Retail Discount 3.0 Era: The Secret of Low Prices is Here

You can see those retail stores everywhere on the street, but why are the prices so low? Read this article to find out.

Suddenly, like a spring breeze, driven by consumers' preference for cost-effectiveness, snack discount stores opened up all over the country.

Lin Ming, who lives in a small fifth-tier county, recently discovered that several discount snack stores have opened near his home. Among them, Zhao Yiming Snacks, Lai Youpin, and Snacks Are Busy are even clustered at the same intersection.

In these stores, you can buy Nongfu Spring for 1.2 yuan, Coke for 2.1 yuan, Wanglaoji for 2.8 yuan, and Lays potato chips for 3 yuan. In general, the products in snack discount stores are generally 20-30% cheaper than those in supermarkets.

For young people like Lin Ming, these snack discount stores are a boon, as they can choose from a wider variety of products at lower prices.

Not only that, the bulk sales model also allows them to flexibly choose the quantity to purchase according to their needs and financial conditions, which not only satisfies their appetite but also avoids snack accumulation and waste.

This "simple and crude" way of acquiring customers has allowed discount stores to quickly take away the market share of snack shops such as Three Squirrels, Bestore, and Laiyifen, and even left many convenience stores and small supermarkets powerless to fight back.

More and more snack food practitioners feel a sense of crisis. In order to meet the challenge, on November 29, 2023, Bestore announced the implementation of the first and largest price cut in 17 years, with an average price cut of 22% for 300 products and a maximum price cut of 45%. The second and third rounds of price cuts followed.

The official information disclosed by Three Squirrels is that the price of its star product macadamia nuts has dropped by about 30%, and the price of air-dried duck necks has dropped by about 33%. Shi Yonglei, chairman of Laiyifen, said in his circle of friends that the Laiyifen team has always been starting from the user's perspective, selecting high-quality raw materials from around the world, and has been pursuing cost optimization from all links in the industrial chain, with the cheapest price for the same quality, so that consumers can truly benefit.

The entire snack industry is undergoing an unprecedented new transformation.

1. The “price war” cannot be stopped

my country’s snack channels have always been mainly offline.

In my country's snack channel structure in 2023, supermarkets account for the largest proportion, exceeding 40%; convenience stores and mom-and-pop stores account for about 24% in total, and e-commerce channels account for about 19.6%. It is precisely because of this that offline channels have an irreplaceable position in the process of snack consumption.

The "Snack Industry Analysis Report" released by Hengzhou Chengsi shows that the market size of snacks in my country will exceed 1.5 trillion yuan in 2023. However, considering that there are many types of snacks and most companies are small in scale, the competition landscape of my country's snack industry is relatively fragmented.

According to new distribution data, the CR5 of my country's snack food industry will be 14.7% in 2022. Among them, Mars has the largest share, about 3.5%; PepsiCo and Want Want have market shares of 3.3% and 3% respectively, ranking second and third; the market shares of other individual companies are less than 3%.

As consumption levels rise, the demand for snacks is becoming increasingly strong. Coupled with the closure of some supermarkets that were poorly managed after the epidemic, the snack hypermarket market has ushered in development opportunities.

Last year, leading companies such as Snacks Are Busy and Zhao Yiming received financing of hundreds of millions of yuan, further boosting the popularity of the snack discount store market.

Image source: Dongguan Securities

Although most products in snack discount stores are sold at very low prices, according to estimates by West China Securities, the profit margin of busy snack stores is around 6%-8%; Zhao Yiming's net profit margin also reached 3.2% and 2.7% in 2022 and the first half of 2023.

The business philosophy of "small profits but quick turnover" has squeezed the operating space of those snack giants that claim to be "high-end", so Liangpin Shop, Three Squirrels and others have successively reduced their prices.

Judging from the financial reports, the profit margins of several major snack giants have declined since last year. In Q3 2023, the year-on-year growth rates of gross profit margins of Bestore, Three Squirrels, and Yanjin Shop were -0.41%, -0.23%, and -0.89%, respectively.

