Because many readers of New Distribution are distributors, this article will interpret current hot topics from the perspective of a retail industry investor and researcher. It covers: Why have snack discount stores suddenly become so popular? Are they just a passing fad? What is the essence of the discount format? How will the industry evolve? Let me share my views. Currently, there are nearly 20,000 snack discount stores nationwide, causing a huge impact on the existing distributor system, with many distributors' performance declining sharply. Every time I visit third- to fifth-tier cities for research, the first question friends ask me is, "Should I franchise a snack discount store?" The industry's heat has reached its peak.

Why has the snack discount format become a trend?

First, consumption downgrading is the catalyst. From a global perspective, the consumer industry will inevitably undergo a process of binary differentiation. For most categories, consumers will endlessly pursue "cost-performance" or "quality-price ratio," while a small portion of categories will see continuous consumption upgrades to meet emotional and spiritual needs. Europe and the US have already completed this process, so today you can see that in developed regions like North America and Europe, high-end retail and discount formats coexist. Europe has Monoprix, Esselunga, Globus, as well as Aldi and Lidl; North America has Whole Foods and Dollar Tree. When the economy enters an era of stock competition, discount formats representing consumption downgrading will inevitably emerge, and China is just beginning this historic process.

Second, snacks are the easiest supermarket category to be singled out as an independent discount format.

There are several reasons:

  1. Snacks are the easiest category in supermarkets to reduce procurement costs. There are many snack brands, supply chain barriers are low, and brand awareness is low, making it easy to achieve cash purchases directly from suppliers or obtain special factory channels early on, becoming a primary distributor. This aligns with the basic procurement logic of hard discount formats.
  2. Assembling snack products for stores does not place significant pressure or difficulty on store operations, especially compared to fresh produce. Franchisees can handle store management.
  3. For consumers, snacks are the most impulse-purchase category. From consumer decision-making behavior, similar to tea drinks, site selection can focus on high-traffic business districts, allowing early establishment of C-end momentum.

The snack discount format is not a new product of the past two years. Ten years ago, Zhejiang's Laoban Daren and Fujian's Tangchao established basic models, and during this decade, small brands have been experimenting.

But why have Snack Very Busy, Zhao Yiming, and Snack Youming expanded it in the past two years? It must be said that this is due to the historical process of the discount format, and snacks, as the best breakthrough point, began to explode first.

Finally, snack discount is currently the only discount retail format based on a franchise model as its organizational foundation. Globally, all hard discount formats are based on direct operation. Because in the final efficiency competition, costs at both the store and headquarters levels must be compressed. Currently, compared to full-category discount store models, snack discount formats have lower store management difficulty and are more suitable for expansion through franchising. This has allowed the snack discount format to grow at 2 to 3 times the speed, far exceeding traditional retail growth rates, while industry attention has reached its peak. Globally, retail should be a relatively slow industry. Walmart has developed over 60 years, and Aldi over 100 years. The core reason is that retail is naturally a 2%-4% profit margin industry. So relying on the company's natural cash flow to open stores like a snowball is inherently slow, but retail is a business where scale increases value. How to solve this? Two ways: first, leverage VC investor funds, using financing cash flow to replace operating cash flow for store openings, compressing the growth cycle of a retail giant from 60 years to 6 years. Second, leverage franchisee funds, using social capital to quickly compress the retail format's growth cycle. Against the backdrop of the VC industry basically stopping large-scale investment in retail, choosing to leverage franchisee capital has put the snack discount format in the spotlight. After forming scale, it has actually forced investors to return to invest in the snack discount format. So as a retail investor, I often lament that if today's dollar funds could still invest billions of dollars in community group buying and instant fresh e-commerce subsidies, the hard discount format would not have the momentum and speed it has today.

Hard Discount Format vs. Community Group Buying

Although I lament for online e-commerce platforms, from multiple perspectives, there is no doubt that the existing hard discount format has far higher competitive efficiency than community group buying and instant e-commerce from a few years ago.

