With an annual income of 20 billion, the snack version of Pinduoduo is hunting for county towns

Why are discount snack stores growing so fast in the context of weak offline business? This article attempts to unravel the low-price secret of this model and whether the industry can give birth to the next company with 10,000 stores.

Following Zhengxin Chicken Steak, Wallace, Juewei Duck Neck, Mixue Ice City, Luckin Coffee, and Guoquan, another brand announced that it will soon reach the 10,000-store mark.

However, this is a snack discount store brand that is rarely heard of in first-tier cities - Snacks is Busy. It started in Changsha, Hunan, and focuses on county towns. In the store, you can buy Sprite for 1.9 yuan, Xizhilang Jelly Soup for 2 yuan, and bulk snacks that cost only a few cents per package. Some franchisees describe it as the "offline version of Pinduoduo" or the "snack version of Mixue Bingcheng."

At the end of last year, Snacks is Busy merged with another brand, Zhao Yiming Snacks. At that time, the number of stores was 6,500. Now it has increased to more than 7,700, mainly through franchising.

Not only are snacks very busy, but in the past two years, the discount snack track has also seen the emergence of a number of leading players such as Haoshanglai and Xiaozha Youming. From regional operations to national development, there is no shortage of investment institutions and traditional snack brands behind them.

Seizing the development potential of the domestic county economy and satisfying customers' demands for speed and economy by providing high-cost-effective products, this group of snack discount stores have snatched a lot of market share from Three Squirrels and Laiyifen, and also eliminated many mom-and-pop stores.

Why are discount snack stores growing so fast in the context of weak offline business? This article attempts to unravel the low-price secret of this model and whether the industry can give birth to the next company with 10,000 stores.

1. How did the snack consumption surge?

Many people's first impression of snack discount stores is that they are cheap. One consumer said that a stick of ice cream and a box of drinks at a snack discount store cost 2.9 yuan, while the prices of the same brands at the supermarket in her university were 6 yuan and 3.5 yuan respectively.

Low prices have enabled snack discount stores to attract many consumers, so how do they achieve such low prices?

Here we need to first explain the two types of discount stores in the retail discount track. One is hard discount, which means selling regular products at low prices through centralized procurement and reduced operational efficiency; the other is soft discount, which means selling products that are about to expire at a discount based on the original price. Snack discount stores, represented by Snacks Are Busy, follow the hard discount model.

Zhang Gouzi, an expert in hard discount research and the manager of "Zhang Gouzi", told "Dingjiao" that hard discount snack stores reduce procurement costs by reducing the SKUs of a single category, increasing the scale of procurement, and building a vertical supply chain. At the same time, they build their own channels by opening franchise stores, purchase directly from brand manufacturers, eliminate the middle distributor link, and reduce circulation costs. Finally, through standardized store operations, they reduce manpower expenses such as shopping guides and maintain a low price advantage.

Chen Momo, an investor in the consumer industry and host of the podcast "Eat, Drink, Play, and Be Fun," said that in order to ensure a wide range of goods, traditional chain supermarkets may not necessarily gain a uniform cost advantage in the purchase of all commodities, and their ability to manage the risk of unsalable goods is also relatively poor; snack discount stores have certain cost advantages due to their flexible product selection, and can further control costs through inventory management and product selection updates of bulk foods.

"In essence, the hard discount model for snacks controls profits by systematically improving supply chain and operational efficiency and streamlining circulation links. Part of the saved profit is kept for ourselves, and the other part is passed on to consumers," said Zhang Gouzi.

Snack discount stores that sell low-priced snacks are not a new business model. As early as around 2010, brands represented by Lao Po Da Ren (Zhejiang) and Tang Chao (Fujian) developed. They are different from Laiyifen and Liangpin Puzi, which only sell their own brand snacks. The only difference is that these companies are regional brands.

It was not until 2017 that Snacks is Mang was established. A group of Hunan entrepreneurs, including Snacks is Mang, began to imitate the model of Lao Lao Da Ren. With the help of capitalization, they started from Hunan and gradually expanded the blank market across the country. After scaling up, the hard discount characteristics of the entire industry became more prominent.

