---
title: "Who Will Defeat Sam's Club? — Development Strategies for Local Hard Discount"
description: "Sam's Club and other similar retailers, despite being labeled as membership or warehouse stores, are essentially hard discounters. Their competitive advantage lies in private-label products with no advertising budgets and direct sourcing without distributors, resulting in high cost-performance. To defeat Sam's Club, Chinese retailers must offer a faster-iterating, more dynamically leading, and appropriately scaled product pool, leveraging China's unique conditions such as fragmented supply and demand, advanced internet, and socialized hard discount movement."
author: "连杰、上官易易"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2023-11-14"
language: "en"
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# Who Will Defeat Sam's Club? — Development Strategies for Local Hard Discount

> Sam's Club and other similar retailers, despite being labeled as membership or warehouse stores, are essentially hard discounters. Their competitive advantage lies in private-label products with no advertising budgets and direct sourcing without distributors, resulting in high cost-performance. To defeat Sam's Club, Chinese retailers must offer a faster-iterating, more dynamically leading, and appropriately scaled product pool, leveraging China's unique conditions such as fragmented supply and demand, advanced internet, and socialized hard discount movement.

**Sam's Club and the Essence of Defeating It**
Sam's Club, along with Costco, Aldi, and others, may be called membership or warehouse stores, but **their essence is hard discount.** This is reflected in their focus on private-label products, which have no advertising budgets; their sourcing is primarily direct from the source, with no distributors involved in the distribution process. As a result, their products offer tremendous value for money. Taking Sam's Club as an example, its main SKUs number around 5,000. First, these 5,000 products were not created overnight; in fact, they were selected from over 50,000 (or more) varieties within the Walmart system and refined through decades of supply chain optimization. Second, these 5,000 products are not static. Customer purchase data changes constantly, and Sam's adjusts accordingly; changes in supply chain technology also bring about product changes. Therefore, **Sam's 5,000 SKUs represent a continuously evolving, dynamically leading product pool. The essence of defeating Sam's is to offer a product pool that iterates faster, is more dynamically leading, and has a more reasonable scale.**

**The Essence of Hard Discount**
The core of hard discount is "double reduction": **reducing brand premiums and reducing distribution costs.** By compressing costs through these reductions, the cost-performance of products is improved. In the development of hard discount in the West, retailers' private-label products gradually replaced the market share of upstream manufacturers' branded products; and factories delivered directly to retailers, with distributors exiting the transaction. In the West, this process was mainly led by large retail enterprises. China's national conditions differ from the West.

**Two Strategies**
Defeating Sam's is a common aspiration of many Chinese retail enterprises. Based on this, two strategic approaches have emerged: **The first is to replicate Sam's, tracking its store formats and best-selling products and copying them one by one into their own stores; the second is to accelerate evolution, optimizing existing retail scenarios and increasing the speed of product iteration. As long as the iteration speed is faster than Sam's, surpassing Sam's is only a matter of time.** On the question of who to rely on, two positions have also formed: **The first treats defeating Sam's as a corporate matter, planning to complete it independently and enjoy the fruits alone; the second treats it as a people's war, with multiple parties promoting and sharing.** Those who believe in the replication strategy often prefer to do it themselves, while those who believe in the second strategy often prefer co-construction and sharing. Thus, we can call these two strategies **independent replication strategy and collective evolution strategy**.

