The snack food industry has a large market but is fragmented, with companies heavily reliant on distribution channels. As traditional supermarkets slow down, where does the power to break through come from? I've asked this question before, and the answer is hard discount stores. In fact, clearance discount and hard discount share the same underlying logic: using discounts to boost snack purchases, essentially a promotional tactic. Of course, it's unrealistic to say every discount store is raking in profits. Recently, snack collection stores have been making big moves. Aix零食 acquired Dinosaur and Teddy, making the Sichuan-Chongqing region the main battleground for retail. As for how they'll compete and what strategies they'll use, we'll discuss that next time. Around retail, the logic of hard discount and clearance discount is harmonious yet different: hard discount focuses on supply chain integration, using negotiated production quotas to force production requirements, while clearance discount cares more about the stability of the channel for acquiring surplus stock. I believe hard discount and clearance discount can actually transform into each other under certain conditions. For example, even the definition of clearance products varies. Some consider products produced last year with two months left on their shelf life as clearance. But when I went to Sam's Club to buy oat milk, a product with a one-year shelf life produced in March this year was also placed in the clearance section. Isn't that unreasonable? So, do discount stores make money? Current State of Local Discount Stores Many local hard discount stores have opened, including well-known names like Aotle, Hi-Tech Go, Xiaoxiang Life, Yipin Wholesale, and Tiaoma. The more populous the province, the fiercer the competition. For a moment, people might have wondered if we really need so many brands. But with the tide of capital, everything becomes less important, as real money investments also balance various interests. Tiaoma is a hard discount chain headquartered in Chongqing, with over 200 stores and average daily sales of 20,000-30,000 yuan per store. I asked a friend in Chongqing what the biggest impression of Tiaoma was. Plenty: plenty of goods, plenty of stores, plenty of money—truly three plenties. As an upgraded version of mom-and-pop stores, Tiaoma has about 800 SKUs, so it's hard to say they lack goods. The abundance of stores is also easy to perceive; a quick search on Amap shows a high density in Chongqing. It's no exaggeration to say they're everywhere. As for money, Tiaoma's short-term investment jumped from 1.5 million to 78.5 million yuan, an increase of nearly 80 million, which is commendable in today's market. This also led Yipin Fresh to feel restless a few months ago, fully converting itself into a hard discount supermarket, but without completely separating from its fresh produce business, which remains a serious limitation. Tiaoma only sells snacks, while Yipin Wholesale offers snacks with fresh produce, but fresh produce often goes unnoticed. Aotle took a risky path, starting with daily chemical and skincare products, and adding snacks. They hope to give female shoppers a reason to visit first, then influence their purchasing behavior. The results are evident from multiple channels; whether on Xiaohongshu or in physical stores, foot traffic is good. Since writing the first article in this series, I've believed hard discount stores have great potential, and indeed they do. In the first quarter of 2023, Aotle expanded beyond Sichuan-Chongqing, and has now established a presence in Shaanxi, Guizhou, and Hubei. In less than two years, Aotle has opened nearly 200 stores nationwide, all directly operated, with an average store area of about 300 square meters and average monthly sales of over 2 million yuan per store. It's clear that with the same 200 stores and hard discount model, Aotle's large-store format differs from Tiaoma. Moreover, Aotle focuses on wide categories but narrow brands, with only 2-3 selected products per category. Aotle clearly understands the philosophy of "less but better, small but exquisite." Targeting women aged 20-40, the store's products are divided into four categories: beauty and skincare, global merchandise, snacks and beverages, and mother and baby products. This product mix is a first in the industry. Regular brands account for 60%, surplus brands 20%, and private labels 20%. That means Aotle also has surplus goods, i.e., clearance products. I've been there, and the price tags for surplus items are printed in a uniform format, which is time-consuming and labor-intensive. Although hard discount is well-received and popular, actual profitability has become a major challenge for the sector. You can extend your thinking from the price tag issue: if they need to be made uniformly, is it troublesome? Quite troublesome, even more than stocking. First, hard discount stores have many SKUs, with clearance items accounting for 20%. Even with 800 SKUs, that's 160 clearance items needing price tag changes daily or every other day. Excluding labor and rent, clearance items become a lingering problem. Pure clearance discount stores can't scale up for this reason: price tags change too frequently, and customers lack loyalty. Some say, "Then just don't do clearance." That's naive. Without clearance, the only options are private labels and brand channels, which is what many hard discount stores later did. Incidentally, many hard discount stores started as clearance discount stores; for example, Discount Niu also transitioned later. Why Don't Hard Discount Stores Make Money? In other words, hard discount stores do attract many consumers, and they do make purchases, seemingly buying lots of stuff, but when it comes to final accounting, hard discount stores struggle to profit, and the problem lies in low gross margins. Earning from channels is the basic method for hard discount stores, and using channels to empower their own brands is also common. Take Aotle as an example: surplus goods account for 20%, meaning revenue from surplus sales also takes a significant share. Selling surplus goods often doesn't make money. Earning just one jiao per bottle of water is common, and surplus goods are inconsistent, with unstable supply. A consumer might buy something today and like it, but when they return tomorrow, it might be sold out. Merchants can't restock, so they can only worry. Some might say, "Goods can always be sourced." But what about price? The price difference from surplus goods is huge, and surplus goods are typically well-known brands or high-end white-label products, making cost an insurmountable hurdle. After deducting channel investments, rent, franchise fees, and product costs, what merchants actually pocket barely supports the model. Therefore, to profit, several methods have evolved: either raise prices to make customers pay more, but in a competitive landscape, price undercutting means selling at a higher price is equivalent to immediate elimination. This leads to the second method: some hard discount stores choose to "save the day" by offering memberships. Yes, I'm talking about Hi-Tech Go. In my view, this