Discount stores, how deep is the water?

What is the core problem of the discount store industry? Do you know discount MAMA? What is the current situation of the discount store industry? Read this article together and you will find the answers in the article.

The core issues of discount business: supply, scale, and profitability.

Discount MAMA’s store in Yizhuang, Beijing, has recently added a lot of check-in posts, most of which say, “Because Teacher Liu Run is here.”

Many people had not heard of the discount retail brand MAMA before Liu Run, a well-known business consultant, gave his annual speech titled "The Power of Evolution" on October 28. In Liu Run's presentation, the data of 2,500 stores, 1.7 billion in revenue, and 32% gross profit attracted attention from the outside world.

Among them, a discount retail colleague questioned: "Why can only four stores be searched on the map?" "If a store sells 680,000 yuan a year, with a daily turnover of more than 1,800 yuan and a gross profit of more than 600 yuan, can it make money after deducting the employee salary of 200 yuan and the rent of 200 yuan?"

Subsequently, Discount MAMA founders Xing Yunfei and Liu Run responded to this separately. Liu Run said on November 1 that the data and Discount MAMA founder Xing Yunfei himself had confirmed it; the 2,500 stores mentioned include self-operated stores, co-branded stores, and supply chain-supported stores; the revenue of 1.7 billion is the total revenue of Discount MAMA's three types of stores.

However, the discussion has not stopped, and more people have noticed the discount retail business model that has become popular in recent years.

In fact, this is a proven business model. It originated in Germany in 1945, where the famous German discount supermarket ALDI was born, and in Japan, the king of discount chains Don Quijote was born in 1989. These two companies have flourished to this day. According to data, by 2022, discount retail stores account for more than 10% of the top 250 retailers in the world.

In the past two years, a number of discount chain stores have emerged in China, including Haotemai, Hitego and Wanxiaohenmang, which have expanded from regional operations to nationwide operations.

Beyond the controversy, this article attempts to dismantle what kind of business is the discount store? What role does the discount MAMA play in the track? As the discount store model has developed to this year, is this track still optimistic, and what is the competitive landscape?

1. What exactly does Discount MAMA do?

If we use one sentence to summarize the recent debate surrounding Discount MAMA, it is that the three data on the PPT have different subjects and calculation calibers, but when put on the same picture, it is easy to be misunderstood.

According to Xing Yunfei's responses in various channels, 2,500 of the stores include Discount MAMA's own stores and stores that it supplies, 32% is the gross profit margin of terminal retail stores, and 1.7 billion is the supply revenue of Discount MAMA to third-party channels + its own stores.

On November 2, Liu Run responded again, and his article supported the above point of view, saying that Discount MAMA has served a total of 2,500 stores, of which 1.7 billion in revenue includes Discount MAMA's own store revenue plus supply chain service revenue, and the main body of the 32% gross profit margin is its supply stores.

After several debates, the outside world began to be curious about the business of Discount MAMA and its founder Xing Yunfei himself. Xing Yunfei also repeatedly stated that it is wrong to understand Discount MAMA from the perspective of a C-end retail store brand.

So what exactly is the Discount MAMA model?

According to Xing Yunfei's introduction in an interview in September this year, he once worked in the European Investment Department of Blackstone Group and was the head of the national strategic operation of Meituan's community group buying. He is a serial entrepreneur in the retail and fresh food industries. He founded Discount MAMA in 2021. As of September, it has more than 20 stores in Beijing, with a gross profit margin of 36%.

In various interviews, Discount MAMA is described as a company that has both self-operated near-expiry discount stores and TO B business, which includes joint stores, joint channels and wholesale business. The key channels of the joint venture are gas stations and highway service areas. Discount MAMA also supplies urban chain supermarkets, convenience stores, community group purchases, campus channels, and some Southeast Asian export channels. Xing Yunfei also claimed that Discount MAMA's overall business has always been profitable.

However, the current map shows that Discount MAMA has only three stores in Beijing, and stores in cities outside Beijing are not shown on the map for the time being. In other words, Discount MAMA now plays more of a supplier role, buying expired products from brand owners at low prices and supplying them to its own direct stores and third-party channels.

Gaode Map shows that discount MAMA has three stores in Beijing

Xing Yunfei has repeatedly emphasized supply capabilities in interviews. He said that the company does not have a purchasing staff, and all goods are purchased directly from the brand side in cash, providing a set of solutions based on annual frames for brands, forming a monopoly on brand supply. The example he cited was Procter & Gamble, "After obtaining the authorization from Procter & Gamble, Procter & Gamble synchronizes the inventory table with us every quarter."

