The price reduction space for snack discount stores is related to the category characteristics of snacks themselves (category without brand, small items, low average transaction value, long tail, severe homogenization, etc.), as well as the market space left by the choices of previous representative snack channels during the consumption upgrade wave of the past decade or so. Under new market conditions (mature community formats, supply chains pursuing extreme efficiency, complete chain franchise infrastructure), the single-store model and business model have been reshaped. In recent years, snack discount chain stores have clearly increased in number. Snacks are very busy, snack preferred, neighbor food magic, snack youming, lock flavor, Dai Yonghong, snack warehouse, snack workshop, etc. They have opened from new first-tier cities to fifth-tier cities, rooted in communities at extremely low prices, opening hundreds or thousands of stores a year, making snack stores a rare offline format that is still rapidly expanding in the current market environment. The core of this round of snack store format innovation is to squeeze the gross profit space in the previous snack value chain, compressing the 50% gross profit in normal sales of old channels to about 30% or even lower, significantly reducing terminal retail prices, and opening the market with a hard discount posture of small profits and quick turnover. The existence of this price reduction space is related to the category characteristics of snacks themselves (category without brand, small items, low average transaction value, long tail, severe homogenization, etc.), as well as the market space left by the choices of previous representative snack channels during the consumption upgrade wave of the past decade or so. Under new market conditions (mature community formats, supply chains pursuing extreme efficiency, complete chain franchise infrastructure), the single-store model and business model have been reshaped. Therefore, when Snacks Are Very Busy in 2020 created excellent performance in Changsha, which attracted much attention from investors, with community stores outperforming shopping mall stores, this track has received increasing attention and has also attracted many similar enterprises and entrepreneurs to invest in it. We regard snack discount stores as a sample of hard discount emerging in China in the form of category killers. Snacks have problems that online e-commerce cannot solve, and in the corners that Pinduoduo cannot cover, the corresponding discount stores were born during the value depression period of offline communities, also setting off a wave of low prices. Hard discount is similar to the American discount store model, ultimately reducing the retail price of the channel by reducing operating costs and changing the profit distribution model of the original value chain. The emergence of hard discount is closely related to the increase in consumers' price sensitivity, and also requires the channel itself to operate with the core idea of extreme cost reduction and efficiency improvement. And because the previous development of domestic retail was too blind, extensive, and inefficient, the reform space left for hard discount stores is actually very large, and such hard discount stores are also impacting the existing retail landscape. 01 The previous generation of channels relied on high gross profit In the interest chain from production to sales, the formation of the original value distribution system related to snacks is related to both the brand at the goods end and the channel in the field. Snack brands have never been strong in channels. The earliest snack sales channels to emerge from the era of material shortage were street-side stores selling roasted nuts and preserved fruits, as well as large and small supermarkets and hypermarkets. From the perspective of upstream brands, the former usually sells bulk products without any brand labels, while the latter's competition early on included foreign snack giants like Bibabo and Oreo. Domestic snack production can almost be said to have started from scratch, and naturally accompanied by problems such as low entry barriers and severe homogenization. The constantly changing and game-playing relationship between brands and channels is reflected in the fact that during this period, supermarkets and hypermarkets were also slowly expanding, showing obvious regional characteristics, which increased the difficulty for the emergence of national brands. The attribute of channel dominance also led to the absolute strength of retailers. Subject to their business model of charging various channel fees, promotion fees, and extending payment periods to suppliers, terminal selling prices were pushed up, forming a value chain operating with high gross profit. On the other hand, the existence of channel fees also made brands wary of entry costs and inclined to create strong big single products. The paradox is that snacks are not a category with absolute big single products. Financial reports show that even the largest single product of Liangpin Shop, pork jerky, with sales of 500 million yuan, only accounts for 5.4% of the company's total annual revenue of 9.3 billion