Source: Commercial Real Estate Observation (ID: sydcgc)
With discounted prices but undiscounted quality, young people who advocate 'frugal sophistication' are falling in love with the joy of bargain hunting at near-expiry discount stores. On Douban's 'I Love Near-Expiry Food' group, nearly 100,000 people share tips on buying near-expiry products and recommend hidden gem stores.
As a barometer of emerging consumption, discount retail brands represented by HotMaxx and Hi-Get are rapidly expanding in major business districts and shopping malls, bringing discount retail—long confined to the gray area—into the consumer spotlight on a large scale for the first time.
This article focuses on three main questions:
- Behind the surprisingly low prices, is the discount business actually low-margin?
- What is the intention behind choosing locations from street corners to shopping malls?
- How far can HotMaxx and similar stores go given the inherent 'genetic defects' of soft discount?
A Profitable Discount Business
HotMaxx and Hi-Get, rooted in business districts, initially broke through with near-expiry products: 1-yuan Evian water, 3.9-yuan Genki Forest drinks, and many other 2-5% discount items that directly overwhelmed budget-conscious young consumers.
In the mall system, products with only one-third of their shelf life remaining are rarely placed on shelves; instead, they flow to various discount stores as near-expiry goods. In the near-expiry discount circle, it is commonly said that purchasing from near-expiry warehouses at 20-30% of the original cost is possible, making costs low. Even if downstream merchants sell at 50% off, gross margins remain substantial, while consumers perceive the prices as cheap.
However, from actual visits, only a small portion of products in HotMaxx and Hi-Get stores are truly near-expiry; most have relatively fresh dates, with an average remaining shelf life of about one year. They are more like discount collection stores than near-expiry stores.
So how do HotMaxx and similar stores achieve such low prices? Are they profitable at these prices?
The secret lies in the product mix.
In terms of categories, the stores primarily sell food, with a small range of daily chemical products placed at the entrance to attract foot traffic. On the food shelves, common brands like Haidilao, Hi-Table, and Genki Forest account for a small proportion, but they have clear price advantages compared to offline channels like supermarkets and convenience stores—for example, Genki Forest sparkling water at around 4 yuan per bottle. These products, along with daily chemicals, serve to attract customers.
Beyond that, the largest SKU share in the stores comes from domestic second- and third-tier 'white-label' products and niche imported foods, which are the main source of profit.
China is a major food producer with a long-term supply surplus. Mainstream channels are dominated by big brands, and second- and third-tier products lack advantages in marketing and taste, making them difficult to get on shelves and prone to becoming dead stock. Therefore, discount stores become an important channel for clearing low-priced dead stock.
The cost of imported goods is also low. Except for popular items like Kabrita and fire chicken noodles, where manufacturers have pricing power, niche products are not expensive in China. Especially common in discount stores are Thai and Malaysian food and beverages, most of which enjoy zero tariffs, further reducing costs.
Supply of big-brand near-expiry products is volatile, and with the current near-expiry craze, supply chain challenges are evident. In contrast, domestic 'white-label' and niche imported products not only have lower costs but also more stable supply, which is a key reason this business can sustain.
Due to low procurement costs, despite appearing cheap, the gross margin of discount retail is not low. HotMaxx's recruitment staff claim it can reach 35%, while traditional supermarkets generally do not exceed 20%.
Why Shopping Malls?
As a product of the era of surplus goods, discount stores are an old business, but they used to be located on street corners, with urban villages, university towns, and communities as the main location choices.
Now, discount stores like HotMaxx and Hi-Get prefer business districts and shopping malls. For example, HotMaxx has many stores in Beijing in prime areas like Wangjing, Sanlitun, and Yayuncun, and has even entered top-tier malls like Chaoyang Joy City and Huiju Xihongmen.
Although discount stores have decent gross margins, mall costs are high. Why do HotMaxx and similar stores move from street corners to shopping malls? There are three main reasons behind this trend:
First, the core of retail is sell-through. Whether discount stores or convenience stores, products must move quickly to ensure development, especially for low-price discount stores, which require even higher efficiency in product turnover.
However, discount stores are not a necessity; consumers generally do not actively seek them out. Merchants rely more on attracting natural foot traffic and then using low prices to encourage impulse purchases. Therefore, proximity to the target audience is the top priority in location selection.
