Discount retail is surging with massive waves The market has proven once again that if other methods fail, launching a 'price war' always works. In 2023, the discount store model centered on price wars exploded, opening the prelude to China's retail discount transformation. 'Killing big products' is almost the first step for every discount store to attract customers. '1.2 yuan per bottle of Nongfu Spring', '3.8 yuan per can of Red Bull' – all well-known big brands are priced over 30% cheaper. It's not that they're afraid you won't buy, but that you won't be tempted. Unlike price wars initiated by brand owners, this round of 'discount' war is a retail transformation set against the backdrop of continuous decline in traditional retail. The entire 'discount' track is developing fiercely. Take snack discount stores alone. In 2023, the total number of snack discount stores in China is expected to grow to 22,000-25,000, with sales scale reaching 70-80 billion yuan. Within three years, it has expanded more than tenfold. The snack track fired the first shot of hard discount, and quickly extended to the comprehensive track. In addition to the increasing number of emerging snack discount stores and discount supermarkets, new and old retail giants are also embracing 'discount', such as Hema, Yonghui Superstores, and Jiajiayue. Against the backdrop of global economic recession, discount formats are developing rapidly not only in China but also globally. Data from discount giant ALDI shows that in the UK in 2023, its performance grew nearly 30%, and its store count exceeded 1,000, rapidly moving towards 1,500. Does hard discount make money? It depends on supply chain capability In 2024, the crowded discount track will inevitably stage a life-and-death battle. In this battle, those who gain a first-mover advantage in the sprint may not necessarily laugh last. The discount track is a long-distance race, and its core competitiveness is supply chain capability. The strength of supply chain capability is directly reflected in whether one can make money. The hard discount in the snack track has entered an inflection point; 2C promotion may be coming to an end, and 2B supply chain becomes key. In fact, 'not making money' is precisely a mountain on the heads of most discount brands today. Not only are franchise stores struggling to make money, but even the franchisors themselves find it hard to profit. There are certainly factors of intensified competition. Originally, there was only one discount store on a street; now several have opened next to you, naturally making it harder to earn money. But intensified competition is only a superficial factor. The core reason is that compared with discount retail brands that have developed for decades in Europe and the US, we are clearly still in the simple and crude 'price war' stage. What is the essence of a discount store? It is not simply 'low price'. 'Good products, low prices, and profitability' – this is the biggest threshold and moat of discount retail. Some say, isn't this a rehash of 'more, faster, better, cheaper'? Yes, the essential elements of retail have never changed. It's just that times have changed, and the order of elements has also changed. Consumers are willing to accept 'low prices', but that does not mean they will give up the pursuit of high quality. The example of the 'near-expiry' stores that once promoted the concept of 'genuine products at special prices' but quickly fell silent after a brief period of excitement is proof. Mr. Zhao Bo once said, 'The core of a discount store is not to sell cheap goods, but to sell good goods cheaply.' Studying global veteran discount retail giants like Sam's Club, Costco, and ALDI, we can find that they all, on the basis of 'good products', penetrate the upstream industry supply chain to gain huge cost and efficiency advantages. Selling 'good products' increasingly 'cheaply' while making money themselves – this is the underlying logic for the survival and development of discount stores. In November 2023, 'Snacks Are Busy' and 'Zhao Yiming' announced a merger, indicating that the industry will accelerate consolidation. We expect that in 2024, large-scale mergers and acquisitions in the discount retail track will soon arrive. Discount brands that still do not make money in 2024 will have neither the capital value for integration nor the business value for sustained profitability, and will completely lose their survival foundation. Discount retail, especially snack discount stores heavily invested by capital, will face a life-and-death battle in 2024. The key to this battle, besides your existing store count scale, is whether you make money and can continue to make money. How can 'discount' make money? How can it continue to make money? How can it still make money in fierce face-to-face competition? We believe that the key lies in the supply chain capability building of hard discount brands. Brand factory direct procurement rate Determines product competitiveness The underlying logic of discount retail is 'good products, cheap, and profitable', that is, by selecting categories/single products and compressing supply chain links, providing consumers with high-quality, low-priced products. Selecting categories/single products is the front-end operational logic, aimed at achieving higher single-product sales scale and output per square meter. Compressing supply