---
title: "The Secrets, Controversies, and Barriers of Discount Stores"
description: "As the times change, the decline of one industry often mirrors the rise of another. While hypermarkets and convenience stores have waned, membership stores and discount stores for near-expiry goods have boomed. This new species, still evolving, responds to conservative consumption and high brand inventory. Key players like HotMaxx and Hi-TGO are expanding rapidly, but their profitability, supply sources, and barriers remain under scrutiny."
author: "孙静"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2023-07-15"
language: "en"
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# The Secrets, Controversies, and Barriers of Discount Stores

> As the times change, the decline of one industry often mirrors the rise of another. While hypermarkets and convenience stores have waned, membership stores and discount stores for near-expiry goods have boomed. This new species, still evolving, responds to conservative consumption and high brand inventory. Key players like HotMaxx and Hi-TGO are expanding rapidly, but their profitability, supply sources, and barriers remain under scrutiny.

As the times change, the decline of one industry often mirrors the rise of another. For instance, while hypermarkets and convenience stores have waned in recent years, membership stores and discount stores for near-expiry goods have entered a boom period.
Previously, the membership store model represented by Sam's Club and Costco has been thoroughly analyzed; their product selection, pricing strategies, and supplier management are regarded as benchmarks by local membership stores. In contrast, discount stores specializing in surplus and near-expiry goods are still an unformed "new species" in China, rapidly iterating.
This new species responds to the reality of conservative consumption intentions and high brand inventory since the pandemic. In terms of founding time, leading companies HotMaxx and Hi-TGO were established in February 2020 and January 2021 respectively; in terms of main categories, discount stores mostly operate surplus and near-expiry goods such as snacks, beverages, daily chemicals, and cosmetics.
Despite skepticism from the start, the first tier of discount stores has been aggressively opening stores: HotMaxx's direct-operated stores have exceeded 500, and Hi-TGO plans to surpass 1,000 stores this year. Some investors even claim that a batch of thousand-store brands will emerge in this track in the coming years.
In the face of the "cycle," the entire industry is filled with excitement. However, "NoNoise" focuses on specific issues, such as how discount stores make money, how to stabilize supply sources, how to select products and price them, and what are the tricks and barriers in this industry.
**Grabbing Goods**
The story of retail discount stores begins with a shift in consumption trends. Young people are tightening their wallets and advocating cost-effectiveness. At this time, discount stores, where you can easily find bargains, have become small playgrounds in cities.
Besides nominal discounted goods, many consumers enjoy the emotional value of "treasure hunting" in discount stores. Although big-brand near-expiry foods are just traffic-driving products, occupying a small proportion of shelves in various discount stores, who can resist the joy of accidentally grabbing a 4.9 yuan French Perrier or a 2.9 yuan Evian mineral water?
**From this perspective, the boom of near-expiry discount stores is also an outlet for the era's emotions.**
But even in a track with a tailwind, some take off while others fall; the key to competition lies in building industry "barriers."
As a retail format focusing on surplus goods, one barrier for discount stores is supply sources—knowing when and where surplus goods are available for sale.
**Taking HotMaxx as an example, its supply sources mainly come from two channels: channel inventory and excess production capacity.** Channel inventory mainly comes from distributors. Generally, large supermarket channels remove products whose shelf life has passed two-thirds, and these near-expiry goods become part of inventory. Distributors also generate their own inventory. Excess production capacity mainly comes from brands' surplus in raw material reserves and production capacity. For instance, some brands collaborate with HotMaxx on co-branded products; they may not profit directly from the products but can reduce raw material procurement costs through scale production.
In terms of supply proportion, early HotMaxx's supply mainly came from distributors; but since last year, direct supply from brands has grown rapidly from only 10%.
At the founding of HotMaxx, many brands were unwilling to have their products appear on discount store shelves due to price control or brand image considerations; now many brands proactively seek cooperation. HotMaxx co-founder Zhang Ning revealed that currently, directly signed brands exceed 200, and it is expected to exceed 400 within the year.
