---
title: "Strategies for Hard Discount Transformation in Chinese Physical Retail"
description: "Facing the surging wave of hard discount, traditional physical retailers (such as supermarkets) often adopt three attitudes: opportunism, defeatism, and adventurism. The risks of the first two are missing opportunities; the risk of the latter is overreaching. To avoid these errors, we must understand the essence of hard discount, our historical tasks, and the general laws of historical waves."
author: "连杰"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2024-01-28"
language: "en"
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# Strategies for Hard Discount Transformation in Chinese Physical Retail

> Facing the surging wave of hard discount, traditional physical retailers (such as supermarkets) often adopt three attitudes: opportunism, defeatism, and adventurism. The risks of the first two are missing opportunities; the risk of the latter is overreaching. To avoid these errors, we must understand the essence of hard discount, our historical tasks, and the general laws of historical waves.

Facing the surging wave of hard discount, traditional physical retailers (such as supermarkets) often form the following three attitudes:
> The first believes that hard discount is just capital burning money, not sustainable, and waiting for its demise is enough. The author calls this opportunism.
>
> The second believes that hard discount transformation is too difficult, impossible for traditional retail, and directly surrenders. The author calls this defeatism.
>
> The third believes that hard discount transformation is very easy, requiring only a little time and effort. The author calls this adventurism.
**The risk of the first two is missing opportunities; the risk of the latter is overreaching, like pulling up seedlings to help them grow, going beyond the proper limits.**
Such problems are very common in any major historical transformation period. We must learn from historical experience and avoid these recurring erroneous tendencies. We must understand the essence of hard discount, our historical tasks, and the general laws of the evolution of historical waves.
**First, hard discount is a systematic change on the supply side.** In the first 20 years of this century, supply-side development mainly served to provide consumers with higher-quality goods; now, the supply side is shifting, and for a considerable historical period, the main service goal of supply-side development will be **to provide consumers with more cost-effective goods.**
This shift in goals means that the resources required by the entire system and the methods of work must change accordingly. The three camps have vastly different perceptions of this issue:
**Opportunists often ignore such changes and refuse real investigation and research.** The author's research in a rural county town found that Haoxianglai (a snack hard discount chain, also known as a bulk snack store) has already opened a generational gap with traditional supermarkets in the same area: Haoxianglai's snacks are significantly higher in quality and significantly lower in price than traditional supermarkets.
In other words, Haoxianglai's cost-effectiveness has a generational advantage over local traditional supermarkets.
In areas where hard discount transformation has been preliminarily completed (including partial categories and regions), hard discount stores have helped customers get better goods with less money through supply chain changes; at the same time, they have formed a huge advantage over competitors.
With these two points, hard discount is not a fleeting phenomenon but a vibrant and promising main consumption scenario. Those who think hard discount will naturally die out as capital retreats can give up that idea.
**Adventurists, on the other hand, tend to understand hard discount as simple price cuts.** **They think that by sacrificing some gross margin and asking suppliers to lower prices, the hard discount transformation is accomplished.**
The author noticed that Hema's recent policy of asking suppliers to lower prices has made it impossible for some suppliers of cost-effective goods to continue, resulting in the overall cost-effectiveness of the store not improving and quality declining instead. This runs counter to the original intention of hard discount transformation.
This also exposes a problem: the capabilities of procurement personnel in Chinese supermarkets cannot immediately meet the requirements of managing hard discount business. From a competitive perspective, our procurement personnel's capabilities lag significantly behind Sam's Club. Because price cuts lead to a decline in cost-effectiveness, this would not happen at Sam's Club because their procurement understands products better.
**The common manifestation of adventurists is blindly pursuing overly ambitious goals regardless of actual conditions.** Completing hard discount transformation requires both the improvement of our procurement personnel's capabilities and the improvement of our supplier team's capabilities.
Without going through this improvement process, we cannot achieve hard discount results. It should be noted that replacement is also an important means of improvement because many people refuse to improve. But discarding all the bottles and jars and replacing everything is also adventurism.
**Defeatism is being scared by new species.** Over the past decade or more, the department store area of supermarkets has been hit by Taobao, the home appliance area by JD.com, and now the snack area has been largely taken by bulk snack stores. So they passively believe that it is only a matter of time before the washing and care categories, alcoholic beverages, etc., are taken by enemies, and only fresh food (including on-site preparation) can be defended.
So they put all their energy into improving fresh food. Their excuse is "fresh food accounts for an increasing proportion, so we must manage it well," ignoring that the large proportion of fresh food is precisely the result of the shrinkage of other categories, and the space for optimizing the cost-effectiveness of fresh food is very small.
This is like saying: because the Northeast is lost, North China will definitely be lost, and only the Southwest is our home. Regarding the question of "whether North China can be defended," we must analyze objectively.
**1. After more than a decade of squeezing by e-commerce platforms, the goods now on supermarket shelves generally share a common characteristic: they cannot afford express delivery fees.**
E-commerce platforms use express delivery to deliver goods, and those goods where the express fee accounts for a small proportion of the value have gradually moved online. But many goods, due to harsh logistics conditions, large size, non-standard shape, low value, etc., have too high delivery costs via express. These goods still rely on offline centralized delivery. Moreover, there is no room for further decline in China's express delivery fees, which leaves survival space for physical retail.