By 2022, the industry was fully activated and entered a frenzy of mergers and acquisitions. Many investors said that the merger and acquisition wave in this industry came earlier than expected.

In August 2022, Wanchen Group, which was originally engaged in the cultivation of edible fungi, established the "Lu Xiaochan" brand and started large-scale acquisitions. By September 2023, Wanchen will merge the four major snack brands of Youpin, Haoxianglai, Adi Adi, and Lu Xiaochan into a unified brand of "Haoxianglai". At the same time, it will acquire Lao Lao Da Ren, with more than 5,000 stores, becoming the first in the industry.

Two months later, Snacks Henmang, which started in Hunan, and Zhao Yiming Snacks, which made its fortune in Jiangxi, announced their merger. After the merger, the number of stores reached more than 6,500, and the top spot in the industry soon changed hands.

Mapping/ Focusing

Why have snack discount stores suddenly become popular in the past two years?

On the one hand, consumers have gradually pursued rational consumption and high cost-effectiveness in the past two years, giving the snack discount industry more room for survival.

Chen Chong, a franchisee of Haoxianglai, mentioned that Laiyifen and Three Squirrels are also reducing their prices. "Traditional supermarkets have high purchase prices and high selling prices, taking rebates and display fees from suppliers. We sell the same products cheaper than them, with newer and richer SKUs, similar to offline Pinduoduo."

On the other hand, compared with online channels such as e-commerce, live broadcasting, and community group buying, offline channels can better meet consumers' occasional needs for snacks, presenting the characteristics of easy shopping, good prices, and immediate delivery. "In fact, the average customer spending is not low. You may just pass by and want to buy a bottle of water, but when you check out, you find that you have bought a large bag of things in bits and pieces. Because they are sold in bulk, the repurchase cycle is also shorter." Chen Momo said.

The influx of franchisees has also boosted the development of the hard-discount snack model in the past two years. Zhang Gouzi said that many franchisees used to do other franchise businesses, but suddenly found a business model that was still growing rapidly in the market and decided to switch to franchising. " This is a business that is driven by both consumers and franchisees , forming a resonance between the supply side and the demand side."

By the end of 2023, a "North-South confrontation" pattern has taken shape in the snack discount industry. Recently, the two major snack camps, Busy Snacks and Wanchen Group, have also shouted the slogan of 10,000 stores and are eyeing the throne of "No. 1 in the industry."

Because only by maintaining its position as the industry leader can the Snacks Group have the opportunity to obtain a higher valuation during its IPO, and only then can the Wanchen Group perform better in the secondary market.

Judging from the performance of Wanchen Group, although the merger and acquisition has brought a substantial increase in revenue, it has also brought losses. According to the performance forecast of Wanchen Group, the group expects to achieve operating income of 9 billion to 9.6 billion yuan in 2023, a year-on-year increase of about 1538.55%; the net loss is 69 million to 89 million yuan, compared with a profit of 47.7656 million yuan in the same period last year.

According to the Snacks Busy Group, after the merger, the total revenue of the group's stores will exceed 20 billion yuan in 2023. At the end of 2023, the Snacks Busy Group received an investment of 1.05 billion yuan from Haoshangni and Yanjinpu Holdings, which was regarded by the outside world as "ready to burn money."

The performance of the Snacks Group also briefly boosted Wanchen's stock price. In the first half of 2023, due to the hot track, Wanchen Group's stock price soared to 47.53 yuan per share, but now it has fallen to 29.28 yuan per share due to its performance.

2. Price wars and competition for talent: the snack discount market continues

The profit model of snack discount stores determines that these brands need to expand their scale, share management and financial risks, and build their brands through franchising. With the merger of Snacks is Very Busy and Zhao Yiming Snacks, franchisees have not yet reacted to the situation of "opponents becoming teammates", and a new battle for talent and land has begun.

"Flipping the card" and "inserting into a store" are common methods.

In January this year, Xiaoshihenmang released a notice stating that "someone wanted to offer attractive conditions (minimum 200,000 yuan subsidy) to guide our franchise stores to 'flip'". Soon after, Laiyoupin (Wanchen Group) released a video of a "joint letter from franchisees", saying that they had recently received frequent calls from a salesperson named Zhao Yi, "asking us to change the signboard and buy the store at a high price, promising cash compensation". Currently, the video has been hidden.

