Store Visit Insights Before the Spring Festival, I spent several days visiting hard discount stores and gained some insights: First, the hard discount landscape for snack foods has been settled. The model is basically finalized, the ranking is set, and no major changes are expected. What remains might be integration among leading brands. The next direction could be "snack foods plus." In 2024, the heat around snack food hard discounts will cool down. Currently, there is no second major category that can take over from snack foods, and sustained explosive growth in single-category hard discounts is unrealistic. Second, Hema's private brands are very successful. The proportion of private brands is high; except for a few categories like liquor, most categories may exceed 50% of SKUs. This shows that as long as there is determination, it is not difficult for KA stores to do private brands. However, KA stores are currently not very active, still mainly using soft discount models, and there won't be major changes in the short term. But without large-scale participation from KA stores, hard discounts are only marginal experiments. Third, a group of new retail enterprises are on the verge of breaking through with hard discount models, but the heat is not enough yet. I call this model the white-label hard discount model. The problem hard discounts face now is: The climax of snack food hard discounts has passed, and the progress of private brand hard discounts is too slow. There is a huge gap between the two. If there is no new hotspot, the heat of the supply chain revolution may cool down. So, which model can fill this gap in 2024? Preheating, Climax, Peak I divide the entire process of the supply chain revolution into three stages: preheating, climax, and peak. Stage one, preheating period. The preheating period is characterized by marginal breakthroughs, single-category breakthroughs, and innovative enterprise breakthroughs. The main method is direct supply from brand manufacturers, bypassing distributors. Marginal category breakthroughs and single-category breakthroughs are common forms of innovation diffusion. Snack food hard discounts are an example. Stage two, climax period. Retailers bypass brand manufacturers and make private brands. They enter the core categories of FMCG, form mainstream retail formats that follow suit, and use the proportion of private brands as an observation indicator. Although Hema has a high proportion of private brands and is a comprehensive hard discount, it is still an innovative enterprise breakthrough, and the mainstream retail format has not followed. Why haven't mainstream KA stores followed suit with private brands? I have two observations:
First, the scale threshold for private brands is very high. For example, RT-Mart's private brands had 300 SKUs in 2024, but expected sales were only 1 billion yuan. With such a large store scale, an average private brand SKU only sells over 3 million yuan, showing how high the threshold is;
Second, for many KA consumers, soft discounts are quite tempting (China's soft discount model has a high "technical content" and is extremely enticing). Stage three, peak period. Retailers bypass OEM factories and directly build factories. The peak of the supply chain revolution is when retailers build their own factories. Although it is not suitable for most categories, it is undoubtedly the peak of the supply chain revolution. Snack food hard discounts progressed too quickly, while private brands overall progressed too slowly. Therefore, discovering new highlights in hard discounts in 2024 is crucial. During my store visits, I found a group of enterprises that could become new highlights in hard discounts, such as Leerle, HotMaxx, Xunwushe, Discount Niu, and Duoledun. They have the following characteristics: First, they are all innovative enterprises. They are currently on the fringes of the retail industry, have a strong desire to break through, and are already on the path of hard discounts without legacy obstacles. Second, they have a certain scale and store density. But their scale is not enough to support private brands. Of course, it is possible that some individual SKUs are private brands.
Third, they are all comprehensive hard discount stores. There is a relatively large space for category selection. When there is no relay category for a single category, entering comprehensive categories becomes very important. These stores also face three major difficulties: First, using big brands' super single products to attract traffic is the standard practice. However, due to the limited total scale, the discount space from direct supply by well-known brands is not enough to support sustained hard discounts. Second, the area of a single store cannot be too small. This is an important observation. If a store cannot ensure a sufficient number of SKUs of well-known brands' super single products, it will give users the image of a grocery store rather than a hard discount store. Only with a sufficiently large store area can the basic set of well-known brands' super single product SKUs be guaranteed, and then the basic image of hard discounts can be established.