He believes that HotMaxx implements a "flash sale" style sales, generally achieving inventory turnover within 21 days, which actually does little harm to brands. A new trend is emerging: many big brands provide targeted inventory and surplus goods.
Unlike the dedicated outlet product lines in apparel, surplus goods from some big brands may be "byproducts" of innovation, and the value of discount store channels lies in reducing the trial-and-error cost of innovation. For example, a new flavor of sparkling water launched by a well-known brand failed in traditional channels but sold surprisingly well after entering HotMaxx, becoming a small hit.
Given that the basic market for discount stores is still distributors, mining surplus goods information is crucial. In the industry, surplus goods information is not transparent and is regional. HotMaxx currently "plants" over 100 buyers nationwide to collect information. Through a database of over 10,000 distributors accumulated earlier, they closely monitor indicators such as product movement speed. If some categories do not move well within the first third of their shelf life, buyers will quickly act to negotiate prices.
But this does not mean buyers enjoy pricing power. Zhang Ning believes that HotMaxx's core barrier lies in digital capabilities; they rely on big data algorithms to decide whether to buy out a batch of surplus goods and calculate a specific purchase price.
Specifically, the algorithm first determines a retail price based on historical data performance, then derives the purchase price based on movement speed, shelf life, batch size, etc. Within this system, the most attention is paid to the movement rate. Even if the gross margin of a batch is only a dozen percentage points, if the algorithm determines it has a high movement rate, the system will make a transaction decision. On the distribution side, HotMaxx has 180,000 SKUs in its backend, and how to allocate them to each store is achieved through algorithms.
Of course, algorithms are not 100% accurate. According to Zhang Ning, the current proportion of slow-moving goods at HotMaxx is about 1%, and overall store gross margin is controlled between 20% and 40%.
**The Uniqlo of Snacks**
The special business model of discount stores leads to uncertainty in brands and individual items on shelves. Among the over 1,000 SKUs in a store, what you buy today may be out of stock tomorrow and never appear again.
HotMaxx's strategy to hedge against uncertainty is to maintain certainty in "category structure." Each store has fixed over 20 categories, and they strive to ensure stable supply for each category—for example, shampoo may be from Japanese or Korean brands today, and European or American brands tomorrow, but the shampoo category is always on the shelves.
Senior retail expert Wang Guoping analyzed that in the early trial phase, discount stores without brand power will introduce some scarce big-brand surplus goods or exclusive products to drive traffic, but exclusive products become a new pain point due to scarcity. Big brands cannot have that many surplus goods, making it unsustainable. Channels will eventually follow the path of private label substitution, **"which can be understood as the snack industry running the Uniqlo model, whose core is scenario + affordable prices + white-label or private label + rapid iteration."**
Currently, many discount stores are vigorously developing private labels. For example, Hi-TGO previously revealed that private label goods account for 20%-30% of its products, with a gross margin of about 42%. HotMaxx also has a certain amount of private labels, but is currently compressing the scale of private labels. Zhang Ning revealed that internally, the positioning of private labels is mainly to stabilize the product mix and sales.
According to "NoNoise" observations, doing private labels actually has high thresholds, testing the channel's brand power, supply chain capabilities, and the professionalism of "buyers." The hard discount format represented by membership stores has closer ties with the industry chain, stronger product selection capabilities, and higher bargaining power; but soft discount surplus goods stores deal more with distributors, and their upstream supply chain advantages are not obvious. This also leads to some discount stores having featureless OEM snacks, suspected of being "knockoffs" of popular brands.
A simple and crude OEM model may yield higher profits in the short term, but it may not enhance customer loyalty and brand recognition. In other words, private labels cannot be rushed; product selection capabilities and supply chain construction are slow efforts.
