In recent years, wholesale supermarkets have sprung up like mushrooms. The term "hard discount" has evolved from a "foreign import" and a "retail model" into a widely adopted concept, becoming a deeply ingrained "trend" where everything seems to be hard discountable. Some even argue that the market will move toward full discounting. Consequently, traditional retailers are considering whether to enter the discount store business, while brand owners worry about the future of distribution channels and whether small brands will become OEMs for discount channels. Some have even asked me if this trend will lead to industry-wide deflation. Therefore, I believe it is necessary to clarify the current changes in the retail market to help everyone better anticipate and prepare for future market shifts. Undoubtedly, China's offline retail industry is in a major transformation cycle. Understanding the logic of retail transformation is of great value to brand owners, channel players, and suppliers. In such a major cycle, brand owners, retailers, and distributors all feel chaos and confusion. I will explain this topic from my framework to clarify how the retail industry is changing. The article will be divided into two parts, analyzing five major segments of Chinese retail.
Three Major Characteristics of China's Retail Structure
Before expanding my framework, let's consider: as consumers today, in what scenarios do we shop? The answer generally falls into three categories:
- Stores in your residential community
- Stores in shopping malls near your home
- Online shopping
Snack discount stores and wholesale supermarkets are replacing community convenience stores; community hard discount supermarkets/fresh-enhanced supermarkets are replacing community BC supermarkets; discount collection stores/emotional value collection stores in shopping malls are replacing mall collection stores; value-oriented supermarkets/efficiency-oriented supermarkets are replacing traditional KA supermarkets; warehouse membership stores are replacing traditional hypermarkets.
The competitive relationship in the retail industry is a zero-sum game. Today's Chinese retail market has no incremental growth; the rise of one format inevitably means the destruction of another.
Snack Discount Stores and Wholesale Supermarkets
Replacing Community Convenience Stores
China's retail foundation is highly fragmented, based on a large number of mom-and-pop stores, convenience stores, and small shops that form community retail terminals. There are several social and historical reasons for this:
- China's urban population is dense, and communities are compactly distributed. Small family-run stores can penetrate every corner, meeting residents' immediate and high-frequency needs. Especially in old communities or urban-rural fringes without large commercial complexes, community convenience formats become capillary-like presences.
- Since the 1980s, China has gradually relaxed individual business licenses, encouraging family entrepreneurship. Mom-and-pop stores have low startup costs and flexible operations, making them a primary form of entrepreneurship for ordinary people. Meanwhile, early state-owned supply and marketing cooperatives covered the grassroots, but after marketization, individual grocery stores gradually filled the gap left by their exit, forming a decentralized retail network.
- Mom-and-pop stores require no complex management or high-tech investment, making them suitable for those with lower education levels or middle-aged and elderly groups, serving as a reservoir for grassroots employment. Additionally, in third- and fourth-tier cities and rural areas, consumption capacity is limited, and large supermarkets struggle to cover these areas, while small stores survive through low rents, low inventory, and personal customer relationships.
- China has long had a multi-tiered product distribution system, allowing small stores to flexibly source goods from local wholesalers, reducing supply chain management difficulty.
However, against the backdrop of circulation chain transformation, snack discount stores and wholesale supermarkets are beginning to compress the space of traditional community convenience formats. A large number of community retail terminals are essentially products of the multi-tiered distribution system in China's FMCG industry. As the final link in the circulation chain, they will face enormous pressure amid circulation changes and FMCG chain compression. This is because many community retail terminals lack supply chain capabilities, retail technology, and price advantages.
In the past, Meiyijia attempted to standardize supply chains and provide whole-store output for convenience retail through a franchise chain model, helping mom-and-pop stores improve their supply chain capabilities and retail technology. However, it did not fundamentally replace the existing space of mom-and-pop stores. The reason is that although Meiyijia improved efficiency through unified procurement, its store operating costs remained higher than those of mom-and-pop stores. Mom-and-pop stores are rooted in more grassroots townships and urban-rural fringes, surviving through extremely low operating costs such as family labor, no franchise fees, and flexible business hours. At the same time, Meiyijia's price advantage is not significant, while mom-and-pop stores can further reduce gross margins by lowering operating costs and flexible pricing/negotiation.