According to industry insiders, discount retailers open their own stores, control their own channels, cooperate directly with brand manufacturers, and deliver point-to-point, which is a healthy and efficient model. However, it is puzzling why discount MAMA is closing its own stores in batches this year and turning to upstream businesses with slimmer profits, and is currently promoting franchising?

Xing Yunfei revealed in a podcast that the company now adheres to two franchise models: one is the city partner (2 million yuan fee), which can replicate the supply chain resources of discount MAMA and attract local mom-and-pop stores to join. The other is the city franchise store (200,000-250,000 yuan fee), which recruits franchisees in sinking markets and regions.

Generally speaking, different capabilities are required for self-operated stores, supply, and franchise. Na Mingyuan, co-founder of Dolphin Club, told Dingjiao that different business models correspond to different business capabilities and requirements. Opening a store requires good site selection, rent negotiation, and daily business operations; supplying requires a stable supply, delivery capabilities, and the ability to expand end customers; franchising requires strong SOP capabilities, money-sharing capabilities, and brand marketing capabilities.

2. Hard discount vs. soft discount, who wins?

The discount retail industry has developed into three ultimate forms.

Wei Fan, a senior practitioner in the discount retail industry, summarized that one type is membership-based warehouse hypermarkets such as Costco and Sam's Club, which have gross profit margins of around 14% and make profits from membership fees, but this type is not considered by investment institutions.

At present, there are two types of discount stores that are more popular among domestic investors. One is a hard discount store that is comparable to ALDI, selling regular products at low prices through centralized procurement and reduced operational efficiency. The other is a soft discount store that is comparable to Don Quijote, selling products that are about to expire at a discount based on the original price.

As the discount retail industry becomes more popular in China, the debate over the "hard discount" and "soft discount" models has never stopped. Which model is better?

Soft discounts are used to attract customers into the store by selling near-expiring products. However, because users do not have a clear consumption purpose before entering the store, it is necessary to create an immersive shopping experience for users. Therefore, a store has three to four thousand SKUs, and the customers served are mostly young white-collar workers or students.

This also leads to a fatal weakness of soft discounts, which is dependence on suppliers. The supply of expiring goods is unstable, which also leads to unstable customer unit price. Therefore, stores need to be located in places with relatively good customer flow, such as shopping malls, park office buildings, etc., to increase the number of users entering the store.

Hard discount stores are opened around communities to serve family groups. There are only about 800 product SKUs, all of which are regular merchandise, covering categories needed for daily life. Most categories only offer 2-3 brands, so as to reduce prices through large-scale bulk purchasing. Users generally enter the store with a certain goal and leave after buying.

Ren Yu, an investor who has been paying close attention to the discount retail sector for a long time, said that the gross profit margin of soft discount stores is between 30% and 40%; the revenue of hard discount stores is relatively more stable, but the gross profit margin is lower, generally between 15% and 20%.

In the hard discount track, the snack discount business has also emerged this year. Its model is to anchor users' low-price mentality with big-name products, and then make money with high-gross-margin bulk snacks. According to Renyu, the gross profit of franchise stores is 18%-20%. This track is expanding rapidly in the sinking market, and many brands have obtained financing in 2023.

In summary, most of these discount retail companies were established during the epidemic, and concentrated their financing in 2021 and 2022. According to the number of stores opened and regional layout, a clear track pattern has now been formed.

Fixed-focus mapping

Wei Fan mentioned that one of the problems faced by discount stores in the later stages of operation is the scattered supply of goods. On the one hand, the number of players entering the market has increased, competition has become fierce, and it is difficult to integrate the upstream supply chain; on the other hand, there are more channels for dealing with tail goods, and many people who have goods in hand choose to sell them directly through live broadcasts. Many sellers who are about to expire have already created IPs on Douyin.

Under such circumstances, many soft discount companies that started with near-expiry products began to dynamically adjust to hard discount or mixed models after completing the low-price mental anchoring of consumers. One of the manifestations is that they gradually reduced near-expiry products and began to establish their own OEM brands. Some of their own brand products even accounted for more than 65%. Among them, Haotemai applied for the "Xiaqu" trademark, and Hi-Tego has also registered several trademarks such as "Qiang Xiaolu" and "Mutou Qiqi".

Another major problem for discount retail is scale. If there is not enough scale, it is difficult to replicate and expand by relying solely on one's own cash flow. Therefore, most soft discount brands choose to open up franchises to accelerate expansion and help solve funding and site selection problems.

