Introduction: Whether it's products or operations, the focus remains on community and low prices... Author | Wang Shiqin Review | Gou Gou Layout | He Wen
The leisure snack industry is rapidly returning offline from the internet, fundamentally due to high costs and less convenient traffic acquisition. Online shopping pursues variety and speed, but delivery costs are not low, and the price merchants pay for traffic is increasingly high. To reduce costs, various discount stores have emerged.
Channels are constantly evolving, and the fragmentation of traditional channels is nothing new. Membership stores, discount stores, and specialized category chain stores are springing up like mushrooms. With the support of live-streaming e-commerce, various new channels are converging.
Looking again at this area, one can see its vitality. Indeed, after the pandemic, the future trend of retail is becoming clearer, and the leisure snack economy is becoming an important part of future development. In 2019, China's per capita retail consumption was about a quarter of that of the United States, so there is clear room for growth. Meanwhile, according to data from market research firm Statista, revenue from discount stores in the U.S. was approximately $300 billion in 2019.
The leisure snack industry has a large track, with fragmented competition, and snack companies are more dependent on channels. The development of traditional supermarkets in China has slowed; where will the breakthrough power come from?
One answer remains: hard discount stores.
The Unchanged Low-Price Strategy
Different types lead to significant differences in capital scale and goods volume, which involves supply chain issues, including distribution and assortment.
According to Euromonitor data, in 2021, per capita snack consumption in mainland China was $52.5, while regions with similar food culture such as Taiwan, Japan, and South Korea had at least double that amount, indicating significant room for improvement.
In traditional hypermarkets, products are arranged by stacking and shelving, with the creed of "volume-based pricing, good quality and low price." It can be seen that hypermarkets place great emphasis on price sensitivity, have considerable scale, target a low-price strategy, and mainly target housewives.
Near-expiry discount stores use near-expiry products to lower prices, and the discount is directly marked as a selling point. Hard discount stores, on the other hand, directly lower the prices of best-selling products through their channels, allowing consumers to enjoy good quality and low prices almost at wholesale prices.
China's current first-tier discount store players are numerous, each with their own formats, including Zhekouniu, Saomaomao, Dongluoxisou, ALDI, Youpinshi, Hema Fresh Outlets, and Zhemanman, all of whom have entered the game.
Community hard discount chain supermarket brand Zhekouniu was founded in 2019, and as of December 2022, it had around 110 stores. In the next three years, Zhekouniu aims to have 1,000 24-hour stores. In terms of model, Zhekouniu has admitted that it is a one-to-one copy of ALDI.
Image source: Internet
At the same time, Zhekouniu believes that unlike ALDI, ALDI cannot truly be a "poor people's store," but Zhekouniu might be able to. European and American discount stores often use large-scale procurement to lower prices, while using second- and third-tier factories to complete customized products. Chinese hard discount stores like Zhekouniu start from the source, with lower costs, better site selection, stable supply channels, and more guaranteed R&D.
Last year, Zhekouniu had around 800 SKUs, including rice, flour, oil, daily necessities, beverages, leisure snacks, kitchen and bathroom condiments, washing and care products, internet-famous products, private brands, snacks and dried fruits, and soy milk products, mainly covering five household scenarios (kitchen, bedroom, living room, bathroom, balcony).
In 2022, ALDI's 27 stores in China are expected to have average sales of 20 million yuan each, totaling over 500 million yuan. Zhekouniu's performance that year grew fivefold year-on-year.
Here, let's talk about near-expiry discount stores. The near-expiry discount store near the author's home sources goods from manufacturers, with several characteristics: unstable goods, near-expiry products testing selection skills, frequent price tag changes, and low profit per item. However, the advantage of near-expiry discount stores is that they maintain continuous appeal when consumers are financially constrained.
Compared to near-expiry discount stores, hard discount stores place more emphasis on supply sources and quality. Chain stores do not need to scavenge for surplus goods; by carefully selecting SKUs, they increase sales per item, achieve small profits but quick turnover, and ensure extreme cost-effectiveness.
Convenience stores focus on SKU continuity, while hard discount stores are more precise in their SKU selection. Convenience stores typically have goods assembled by brands or merchants themselves, while hard discount stores rely more on combined strategies. For some store owners, reasonably predicting brands and products has almost become a required course.
In 2022, private brand sales accounted for about 10% of Zhekouniu's total sales, and other hard discount companies also place great emphasis on the R&D of their own products.
The operations of hypermarkets, convenience stores, and hard discount stores are not as traceable as their products; they are still mostly self-explored and adapted to local conditions.
But whether it's products or operations, the focus remains on community and low prices. The projection of consumer psychology's sensitivity to price remains an important reason for the continuous development of the retail industry.
