The transformation of the entire retail channel and the trend of discounting is one of the most noteworthy propositions in the consumer industry in 2024.
Is the era of brand dividends weakening and channel king coming again? How is this new wave of discount retailing different from the past? How does traditional retail face the impact, and what do discount stores rely on to build competitiveness?
At the closed-door seminar on the consumer industry held by Kuanzhai Venture Capital this year, the topics covered the analysis of the macro environment of consumption, the research of emerging categories and the dismantling of important trends. Among them, Hu Chunlong, managing director of Kuanzhai Venture Capital, shared his first-line insights on retail discounting from a very professional and critical perspective.
In Hu Chunlong's view, the essence of "discounting" is the migration of the owner of the FMCG value chain. The market is shifting from a push-type supply chain dominated by brands to a pull-type supply chain dominated by retailers, and retailers are really starting to take charge of the right to goods.
This change also means that retailers need to consider all aspects of product selection, pricing and risk control, and continuously improve the efficiency of product circulation based on the natural sales of terminals.
In the face of the impact of discounting from the community to the commercial center, from the immediate impact to the medium and long-term, Hu Chunlong believes that the convenience store format similar to the supermarket function will be seriously affected by the efficiency, but it is not without a solution.
For example, the function of strengthening immediate demand based on convenience scenarios is similar to the in-depth development of multi-temperature zone products around the main meal, afternoon tea, and supper scenes, and at the same time, it can also strengthen product differentiation, carry out active OEM product development and improve the product replacement iterative mechanism. In this way, through the optimization and reconstruction of the supply chain system, it will be sold to consumers in a more retail-oriented and efficient way, which will strive for new living space for convenience store enterprises.
Of course, meeting the discount challenge is one dimension, and actively evolving on discounts is another dimension that is more attractive. As for how to build competitive barriers for discount stores, Hu Chunlong put forward a variety of attack directions and difficult questions around "why discounts".
For example, to build a competitive advantage in procurement, the significance of product delivery in the current offline scenario has been improved, the offline exposure value has decreased significantly, and the cash purchase model has become more and more popular, and the comprehensive purchase price of the cash purchase model is at least 25% lower than that of the back-end fee-led procurement model. However, at this stage, even under the framework of cash purchase, not many retailers really have the advantage of scale, and the scale effect of procurement is still far away.
In addition, the location determines the size of the near-field traffic pool of the offline format, and the types of scenarios and the upper limit of the traffic that can be actually covered by the format are usually limited. After the area and site selection are confirmed, the innovative space has entered a small range, and how to improve the traffic conversion rate under the shackles is very important.
There is also the design of product mix and operational efficiency, and Hu Chunlong believes that the perception of enterprises here is very different. Taking the community hard discount format as an example, when the format is constructed, the proportion of fresh food, the selection of different categories of different products, and the determination of the depth of discount all need to be continuously selected and balanced. Including the close category and commodity structure, how to achieve full-link product delivery at a lower cost will be the real core competence of discount retailers in the medium and long term.
In the face of this increasingly fierce offensive and defensive battle for discount retail, few consumer companies can get out of it. This in-depth research and sharing of Kuanzhai Venture Capital has undoubtedly given entrepreneurs a strong value inspiration from a more fundamental and future perspective. We also expect that under the tide of discounting, more and more high-quality retail companies will emerge in the future to lead a new efficiency revolution.
Share | Hu Chunlong
Edit | Ye Zhefeng
Hello everyone, I'm Hu Chunlong from Kuanzhai Ventures. Kuanzhai is a fund that focuses on the retail track, and since its establishment in 2019, the analysis and investment of trend changes in the retail industry may account for more than half of our energy.
The phenomenon of discounting is a topic that all retail practitioners here here cannot avoid this year, but when we started our research in 2019, there were not many real snack discount chain brands, at that time, there were only 210 stores in the Changsha market, and there were only more than 300 stores in Zhejiang.
However, by 2023, there should be 4-50,000 stores in the whole market, which may reach the level of terminal retail sales of nearly 100 billion, and almost all snack stores will reduce prices and label snack discounts.
The second phenomenon is that the term "hard discount", which usually only appears in overseas research materials in the past two years, has begun to enter everyone's field of vision, and some traditional counters have begun to try to adjust the entire system, and offline prices are sometimes even cheaper than online.
Of course, the most lively are Sam's and Hema , and we all know that many retail products may be 30% higher prices for OEMs in upstream channels. One of the breakthroughs of Hema is that it pioneered the concept of "offline is cheaper than online", and some single products are achieved in a specific price range offline, hoping to guide consumers to offline consumption in this way.
This may also be a small sign of the migration from online to offline in the past few years.
What exactly is the essence of discounting? What is the driving force behind this?
In the past, the FMCG market has been growing very fast, with an annualized growth rate of 5-10%. Brands dominate the entire supply chain system and are the chain owners of the entire supply chain, and their ultimate goal is to effectively push products into different levels and forms of business formats, which is the model that is most conducive to wide-area channel coverage. Theoretically, this is a push supply chain form.