Through public information, we can learn that Haotemai has opened a joint venture model. By paying a deposit of 340,000 yuan plus a training fee of 19,800 yuan, one can become a "partner", and the project's payback period is about 10 months; Hi-Tech Shopping currently includes three cooperation models: brand authorization, store franchising and independent operation. According to the simulation calculation data provided in its franchise investment manual, for a 300-square-meter store with a lease term of 3 years, with an average monthly income of 500,000 yuan and an annual income of 6 million yuan, the franchisee can earn 1.68 million yuan a year, and the investment can only be recovered in 17 months; Discount MAMA's franchise model is similar to the above two companies.

However, many industry insiders are not optimistic about the hard-discount brands opening up to franchisees. "We believe that the franchise model is inherently contradictory to hard-discount retail. The profit of hard-discount itself is very thin, there is no extra money to give discounts to franchisees, and franchisees do not have much price advantage," said Renyu.

3. Discount store industry: bubbles and opportunities coexist

Why has the discount retail industry experienced an explosion in recent years?

"Consumption can be divided into quality-oriented consumption and profit-oriented consumption. Brand and price are equal. If you can buy an old model of a brand at a relatively cheap price, it is more cost-effective and meets the current market demand." Na Mingyuan said.

From the supply side, the development of new consumption in the past few years has created a bubble in the primary market. Consumer brands have accelerated the pace of new product launches and to a certain extent have entered a stage of oversupply. Now it has cooled down, resulting in a large amount of inventory and tail goods accumulation.

According to Wei Fan, some emerging brands in China have long-term inventory of 8%-12%, and some brands may be even higher. This type of tail goods products have actually existed for a long time, but they were previously sold in some gray areas, and now there are formal channels.

In 2008, during the US financial crisis, Vipshop seized the opportunity of online discounts. In 2018, during the Sino-US trade friction, Na Mingyuan and his team predicted that offline discounts would be an opportunity, so they participated in the Bigoffs warehouse retail discount store. He believes that brands need to constantly launch new products to lead the market trend and capture consumers. The inventory pressure of old models needs to be released through channels. As long as the balance of quantity is properly grasped, it will not affect the price of new products.

In addition, Wei Fan mentioned that in the past three years, commercial real estate has faced problems such as store closures and vacant stores, which has also provided opportunities for discount stores to enter shopping malls and shopping centers.

Therefore, many industry insiders said that in just a few years, under the catalysis of capital, a leading echelon has been formed. Discount stores are a business that can be developed in the long run, and the business model has been proven in many countries. The next few years will be a stage for leading players to scramble for market share.

However, since last year, some startups such as Fanrong Market and Bengong Snack Research Society have withdrawn from the market for various reasons. Discount stores of multiple brands near their expiration dates, such as Hi Special Purchase and Hao Special Purchase, are also experiencing a wave of store closures in some cities.

Bubbles and opportunities coexist, which is the consensus of many industry insiders on the current status of the discount store industry. Discount stores abroad have been operating for decades and have reached a scale of tens of thousands of stores. However, China's discount store industry is still in its development stage. Renyu said that the ideal situation is that there is a very cheap discount store around every community.

Between ideals and reality, the discount store industry still has difficulties to overcome.

The most important thing is how to balance the profitability of a single store and overall expansion. Renyu said that in the face of shareholder pressure or competition from peers, companies need to expand, but the single-store model needs to be polished and cannot be quickly replicated.

The second issue is how to solve the commodity problem during the expansion process. In the past few years since the pandemic, new channels such as community group buying and live e-commerce have developed, and how discount stores compete with brands is also a major problem.

There are questions about how long it will take for the industry to reach a larger scale, whether players have the possibility of going public, and whether it is possible to develop a national, marketable discount chain brand in China.

At present, practitioners see only regional brands, which is related to the characteristics of China's retail industry. "Everyone has some local supply and store capabilities in their respective regions. The higher the store density, the lower the fulfillment and promotion costs. However, whether a national brand can be built across provinces depends on whether the team is good enough, whether it can find categories where national brands are concentrated and control the goods at the headquarters, and whether it can solve the problem of high cross-regional transportation costs and warehousing system management costs." Renyu said.

Looking back, compared to the controversy surrounding a single company, the “low price as the core competitiveness” represented by the discount retail industry, and the business logic and thinking model behind it, are what are truly worth exploring.

At the request of the interviewees, Wei Fan and Ren Yu are pseudonyms in this article.

Author: Bruce, Editor: Xiang Yuan

Source: WeChat public account "Dingjiaoone (ID: dingjiaoone)"