Source: Wall Street News

Recently, at Jing'an Temple Station of the Shanghai Metro, several eye-catching oversized vegetables, milk, and bread appeared, making pedestrians stop by.

The sculptures are from Olezi, an affordable supermarket. Not only are their images evocative, but their advertising slogans are also very “grounded”. Chinese cabbage is shouting “I have a good dish, but it's cheap!” , Carrots “I'm not talking nonsense, I'm really cheap!” , “Exaggerated! The Swiss roll next door expired before I finished eating it!” The copywriting all revolves around the keywords “high quality,” “low price,” and “small package.”

The ironic scene was that next to this scene was Sam's ad, which drew ridicule from netizens as a result: false commercial warfare — price reduction, human scavenging; real business warfare — the yin and yang are strange and faceless.

From Hema leading the battle with Sam, to Aletzie making waves again in the year-end commercial war, “cost performance” was undoubtedly the main theme of the retail industry in 2023. The low price trend blew all the way from soft discounts such as Good Deals and Hi Specials to more retail channels: leading snack sellers, snack groups are busy entering 10,000 stores, while the “first stock in high-end snacks” Liangpin Store cut prices twice to “save their lives”; Pinduoduo's market value in the sinking e-commerce platform overtook Alibaba's “Small Commodity City”; the e-commerce platform overtook Alibaba's “Small Commodity City” Mingchuang Premium's performance has repeatedly reached new highs this year, and many core data such as gross profit margin and net interest rate have achieved historic breakthroughs.

These representative cost-effective consumer companies are showing a speed of expansion and growth that surpasses the industry as a whole, and their prosperity is outstanding.

This article will analyze the following three points in detail:

1. In 2024, “cheap” will still be the core of retail

2. In the complex and changing Chinese market, where will the retail discount business evolve?

3. The discount circuit is still in its early stages, and the competitive landscape is still unclear. Who will have the advantage of leading players on the track, such as Aletzie, which is entering China at a hard discount from overseas, or Hema, which is shifting from local retail to discounts?

The essence of retail: complete the circulation of goods at the lowest cost and with the highest efficiency

If 2012 is viewed as an important inflection point in the transition from offline to online retail, then 2023 is more like an inflection point for the entire retail industry.

When the increase peaked after the boom, the performance of the giants was divided, and both Ali and JD were anxious. On the one hand, price competition models such as Pinduoduo, community group buying, and live e-commerce have opened up new traffic entrances; on the other hand, new business formats such as mass-selling snacks and discount supermarkets have rapidly emerged, forcing retail companies to optimize their supply chains.

The market has reached a consensus: in the future, retail will return to its essence, that is, complete the circulation of goods with the lowest cost and the highest efficiency.

The reason behind it is also very simple. Currently, consumer demand is fully satisfied, and there is an oversupply in the market. They are no longer pursuing premium products from one-sided brands and are paying more attention to cost performance; at the same time, retailers' efficiency is not high enough, the price increase rate for terminal products is still high, and there is room for efficiency improvement in the middle. For example, after extreme compression of the supply chain, ALDI product prices at German discount stores can be 20%-30% cheaper than ordinary supermarkets, and the price of mass-sold snacks is about 10% to 20% lower than that of ordinary stores.

In other words, the popularity of low-cost channels such as discounts is not only a sign that consumers are disinterested in the brand and focus on the product itself, but the shift from inefficient channels to high-efficiency channels is also an unavoidable trend in the retail industry.

This can also be enlightened by referring to Japan's development path. According to “The Fourth Consumption Era” by Japanese consumer society research expert Miura Manabu, after 2005, Japanese consumption was in a similar situation to the current situation in China: during the economic downturn, consumption moved from a stage of rapid growth in high-end branding to simple consumption. Corresponding to this is the transition of Japanese retail channels from department stores to convenience stores and discount stores. Among them, Don Quixote, a representative discount company, uses a product portfolio of “30% off goods +70% regular price discount” to cleverly meet the needs of various customer groups such as consumer-sensitive people, young people, and housewives.

Don Quixote's revenue has continued to grow for 30 years, maintaining strong countercyclical growth capabilities. In fiscal year 2023, the company's revenue and net profit to mother were 1.94 trillion yen and 76.4 billion yen respectively. The compound growth rate for fiscal year 06-23 was 12.5% and 18.3%, respectively. The net interest rate level increased from 1.7% in FY06 to 3.9% in FY23. Profitability increased steadily, and the stock price increased more than 7 times since 2006.

Unlike overseas countries, the penetration rate of the hard discount industry in China is still very low. Whether it is a community-based hard discount or a warehouse membership store, the penetration rate is less than 0.5%, and the cake is huge. According to China Merchants Securities's calculation, referring to the 15% penetration rate of community hard discounts in Germany and the 4% penetration rate of warehouse member stores in the US. Assuming that China's hard discount penetration rate reaches the global average, the two types of hard discount market space for community hard discount+warehousing member stores are expected to reach nearly 700 billion dollars.

China's discount market in 2024: local and overseas disputes, speed and efficiency

However, when referring to the word “discount,” the first thing most consumers think of is probably soft discounts represented by good sales and special offers. “Discounts” seem to be inherently related to sacrificing quality in exchange for low prices, such as temporary or seasonal periods, and is considered a “paradise for the poor.”

But in Shanghai, a unique “monster” is emerging. The discount supermarket “Allezi” is becoming a good place for Shanghai financial women and Guomao fitness men after work. Fat-reducing meals, sugar-free drinks, and high-protein meat can all be prepared within 50 yuan. It is known by Xiaohongshu as “the best supermarket for distinguished migrant workers in Shanghai.”