"Flipping a brand" means that brand A uses subsidies or high-priced stores to allow franchisee B to replace the store with brand A's sign and reopen. "Inserting a store" means opening a store of brand B opposite or next to brand A through subsidies. Chen Chong said that the cost of inserting a store is more than 1 million yuan, which is hundreds of thousands higher than the cost of opening a normal store.

In some areas, brands frequently engage in price wars in order to compete for customers.

Chen Chong has joined 7 Haoxianglai stores in Taizhou. Whenever a new store opens or on member days, a 12% discount is a common practice. Chen Chong said that when price wars in other provinces and regions are fierce, competitors will even offer discounts of 49% or 46%. "Both brands need to be supported, and neither side makes money. If this kind of discount that loses money is stopped, customers will also be dissatisfied."

However, because some people have tasted the sweetness, there are many franchisees who want to squeeze in, and the huge subsidies from brands have added fuel to the fire.

The southern snack food group is busy expanding its northern market, including Henan, Hebei, Shandong, Shanxi, Shaanxi, etc., of which Hebei and Shandong are the core markets of Wanchen Group. The northern group Haoxianglai is heading south, announcing its entry into Hunan, Hubei, Guangdong and Guangxi, and holding an investment promotion conference in Changsha, the base of snack food.

According to media reports, the Snacks Mang Group and Haoxianglai announced almost simultaneously that franchisees can enjoy subsidies such as 0 franchise fees, 0 management fees, 0 training fees, and 0 service fees, and also support "price war activities". Snacks Mang mentioned in the public investment conditions that "whenever a store encounters malicious discounts and promotions from competing stores, the company will subsidize the gross profit margin to 15%." Wan Chen also mentioned that "for any store within 200 meters of a 'Mang Series' store, the company will subsidize the activities."

Image source: Snack Busy official website

Chen Chong told Dingjiao that Taizhou is the headquarters of Haoxianglai, which has more than 200 stores. Last year, Zhao Yiming Snacks opened a store in Taizhou, but closed it soon after. Recently, two more stores have been reopened and are still in the trial operation stage. Dianping shows that Zhao Yiming Snacks has two stores in Xinghua, Taizhou.

But it is not easy to test the waters and expand into new cities. Chen Chong explained that if competitors do not have warehouses in the local area, logistics may not be able to keep up, and cross-regional management costs will also be higher.

There are still many franchisees who want to join the game. What they are most concerned about is whether it is too late to join now and whether they can still make money.

According to Dingjiao, the current models of franchisees of snack discount stores on the market generally have daily sales of more than 10,000 yuan (more than 200 orders, with an average customer price of about 50 yuan), a comprehensive gross profit of 18%-20%, and an average initial investment of 500,000-600,000 yuan (including franchise fees, deposits, equipment, decoration, initial stocking, etc.). The payback period is one and a half to two years, and in the case of price wars, the period will be longer.

The gross profit margin in the snack discount industry is actually not very high. Under such circumstances, it is not easy for stores to make a profit.

Chen Chong said that the overall threshold for joining the franchise is higher now than before. The advantage is that a certain brand premium has been accumulated, and the probability of users entering the store and converting is higher. However, when it comes to site selection, rent, labor costs, payment terms and inventory control, it is a test of each franchisee's experience and ability.

"With such a low gross profit margin, we have to estimate the monthly income before deciding whether the current rent and transfer fees are controllable. An employee's base salary plus social security is at least 60,000 yuan a year. One more employee means an extra 60,000 yuan a year. It is also crucial whether we can hire employees with high labor efficiency." He analyzed.

As both the North and South snack brands have announced their goal of opening 10,000 stores, franchisees hope not to further expand their existing areas or engage in price wars.

Many franchisees, including Chen Chong, said that by the end of this year, there will definitely be a winner and a loser . "If the fight continues in an unordered manner, neither side will be able to bear it, and they may not be able to afford it."