1. From the procurement dimension Snack discount stores have stable secondary distributor services early on, gradually forming special factory channels for direct supply, and ultimately achieving private label products. The problem with the community group buying model is that the bidding procurement model leads to unstable supply from secondary distributors, and instability ultimately results in costs being recovered through other means. For suppliers, stability of channel sales is paramount. Only through planned relationships with suppliers can efficiency be further improved. The bidding model may achieve the current optimal price at a certain point, but it sacrifices long-term efficiency improvements. More importantly, the hard discount industry can improve supply chain capabilities as scale expands. According to the development trend of the foreign hard discount industry, as the scale of discount formats increases, there will be:

  1. Secondary distributor cash purchase direct supply

  2. Special factory channel procurement

  3. Joint brand with manufacturers

  4. Contracting production lines for private label production

  5. Contracting factories for private label production These 5 growth stages, gradually evolving to reduce procurement costs and pass benefits to consumers. Currently, the snack discount format is in the second stage, with some categories having potential for private label. Instant e-commerce cannot do cash purchases, and community group buying finds it difficult to achieve private label products.

2. From the logistics fulfillment dimension Currently, snack discount stores use a model of direct delivery from central warehouses to stores in full truckloads, with no sorting links. Both community group buying and instant e-commerce undergo more than two sorting and warehousing links. From the results, hard discount can achieve 2 percentage points of fulfillment cost, while group buying naturally costs over 10 percentage points. Group buying's per-item fulfillment cost of 1 yuan is already good, while hard discount's per-item fulfillment cost is 0.1 yuan. The cost advantage in the entire logistics process is obvious.

3. From the front-end operations dimension The display essence of hard discount formats is warehouse-style, with some cut-case displays, significantly reducing labor costs. Group buying still has sorting links at the front end, while instant e-commerce has last-mile delivery costs. Overall, the front-end costs (store + labor) of hard discount are basically similar to the 10% commission cost structure of group buying leaders, and compared to "instant e-commerce front warehouse + delivery," it has a cost advantage.

Is the snack discount format just a passing fad?

Can it survive?

My view is clear: the snack discount format is the prelude to China's discount retail wave.

Due to the many factors I have discussed, the big show of discount retail in China has begun, and the director has singled out snacks, the easiest category to pull out, to start exploding at the fastest speed.

Snack bulk sales have already shown the prototype of a hard discount format in multiple dimensions such as stores, procurement, and logistics. In the short term, snack bulk sales will not be just a passing fad.

But in the longer cycle, the vitality of the format depends on whether the team can further evolve the model. The current snack discount format model will definitely evolve, because in the future, facing competition from wide-category hard discount models, snack discount will gradually expand to wider categories. When more new categories are added, such as daily necessities and frozen foods, the current snack bulk sales will gradually lean towards a comprehensive format. Some people have asked me, if snack bulk sales continue to add wide categories, what difference will there be between snack bulk sales and convenience stores? I would answer that the difference lies in the business logic. The category management logic of snack bulk sales or hard discount is to establish products with optimal omnichannel efficiency, while convenience stores follow consumer demand changes, manage individual SKUs, provide quality new products, and frequently list and delist based on sales velocity. Therefore, although hard discount expands categories, it remains unchanged in response to all changes.

Snack discount is not the endgame.

The hard discount play in the snack category only compresses costs in procurement and logistics within a single category, while wide-category hard discount stores need to extremely compress costs in all four links: procurement, logistics, stores, and headquarters. In addition to needing strong operational capabilities and cost control in these four links, there are three factors that need further evolution.

1. Private label product development capability The proportion of private label products in mature hard discount stores will be very high, basically 60-70%, possibly up to 75%. Aldi's current private label share is close to 75%, but the leading player in China, Bied, is only at 30%, leaving huge room for future evolution.

2. Production capacity Because private label product development is done by the hard discount store itself, actual production is achieved by acquiring production capacity, directly contracting production lines for OEM production. Aldi currently does this best, but in Aldi's entire system, only coffee is self-produced; everything else is achieved through contracting production lines, i.e., acquiring production capacity.