What is different from most affordable supermarkets is that even though it sells products at extremely low prices, there is quite a bit of experience and B-grade. When I walked into the bread and cooked food area, a burst of heat mixed with aroma fluttered over my face. The 6 yuan German alkali water condensation made my colleague call it “more delicious than the one that costs tens of yuan in a boutique bakery.” You can live a “small life” for a small amount of money. Allezi combines the “face” and “inside” that Shanghainese people focus on.

This “hard discount originator” from Germany has a century-old history. The reason why it has built up such low prices is summed up in one sentence: extremely reduce SKU and operating costs, shorten the supply chain to improve efficiency, and launch its own brand, thereby reducing the retail price of the channel. Reducing costs and increasing efficiency is the core logic of community discount stores like Allezi.

Compared to Walmart, which has more than 100,000 SKUs, there are only 1,800 SKUs, yet the sales volume of a single SKU is more than 10 times that of Walmart. Larger purchases bring more significant pricing advantages. According to Wlofe Research's comparison of the procurement costs of a basket of fixed products at ALDI and Walmart, ALDI costs only about 80% of Walmart's.

In order to reduce costs to the extreme, Allezi pays employees higher wages than their peers and uses a method where one employee has multiple jobs, such as shopping or cashier, to improve human efficiency. Compared to the 4,000-6,000 US dollar floor efficiency of Walmart and Target's traditional hypermarkets, after draining away the moisture from renovation costs, labor costs, and shipping costs, Alleghi's floor efficiency is around 8,800 US dollars.

What is a significant difference from other discount stores is that Allezi has also taken its own brands to the extreme. 90% of its own brands account for far higher than Costco, Sam, and Hema. Even in the Chinese market, its own brand products account for more than 70%. According to industry insiders, optimization of private brands on the manufacturing side can bring about 40% price reduction space for Alleghi.

As Germany's largest discount retailer with over 10,000 stores around the world, Allezi's expansion in China appears to be a bit slow. Entering the Chinese market for 4 years and opening 50 stores, this is not in line with the 3-digit expansion plan revealed by Allezi China CEO Roman Rasinger in 2022.

However, starting in the second half of last year, I clearly felt that the German retail giant had begun to “work hard.”

Whether it's using low-priced basic ingredients such as radish and cabbage to attract a target group of migrant workers at Jing'an Temple Station, where commuting traffic is huge, or to promote full-network marketing of white brand products such as 3 9 10-pack sanitary napkins, 9 packs of 9 bottles of shampoo and conditioner at significantly lower prices, iterating and expanding SKUs such as “Old Shanghai Babao Duck”, “New Year's Eve Dinner at an Old Shanghai Hotel”, and “Butterfly Cake without queuing at international restaurants,” Alleqi is rapidly changing.

The most important change is that among Allezi's current suppliers, more than 80% are already local suppliers in China.

However, if Allezi wants to gain an absolute advantage in the huge Chinese market, it still faces challenges. First, Hema Xiansheng, which is also based in the local market in Shanghai, bears the brunt. In order to expand its share of the discount market, Hema also spared no effort in its own reforms.

The second half of last year became a milestone.

In October, Hema generally reduced the prices of more than 5,000 products by 20% and plans to reduce SKUs to around 5,000. What supports the price reduction is the readjustment of the supply chain system. If Hema's former advantage was that it “knows the Chinese better,” then the supply chain is the biggest shortcoming for local retailers to transform into a discount business. Hema has always been criticized for poor product quality levels and many SKUs.

And Hema is also trying to make up for this shortcoming. One important step in the reform is to make extensive adjustments to the KA model used in supermarkets in the past, and re-establish a procurement system with “OEM work/own production” as the core, the same as mature discount stores such as Allezi and Sam.

For example, in the past, Hema used to make large single-product white toast, Hokkaido toast, mochi, and croissants in multiple processes and transportation, but now it is delivered directly to the sugar box factory through its own factory, Yihai Kerry Plant, which eliminates the cost of transporting and packaging the flour, while also drastically reducing labor costs. Currently, the sugar box factory has a design capacity of 20,000 tons/year, with an output value of 350 million yuan.

Meanwhile, Hema decided to suspend membership renewals, although this has caused dissatisfaction among old members. If a supermarket is positioned as boutique, but it does not have sufficient advantages in terms of price, and also lacks competitiveness and no obvious differentiation in product selection, then the membership system is in vain. In particular, the current discount market is becoming more and more competitive, and there is no price advantage compared to discount businesses with no threshold such as Allezi.

After the reform, Hema was once again brought to the table.

summed

Generally speaking, the discount industry is not only a disruption of the retail price system, but also a reshaping of the supply chain, brand, channel, and product structure. Every step of the adjustment will trigger a redistribution of profit patterns and profit models.

In 2024, cheapness is still the core of retail. Whether it is a local retail giant that has transformed into a discount business or an “hard discount originator” entering China overseas, if they want to gain an absolute advantage in the early stages of the industry, they must not just rely on past experience models; they must actively seek change; speed and efficiency will become the key to market victory.

If expansion is slow, scale effects cannot be achieved; if expansion is rapid, they will also face higher trial and error costs and greater capital investment. Whether the company itself has sufficient hematopoietic capacity to continuously invest in strengthening the moat after capital declines is also the key to future competitiveness. After all, not all companies rely on Ali like Hema.

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