Today, snack discount stores and wholesale supermarkets have emerged against the backdrop of the second circulation transformation, posing a greater impact on small circulation terminals. As we have discussed, in the second circulation transformation, the brand-led market will transition to a retail-led market, characterized by the emergence of numerous "price disruptor" retail formats. Snack discount stores and wholesale supermarkets have compressed the markup rates of traditional FMCG in circulation, achieving prices 20%-30% lower than traditional retail channels, while also replacing some traditional terminals. Therefore, Meiyijia's failure to replace mom-and-pop stores lies in the fact that its supply chain scale output model did not shake the foundation of mom-and-pop stores' survival. Today, snack discount stores and wholesale supermarkets have achieved a deeper impact on mom-and-pop stores through supply chain efficiency innovation.
At the same time, since community convenience store formats under 300 square meters do not carry fresh produce, they have strong scalability for replication, making them, in my view, one of the few retail formats in China's social context that can achieve scale advantages. Combined with the "Chinese characteristic" of "franchisee leverage," they grow extremely fast. Of course, we understand that the growth rate of wholesale supermarkets will not be as fast as snack discount stores, but they still have a relatively certain path for nationwide scale replication.
Community Hard Discount Supermarkets/Fresh-Enhanced Supermarkets
Replacing Community BC Supermarkets
As we have previously discussed, in community spaces, there are actually two major retail formats. One is community convenience store formats under 300 square meters without fresh produce. The other is community BC supermarket formats ranging from 300 to 1000 square meters with fresh produce. Examples include Yonghui Life, Zhongbai Linli, Suguo Supermarket, etc. In the competition within this community retail segment, traditional retail is also facing pressure from "price disruptor" retail. The "price disruptor" retail in the BC supermarket format differs from snack discount stores and money-saving supermarkets; it adopts a full-category, wide-assortment-but-narrow-depth (宽类窄品) approach, with business logic closer to European and American hard discount models.
Previously, there was a view in the market that China's local market was not suitable for the "wide-assortment-narrow-depth" business logic. This bias stems from not seeing the full picture of China's retail market, or focusing only on the "snack discount" direction, even leading to the "snack plus" viewpoint. In fact, there are many companies in China's retail market that practice wide-assortment-narrow-depth well, and "snack plus" is a pseudo-proposition, because the ultimate efficiency-oriented retail must be full-category. Two years ago, someone asked me who would become the biggest player in China's future hard discount track. My answer at the time was Aldi and Hema. Some friends thought Hema was unlikely and held different views, but in fact, today we have already seen the success of Hema NB in East China. So, I believe that as the market develops, even today, there is still much room for improvement in understanding "what is hard discount?"
If snack discount stores are a product of Chinese characteristics, the hard discount format in the community BC supermarket segment is a purer hard discount model. In the context of community BC supermarkets, hard discount formats will not completely replace traditional retail. Community supermarkets can also find new value positioning by transforming toward value orientation, such as small food supermarkets and fresh-enhanced supermarkets, where there is still significant space. It should be emphasized here that our consistent view is not that retail will become fully discounted. Consumers will also accept products with high gross margins, but when consumers pay for "high gross margins," there must be a clear reason, such as meeting more convenient needs (lightning warehouses), emotional value (goods stores), better environments (enhanced fresh supermarkets/food supermarkets), or better products (category killers). We will explain each of these in turn, detailing the changes happening in each segment.
In this article, we have constructed a model for China's retail transformation, breaking it down into five major segments, and interpreted two of them: community convenience store formats and BC supermarket formats in community scenarios. In the next part, we will further analyze the remaining three segments.
Qi Te, Chief Research Consultant at New Distribution Research Institute. He has held positions at several FMCG and retail listed companies, responsible for strategy and investment, and has also worked at several well-known domestic and international funds and investment banks, responsible for consumer investment. He now focuses on strategic consulting for FMCG and retail companies, helping them think deeply.