method can solve immediate problems in the short term, but in the long run, its drawbacks are quite obvious. First, looking at user feedback, many users feel that they came with the intention of buying cheap, good products, but after visiting Hi-Tech Go, they didn't get the value. The reason is that Hi-Tech Go's price tags show two prices: one for members and one for non-members. Many users order based on the more prominently displayed member price, only to find at checkout that they aren't members and can't enjoy the discount, with membership costing 99 yuan. Moreover, I checked Heimao and found that some stores use coupons instead of discounts. I've always said, don't make customers feel like they're being taken for a ride. While private labels are an idea for hard discount stores, the number of well-known brands that have actually succeeded is very limited, so consumers often still choose big brands and well-known white labels, leading to homogeneous competition. For example, if everyone sells Coke, consumers will definitely go to the store with the best service, no doubt. Consumers of hard discount stores originally shop with the motivation to save money, so paying for a membership contradicts their purpose. That leaves the channel approach. Currently, hard discount stores essentially still source goods, which differs from the direct supply model of snack collection stores, leading to price undercutting and issues with supply sources and delivery times. This cost loss is inevitable, so hard discount stores choose to promote profit growth through scale advantages. This splits into two models: direct operation and joint operation. Some industry insiders believe that the pure direct operation model, like Tiaoma's previous approach of burning money through financing to scale, with many stores open, is itself a loss because the categories aren't profitable. The other is the joint operation model, where stores share the same brand name but also contribute some capital. This model differs from franchising, but its drawback is that each party has its own agenda. A certain domestic hard discount store using the joint operation model has shown noticeable differences between stores, preventing consumer aggregation. I encountered the same issue when I was in the restaurant industry. According to company standards, franchise stores need to meet operational requirements, but this requires real investment, and after spending money, profits become very thin. If merchants control their own channels, product quality varies, making it hard to satisfy consumers and leading to low repurchase rates. Therefore, for hard discount stores to profit, they first need scale aggregation and ample funds. This is also a form of long-termism, prioritizing channel construction and deepening their distribution capabilities, of course, based on sufficient capital. It's foreseeable that hard discount stores are still in the phase of major head brands expanding their territory, and the elimination period is approaching. Ultimately, no more than five will survive. **The winning players might possess qualities such as sufficient cash flow, stable channel capabilities, a good reputation, and capital favor.**What Is the Significance of Hard Discount Stores? Looking at the big picture, hard discount players rush in and then leave dejectedly one by one. What's the point? Is it just to follow trends and make quick money? What impact will they have on the industry? To understand this, we need to return to the original purpose of hard discount. As an imported concept, the main hard discount supermarkets originated in Germany with Aldi, whose founders were former Allied POWs. After WWII, Germany was divided into East and West, and low-priced Aldi had an excellent development window, as people only wanted cheap goods. The worse the economy, the faster hard discount stores grow. In 1950, they had 13 stores; by 1960, that jumped to 300, with annual revenue of 90 million Deutsche Marks. The Albrecht family treated "ultra-low prices" as the golden rule, and in Germany, Aldi was called the "poor people's supermarket." Hard discount entered China but remained relatively cold for a long time, with many international giants retreating in defeat. This was because China's economy was growing rapidly, and demand was constrained. In today's rapidly changing world, China's demographic dividend has come to an end, and economic growth will naturally change accordingly. Therefore, different eras produce different business formats best suited to the times. The vigorous development of the hard discount format in recent years is based on this underlying logic. So, what's the significance of hard discount stores that burn money and incur losses? What value do they bring to the market? As a mass-market format, they meet consumers' demand for high-cost-performance products and address some livelihood issues. However, the price undercutting caused by numerous players and the intrusion of speculators have directly worsened the competitive environment. But I believe the brief chaos isn't entirely without benefits; at least it forces innovation across the snack food industry. Without hard discount stores, new formats like snack collection stores wouldn't have emerged. A supermarket practitioner said that a new discount store can cause snack sales in supermarkets to decline by at least 20%. Convenience stores' beverage sales have also been affected. This format, emphasizing low-cost operation and extreme cost-performance, also tells us that price speculation is not advisable; price competition will eventually evolve into channel and distribution capability competition. Sometimes, a butterfly flapping its wings in the Amazon rainforest can cause a tornado in Texas two weeks later. Hard discount stores flapped their wings, and China saw the emergence of snack collection stores, whose impact on traditional supermarkets, mom-and-pop stores, and convenience stores continues. Is it a new butterfly? No one can answer that now. Hard discount can also be understood as the catfish effect, forcing industry development through self-competition and stimulating the former "middle-aged and elderly formats" to return to the race track. Today, no one dares to rest on past achievements. Hypermarket reforms, supermarket transformations, membership stores springing up, convenience stores continuously upgrading... It's hard to define what era we're in, or where dealers' business will be tomorrow. All we can say is that we're in the midst of a major retail transformation, striving to become one of its footnotes. Besides the catfish effect, hard discount stores also carry a lot of gambling, like Russian roulette, where the winner takes all. I believe one of the core logics behind losing money to push forward is that everyone thinks they're lucky enough. With huge investments and the promising prospects of hard discount stores, whoever laughs last laughs best. It's this state between forced and unforced that keeps the hard discount movement going, unconsciously providing continuous internal momentum for industry change. If I had to draw a conclusion, it would be: Hard discount has its own significance.