Third, products with enough discount space can only be white labels. With the support of the basic set of well-known brands' super single products, users have recognition of white labels. The Gap and the Relay Baton Twenty years ago, there was a bestseller "Crossing the Chasm," which explained why some very good high-tech products fail. Because success requires crossing a huge chasm. This chasm is actually a transition stage, through which one reaches the critical point of explosion. If you see the beginning and the end but not the middle, you cannot cross the chasm. Many people ignore how successful people cross the chasm. Recently, Eastern Leaf tea became very popular, and many people are asking: Eastern Leaf was launched in 2011 and was once rated as one of the five worst-tasting beverages. So, how did it survive between 2011 and 2023? Actually, I had thought about the success case of Tang Daren earlier. Tang Daren was launched in 2008 but became popular in 2016. So, how did it survive from 2008 to 2016? To cross the chasm, you need to find a transition zone. In the transition zone, someone must take over the relay baton until the mainstream participates and forms a climax. If no enterprise takes over to maintain the heat of hard discounts, once it cools down, it will be difficult to heat it up again. Finding the relay baton is the key to maintaining the heat of hard discounts in 2024. In fact, if we summarize hard discounts, we can also include e-commerce in our thinking, and summarize and deduce the logic and path of e-commerce. Because e-commerce can also be regarded as hard discounts, and the business logic behind it is also a supply chain revolution. We know that the current mainstream model of e-commerce is B2C, but the transition model of e-commerce is C2C (Taobao). The transition model of e-commerce is roughly divided into three stages: **The first stage is C2C (Taobao) enlightenment, which is small-scale but lively; The second stage is white-label B2C;
The third stage is big-brand B2C. In 2024, which enterprises have the potential to take over the hard discount relay baton? I mentioned several conditions earlier: innovative enterprises, marginal formats. Indeed, there are a group of enterprises on the verge. Their breakthrough will have a greater impact on the mainstream retail format than snack food hard discounts. Personally, I think comprehensive retail innovative enterprises like Leerle are likely to create new heat and take over the relay baton of hard discounts. So, what is the logic of their breakthrough? I think it is white-label hard discounts. What is a white label? A white label is definitely not a first-line brand, nor even a second- or third-line brand. As long as it is a brand, there is investment in the brand, labor costs in sales, and distributors in channels. With the above investments, for retailers, the discount space is lost, and they can only be used for low-price traffic attraction of well-known brands. So, isn't a white label just a generic brand? If there were no hard discount business logic, a white label would be a newly established brand, or a generic brand that has been around for a long time but has little influence. A generic brand is not necessarily bad, but it is unknown whether it is good or bad, lacking recognition. But in the context of hard discounts, there is brand endorsement from well-known retailers or large platforms. When unknown brands (perhaps former generic brands) receive endorsement from retailers or platform operators (such as community group buying platforms, well-known streamers), quality generic brands transform into white labels. Therefore, white labels meet the following conditions: First, white labels lack investment in marketing and have no brand awareness. Therefore, there is a large price discount space. Second, although they have no brand awareness, they have received endorsement from retailers or platform operators, and the commercial credit of retailers or platform operators is transferred to white labels.
Third, the premise for white labels to receive endorsement from well-known retailers or platform operators is that quality is guaranteed. The hot snack food hard discounts in 2023 had a large number of direct-supply brands that were white labels. Without the endorsement of snack food chain brands, they would be generic brands. White-Label Hard Discounts: Induction and Deduction The same business event can be classified according to different logics. For example, snack food hard discounts can be classified as snack food hard discounts or as white-label hard discounts. Different classifications produce different effects. There are two basic logics for thinking about success: induction and deduction. Induction is for deduction. Induction is to find patterns, and deduction is to find the next landing point of the pattern for sustained success. If the direction of induction is wrong, deduction cannot find the next landing point. For example, for the induction of snack food hard discounts, two different inductions form two different deduction logics. If it is induced as snack food hard discounts, then we will look for categories similar to snack foods as the next opportunity point for hard discounts. In 2023, I discussed this topic with many friends: which categories are as high-frequency as snack foods, have high circulation gross margins, and have a sufficiently large market capacity? This process is deduction. The reason for looking for categories like snack foods is because it is induced as category hard discounts. If we search and cannot find a new category, the heat of hard discounts may cool down. If we induce snack food hard discounts according to the white-label logic and then deduce according to the white-label logic, there are relatively many opportunity points for white labels. According to the European and American hard discount logic, I have always induced and deduced according to the private brand logic. However, KA stores that fit the private brand logic are indifferent, so there is no choice but to induce and deduce according to a new logic. Otherwise, those hard discount stores already on the road may disappear on the way to private brands. Can White-Label Discounts Support Hard Discounts? Hard discounts are different from soft discounts. The difference is that the discount intensity of hard discounts is far greater than traditional soft discounts. Soft discounts are periodic discounts, sometimes present, sometimes absent, sometimes large, sometimes small. In short, they give consumers a feeling of getting a bargain. Hard discounts are not about the feeling of getting a bargain, but about being truly cheap. The power of hard discounts lies in the price contrast. How much discount is needed to create a contrast? More than 50% discount space. Currently, there are only three ways to provide such a large discount space: First, retailers make private brands. This is how hard discounts work in Europe and America, and it has long been proven. The climax of China's hard discounts will also be like this. Second, white-label hard discounts in marginal categories. For example, snack foods were a marginal category in the past, and long-tail industries generally are. Snack retail became a mainstream topic in 2023 because marginal categories provided a high hard discount space. Many categories involved in community group buying are also marginal categories, which also provide the hard discount price space for community group buying. Third, online brands enter the hard discount supply chain. There are a large number of white labels online that win by price. Apart from traffic fees, they have no other marketing expenses. The core of hard discounts is the low price generated by the absence of marketing expenses. Many innovative retail enterprises, although not very large in scale, can create a large discount space as long as they seize the above categories and do white labels. If they cannot, they have to "burn money" with capital. In the field of hard discounts, burning money is hard to succeed. Can White-Label Hard Discounts Work? Whether it works mainly depends on whether consumers recognize it. The basic value of a brand is a kind of trust. For well-known brands, without considering added value, it is because consumers trust them. What white labels lack is precisely trust. If consumers also trusted white labels, there would not be so many enterprises investing heavily in brands for a long time. However, since e-commerce, white labels have won widespread trust from Chinese consumers. I think there are roughly several reasons: First, platform endorsement. The 7-day no-reason return and exchange policy of e-commerce platforms, as well as the user review system, allow users to understand the quality of white labels, and even if they are white labels, there is no worry.