A Long-Term Perspective
Kaiyuan Securities Research Institute believes that the chain discount store format has outstanding cost-effectiveness, and the primary market is optimistic about the rapid development stage of offline discount formats, with various brands raising funds. In addition to snack discount collection stores represented by Snacks Are Busy, near-expiry food discount stores that emphasize cost-effectiveness are also developing rapidly and obtaining primary market financing. The discount format can bring consumers good quality and low prices, has significant development potential, and is unanimously favored by industry and investors.
In simple terms: discount stores have great potential.
The discount store format appeared overseas as early as the 1950s. It is essentially a retail format that achieves small profits but quick turnover, rapid store expansion, and sustained growth driven by operating scale and high turnover efficiency.
Image source: Internet
Since their listings in 2005, the two U.S. discount store oligarchs, Dollar General and Dollar Tree, have seen continuous revenue growth for 18 years. Both companies now have over 10,000 stores each, with Dollar General at about 17,800 and Dollar Tree at about 15,900. According to Deloitte data, among the top 50 fastest-growing retail brands globally from 2015 to 2020, discount store retail formats accounted for 7. According to an iiMedia Research report, in 2021, the market size of China's discount retail industry reached 1.62 trillion yuan, a year-on-year increase of 2.12%, with a CAGR of 4% over the past five years, so the retail industry can definitely ride through cycles. Hema CEO Hou Yi stated that hard discount stores are not a bubble but real retail skill, and will replace supermarkets and hypermarkets in the future. According to relevant data, Hema has opened at least 20 hard discount stores, achieving full profitability at the store level. The core is extremely low product prices, with plans to achieve half the price of hypermarkets, removing all intermediate links in the supply chain, with a gross margin of 15%; operating costs are controlled at 10%. Aldi's composition is 60% brand discounts, 20% private brands, and 20% surplus goods, and it is believed that the proportion of private brands will increase in the future.
The trend is clear: although economic development has different stages, retail consumption will continue to rise. From the data, after the 2008 U.S. financial crisis and the COVID-19 pandemic, retail companies actually received more orders. When the economy is bad, customers cannot afford large items, but their enthusiasm for consumption has not diminished, which is a concrete manifestation of the famous "lipstick effect." In the domestic market with rising consumer enthusiasm, the rise of hard discount stores is a foregone conclusion. Currently, there are many well-known hard discount store brands in China, led by Zhekouniu, Aotelle, and Biyide. In Chengdu's hard discount brand Aotelle, a store of about 300 square meters has around 2,000 SKUs, nearly double that of European and American hard discount stores. Product categories include snacks, beverages, daily necessities, and beauty products. Among them, snacks account for one-third, and the brands are mostly well-known big brands and internet-famous brands. At the same time, Aotelle also offers same-day delivery on Meituan, providing diversified services.
So what is the difference between snack collection stores and hard discount stores? Many people are concerned about this.
Similarities and Differences in Discount Store Formats
Soft discount stores are usually presented in the form of platform-based retail. Although they may not charge platform fees, the products sold are mostly surplus, off-season, or near-expiry items. These products may have minor defects, but quality is still guaranteed, so customers can get a certain degree of discount by purchasing. Unlike soft discount stores, hard discount stores are usually self-operated and deeply involved in product R&D. Their operating model is relatively heavy and stable, allowing merchants to provide better product and service quality. This is the capability formed by their deep cultivation of the supply chain and refined operations.
In general, soft discount stores are platform-based retail, offering a variety of product choices, but often in the context of reduced consumption and economic downturn. Hard discount stores, on the other hand, focus more on their own product development and operating model, providing high-quality and stable products and services.
Snack collection stores' sales strategy focuses more on creating a store experience, providing a comfortable environment, quality service, diverse product choices, and personalized product customization to meet consumers' mid-to-high-end needs. Hard discount stores, however, put more effort into private-label products and selected SKUs, using low-priced products to attract traffic, leaving room for more profitable private-label products and promoted new products, allowing manufacturers to lower prices from the source.
Their commonality is the focus on community and "good quality and low price." We should trust consumers' purchasing power and willingness. In 2021, when Tesco opened a new supermarket in Jinan, within less than two hours from 8 to 10 a.m., turnover exceeded 30,000 yuan. Today, the expanding team of hard discount stores also shows that the business model has been proven. Although the economy is a decisive factor, it is not the only one. The retail industry focuses on service and quality. Whether soft or hard discount, what remains unchanged is consumers' pursuit of cheaper and more affordable products to improve their quality of life. The rapid development of the industry is inseparable from everyone's pursuit of good quality and low prices, as well as the social responsibility of the enterprises involved. Therefore, 2023 will definitely be the year for soft and hard discount stores to make efforts in communities.
** PS: If you have unique thoughts and insights on discount retail, or want to join in-depth exchanges and discussions, you can add the editor's WeChat to establish a communication group. **
Extended Reading