be said that snack hard discount is actually the product of the superposition of the big trend of hard discount and the small trends of community retail and category chains.
Snack hard discount will not be a flash in the pan—of course, it will continue to evolve. The question is, what does it mean for distributors? Recently, I've communicated with several brand personnel, and the information I've received is that it's become common to set up a dedicated department to handle this channel or assign this function to a specific department. Now, the major snack chain enterprises have achieved over 90% direct procurement, and a few leading brands have not yet adopted an active cooperative attitude. Industry insiders judge that once the data on the share of the snack channel is reflected in Nielsen, their attitude will change. What role do distributors play here? In the early stage, they contributed to this format, but when the new channel grows, distributors become the ones who are bypassed. We're familiar with this situation; it happened when hypermarkets developed in the early years. Many people think that in the game among terminals, distributors, and brands, distributors will always have business. Will this snack hard discount be the same? Is it different from hypermarkets? In fact, it's very different—hypermarkets operate on credit, while snack hard discount operates on outright purchase. But to explain this clearly, we need to do a detailed model breakdown. We need to ask: Who does snack hard discount actually take business from? How can it take away business?
Model Breakdown
You might say: How? By low prices! Indeed, regarding snack hard discount stores, a common saying is: low-price competition, low prices can't offer good service, how can it last? My view is that low prices are a strategy in the early stage, leading to low prices as an overall result. Its essence is not low-price competition but a hard discount business model with total cost leadership. We visited the market and collected first-hand information: Low prices are undoubtedly the main selling point. But don't just stare at the price; look at the model behind it. Now, the major snack hard discount enterprises basically say they keep about 10 percentage points of gross margin at headquarters and give about 20 percentage points to stores. We did in-depth research; different snack chain enterprises vary, but basically they're around this range. In fact, many early franchisees of snack stores made a lot of money. Now in the northern market, especially in counties, newly opened stores are performing very well. Low gross margin, high turnover, can still make money. Of course, there are definitely franchisees losing money; there are many factors, such as location, rent costs, operational ability, etc. Moreover, when too many people enter any business, it becomes hard to make money. With capital chasing and expanding, more and more stores are opening, and price wars at the C-end, we'll see more and more cases of losses. The industry is developing too fast, moving from taking business from traditional stores to competing among peers—price wars have already started. But returning to the hard discount model itself, low prices are the result; its essence is to compress costs and margins, pass savings to consumers, and then make money through high turnover.
This is a change that disturbs the entire upstream and downstream of the industry chain. Why do I say this? Let me summarize a formula: Snack hard discount chain = upstream collective procurement + logistics distribution + front-end delivery + consumer insight. What does this mean? Snack discount stores purchase directly from manufacturers, then through self-built warehousing and distribution systems, quickly deliver products to their terminal stores. What is this called? Distribution and retail integration; distributors are not bypassed, they are internalized. Because it directly connects with consumers and has consumption data, it's easy to do consumption analysis and consumer insight, then feed that back to upstream product selection and collective procurement. The traditional distribution model simply can't do this. With layers of markups and multiple handling, especially at the terminal, there are entry fees, barcode fees, anniversary fees, and other miscellaneous costs, including products that brands force on stores and can't sell—these are all costs that ultimately consumers pay for. In the traditional channel model, from manufacturer to consumer, it's like climbing mountains and crossing rivers, with layers of barriers. Snack hard discount chains have built a highway. To truly open this highway, the enterprise's operational ability, product selection ability, and supply chain efficiency are crucial. Snack stores are not as simple as the street shops you see—what's truly important is what you can't see. Store location is the foundation; I won't elaborate here. But with similar locations, stores may look similar, yet sales can vary greatly. Why? First, operations. Staff are responsible for stocking, displaying, weighing, and checkout; they don't make recommendations. Sales rely on the product's silent selling power. What products to eliminate? What to bring in? Bulk items are placed in bins; by looking at monthly sales per bin, and for packaged items, per SKU, headquarters can easily analyze data to know which are selling well and which aren't. Headquarters must provide capability output. Besides daily operational standards, supervisors must communicate with stores, translating data analysis and insights into specific replacement and new product actions to achieve high turnover and sales. Of course, this also involves product selection capability. Snack stores must maintain a certain elimination rate. On a monthly basis, they continuously do