Regardless of whether there are distributors and channel providers involved, the ownership of all products in the whole process is under the scope of the system dominated by mainstream brands. This means that brand owners need to be responsible for the efficiency of the entire circulation link, and channel providers are mainly responsible for product shelf resources with heavier advertising attributes, and product delivery attributes are taken into account.
But we think the system has changed a bit since 2019. The current economic environment is similar to Japan in the 90s, when the market growth is weak, there is an opportunity to change, that is, the retailer becomes the chain owner to form a pull supply chain, which can be simply understood as the retailer really begins to be responsible for the right to goods and bear the risk of unsalable goods.
This is a major difference from the retailer characteristics of the previous platform investment model, which means that all goods are self-operated. How to match different retail environments, and how to select products according to different customer groups, tags, and scene construction characteristics, requires more thinking.
Under the push supply chain model, there is a relatively large attribute of production and sales, which is to press the inventory goods into the capillaries of each sales under the multi-level distribution system. However, the characteristics of the pull supply chain are reflected in the greater degree of "sales to production", and the production plan is generated with the terminal sales.
At the level of pricing strategy, retailers' purchasing behavior in the push-supply chain environment is mainly recommended by distributors, and they tend to rely on the back-end fees provided by brands as the main means of profit.
Under the pull supply chain, especially for direct procurement retailers, its characteristics are more inclined to the procurement method of cash procurement, no returns, and no back-office fees, and the risk of the entire product is fully assumed. This change is also forcing brands to establish dedicated channel teams to meet the needs of such channels.
Everyone should be familiar with the key clauses, which used to be returnable, and the account usually has 45 days, 90 days, 120 days and other situations. Under such conditions, the proportion of back-office revenue is very important, because it is the most important indicator when calculating gross profit. The pull supply chain is basically a channel buyout of products, and it is a cash buyout with no back-end income, and how much gross profit is earned.
The push supply chain has led to a common phenomenon in China in the past, that is, the factory shipping price of 1 yuan of products, consumers get the price of at least 2.5-3 yuan, and through the pull supply chain model, discount retailers add 15-30% on the basis of the ex-factory price, and the products of 1 yuan are sold for 1 yuan 2, which forms a very large price gap.
Of course, the gap in the intermediate cost structure is also very large, and the push supply chain enterprises also involve a large amount of investment at the marketing level and the management and construction of the channel direct sales team. We often say that the wool comes from the sheep, which means that all the costs are passed on to the consumer and the channel. Especially in the process of constantly releasing new products, most of the new products will be untenable in the market, and the cost of entering the channel and exiting should also be taken into account, which is also a component of high intermediate costs.
We have repeatedly studied a large number of pull supply chain companies, such as Costco, the gross profit margin is generally 12-15%, and the efficiency of adding 15-30% to the ex-factory price in the case of a large number of categories has been achieved, and the account period is very short. However, such a form is generally in developed countries in Europe and the United States, and it has become the mainstream format, and China is still in its infancy.
1. From hard discounts to soft discounts, the positioning of several types of major discount formats is sorted out
In fact, there are two questions that need to be developed around discounting today, the first is what is the impact of discounting on traditional formats? How should traditional retail businesses respond to the shock?
Let's first sort out the various formats in the entire retail field, the current offline formats can be divided into three categories, the first is the community, that is, the community consumer group that can diverge and cover within 800 meters. Drawing a circle within 800 meters is actually equivalent to the periphery of the community, there is not much traffic, but the age structure is very rich, from children to 80-year-old grandmothers, are your potential passenger flow.
The second is semi-commercial and business formats around transportation hubs, and the third category is commercial entities and shopping malls, and the coverage of different types of customers is quite different. We have observed that in the semi-commercial format, many customers will ride a small electric donkey to it, so the coverage of this type of business can reach 1.5-3 kilometers. The commercial body is even broader, and some scarce commercial entities may be able to cover more than 5 kilometers.
Consumers have different needs for different types of offline retail formats, and it is unrealistic to go to a shopping mall just for a bottle of Coke for 1 yuan 5. They don't go there very often, and every time they go, it may be because of some specific things, such as shopping, shopping for clothes, or watching movies.
Therefore, in the discount format of the commercial body, it provides consumers with some fresh experience, focuses on improving the richness and shopping of the overall goods, and cost performance is not the first demand.
I think that the closer the environment is to the commercial entity, the more "soft discounts" can be made. We believe that the most important element in the definition of "soft discount" is not tail goods, but a way of playing closer to "fast fashion", that is, through the rapid exchange of a large number of optional products, keeping up with the market trend and providing competitive prices.
Several of Japan's mainstream soft discount formats are also located in the urban areas of core cities, and consumers who go shopping in commercial centers (even consumers who come to the city from the countryside to shop) are their very important customers.
Once the scene is switched to the community, there will be some differences in the entire consumption scenario. For consumers in this environment, some specific rigid products need the fastest way to buy, and the price should be cheap enough, and the combination of the two factors can reduce their transaction costs, making the shopping decision-making process simple and inertia.
At the shopping mall level, we observe a consumption characteristic that all product categories are concentrated in the snack category, which can account for at least 50% of the offline retail format. This category needs a wide range of SKUs, and at the same time, it can bring consumers a fresh experience through rapid iteration.
