---
title: "The Development of Discount Retail in China: A New 'Make-Up Lesson' for Lagging Offline Formats"
description: "This year, hard discount has reached a new peak of popularity. Just three years ago, it was a niche segment, but today discount formats are flourishing everywhere. This phenomenon is driven by two factors: a rapidly changing macro environment and the disappearance of online and offline snack retail dividends, leading many to view hard discount as the new opportunity."
author: "戚特"
publisher: "New Distribution"
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published: "2024-08-18"
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# The Development of Discount Retail in China: A New 'Make-Up Lesson' for Lagging Offline Formats

> This year, hard discount has reached a new peak of popularity. Just three years ago, it was a niche segment, but today discount formats are flourishing everywhere. This phenomenon is driven by two factors: a rapidly changing macro environment and the disappearance of online and offline snack retail dividends, leading many to view hard discount as the new opportunity.

This year, hard discount has reached a new peak of popularity. From an industry perspective, just three years ago, hard discount was still a niche segment, but today, discount formats are flourishing in various regions.
**Words like "discount" and "wholesale price"** are appearing in a large number of stores, which is indeed a very interesting phenomenon.
Behind this phenomenon lie two reasons:****
**1. The macro environment has undergone drastic changes;**
**2. The online dividend has disappeared, and the offline snack retail dividend has also vanished, leading many to view hard discount as the new dividend.**
Admittedly, I believe that China's current retail industry is孕育着 significant structural opportunities. However, we must understand that retail is a slow business, and hard discount is even slower. We should approach the industry with full reverence.
Hard discount is just a mature retail business model, and it is also an important component of the entire retail ecosystem.
Therefore, we need to clarify two points:
**1. Hard discount does not simply mean dumping low-priced goods in an environment of supply chain surplus;**
**2. China will not become fully discount-oriented in the future; the discounting process may even be accompanied by upgrading.**
**The Value and Significance of Hard Discount******
First, we need to clarify that there are four models of discount retail: hard discount, brand discount (soft discount), EDLP discount supermarkets, and membership clubs.
Their commonality is, of course, achieving low prices and providing consumers with cost-effective products. However, the methods and effects differ.
**1. Hard discount (e.g., ALDI)** primarily reduces costs by simplifying product categories, centralizing procurement of private labels, minimalist store design, and streamlined operations, attracting price-sensitive consumers with the lowest prices.
**2. Brand discount/soft discount (e.g., TJmaxx)** attracts customers by flexibly sourcing discounted products from well-known brands, maintaining a certain shopping experience, and frequent product turnover, with the main appeal being high-value products at discounted prices.
**3. EDLP discount supermarkets (e.g., Walmart)** rely on their massive scale and advanced supply chain management to achieve cost savings while offering a diverse product selection.
**4. Membership clubs (e.g., Costco)** reduce costs and increase revenue through diverse product categories, bulk packaging, centralized procurement, membership fees, and low-margin strategies, while attracting customers for bulk purchases through membership fees and high cost-performance.
So, returning to this value positioning map, although all four are committed to providing consumers with a high cost-performance shopping experience, the value dimensions they create for consumers are different.
In today's Chinese retail market, stores like Aldi, HotMaxx, Sam's Club, and some transformed traditional supermarkets are all broadly referred to as hard discount.
In fact, there are differences in business philosophy: Aldi leans toward hard discount, HotMaxx leans toward soft discount, some supermarkets are attempting to transform into EDLP discount supermarkets, and Sam's Club is a pure membership warehouse store.
The biggest differences between the hard discount model and the other three discount retail models (membership warehouse, brand discount/soft discount, and EDLP discount supermarket) are: **1. Further simplification of SKUs; 2. A higher proportion of private labels.**
Of course, from a results perspective, the hard discount model also achieves the most price-competitive product assortment in the market.
**1. Further simplification of SKUs.**
The hard discount model further reduces its SKU count to within 2,000, helping consumers make better shopping decisions. (Compared to 4,000 SKUs for membership warehouse models, 4,000 SKUs for brand discount/soft discount models, and up to 40,000 SKUs for EDLP supermarkets/hypermarkets).