**China's Special National Conditions**
The development of discount stores in the United States began in the mid-20th century. Compared to the U.S. of that era, China today has the following characteristics:
1. **A fragmented external environment on both ends.** Retail enterprises are connectors between production and consumption. China's upstream production resources are highly fragmented, reflected in the rural household contract responsibility system at the most upstream level, where raw material supply is very scattered. China's demand is even more fragmented, as seen in the eight major cuisines and tens of thousands of snacks. Since a single retail enterprise can economically circulate a limited number of SKUs, the fragmentation at both ends determines that China's retail industry must also be highly fragmented.
2. **China's internet applications are highly developed, and online transactions are the mainstream retail model.** Online transactions are more efficient than offline. For general merchandise, due to high average order value and low express delivery cost as a percentage, the "online transaction + express delivery" model can be applied. For FMCG, due to low average order value (making express delivery too costly), the "online transaction + customer self-pickup (local delivery)" model can also be applied, known as community group buying. The biggest advantage of community group buying is pre-sale, with inventory turnover days of only 1 day in the retail link, compared to over a month for physical stores. This determines that the speed of product iteration in community group buying is superior to physical stores.
3. **China has just experienced forty years of rapid growth, and this growth is insufficient and unbalanced.** In terms of commodity circulation, many products have excessively long distribution chains (e.g., snacks) or high brand/story premiums (e.g., baijiu). There are many products and distribution processes that can be optimized.
4. **China's physical retail has its own drawbacks that deviate from the essence of retail.** The essence of retail is to complete commodity circulation at the lowest cost and highest efficiency. However, in reality, many retail enterprises have high entry fees, long payment cycles, and procurement corruption. These issues seem to increase retail-side benefits but are actually chronic problems hindering efficient product circulation. Currently, more and more retail enterprises are recognizing these problems and actively carrying out "cleanup."
5. **From a competitive perspective, Sam's 5,000 strong FMCG SKUs are an objective reality.** We are temporarily behind in these products, which is our disadvantage; our advantage lies in greater depth and air superiority (internet).

The above national conditions determine:
1. **Localized and regional optimization can yield relative competitive advantages.** We see some retail enterprises achieving performance improvements by cutting inefficient SKUs and straightening out supplier relationships. Snack collection stores have achieved rapid expansion by optimizing the snack supply chain (through selling white-label products and reducing transshipment). Conversely, some retail enterprises have not made any supply-side optimizations but have continuously tried various store formats, resulting in failures across the board. Some retail enterprises chose fresh produce as the optimization target and found endless things to do, but performance did not break through. This is because China's fresh produce distribution efficiency is already very high, making significant improvements difficult.
2. **It is only a matter of time before e-commerce products surpass Sam's 5,000 SKUs.** E-commerce's inventory turnover days are far lower than Sam's, and high-speed product circulation inevitably leads to high-speed product iteration, so e-commerce product iteration speed will certainly far exceed Sam's. Sam's sales in China are mainly FMCG, which is consistent with community group buying. Therefore, the product level of community group buying will definitely surpass Sam's in the future. The current problems are that local groups are weak and need growth, and capital groups do not know how to sell white-label products, but this does not affect the trend. Currently, the main categories in community group buying, such as frozen foods, bakery, and washing products, are completely consistent with Sam's product structure.