yuan. In fact, in the snack category, except for a few single products that have been precipitated and verified over a long period of time, such as nuts, chestnuts, sunflower seeds, and pork jerky, most products do not sell well. Consumers naturally constantly try new snacks and make unplanned purchases. Category repurchase may be stable, but single product repurchase is extremely low. The dispersion at the consumer end is reflected in the production end. There are not many big single products, and with a sufficiently wide category width, the long tail effect of snacks is obvious. Liangpin Shop divides snacks into six categories in its financial report: nuts and stir-fried goods, dried fruits and preserved fruits, meat snacks, vegetarian and mountain delicacies, candy and pastries, and others. Each major category contains many products of various forms, with a total SKU count controlled at over 1,500. If calculated across the entire industry, the number of snack SKUs should increase by an order of magnitude. Homogenization, long tail, and low average transaction value also mean that snacks have a large number of small and medium-sized factories and brands, with limited market concentration. It is not an exaggeration to summarize it as having categories but no brands. This is the basic soil for snacks to spill out of supermarkets and hypermarkets and form vertical specialty stores. The dispersion at the consumer end is reflected in the channel end. Traditional comprehensive daily grocery stores are limited by store area and shelf capacity, often selling only a few dozen types of snacks. Although large supermarkets have tens of thousands of SKUs, they usually only have two to three hundred types specifically for snacks, still not as many as vertical stores that specialize in selling snacks. In the early 2000s, offline snack specialty stores such as Baicaowei, Liangpin Shop, Lai Yifen, and Laoban Daren began to appear. They rose with new fields such as university towns that had consumption capacity and demand, providing more SKU choices in the thousands. At the same time, because they horizontally benchmarked against the inflated supermarket prices, the business model of this type of snack specialty store was also built on high gross profit since its inception. One manifestation is the use of private label products in their own channels for product differentiation to highlight their own differentiation. However, also because the expansion of early offline formats was relatively slow, and the respective shortcomings of direct operation and franchise forms had not yet been solved with the help of future digitalization and middle-platform, these vertical stores still mainly expanded in small regional areas. It was not until the main battlefield of snacks began to shift online that the influence of these channel brands truly began to play out. Starting from 2012 when Three Squirrels first participated in Tmall Double 11 and won the first place in food GMV, to 2019 when Three Squirrels completed its listing but faced challenges both online and offline, under the joint promotion of the three snack giants (Liangpin Shop, Three Squirrels, and Baicaowei), the online penetration rate of snacks achieved a breakthrough from almost 0 to nearly 15% during this period. Consumption upgrade was the main theme of this period. The earliest hit products of Three Squirrels were undoubtedly nuts, pecans, and macadamia nuts. At the beginning, the differentiation of these products was obvious enough, and thus cultivated certain online snack shopping habits. But the category characteristics of snacks ultimately limited their online sales, preventing them from reaching high penetration rates like beauty and pets, and stagnating in recent years, becoming an early stock market. Qicheng Capital believes that offline is a scenario more in line with consumers' snack purchasing habits. Online solves the problem of big single products and deep inventory. In order to enable originally low average transaction value, small snacks to cover logistics costs, merchants tend to sell large packages of high average transaction value products. Even if sold as sets or gift boxes, they can only be relatively fixed combinations, unable to achieve complete bulk self-selection like offline. And buying more small portions but multiple types for trial consumption is the demand of most consumers. At the same time, the so-called differentiation of early e-commerce products was quickly filled by homogenization, especially in the environment of undifferentiated price comparison in e-commerce, price wars were more nakedly placed on the table. When traffic dividends gradually disappeared, the situation became even more severe. The transfer of online advantageous brands to offline became an inevitable development. And in order to continue to differentiate from the overall homogenization offline, while showing a high-profile brand image, their new stores often opened in shopping malls. Liangpin Shop also formally proposed a high-end strategy in 2019. But it has been proven that the offline business of this generation of retail vertical stores is not easy to do. Liangpin Shop's store count exceeded 2,000 in mid-2016 and finally broke through 3,000 in the first half of this year. Three Squirrels closed nearly 200 stores net in half a year, accounting for 18% of the total stores at the beginning of the period. 