3. Organizational capability Hard discount stores below 1,000 stores only need to consider how to run stores well and how to do private label well. Going further up is definitely about organization, i.e., how to achieve large-scale store openings while infinitely compressing headquarters costs, which requires a new organizational philosophy as support.

So, if snack discount is just an intermediate form, what is the essence of the true discount format?

The essence of discount is actually a choice: by doing subtraction to find the most streamlined SKUs to meet the most basic needs of consumer households, while achieving optimal omnichannel efficiency to build barriers. It focuses on product quality, autonomously controls the supply chain, and reduces costs at every link as much as possible. While maximizing customer benefits, it obtains profits through scale expansion. Unlike traditional retail models where merchants maximize their own interests, from the start, it focuses on providing consumers with ultra-high cost-performance. Therefore, the emergence of hard discount marks the first time in China's retail industry that a narrow-category, streamlined SKU category management model has appeared, consumer-oriented rather than supplier-oriented, while achieving cash purchases, long-term stable procurement volumes, and having space for continued expansion to achieve private labels. From the logistics side, this urban distribution network system of hard discount also has high efficiency advantages, enabling multi-category full-case delivery to stores and sinking to lower-tier markets.

What will the future of the hard discount industry be? Due to the favorable timing, location, and people I have discussed, the snack bulk sales format has run out first, already having the prototype of hard discount in some dimensions. But because it is an intermediate form, today's snack bulk sales may look strong but may also be fragile.

The true hard discount industry should be a slow industry, one that requires considerable patience from both founding teams and investors. First, the store ramp-up period is longer. Unlike convenience stores, where the break-even cycle is basically controlled within 6 months, a hard discount model with a break-even cycle within one year is already a very good store. Second, hard discount requires direct operation, because to achieve extreme cost compression in procurement, logistics, stores, and headquarters, it is necessary to be competitive in the future market. Also, to do wide categories and combine with China's market conditions to do fresh produce, it seems only direct operation can achieve this.

At the same time, the future evolution space for hard discount business models in China is enormous. There are at least several dimensions to consider:

First, how to do fresh produce?

Second, how to do fresh food? Can it still be done?

Third, how to do the online part?

Fourth, should it be direct operation, quasi-direct operation, or franchising?

Each of these four questions, when combined, offers different interesting solutions. For example, fresh produce: Bied initially had no fresh produce, introduced fruits in 2020, and in 2021 tried to introduce some vegetables to adapt to the local market. Xi'an's Jingxiaohe explored fresh produce by reducing SKUs, deep inventory displays, and reducing traffic-driving items. Regarding fresh food, Bied also tried breakfast buns, but this attempt was abandoned after three months because sales could not cover costs. For the online part, Bied's attempt was to set a 65-yuan threshold and no delivery time limit. This improves the efficiency of store employees, allowing them to deliver during idle times without adding extra costs. These four aspects are particularly suited to China's national conditions. What new explorations will emerge in the future is very worth looking forward to.

Finally, discussing whether snack bulk sales is just a fad today is not very meaningful, because this is just the prelude to the systematic transformation of China's discount industry. Although today's snack bulk sales make distributors very uncomfortable, we must face this reality. The improvement of retail efficiency is a process of continuously eliminating intermediate links. In countries with the most developed retail efficiency, we will find a fact: the ratio of wholesale total to retail total is gradually decreasing. We cannot easily deny this, because the retail industry must not be viewed with a static perspective, as changes are too fast. But what remains unchanged is that the traditional FMCG distribution system will definitely be reshaped, because the retail format represented by discount formats will change the category management logic of traditional retail. And this category management logic, as I have explained, is how to achieve optimal omnichannel efficiency by selecting narrow categories and continuously extending upstream in the supply chain. If I were to give a more intuitive example: currently, Walmart's overall annual sales are still 5 times that of Aldi, but Aldi's volume per SKU can be 6 times that of Walmart—and this is the true commercial barrier and terrifying aspect of discount retail.

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