**Main Forces Driving the Hard Discountization of Chinese Products**
1. **Live-streamers** In the past, manufacturers conveyed their selling points to customers through media; now live-streamers can also accomplish this task. Big live-streamers increasingly prefer to sell white-label products because these products offer high cost-performance and enhance the live-streamer's influence.
2. **Group leaders** Group leaders, like live-streamers, can undertake the task of educating customers. What manufacturers used to tell potential customers through media, group leaders can also do.
3. **Community group buying platforms & supply chains** After white-label products are validated by live-streamers, group buying companies take over, changing the delivery form from express to local delivery, further reducing transshipment costs. Community group buying is also optimizing some local delivery products that require multiple transshipments to a single transshipment to the store. Although the mainstream market currently views hard discount and community group buying as two separate tracks, the author believes that community group buying is hard discount with pre-sale wings, more reflective of Chinese characteristics, with greater momentum, and will surely be the main driver of hard discountization of Chinese products.
4. **Supermarket reformers** By cutting inefficient SKUs in traditional supermarkets, reducing games with suppliers, eliminating payment cycles and entry fees, and reducing unnecessary decoration and service costs, they improve supermarket operational efficiency. The author notes that these actions are indeed effective, but the optimized stores' profit margins remain around 3%, still at the level of traditional supermarkets.
5. **Category optimization players** The core of category optimization is to offer richer SKUs and lower prices in one or more categories than competing scenarios. For example, snack collection stores have over 1,000 SKUs, significantly higher than the bulk/snack areas of supermarkets. The product transshipment path for snack collection stores is: manufacturer—snack collection store warehouse—store, while traditional supermarket snack areas often go through several levels of distributor warehouses. Snack collection stores mainly sell white-label products with no brand premium. These two factors determine that snack collection store prices have a huge advantage over supermarkets. Another example is Jinbaibai Warehouse Discount, which optimized the baijiu category. Jinbaibai's liquor area regularly displays over 300 SKUs, while typical tobacco and liquor stores display no more than 100 SKUs. Similarly, by selling white-label products and reducing transshipment, Jinbaibai's liquor prices are about 30% lower than competing scenarios. From an operational results perspective, category optimization profitability is far higher than supermarket reform.
6. **Sam's replicators** These players are also known as comprehensive category hard discounters. They select the most essential single products (spanning multiple categories) and optimize their supply chains. The hard discountization of Western products is a corporate movement, where retail enterprises customize products with private labels, and successful products are exclusive to one retailer. The hard discountization of Chinese products is more like a social movement, with many participants sharing results. For example, products that succeed in live-streaming are then used by community group buying; products that succeed in community group buying can also be used by physical stores; after a product succeeds in one retail enterprise, it actively seeks cooperation with other similar retail enterprises. Overall, the main drivers of improving the cost-performance of Chinese products are: in manufacturing, mainly removing brand premiums, which the author calls the white-label dividend; in distribution, mainly reducing transshipment times and participants, which the author calls the full-truck dividend (i.e., after loading at the place of origin, the truck goes directly to the retail enterprise's warehouse without passing through wholesale); in sales, mainly the significant compression of inventory turnover days brought by pre-sale, which the author calls the pre-sale dividend. Local community group buying platforms enjoy all three dividends simultaneously and are currently developing rapidly and in good condition; vertical category discount stores enjoy both the white-label and full-truck dividends, with fast development and good profitability; comprehensive category hard discounters enjoy partial white-label and full-truck dividends but not fully, and their profitability has improved compared to traditional supermarkets but is limited; traditional supermarkets, not enjoying the three dividends, are being dismantled by competitors who do! If they do not reform, they will only face closure.

**Strategic Arrangements**
Based on the above analysis, from the perspective of product competitive advantage:
1. **Optimizing distinctive categories is easier to form a competitive advantage than optimizing single products in comprehensive categories.** Category advantages are rooted in China's unique supply and demand, which Sam's and others will find hard to grasp in the short term. Integrating supply chains in vertical categories is relatively easier. The top single products in each category are closely watched, making it difficult to gain an advantage. However, products in the middle and lower tiers are easier to work with.
2. **The product level of community group buying's big single products (belonging to comprehensive categories) is bound to surpass Sam's Club.** Based on these two judgments, "opening stores based on category advantages and doing single products based on pre-sale advantages" is the most effective product strategy. The key points for various types of entities to implement this strategy are as follows:
> 1. Community small formats should introduce pre-sale business as soon as possible, including various community discount stores and snack collection stores in communities. 2. Large formats should promptly add single products that have emerged from community group buying to their store displays. 3. Manufacturers and supply chains should track both hard discount stores and community group buying tracks simultaneously.

**Finally, simply replicating Sam's is not a good strategy.** First, it is like "carving a mark on the boat to find a lost sword" (i.e., being out of touch with reality). Second, it easily isolates oneself from the socialized movement of hard discount in China, ultimately making one's own evolution speed slower than the overall social evolution speed.

**From December 5-7, 2023, New Distribution will hold the First China FMCG Hard Discount Conference in Zhengzhou.**
At that time, hard discount chain brand entrepreneurs, FMCG head brand executives, outstanding national FMCG distributors, traditional retail enterprises, as well as service providers and research experts, will gather in Zhengzhou to discuss the underlying logic of hard discount, practical cases, long-term trends, and opportunities.
If you are also interested in hard discount, you can scan the QR code to add customer service WeChat, inquire about the details of the hard discount conference, and join the [Hard Discount] themed community to discuss the development trends and opportunities of hard discount.

*Author: Lian Jie, New Distribution Hard Discount Research Consultant; Shangguan Yiyi, Independent Retail Analyst.*


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