02 The next generation of discount stores is innovating in model Data shows that in 2020, by sales scale of leisure snacks, food stores and food markets accounted for 46%, supermarkets and convenience stores accounted for 37%, and online channels contributed 13%. In the offline food store sales accounting for nearly half, the store with the most stores, Lai Yifen, has only over 3,700 stores, and 98% of the stores are distributed in Jiangsu, Zhejiang, and Shanghai. A national snack chain has not yet appeared. It was not until this round of snack discount store entrepreneurship that a new round of collective expansion was set off. The core of snack discount stores is absolute low prices. According to data officially disclosed by the brands, the gross profit of Snacks Are Very Busy is 18%, and Snack Preferred is controlled at about 22%, far from the 50% or so of supermarkets and the previous generation of vertical stores. "The previous generation of snack specialty stores still treated snacks as a subcategory, a professional channel, believing that its audience is not so broad and not the main consumption scenario, so it needed medium to high gross profit to maintain the business model," said an investor from Qicheng Capital. "In Snacks Are Very Busy, you basically cannot see products with a unit price exceeding 60 yuan per jin. This is actually a choice of people. The customer group of Snacks Are Very Busy is all customer groups, and the prices are generally acceptable to consumers." After removing the higher-cost parts of meat snacks and seafood snacks, the main products of Snacks Are Very Busy are puffed and baked products at 8.8 yuan per jin. Data from Narrow Door Restaurant Eye also shows that the average transaction value of Snacks Are Very Busy is 38 yuan, while those of Liangpin Shop, Lai Yifen, and Laoban Daren are 56 yuan, 61 yuan, and 70 yuan, respectively. In addition to snacks, these stores usually also sell equally low-priced packaged foods, milk drinks, yogurt, etc., such as Nongfu Spring and C'estbon at 1.2 yuan, and Ganten at 2.4 yuan, which can both play a certain role in attracting traffic and further increase consumption frequency. In this way, under the overall low-price sales strategy, snack discount stores expand their target customer group to all ages and open up expansion space from new first-tier to fifth-tier cities. Pure low prices are not difficult to achieve; internet companies can do it by burning money. But how to enable enterprises to operate normally while ensuring absolute low prices is actually the reshaping of the entire business value chain based on this point. Snack entrepreneur Brother Hu believes that generally speaking, the space for price reduction usually comes from innovation and improvement in multiple links such as capital costs, supply costs, rent and labor, and inventory, and requires enterprises to take extreme efficiency as the core idea. The compression of capital costs comes from the fact that the new generation of snack discount stores generally adopts cash procurement, no payment period, and does not charge entry fees, channel fees, promotion fees, or other fees. These back-end fees and capital occupation that are common in the supermarket system make suppliers complain bitterly, and the supply prices to supermarkets are forced to be raised. Unlike supermarkets that face consumers directly and have long sales cycles, snack discount stores essentially sell goods to franchisees, with rapid cash collection, and abundant cash flow can also obtain more cost concessions from suppliers. Direct procurement from brands or high-level distributors, removing intermediate links, is also one of the ways to obtain low supply costs. But more importantly, because as mentioned earlier, the upstream of snack production is largely in a state of having categories but no brands, the ability to identify and explore more cost-effective suppliers is also one of the basic requirements for snack discount stores. Different from the previous generation of snack channels such as Liangpin Shop and Lai Yifen, this round of snack stores gave up the persistence of private labels. This makes their product selection more flexible and allows them to quickly iterate new products based on market changes, while private labels go through a whole set of processes from production to packaging design and quality control, with a development cycle of at least 3 months. In 2022, Brother Hu, starting from the Sunan market, co-founded a snack discount supermarket called Kazhihu. She divides snack brands into four categories: the first category is well-known domestic and foreign brands and national brands; the second category is internet celebrity brands that have emerged in recent years; the third category is distributor brands that are not widely known to the public but have existed in the distributor system for many years and are recognized by insiders; the fourth category is completely white-label products, which may come from factory sub-brands or OEM self-labeling. The main role of the