In the same Q3, many snack brands fell into the dilemma of declining performance. For example, the revenue of Bestore decreased by 14.33% year-on-year, the revenue of Three Squirrels decreased by 14.07% year-on-year, and the revenue of Laiyifen decreased by 7.61% year-on-year.

As revenues decline, the above brands have to rejoin the "price war". However, compared to simply "squeezing" low prices, today's price war is more about pursuing the ultimate cost-effectiveness, which tests the company's ability to control all upstream and downstream links.

2. Finding a “balance” in parity

After all, the essence of "snack discount stores" is still a competition of price-performance ratio, especially in low-tier cities, where the price directly determines the competitiveness of the product.

The "2023 Consumer Trend Insight Report" shows that regarding the consumption habits developed during the epidemic, 63% of respondents mentioned that consumption has become more rational. The specific characteristics are living within one's means and not spending beyond one's means, planned spending, buying less non-essential items, comparing prices before shopping, paying more attention to cost-effectiveness, and paying more attention to the practicality of products.

Under the consumption trend of "prudent and smart", "extremely affordable" and "high-quality and affordable" products will always be favored by consumers.

Discount snack stores have the characteristics of "more, faster, better and cheaper", which can better meet consumers' demand for high cost-effective products. Generally speaking, discount snack stores mainly sell bulk products, with rich product categories and fast update speed. According to Euromonitor data, the average SKU of Zhao Yiming's snack brands is about 2,000, with 100+ SKUs updated monthly; the average SKU of Wanchen's snack brands is about 1,600, with 100-150 SKUs updated monthly.

Image source: China Insights Consulting

In terms of price, since they save on distributors and directly purchase goods from factories, snack discount stores have a higher cost-effectiveness. Take Oreo birthday cake biscuits as an example. The price of this product is 9 yuan in offline supermarkets, about 6.9 yuan on e-commerce platforms, and only 5.4 yuan in snack discount stores; Dove chocolate is 9.5 yuan in supermarkets, 7.0 yuan on e-commerce platforms, and 5.4 yuan in snack discount stores. The overall price discount is about 60% to 80%, which is very attractive.

The characteristics of "more, faster, better and cheaper" have led to a 393.7% year-on-year increase in the number of searches for the keyword "discount snacks store" on the Meituan platform, and a 250% year-on-year increase in the number of comments. During the same period, the transaction volume of "discount snacks store" on the platform increased by 517.6% year-on-year, the order volume increased by 232.5% year-on-year, and the number of users increased by 241.2% year-on-year.

Source: Photographed by the author

Looking ahead, as the number of snack discount stores approaches saturation, in the context of competition for incremental volume to existing volume, brands will turn to competition in the industrial chain, products and brands.

Referring to the evolution experience of offline chain supermarkets - membership-based supermarkets - O2O, snack discount companies will later extend upstream through models such as brand OEM, acquisition or equity participation, reducing procurement costs while controlling food safety and building brand power.

Therefore, the future development of snack discount stores will also show two major trends. The first is to divide the brands and form a layout of three price segments of "high, medium and low". It can even consider introducing daily consumables other than food to reduce the impact of excessively low prices on profits. The second is to strengthen cooperation with upstream production companies, timely feedback on changes in downstream demand, promote new product research and development, and form differentiated supply.

3. Break first and then build, the snack food sector welcomes structural opportunities

Under the trend of affordable prices, the entire snack industry will usher in new structural opportunities.

CITIC Securities research report predicts that the performance of consumer goods demand in 2024 will still depend on the recovery of overall consumer prosperity, among which the structural growth opportunities in the snack sector are relatively clear.

Analysts believe that, on the one hand, from the perspective of market size, the snack industry is still in a stock market environment, and there is no absolute leader. On the other hand, online and offline demand will exist for a long time, and live broadcasting, private domains, community group buying and other forms are further promoting channel changes in the snack industry.