chain links is the core and the infrastructure that strongly supports front-end operations. For discount retail, there are two key points in the supply chain, which are currently the most important and most common weaknesses: one is procurement, and the other is logistics. First, procurement. It mainly includes brand standard product procurement and factory OEM private label products. According to market research by 'New Distribution', currently, the vast majority of brand products in discount retail are still procured from local supply chains. This greatly affects cost optimization and supply stability of products. To maintain price competitiveness, many discount retail brands even have to sell at a loss, increasing the profitability pressure on stores. Some excellent discount retail brands have begun to seek factory OEM to create private labels. However, they mainly use price as the criterion, and their ability to control safety and quality varies, posing many quality and safety risks. We suggest that discount retail brands can follow the following ideas in supply chain procurement: First, adhere to the concept of win-win, fully establish dialogue and cooperation mechanisms with first-line brands. The growth pressure in the FMCG industry is real, and brand owners have a limited open attitude towards cooperation with discount retail. While fully considering brand owners' price system demands, use limited-time, limited-quantity special offers to avoid disrupting the price system as much as possible. Such an attitude will surely gain greater policy support from brand owners. Isolating dialogue and talking to oneself will only increase procurement costs and volatility for discount retail. Whoever can understand and respect brand owners' need for price stability will ultimately find a way to get along with first-line brands and gain continuous support. Direct cooperation with first-line brands, with factories directly shipping to discount retail warehouses, maximizes savings in procurement and logistics links, which is in line with the concept of compressing supply chains in discount retail. Second, form various forms of cooperation with well-known brands, such as co-branded products and OEM products. Many discount retail brands tend to overlook food safety and quality risks in OEM. In fact, we must admit that the management level of the food processing industry is uneven. Many factories' low costs come at the expense of using inferior raw materials and lowering management standards. The R&D strength and management level of major FMCG companies are beyond doubt. With huge scale support, if brand premium and marketing costs are excluded, the OEM cost of major factories may not necessarily be higher than that of small factories. But their safety, standardization, stability, and quality levels are incomparable. However, many discount retail brands currently do not understand or grasp this situation. How many logistics hops to the store? Determines cost and efficiency After discussing product procurement, let's look at discount retail logistics. Currently, discount retail brands generally have a central warehouse and regional sub-warehouses. According to product procurement and flow, there are generally the following logistics actions. Factory direct procurement/OEM products: factory—central warehouse—(sub-warehouse)—store; if the central warehouse is located in the same place, it may be factory—central warehouse—store. Logistics links are 2-3 hops. Regional local procurement products: factory—dealer warehouse—(distributor warehouse)—(regional sub-warehouse)—store; logistics links are 2-4 hops. Whether products enter the regional sub-warehouse depends on whether procurement is from dealers or distributors, and whether dealers or distributors deliver to the sub-warehouse or directly to stores. We can see that the overall logistics links for discount retail products are 2-4 hops to reach the store. In fact, limited by warehouse and distribution capacity building, brand direct procurement negotiation capabilities, and other factors, the vast majority of products in discount retail brands require at least 3-4 hops to reach the store. Each hop in FMCG logistics costs about 10%, plus efficiency losses. Remember, the essence of discount retail is a business of picking up steel coins. Therefore, reducing the logistics links from the current 3-4 hops to at least 2-3 hops, with most being 2 hops to the store, is the top priority in supply chain transformation for discount retail brands, and also the key to solving the problem of 'good products, cheap, but not profitable'. Is there a mature logistics supply chain solution? Yes, there is. Supply chain service enterprises represented by Anneng Zhilian, based on the integrated supply chain service of 'one pallet of goods', can help discount retail complete the logistics requirement of 'at least one less hop'. Moreover, under the premise of meeting 'shorter links and higher efficiency', Anneng Zhilian's supply chain services can perfectly match the picking and distribution needs of discount retail stores, such as split-case picking, high-frequency small quantities, and multiple deliveries per day. We will use the supply chain service provided by Anneng Zhilian to a discount retail brand to help everyone fully understand the significant value and significance of logistics transformation in cost optimization