bottom-out elimination through data comparison and analysis to improve overall store sell-through and turnover. Operational and product selection capabilities are very important, and they vary greatly among enterprises. Products come from suppliers, which involves a core aspect—backend supply chain efficiency. Why are snack store prices low? The key is supply chain efficiency. In the traditional distribution model, from factory to brand central warehouse, to first-tier and second-tier distributors, to terminals, and finally to consumers, the markup rate is between 1.8 and 2. What about snack hard discount? Directly from factory to the company's warehousing and distribution center, then through terminals to consumers, the markup rate is between 1.3 and 1.4. This is why snack store product prices are on average 20-30% lower than other channels. Sales determine bargaining power, bargaining power affects efficiency, and efficiency affects sales—scale basically equals efficiency. This is a business of scale. Two additional points: To expand, chain brands must build warehouses by region; otherwise, costs won't come down and distribution can't keep up. This is a large investment and a barrier to entry. Supply chain management capability is important, especially for high-turnover products; don't run out of stock, as it affects consumer experience and, more importantly, single-store output. The core of snack hard discount is low gross margin and high turnover; refined operations, product selection capability, and supply chain efficiency are key. Whose business does it actually affect? Snack stores are mainly in communities, affecting supermarkets, hypermarkets, mom-and-pop stores, and some convenience stores within a 1-1.5 km radius. Our preliminary research shows that stores near snack stores see a 30-40% decline in related category sales, some halved, and some even forced to close. Depending on region, scale, and model, individual distributors' perceptions vary. Which types of distributors are currently most affected? The main categories snack stores handle can be divided into four types: bulk snacks, packaged snacks, alcoholic beverages and dairy drinks, and frozen/chilled products. First, bulk items are a source of profit. This differs from many people's perception; they think bulk items make money because they're opaque and have higher margins. But in fact, bulk items have no brand premium, and profit margins aren't large. Bulk margins are indeed slightly higher, but not by much—at least for leading snack hard discount stores. Bulk items are the profit source for snack stores mainly because they sell more, accounting for 50-70% of a store's sales. Second, snack stores are expanding their product range; early on it was drinks and snacks, now it includes alcoholic beverages, dairy drinks, frozen and chilled items, etc. They will definitely expand further; now they're generally opening larger stores of 150-200 square meters to prepare for expansion. Currently, the most affected are distributors mainly dealing in leisure food, followed by those dealing in beverages. But the disruption from snack hard discount will be systemic because it pulls down terminal prices, disrupts the price system, and the overall water level will drop, leaving less and less room for everyone, eventually affecting the entire trade and distribution field.
Challenges and Opportunities
In a recent survey by New Distribution, 70% of distributors said their business had declined to varying degrees due to the impact of snack stores. Based on the survey, we've summarized several definitive conclusions. First, no matter how big the impact, once snack hard discount stores open locally, they will definitely affect distributors' business (mainly leisure food and beverage distributors now), to a greater or lesser extent. Second, the size of the impact is related to many factors, such as the local trade competition, retail landscape, the distributor's own operating condition, and the development stage of snack stores. Third, relatively speaking, the southern trade ecosystem is richer and more diverse than the north, giving distributors more resilience and room to maneuver. Fourth, the impact on the northern local supply chain system may just be beginning; some distributors are proactive in responding, while others are waiting and seeing.
Snack stores have impacted the local supply chain system. How to understand this? Look at it from vertical and horizontal perspectives. First, vertically, look at the model's penetration. Snack stores have much stronger penetration in lower-tier markets than convenience stores. Convenience stores have short-shelf-life products, but snack stores have products with at least two to three months of shelf life. So we see snack stores opening even in townships in many places. Second, horizontally, look at the density of store coverage. A store has the greatest impact within 1-1.5 kilometers. Some say that no matter how many snack stores open, density has a limit; they can't take all the business. That's true, but the real impact, as mentioned, is not just directly taking away your clients' business, but more importantly, disrupting the entire price system. Snack stores have low prices, so supermarkets and small shops have to lower prices to stay competitive. Through the traditional levels, to maintain business, your already thin profits disappear. It's not that you lose all business; the market is big, and snack store penetration can't be 100%. The problem is that business decreases, your scale shrinks, and you quickly fall below the break-even point. It's like climbing a mountain; the air gets thinner, and those who can't hold on fall first. Regarding this, distributors in different places have different feelings. But we're looking at this from an industry perspective.