Second, the improvement of China's legal system and the intensity of competition. Under the above two premises, as long as the hard discount is hard enough, consumers are willing to try white labels. After e-commerce, the white-label hard discount logic of e-commerce extended to community group buying. There are many long-tail categories in FMCG. The characteristic of long-tail categories is that the leader is not big, but the long tail is long enough. Consumers are accustomed to buying white labels. Snack foods themselves are a long-tail category, and consumers usually buy a large number of white labels. From the above, it can be seen that white labels have been in practice in China for a long time, and the social foundation for white-label consumption already exists. Of course, ultimately it depends on the brand power of retailers. Because whether it is private brands or white labels, the ultimate endorser is the retailer. Retailers must do a good job of strict selection of white labels. China already has many "strict selection," "careful selection," and "premium selection" platforms, which are actually endorsements for white labels. White-Label Hard Discounts Are an Opportunity for Small Brands Small brands are white labels, but under traditional distribution channels, the ex-factory price of small brands is not high, but the retail price is not low. Small brands become profit products in the product portfolio of distributors and retailers, using big brands for low-price traffic and small brands for profit. White-label hard discounts give small brands an opportunity, not through channel distribution, but through direct supply to retailers. However, for small brands to seize the opportunity after white-label hard discounts, they also need to make some adjustments. First, design products for first- and second-tier markets, not for lower-tier markets. Traditionally, small brands mainly survive in lower-tier markets. Except for long-tail products, it is hard to see small brands in first- and second-tier markets. The current hard discounts are precisely active in high-tier markets. The main consumers of hard discounts are not the low-income groups as many people understand, but middle-income consumer groups, as is the case in European and American countries. For example, Costco, Sam's Club, and Hema are all in high-tier markets. Second, quickly complete the coverage system of factory-store direct supply. Small manufacturers' sales systems are not yet formed, and some even have the boss as the chief salesperson. But as a transition stage of the supply chain revolution, the window period for white-label hard discounts will not be too long. It may even pass in one or two years or two or three years. The famous American futurist Naisbitt said that success is not because you solve problems, but because you seize opportunities. If tactical opportunities and strategic trends are integrated, then seizing tactical opportunities may achieve a strategic turnaround. When retailers' private brands take shape, white-label hard discounts will shrink, and the window of opportunity for small brands will close. In some industries, manufacturers are already advertising "white-label OEM." For small brands, white-label hard discounts are a once-in-a-lifetime opportunity. Do Well-Known Brands Have Opportunities? In the innovation of new business models, active participants all have opportunities, while passive changers will definitely suffer losses. Whether white labels or private brands, they will erode the market share of well-known brands. So, do well-known brands have opportunities? Active participants certainly have opportunities. Hard discounts will shape new national brands (NB), and now is precisely the opportunity to create new national brands. Hard discounts will introduce white labels and private brands, which will compress the SKUs of well-known brands. This is the standard practice of hard discounts. Hema has compressed more than 50% of its SKUs. However, well-known brands are still indispensable traffic-generating products for hard discounts, especially for white-label hard discounts, which must have a basic set of SKUs of well-known brands' super single products. Therefore, SKUs that enter this basic set may be amplified and become part of the new NB list. On March 15, in Chengdu, the "Second China FMCG Hard Discount Conference" will be held, where discount retail founders, brand executives, distributor bosses, traditional retail enterprises, and industry research experts will gather to focus on core issues of hard discounts and examine new directions, new thinking, and new opportunities in the discount era. We look forward to your arrival! On March 14, a closed-door meeting on hard discounts will be held: Hard Discount Models and Operations, with one-on-one discussions with experts and teachers, sharing experiences, and discussing dividend opportunities in the hard discount era! During the three-day conference, centered on the theme of "Supply Chain Revolution," in addition to the Second Hard Discount Conference, there will also be a main forum, a China FMCG Distributor Conference, more than ten sub-forums and closed-door exchange meetings, and the first grand debut of the [Ultimate Supply Chain] Brand Factory Direct Procurement Fair, which will meet with thousands of FMCG brand owners, distributors, retail transformers, and industry service providers from across the country in Chengdu, continuously brainstorming, and jointly discussing the challenges and opportunities, changes and ways out in the era of supply chain revolution.