and efficiency improvement for discount retail. Integrated supply chain Making store logistics one hop less The most ideal supply chain state for discount retail is that most products are directly procured from factories, delivered directly from factories to regional warehouses, and then to stores; a small portion of products are locally procured, with suppliers delivering to regional warehouses, and then distributing to stores. An extremely short and efficient supply chain provides stores with strong competitiveness and profitability. It's not that discount retailers don't want to do this, nor that procurement negotiations cannot achieve it, but the reality is often that at the logistics level, they can think of it but cannot achieve it. For example, for products shipped directly from factories, can they solve the problem of low-cost 'non-full-truck-load direct delivery to regional warehouses'? If so, one logistics link is reduced, saving 10% in freight, warehouse entry/exit fees, and management costs. However, such service needs are rarely provided by supply chain enterprises, and discount retailers themselves cannot possibly independently establish such a system. Another example: the most popular places for discount stores are often not first- and second-tier cities, but third- and fourth-tier cities, or even township markets. Who can meet the distribution needs of high-frequency, multi-product stores in lower-tier markets? The vast majority cannot. Therefore, in reality, discount retail headquarters often list logistics fees separately into franchisees' product costs, achieving cost transfer, but increasing the operating pressure on franchise stores. Especially when facing competitors' possible free logistics 'free shipping', this problem becomes serious. To build an 'ultimate supply chain', discount retail cannot rely solely on theory and wishes. The reason Anneng Zhilian can assist discount retail enterprises is first that its hardware configuration is strong enough to fully meet the supply chain needs of discount retail enterprises. Anneng Zhilian originated from Midea Group, relying on Midea Group's home appliance logistics foundation. During 20 years of supply chain services for FMCG brand owners and distributors, Anneng Zhilian has built a seamless nationwide 'heaven and earth net'. Currently, Anneng Zhilian has 136 distribution centers nationwide, over 5 million square meters of warehouse space, and over 500,000 delivery vehicles, covering all major cities nationwide including 99.1% of townships. In addition to building a strong supply chain network over more than 20 years, Anneng Zhilian also leads FMCG peers in digital construction. Relying on digital systems, Anneng Zhilian has achieved full-chain online and visualization of its nationwide 'warehouse network' and 'distribution network', while linking upstream and downstream customers to form an integrated supply chain. From the upstream of the supply chain: Anneng Zhilian has long-term deep services and connections with thousands of well-known FMCG brand owners and leading national FMCG distributors, covering almost all categories and the vast majority of well-known brands operated by discount retail enterprises. Product inventory from the mid-to-upstream of the industry chain will be concentrated on the Anneng Zhilian platform, forming an overall 'one pallet of goods', reducing logistics links and significantly reducing costs and increasing efficiency. This means it can not only provide full digitalization and visualization in integrated supply chain services, but also rely on its own 'one pallet of goods system', channel resources, and credit accumulation to provide 'new growth' services for brand owners, distributors, and retailers. The 'new growth' model builds a communication and cooperation platform for discount retail enterprises to directly procure from a vast number of high-quality brand owners. This is a very important resource and opportunity. From the downstream of the supply chain: Anneng Zhilian has built two powerful 'nets'. One is a 'warehouse network' covering major cities nationwide with up to 136 distribution centers; the other is a 'distribution network' covering almost all cities and 99.1% of townships. With the establishment of these two 'nets', no matter where discount retail stores are located or how scattered the orders directly procured from brand owners are, Anneng Zhilian is fully capable of ensuring that every procurement order of discount enterprises is delivered from factory to store with the shortest links, shortest paths, fastest speed, and lowest cost. If we were to summarize the unique value Anneng Zhilian can create for discount brands in one paragraph, it would be: Through 'New Growth', establish a procurement resource library for discount brands to directly face a vast number of excellent FMCG brands; through an integrated supply chain centered on 'one pallet of goods', make store logistics always one hop less, saving at least 10% profit margin and at least one week of product inventory. Obviously, the 10% profit saved by Anneng Zhilian for discount brands, as well as the improved efficiency, will greatly enhance the winning rate of discount brands in competition. In 2024, a discount war is inevitable. This battle is a capital war, a resource war, and an operational war, but the key to determining the outcome is the supply chain battle.