How do distributors currently view and respond? The chart below is a summary of our research. We take two dimensions: one is the density of snack store openings, and the other is the breadth of the distributor's channels, resulting in four categories. For each category, the response can be seen in the chart. This is a simple summary; everyone should analyze based on their specific situation. But overall, single-channel distributors are the most vulnerable; relatively speaking, multi-channel, cross-category, and cross-regional distributors have more room to maneuver. What advice do we have for distributors? First, operate multi-channel and cross-category. If conditions allow, transform into a B2b supply chain platform. Multi-channel and cross-category give you room to maneuver and keep you above the break-even line. A prefecture-level city can only accommodate about two B2b platform players. From the perspective of the impact of snack hard discount we've discussed, this is consistent with forcing local supply chain integration and upgrading. Second, deeply understand the snack hard discount model, don't resist it, and see if you can find opportunities based on your own situation. There are two scenarios. 1. Supply snack discount stores. It's difficult with leading snack chain enterprises; regional distributors have little chance. But there are opportunities, such as in the water, dairy, and beverage categories. After obtaining manufacturer fee subsidies, distributors have a price advantage, making cooperation more likely. Also, due to invoicing processes that create obstacles for brands to transact directly with snack stores, distributors can provide short-term financing and act as intermediaries. There are more opportunities to supply local chain brands, but there's a risk warning: as competition intensifies, pay attention to payment terms and control risks. 2. Open your own snack store. In the current situation, starting from scratch is not recommended. From the previous analysis, you know that what seems easy actually has extremely high barriers. The remaining option is to choose franchising, but you must do thorough research on the local competitive landscape, single-store input-output ratio, and the strength and support of the franchisor.
The trade and distribution industry was already undergoing reshuffling, and the development of snack hard discount will definitely accelerate this process. Because systemic, capitalized supply chain systems, relying on the penetration of snack hard discount, squeeze local supply chains. But at the same time, I want to say, don't over-amplify this impact. First, as we said, no format can achieve 100% penetration; there will always be business that requires distributors—it's just a question of who does it. Second, the survival space for local trade may become increasingly tight, then gradually relax. Things fueled by capital, after accelerating growth and expansion, often face bubble bursts. Now, the major snack store brands are racing to expand, forming alliances, and in many places, they're already in close combat. In the next one to two years, there will definitely be mergers and acquisitions, bankruptcies, and franchisees losing money. That is, after the bubble bursts, this format will gradually enter a mature and stable development stage. But the hard discount model of integrated distribution and retail will definitely exist, and after its baptism, the local supply chain system will be forced to become more efficient. You need to find a way to become a part of the local efficient supply chain. Some distributors might say, these methods are too late for me. Frankly, some distributors will definitely be eliminated. It's cold, but it's the law of development.
In Conclusion
Since 2022, snack hard discount has accelerated wildly. Some see low-price sales, some see franchisees losing money, but from an industry perspective, its real impact lies in the shock to the upstream and downstream of the industry chain—China's modern food processing industry is undergoing a supply-side reform.
Why are snack discount stores so crazy? Not embracing them is impossible, but embracing them means facing the disruption of the price system and the difficulty of maintaining traditional distribution networks, leaving brand owners in a dilemma. How are various brands responding? What impact does it have on the industry chain? Where should distributors go? What are the future challenges and opportunities?
From October 9 to 11, 2023, the 5th China FMCG Conference will be held in Shenzhen. On the morning of October 10, we have organized a parallel forum on 'Snack and Discount Stores.' At that time, snack/discount store brands, FMCG manufacturer executives, distributor experts, and industry observers will gather to have in-depth exchanges on topics related to 'hard discount,' discuss, and collide ideas. Welcome to join! At the conference, we will release the '2023 China FMCG Snack Hard Discount Development White Paper.' From the perspective of the FMCG industry, New Distribution, through systematic investigation and research, analyzes the cooperation situation between brand owners and snack hard discount, interprets the impact of snack hard discount on the local trade system, and helps brand owners and distributors objectively, comprehensively, and deeply grasp industry trends, meet challenges, and discover growth opportunities.