Of course, this does not mean that the hard discount model must adopt a wide-category, narrow-product approach in all categories. For example, Trader Joe's has built a certain richness in the alcoholic beverages category, and BM Retail has built a certain richness in the home furnishings category.
**2. A higher proportion of private labels.**
Hard discount is a production-oriented retailer, with private label products accounting for as high as 80-90%.
The endgame of hard discount adopting a high proportion of private label products is an inevitable result of further reducing costs as the scale of individual products continues to grow.
We generally believe that brand investment for traditional FMCG brands is a business with a very low return on investment. Because if a brand's service or product quality fails to meet consumer expectations, consumers will immediately switch to a new brand.
On the contrary, consumers are less critical of retailer private labels than traditional FMCG brands, provided they offer high-quality, cost-effective products.
Having said all this, I want to convey that in my framework, although everyone is broadly talking about "hard discount," a considerable portion of it is actually discount retail in a broad sense.
Discount retail has four types based on different business philosophies, and hard discount is the true "price butcher" because **the efficiency improvement and low markup rate achieved through simplified SKUs and private label products are incomparable to any other discount retail format.**
Therefore, the value of hard discount extends the price positioning of the traditional retail industry to a new dimension, creating a new blue ocean market.
******The Evolution Direction of Different Retail Formats in China******
First, we need to establish a basic understanding.
China's retail industry faces two fundamental facts:
> **1. The industry changes rapidly, and online and offline are in borderless competition** — or rather, format innovation is endless.
>
> **2. The retail industry is relatively competitive, with overall profit margins low** — globally, the retail industry can earn about 5% EBITDA and 3% net profit. If it exceeds this level, we consider there is excess profit space, and retailers have a relatively comfortable living space; while the average profit margin of Chinese retailers is below this level.
So when the total social consumption enters a stock phase, and a new species appears in the industry, it accelerates the involution of the original sectors.
Frankly speaking, before 2020, China's offline retail market was extremely backward and a highly inefficient organizational form.
The overall performance is:
**1. The formats were mainly traditional supermarkets/hypermarkets + mom-and-pop community stores;**
**2. The industry distribution was fragmented, not a unified retail market, which made it difficult for some advanced retail businesses that require scale to develop;**
**3. More retail innovation came from online, with online innovation leading the world, while offline infrastructure was weak.**
So when a relatively advanced new species appears in the market, it takes a slice of the original market, making the already red ocean traditional retail market even more competitive.
Therefore, we saw in 2023:
  * Most traditional supermarkets experienced double-digit store closures in 2023. Large supermarket sales fell by 5% to 10% year-on-year, and store traffic decreased by more than 10% year-on-year.
  * The overall sales growth rate of convenience stores dropped from 8% in 2022 to 3% in 2023. Although the total number of convenience store outlets did not decline, industry growth was mainly driven by new store openings, and average store performance has been deteriorating.
  * According to statistics, the closure rate of mom-and-pop stores nationwide reached 15%, especially in urban communities, where the entry of large chain supermarkets and convenience stores, as well as the rise of online shopping, further squeezed the survival space of small shops.
The reason I believe that China's offline retail market before 2020 was extremely backward and inefficient is that in the historical development of China's retail industry, both extreme operational efficiency and excellent product selection capabilities have been relatively absent.
So today, the entire discount retail industry represented by efficiency operations has been absent in China's past, including hard discount, brand discount (soft discount), EDLP discount supermarkets, and membership clubs.
Today, we see hard discount growing, Pang Dong Lai helping many traditional supermarkets transform (undergoing EDLP reform), soft discount growing, and Sam's Club/Costco growing. Because everyone is facing a blue ocean market together.
Therefore, we say that the development of discount retail in China is more like a new "make-up lesson" for the once backward offline formats.
But unlike foreign countries, different discount retail formats in China have almost erupted simultaneously.
Taking the United States as an example, the four different discount formats emerged in different eras, with relatively long time intervals.
> 1. For example, Dollar General, representing brand discount (soft discount), was born during the Great Depression in 1939. 2. Walmart/Target/Kmart, representing EDLP discount supermarkets, were born in the 1960s during the rapid development of township markets. 3. Price Club (predecessor of Costco), representing warehouse membership clubs, was born in 1976 during the stagflation period. 4. Similarly, ALDI, representing hard discount, also entered the U.S. market in 1976.
