In October this year, Hema announced the launch of a 'discount-oriented' transformation. Meanwhile, traditional supermarkets are also not willing to lag behind, and have started discount trials one after another. For example, Yonghui has set up discount sections in its supermarkets, and Jining's Aikedo Supermarket has converted more than 30 stores into discount stores. The wave of discount transformation in physical retail has begun. Discount transformation is not simply about lowering retail prices, but about achieving sustainable and significant reductions in distribution costs.
1. Reducing the number of product transfer times: In the traditional retail distribution chain, products go from the factory through several transfer points such as wholesale and central warehouses before reaching the store terminal. In discount stores, the chain for many products is shortened: after leaving the factory, they go directly to the retail enterprise's warehouse, and with one transfer they reach the terminal store. One less transfer generally saves more than 10% of costs.
2. Increasing the proportion of white-label products: White-label products refer to products of good quality that have no media promotion costs. In contrast, there are big-brand products (good quality but with relatively high media promotion costs) and generic brands (no media promotion costs but poor quality). Selling mainly white-label products is an important feature of hard discount. Whether it's a brand held by a factory that hasn't invested in media advertising, or a retail chain's own brand (retail enterprises generally don't advertise their private labels in the media), as long as the quality is good, they can be considered white-label. A product pool dominated by white-label products, due to the absence of advertising costs, offers better value for money.
3. Significantly optimizing retail costs: At the store level, hard discount greatly reduces selling costs, mainly through relatively remote but high-traffic low-rent locations, simple decoration, selling only standard products, and reducing service commitments to customers. Warehouse-style discounting is an extreme example of this.
The key to distinguishing hard discount from non-hard discount is whether the supply side has been optimized. There are mainly three types of hard discount models:
1) Vertical category hard discount: Typical representatives are snack collection stores, such as Snacks Are Busy and Love Snacks. They have optimized the supply side for the snack category. Compared with surrounding competitive formats or comparison scenarios (such as the snack sections of supermarkets or mom-and-pop stores), vertical category hard discount stores have formed an absolute advantage of greatly increased product variety and significantly reduced prices.
2) Composite category hard discount: Take the currently popular Tianjin Jinbaibai Warehouse Discount as an example. Jinbaibai has achieved three times the number of SKUs in three categories (snacks, beverages, and tea) compared to competitive scenarios, while prices are 30% lower.
3) Comprehensive category hard discount: Select single products with high customer demand across many categories, and through supply chain optimization, improve the quality of these products and lower their prices. Sam's Club and Costco follow this route, and there are many domestic followers such as Hema Outlets.
The wave of supply chain revolution brought by hard discount has begun. What impact will it bring?
1. The premium of product brands is squeezed, and relying on brands to win easily will eventually become history; 2. The space for distributors is squeezed, especially second- and third-tier distributors; 3. The speed of generating new, good products is greatly accelerated, and the international competitiveness of Chinese products is rapidly improving, helping Chinese retail enterprises go global.
The traditional chain is being deconstructed, and a new ecosystem will be nurtured.
New Distribution will hold the 2023 China FMCG Hard Discount Conference in Zhengzhou from December 5-7, 2023, bringing together hard discount chain brand entrepreneurs, executives of leading FMCG brands, outstanding national distributors of FMCG, traditional retail enterprises, as well as service providers and research experts:
- Build a platform for hard discount practitioners to share insights, experiences, and conduct in-depth exchanges. 2. From multiple perspectives, thoroughly explain the underlying logic, practical cases, and long-term trends and opportunities of hard discount. 3. Create opportunities for in-depth dialogue and precise matching among different roles in the industry chain.
On November 14, from 8:00 to 9:00 PM, New Distribution's video account will launch the first episode of the 'New Ecosystem · Hard Growth' live streaming series: 'The Wave of Discount Transformation in Physical Retail Begins: What Impact on the FMCG Industry Chain?'
Ren Wenqing, COO of New Distribution and editor-in-chief of the 'China Snack Hard Discount White Paper', and Lian Jie, hard discount research consultant at New Distribution and author of 'The Third Type of Retail', will have an in-depth discussion on hard discount and answer the following questions:
What practical cases exist of discount transformation in physical retail?
With the hard discount wave approaching, what impact will it have on brands and distributors in the FMCG industry chain?
Challenges and opportunities always coexist, so where are their opportunities?