Before that, discount stores still rely on various brands in retail circulation. One point of external skepticism is that some products sold in discount stores are "off-brand" or unknown small brands, which is the secret to extreme cost-effectiveness and the source of profits for discount stores.
In response, Zhang Ning emphasized that rooted in the vast Chinese market, consumption is also tiered and regional; some regional brands may not be familiar to consumers in other regions. Therefore, HotMaxx sets basic thresholds in product selection, such as whether the manufacturer has flagship stores on Tmall or JD.com, social media exposure—such as whether users discuss it on Xiaohongshu—and whether sales photos of the product have appeared in major offline retail channels like supermarkets. These data points help determine whether to introduce a brand.
"NoNoise" observed that not only do products on shelves change constantly, but the categories and formats within discount stores are also continuously iterating. More categories mean a more stable supply structure and higher profit margins, so discount stores including HotMaxx are increasing the proportion of daily chemicals, trendy toys, pet supplies, health products, etc. Some discount stores are also trying to introduce fresh produce.
In terms of format, discount stores are tearing off the near-expiry label, strengthening the low-price mindset, and some companies are transitioning to hard discount. But whether the "offline Pinduoduo" model that discount stores tout can hold up in the long term remains to be seen.
Looking at the present, discount stores are not only gaining popularity but also becoming the new favorite of shopping malls. An expert memo from Jiuqian Zhongtai shows that **nationwide, Hi-TGO, Aotle, and HotMaxx have all entered strategic cooperation with Wanda, and discount stores can supplement the necessary formats for Wanda Plaza.**
From new tea drinks to new Chinese-style bakeries to discount stores, the rotation of traffic-driving formats in shopping malls directly witnesses the rise and fall of industries.
**Grabbing Market: Crazy Store Openings**
After the past two years of model exploration, this year's theme for discount stores is grabbing market share.
Since this year, leading companies have accelerated their store opening pace. HotMaxx has opened franchising since April, and it is expected to add 50 new stores per month in the second half of the year. This year's goal is to cover 100 cities and open 1,000 stores. As supporting infrastructure, HotMaxx currently has four transit warehouses in Beijing, Wuhan, Shanghai, and Guangzhou, with an annual throughput of over 100,000 SKUs.
During the industry's rapid expansion, leading companies seem unable to finely calculate the single-store profit model. However, Zhang Ning stated that based on previous experience, franchisees are expected to achieve profitability within one year. This is much earlier than the industry's previous prediction of 18 months. His optimism comes from a data point—HotMaxx achieved profitability in January this year.
Opening franchising brings scale expansion but also greater challenges, such as management of franchise stores, profit expectations of franchisees, supply chain support capabilities, and quality control of near-expiry goods.
Senior supermarket practitioner Chang Jie gave an example: the critical period for canned goods, candies, and biscuits is usually 45 days before expiration, while yogurt's critical period is 5 days before expiration. Other tasks can be solved through algorithms, but details like removing expired products from shelves still require manual checks.
Chang Jie observed HotMaxx stores in Xinjiang, where each store is staffed with 1-3 employees, responsible for over a thousand SKUs, with rapid product updates. **At this point, whether employees have the energy to do quality control and promptly remove expired products is a problem. If there is a flaw in quality control, it becomes a risk point for the enterprise.**
Another dimension that entrants consider is market space. Previously, the China Chain Store & Franchise Association estimated that the market size of near-expiry food in China would be about 47.1 billion yuan in 2026. Some market voices believe that discount stores have limited development space, and once the economy improves, such consumer demand will continue to shrink.
Zhang Ning holds a different view. He mentioned that the current scale of surplus goods has reached hundreds of billions. As long as the economy does not stagnate, innovation will not stagnate, and the surplus goods business will always exist, "because production of small-ticket items is pre-emptive."
In his understanding, doing near-expiry surplus goods business is like being a decomposer in the entire ecosystem, "and the decomposer of the ecosystem must always exist."


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