From brand discount to EDLP discount supermarkets to warehouse membership clubs and finally to hard discount supermarkets, it is essentially the result of the market iterating out more advanced retail formats.
The most classic case is that in the 1980s, after Walmart discovered Price Club, the predecessor of Costco, Walmart replicated its Sam's Club model. Because Sam Walton knew very well that warehouse membership clubs are a more advanced retail business than EDLP discount supermarkets.
So at that time, he said: "We have been in the discount retail business for nearly 20 years. Only efficient operators can survive because prices and profits have been gradually declining. Suddenly, we found a group of wholesale discounters selling goods at prices lower than ours. These wholesalers have low overhead, so their profits can be as low as 5%-7%, far lower than the traditional discount supermarket's 22%. Our 'Everyday Low Prices (EDLP)' allowed us to develop to this point, but now it's no longer enough, so we must enter this field."
We also see that after ALDI entered the U.S. market, it still put some pressure on Costco. We can understand this as more advanced retail formats continuously emerging, iterating, and competing with each other. Of course, overall, both are very advanced retail formats.
But as we said, unlike foreign countries, different discount retail formats in China have almost erupted simultaneously because we have the conditions to learn from all four formats at the same time. This makes today's Chinese discount retail industry present a state of flourishing diversity.
So how will China's retail industry evolve in the future?
The snack food industry creates value for consumers in three dimensions: **richness, convenience, and cost-performance**:
> Discount supermarkets sacrifice richness but provide relatively good convenience and extreme cost-performance. Convenience stores sacrifice richness and cost-performance but provide extreme convenience. Supermarkets/hypermarkets sacrifice convenience and cost-performance but provide a certain degree of richness.
In the past, value creation in China's retail industry focused more on richness and convenience, such as offering more product combinations and creating more community-based formats. We didn't think much about efficiency.
From this, we can imagine that because discount formats have been absent in China for a long time, the four representative discount formats—hard discount, brand discount (soft discount), EDLP discount supermarkets, and membership clubs—will inevitably flourish and compete with each other, jointly squeezing the space of traditional retail.
**Other traditional retail formats, being squeezed, must find their own value positioning space again.**
First, for premium supermarkets that always serve a minority, due to their unique customer positioning, their value positioning space remains stable. After extensive research, we also found that retail strategies based on customer segments, continuously creating value along the vertical axis of the matrix, can still achieve growth in the discount era.
Next, traditional supermarkets and convenience store systems need to reposition themselves.
**Traditional supermarkets will evolve in three directions.**
> Some supermarkets are beginning to transform into EDLP discount supermarkets. Although I don't think every traditional supermarket has the ability to fully transform into a hard discount store, most can still transform into EDLP discount supermarkets. Some supermarkets are beginning to reposition themselves as food supermarkets, with space and value positioning shifting more toward deep operations in non-standard fresh produce and pre-prepared dishes.
>
> As for traditional hypermarkets, due to their value positioning in one-stop shopping and high overlap with online in China, it will be difficult for them to find room to maneuver in the future.
For convenience store systems, in addition to meeting immediate needs, their future positioning needs to upgrade toward productization.
In the past, profit sources were mainly from cooked food, light meals, beverages, cigarettes, etc. In the future, convenience stores will compete on how to continuously innovate in productization in the category of light meals and cooked food.
**Summary**
What role does hard discount play in China's retail transformation?
China will not become fully discount-oriented in the future. Low prices are just the surface; behind them lies the iteration of traditional formats by more advanced retail. This is a long-overdue make-up lesson.
For hard discount, it is more like the sharpest knife in the structural transformation of China's retail industry toward discounting. And many formats will jointly promote the transformation of China's retail industry toward more advanced models.
**Due to space limitations, many valuable insights cannot be detailed here. The author of this article, Mr. Qi Te, a consumer investor and industry consultant, will attend the 6th China FMCG Conference and participate in a roundtable forum at the Hard Discount Conference on the morning of August 21st to share insights and thoughts on hard discount.**
**Interested friends, don't miss it!**


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