**2. Community group buying does not require express delivery, so goods that cannot afford express fees can also circulate through community group buying.**
But community group buying is still an online scenario, and sales depend on the mobile interface, which is relatively small and difficult to form category advantages. Haoxianglai's snacks have over 1,000 SKUs, presented to customers in small packages, forming a large snack display that effectively stimulates customers' purchase desire. This is what we call category advantage. This effect cannot be achieved on a mobile screen.
**Online is difficult to achieve category advantage; offline can achieve category advantage. This is the advantageous weapon of physical stores.**
We must note that **under different external conditions, the connotation of category advantage is different.**
Around 2010, the essence of category advantage was higher quality & better service. Baiguoyuan, Qian Dama, Guoquan, etc., succeeded by establishing such category advantages in their respective fields.
After 2020, the essence of category advantage is richer SKUs & higher cost-effectiveness. Haoxianglai succeeded by establishing such a category advantage in the snack category.
Western hard discount brands like Sam's Club and Costco have formed advantages in many rigid-demand big single products by selecting customers and (across multiple categories) selecting SKUs. Those not selected by them (such as the fifth ring and lower-tier markets) also need higher cost-effective goods; those goods not selected by them (such as rich Chinese specialty snacks, baijiu, tea, washing and care, etc.) also need to be optimized.
Through the above analysis, we can conclude: **as long as our methods are appropriate, North China can be defended. And in areas where the enemy is relatively weak, such as lower-tier markets and some vertical categories, we still have huge development space.**
Lower-tier markets and category advantages are the key strategies for us to pick the peaches. We note four types of players:
> **The first type is those who do hard discount retail in high-tier markets but do not have category advantages (or the direction of category advantages is outdated).** These players have the worst financial performance, with large-scale losses.
>
> **The second type is those who do hard discount retail in high-tier markets and have formed category advantages,** such as Tianjin's Jinbaibai Supermarket, whose financial situation is relatively healthy and development is relatively stable.
>
> **The third type is those who do hard discount retail in lower-tier markets but have not formed category advantages,** whose financial conditions are often relatively healthy and development is also relatively stable.
>
> **The fourth type is those who do hard discount retail in lower-tier markets and have formed distinct category advantages.** For example, bulk snack stores, whose financial health is good and development momentum is very strong.
Forming category advantages in lower-tier markets is the main contradiction at this stage, the peach closest to us, and the lowest goal. But even this closer goal is not easily achieved.
Reviewing the development process of bulk snack stores, under the grand strategy of "lower-tier markets + category advantages," at least the following correct tactical actions were taken:
> **1. Choose a vertical category with large space.** China's annual snack consumption is about 1.3 trillion yuan, and customer demand is highly diversified; moreover, the snack categories in lower-tier markets are few and of poor quality, with huge room for optimization.
>
> **2. Deep cultivation.** Concentrating procurement personnel's attention on one category allows for faster mastery of the underlying knowledge system of the industry; concentrating traffic on one category allows for faster formation of larger procurement scale and dialogue with more upstream players.
>
> **3. Build a franchise system to quickly gather C-end traffic.**
>
> **4. Establish supply chains in second-tier markets to fight third- and fourth-tier markets.** Second-tier markets have lower resource costs and relatively abundant goods, making it easy to form a commodity momentum against third- and fourth-tier markets.
>
> **5. Form the ability to move white-label goods.** While enriching goods, consolidating the low-price image, and organizing a high-quality white-label supply chain.
>
> **6. Optimize the delivery process.** Main goods have basically achieved one-time transfer from factory to headquarters to stores, bypassing wholesale markets.
It is under the dual guarantee of "correct strategic guidance + solid tactical execution" that bulk snack stores have truly formed category advantages in lower-tier markets: snack SKU counts several times that of traditional supermarkets, and cost-effectiveness is significantly higher than supermarkets (prices significantly lower and quality significantly higher).
And with this advantage, they have achieved rapid development. In contrast, most traditional retail enterprises that claim to be doing hard discount transformation have not yet done these actions.
Looking at the whole chapter, the summary is as follows:
> **1. The discount transformation of Chinese retail is an objective and established trend. We should not ignore it.**
>
> **2. Hard discount transformation can be completed. We need not fear it.**
>
> **3. Hard discount transformation is a systematic project, and we need to complete it step by step.**
>
> **4. "Lower-tier markets + category advantages" is the most important strategic arrangement at present and the shortest path to success.**
>
> **5. Under the guidance of this grand strategy, retail enterprises must also implement correct tactical actions to pick their own peaches.**
Finally, Mr. Lian Jie, a research consultant on hard discount at New Distribution, calls on the vast number of physical retail entrepreneurs in China: **Calm down, go to lower-tier markets, and build category advantages!**
In this era of supply chain revolution, a new business era will be born. I hope every participant will still have a place in this wave. I believe this will be a conference worth attending! For conference business cooperation, please contact:
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