first and second categories of brands is to show absolute low prices, depending on the supply chain efficiency of snack enterprises. The combination of the latter two categories tests the ability of channel quality endorsement and grasping consumer preferences. Being able to replace "distributor brands" with white-label products endorsed by their own channels is the largest source of channel profit. This is a requirement for the accumulation of industry experience. Therefore, as Li Chao, general manager of Snack Preferred chain stores (he himself was an agent for Baixiang and Hsu Fu Chi), once told the media, in the snack chain industry, there are many entrepreneurs who transformed from distributors. Rent and labor costs are the major parts of the single-store model. Opening stores in communities is an important way to reduce rent. Communities are closer to consumers and have stable foot traffic, and are more favored by chain brands in the post-epidemic period. Of course, this is also related to the increase in standardized configuration of residential areas and the gradual maturity of the ground-floor commercial ecology. It is understood that community stores in Changsha even control the rent ratio within 5%. Zhang Xinzhao, founding partner of Qicheng Capital, also gave us examples of two details in saving labor costs in Snacks Are Very Busy. One is whole-box transportation, basically no splitting, which also requires the coordination and adjustment of the ordering system, new product launch model, and sales dynamics logic, but undoubtedly reduces the workload of personnel; the other is not doing promotions, so there is no need for the role of shopping guides. In this way, store staff only need to simply display and keep the store clean, with lower requirements for them, which means labor costs can be lower. Inventory management and expiration risk are related to hidden costs, especially for sales models like snacks that mainly rely on bulk weighing. Therefore, snack discount stores have optimized the entire data system, including front-end sales data, and the allocation and distribution of goods. Based on the above measures, snack discount stores have built a complete set of processes from procurement to terminal sales around the principle of absolute low prices. Also because of the standardization of data, standardization of site selection, standardization of product selection, and simplification of store staff work, snack discount itself has the ability to quickly replicate stores, and has broad space for sinking, with the theoretical possibility of ten thousand stores. Liu Xingjian, founding partner of Zhuri Capital, believes that the low gross profit model of snack discount stores is essentially a requirement for capability, which means extremely high requirements for operational efficiency. In the process of operating the low gross profit model, a strong flywheel effect will be generated: stores attract a large amount of traffic through good site selection and good products, and increase store sales to meet the high sales requirements under low gross profit, so the comprehensive capability requirements for stores are very high; this model can also attract excellent franchisees, making them willing to cooperate with the headquarters and bear capital risks; as franchise stores increase, management costs and headquarters expenses will further decrease. The so-called wear and tear of the flywheel in this process will mainly appear in the accuracy of product selection, the grasp of consumer demand, the efficiency of capital use, and the control ability of the terminal. "From these dimensions, looking at it now, the efficiency of snack discount stores is actually much higher than that of traditional snack distribution channels," Liu Xingjian said. Facts have also proven that the expansion speed of this round of snack discount stores is very fast. Snack Preferred has more than 700 stores so far, and according to information released by Yuhua District, Changsha, where Snacks Are Very Busy is located, the number of Snacks Are Very Busy stores exceeded 1,500 in August 2022, with expected annual sales of 6 billion yuan in 2022. Among them, Snacks Are Very Busy has more than 1,200 stores in its home base of Hunan, and its local density has already exceeded that of another well-known Hunan enterprise, Juewei Food (with a total of over 13,000 stores, of which about 900 are in Hunan). But there are also views that although snack discount stores are still in the entrepreneurial boom and expanding rapidly, they actually rely on the dividends of upstream dispersion and channel dispersion. Returning to the store level, the differences between different discount brand stores are very small, and after reaching a certain stage, they will still fall into the quagmire of homogenization. Whether they can achieve the ideal scale remains to be tested. In addition to the extreme efficiency building of discount stores, there have also emerged new types of roasted nut snack stores such as Xueji Roasted Nuts, which focus on extreme experience, featuring selling a large pile of goods (pre-packaged + transparent packaging bulk), in-store roasting, and try before you buy. Small snacks, big business.