HotMaxx's recruitment staff have stated in interviews that their consumer base is mainly young female white-collar workers, so locations are often in business districts and shopping malls where these consumers frequent.
Second, unstable supply makes scale the decisive factor in competition.
In the discount retail industry, downstream channel players are fragmented, giving them little bargaining power over upstream suppliers. It is common to sell whatever is left, leading to unstable supply. In this context, scale provides a clear competitive advantage: large-scale channel players can secure supply first, even signing exclusive supply agreements, and also enjoy lower procurement costs.
A Hi-Get representative said in a recent interview that they have already partnered with over 100 well-known brands and will continue to add more.
In offline channels, compared to street corners, shopping mall locations are standardized, highly replicable, and have a higher success rate, making them the natural first choice for brands during expansion.
Third, capturing consumer mindshare. Discount stores have just entered the public eye, and brands are eager to use scale to build momentum during the communication window, capture consumer mindshare, and establish cognitive barriers against later entrants. Among offline channels, shopping malls not only offer high replicability but also act as natural amplifiers of brand momentum and are more communicative.
From the shopping mall perspective, due to the pandemic, there has been a noticeable 'store vacancy' phenomenon. The 'crazy' expansion of HotMaxx and similar stores does not require prime locations; they prefer B1 levels connected to metro stations. For malls, this solves the vacancy issue without compromising their own positioning—a win-win cooperation.
'China's Don Quijote'
Currently, mainstream discount stores in shopping malls belong to the soft discount category.
The discount format is divided into soft discount and hard discount. Qicheng Capital defined them in an article: hard discount reduces retail prices by cutting SKUs and operating costs, building vertical supply, and launching private brands; soft discount achieves ultra-low prices by selling dead stock, overstock, and financial collateral, using product imperfections as a reason, to attract initial traffic.
Hard discount is similar to the US discount store model, while soft discount is more popular in Japan.
Japan's soft discount model emerged in the early stages of the bubble economy. The explosion in product quantity and rapid iteration created a large amount of dead stock, giving rise to many soft discount retail stores selling such goods.
However, the soft discount model has inherent flaws. Japanese retail scholar Atsumi Shunichi said: 'Soft discount suffers from supply chain instability, making management and operations difficult. Best-sellers sell out quickly, while slow movers gather dust. Stores easily become 'junk piles.' Consumers are not loyal; they come to take advantage of deals. Store employees face heavy workloads. The owner may make some small money, but the enterprise is left with only fatigue.'
Yet, under this model, some companies have overcome their 'genetic defects' through later operational improvements.
Founded in 1989, Don Quijote is Japan's largest soft discount retail group. As of 2020, it had 800 stores and revenue of about 100 billion RMB, ranking as Japan's fourth-largest retail group.
Specifically, Don Quijote turned things around by focusing on consumer experience and inventory management.
In terms of consumer experience, due to unstable supply, consumers may not always find what they need or like, leading to low user stickiness. To address this, Don Quijote instead creates a 'treasure hunt' experience with a vast array of SKUs, redefining the store as a place to discover new products rather than a channel to buy specific items.
In terms of store inventory, Don Quijote promotes sales by adjusting the product mix. The early mix was 60% regular discounted goods and 40% dead stock. Regular goods were priced 10-30% lower than mainstream supermarkets and convenience stores to attract traffic, while the 40% special dead stock became the source of profit.
Over time, as dead stock supply became insufficient, Don Quijote launched private brands and increased non-food product supply, further improving gross margins.
It is easy to see that HotMaxx and similar stores are 'imitating' Don Quijote in their operational models. However, China's retail environment is more complex. Developed e-commerce and logistics systems greatly impact offline retail, and high rents and labor costs mean that even discount stores do not have an absolute price advantage over online channels.
For HotMaxx and others to become China's Don Quijote, their business model needs further iteration.
Regardless, the expansion of discount stores in shopping malls continues, and capital is increasingly backing them, positioning early. HotMaxx completed a Series B financing in August this year, led by 5Y Capital, with participation from Jiayuan Capital and Yunjiu Capital. Hi-Get completed equity financing just two months after its founding, with investors including Gaorong Capital and K2VC.
With online traffic peaking, offline commerce is regaining attention. Can discount stores become the next capital hotspot?
Reference: 'Qicheng View | The Optimal Solution for Japan's Discount Format: Analyzing Don Quijote'
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