Looking at it separately, snack companies represented by Yanjinpuizi and Three Squirrels have achieved certain growth in sales through e-commerce channels.

Among them, in the second half of 2023, the Three Squirrels Tmall system achieved operating income of 894 million yuan, a year-on-year increase of 14.18%, and the JD system achieved revenue of 538 million yuan, a year-on-year decrease of 10.93%; emerging e-commerce platforms represented by Douyin grew rapidly, achieving revenue of 768 million yuan in the second half of 2023, a year-on-year increase of 264%.

Ganyuan Foods has transformed into a dual-wheel drive of "channels + products". In Q3 2021, it entered the Sam's Club channel, and then introduced membership stores such as Hema, Metro, and Costco, promoting multiple mid-to-high-end nut product categories such as salted egg yolk cashews, honey amber walnuts, and mustard-flavored macadamia nuts, thereby finding a new growth point.

In order to quickly improve channel execution capabilities, Weilong has carried out a "sales assistance and auxiliary sales" pilot in some cities. That is, in low-tier cities, it assists dealers in hiring sales specialists to cover retail terminal outlets, effectively manage channel cost investment, promote terminal coverage, and increase single-store output. In core cities, it has established sales offices and internal sales teams to better serve key channels and retail terminals.

In addition to building their own channels, most brands have also chosen to cooperate with snack discount stores. At the end of January this year, Three Squirrels had put four nut products on the shelves of snack mass-market stores such as Snacks Are Busy and Zhao Yiming Snacks.

Ganyuan Food has established cooperative relationships with Snacks Are Mang, Zhao Yiming, Snacks Have Ming, Lai Youpin and other systems. The cooperative products include the classic three, potato chips, mixed beans and fruits, mixed nuts, peanuts and more.

Weilong even directly showed its report card. According to the announcement, in October 2023, Weilong sold a total of 420,000 boxes of products through snack mass-marketing channels, covering all categories of seasoning noodle products, vegetable products and soy products. Yanjin Shop also mentioned in the earnings conference that in the first half of 2023, the revenue brought by snack mass-marketing and other channels increased by more than 200% year-on-year.

In fact, "discount stores" are not a new species.

Dollar General and Dollar Tree, the two largest discount store chain giants in the United States, have seen their operating revenues continue to grow for nearly 20 years since they went public around 2005. Both companies now have tens of thousands of stores. Japan's 100-yen store brand Daiso and soft discount store brand Don Quijote have also grown steadily over the years.

Take Dollar General as an example. Dollar General’s chain discount stores are located closer to the community. Consumers usually live within a radius of 3-4 miles from the store, which is about 10 minutes’ drive away. The dense layout provides consumers with a convenient shopping experience. In the United States, there is an average of one community chain discount store for every 10,000 people.

About 75% of its stores are located in towns with a population of no more than 20,000 people, concentrated in population centers with a high proportion of low-income people, and more than half of its customers have an annual income of less than $50,000.

Moreover, daily consumables account for the largest proportion of products sold in Dale stores, usually more than 70%, including various daily chemical cleaning products, packaged foods, health medicines, pet supplies, tobacco, etc. In addition, there are fixed $1 products and seasonal products to attract customers.

From the overall trend, although the location logic of domestic snack discount stores is very similar to that of Dollar General, the business model is still in the early stages of development. The main SKUs in the store are snacks and drinks, and there are basically no other consumer goods. However, it is gradually evolving towards foreign grocery stores and discount stores. However, due to the diversification and high merger value of the Chinese snack industry, the snack discount store format has stood out first.

Based on public market information, some snack discount stores have begun selling pet snacks in-store, and it is possible that more products will quickly reach consumers through this channel in the future.

Zhao Ding, founder of Zhao Yiming, once said frankly, "Competition among peers is becoming increasingly fierce, and we must find new outlets."

Author: Tang Fei, Editor: Weber

Source: ValuePlanet (ID: ValuePlanet)