3. Snack discount stores, is the industry structure stable?

The development of any industry needs to follow the objective law of development of "germination, growth, maturity, and decline". The snack discount industry is still in its growth stage. Data from a research institution shows that the snack discount industry will be a 2 trillion market, and the number of hard discount snack stores is estimated to be between 22,000 and 25,000 in 2023.

Snacks Mang and Haoxianglai are not big enough to monopolize the market, and many industry insiders believe that the two companies' goal of 10,000 stores is almost certain. As the top players enter the 10,000-store era, the giants are busy spending money on expansion, mergers and acquisitions, and listings, while the scattered small and medium-sized players in the industry are facing a reshuffle.

"M&A is a common choice for the industry to avoid internal friction and improve efficiency." Chen Momo analyzed that especially in provinces with a high store density, there will be excessive competition. For example, in order to open a store in the same location, the transfer fee is artificially high. In order to attract franchisees, more concessions and promotions are made. These costs can be saved; in the case of competition, ROI and site selection standards are lowered, and the losses caused can also be avoided.

Mergers and acquisitions can also solve the industry problem of "expanding cities and stores".

Snack food players all start from a regional perspective. When they expand into new regions, they may not be able to integrate the local flavor supply chain well and form a localized team. "The mergers and acquisitions we are talking about are not just about simply merging brands and channels, but also about merging localized capabilities and know-how. Snack food itself is a strong category with scattered channels, so integration is relatively easier," said Chen Momo.

The industry structure seems to be basically stable at present, so will there be larger-scale mergers and acquisitions in the industry? An industry insider revealed to "Focus" that the Snacks Group is seeking an IPO and has extended an olive branch to other players in the industry.

After continuous integration, the top players will basically be impossible to surpass, and the days of small chain players may become increasingly difficult.

Zhang Gouzi said that on the one hand, the leading brands have a better understanding of the franchise business, more abundant resources, and stronger franchise operation and management capabilities. On the other hand, the profit left by snack discount companies is very thin, and they need to optimize costs by expanding their scale and improving operational efficiency. The leading brands can continue to invest in warehousing, logistics, information construction, etc., while infiltrating their own brands. These measures can improve the moat.

Chen Momo predicts that in the next three years, as the market share of the top players continues to grow, a number of small regional players will be integrated or squeezed out, and the market concentration will increase. This is because large brands can further optimize their supply chain capabilities with economies of scale, and can afford greater room for price cuts once faced with competition.

It is worth noting that more and more brands are willing to enter the channels of snack discount stores, such as Three Squirrels, Bestore, Weilong, Qia Qia Food, etc. In 2022, snacks will surpass Walmart and become the largest customer of Yanjin Shop. Yanjin Shop mentioned in the financial report that in the first half of 2023, the revenue brought by channels such as snack mass merchandising increased by more than 200% year-on-year.

Zhang Gouzi explained that when the snack discount channel first came out, many brands were not optimistic about it, believing that it would destroy the brand price list and impact the distribution system. Only brand distributors were willing to cooperate privately. It was not until the industry grew to the point where it had an impact on sales of other channels that the brands came to their senses and launched customized and special products in accordance with channel demand. The channel's voice and bargaining power gradually increased.

But this is not a simple story of "channel defeating brand". Gloria, an investor at Qicheng Capital, pointed out that under the trend of discounting today, cooperative retailer-supplier relationships (the relationship between retail stores and suppliers) will definitely go further than confrontational retailer-supplier relationships. Brands and channels have clearer boundaries in professional division of labor, and together they create high-quality and cost-effective products for consumers.

Perhaps one day, these discount snack stores that have enriched the county economy will enter first-tier cities . By then, will they change the online snack consumption habits of users in first-tier cities? Will they take away some of the business from takeout and fresh food channels?

Whether we admit it or not, the entire discount snack industry has taken root and been replicated and promoted in China, and traditional offline channels will also be upgraded. However, the busy snack industry players who are accelerating their pace should not forget that stability is more sustainable than speed.

*At the request of the interviewee, Chen Chong is a pseudonym in this article.

Author: Su Qi, Editor: Jin Yufan

WeChat public account: Dingjiao (ID: dingjiaoone)