In addition, the personal care and beauty category is also very magical, under this system, the online penetration rate of this category is very high, attracting many consumers who understand online brands and have a sense of rapid iteration of products.
At present, most snack discount stores tend to choose locations in a semi-commercial environment, and we investigated some of the more important community sites in Changsha and found that the effectiveness is decreasing, but the lively golden street corners and commercial locations are more effective.
In fact, there are not many such high-traffic locations, let's imagine, how many golden street corners with a large number of passengers in a county-level city are there? Some beauty and personal care brands are also vying for these spots, as well as competition from smaller stores and individual flexible stores.
Generally speaking, the rapid growth of the number of stores in stages is not due to how powerful the single-store model is, but more due to the company's ability to leverage resources.
2. From immediate shock to medium and long-term impact, the three stages of "discounting" impact
We believe that the discount impact scenarios faced by traditional business formats can be divided into three stages, and the first immediate impact reflects the actual location of the scene, that is, the market share competition under the same scenario and the same location leads to sales loss. After snack chain stores enter some high-traffic points, the sales of other chain formats will decline, which is also the most common situation in 2023.
The short- and medium-term impact, that is, the decline in traffic quality, has led to the back-end income of some brands not being as expected, which is a violent impact that the supermarket field began to face 2-3 years ago.
The medium- to long-term impact is that when consumers recognise the reasonable pricing band of goods, the operating price band of some products may need to be re-standardized, and many products are unlikely to be sold at past prices in the channel.
For example, in the Changsha market, the price of standard products such as head water drinks and convenience foods has been fully re-anchored, and the retail guide price has lost its effect, and the same situation is also happening in some core cities.
In the past, the traditional retail format was less discussed, and many convenience stores carried some supermarket-like functions in addition to meeting immediate needs, and even some planning attributes were also included in them. The core reason is that consumers think that all formats are about the same price, and it is better to choose a closer place to consume. Therefore, from a broader dimension, the positioning of convenience stores and small supermarkets in China is highly similar.
The fresh supermarket is another idea, and all the current supermarkets have turned to the fresh supermarket, which is the positioning formed in 2016-2017. Through the abundance of fresh food and promotion as a drainage, regular product sales are part of the conversion of fresh traffic. The impact of discounting on such traffic-converting products is irreversible.
3. Convenience stores should think in two directions of "discounting".
We believe that the most important point in the fight against discounting is to strengthen the investment in retail fast food products, that is, to do in-depth development around multi-functional scenarios such as main meals, afternoon tea, and supper. It can be said that the emergence of takeaway has lagged behind the growth of convenience stores by a cycle, but this is also some of the development space left in the current takeaway ecology.
In this case, convenience stores should optimize some large fast food items, so that they can match the sales scene and product form of convenience stores, and seize part of the market in a more cost-effective way.
Optimizing the efficiency of the original commodity is a very important proposition, but this is only a defensive means in general, and the action must increase differentiated site selection and product screening to accelerate iteration.
We have summarized the cost of some common products in scenarios such as meals, afternoon tea, and supper, and the takeaway price of any one category should be at least about 12 yuan to the cost. These relatively low customer unit price products are actually not cost-effective at the takeaway level, which leaves a certain opportunity point for convenience stores.
For example, can you achieve 7-8 yuan of ready-made drinks? Can you give a high-quality $6 bottled coffee solution? Can 5-6 yuan microwave oven food continue to be developed? This depends on the further thinking and solution of convenience store practitioners.
First, the current purchasing power of discount retailers does not have much advantage over traditional retailers, and many of them advertise themselves as discount retailers or have a billing period of about 45 days, but it is worth noting that these innovative formats more or less use the cash purchase model.
According to our previous research, compared to the past back-office fee-led procurement model, the naked price of products purchased in cash is about 25% lower. The advantage of the back-end cost-led model is that it integrates quality and efficiency, and it is also advertised while delivering offline. But this era may no longer exist, and consumers have very high requirements for the cost-effectiveness of offline products, which reflects that the delivery value of offline goods is beginning to be greater than the value of offline exposure.
At this stage, we believe that no retailer has really achieved scale advantage under the framework of cash purchasing. Imagine a discount brand with 15,000 Japanese merchants, 100 stores, SKU1000 stores, and the average purchase amount of a single SKU is expected to be about 450,000, so the annual volume of goods will be millions, and it is not even possible to get goods from the factory. Therefore, from the perspective of purchasing model alone, a single discount retailer will not have much advantage over other competitors.
In addition, the current self-owned product OEM model is not a more advanced model. Overall, the current OEM strategy is more focused on achieving product differentiation rather than cost leadership. Although the minimum order quantity threshold has been lowered, the price difference between some packaging and OEM models that bypass the price management system of core single products of supply chain enterprises is not significant.
Second, behind the location and drainage strategies of different discount retailers, it is actually the cognitive differences behind the service consumers. The location and area basically determine the choice of customer group, scenario, rent and traffic cost. Is it for the community or for the mall? Is it for personal consumption or family consumption? Is it necessary to do online placement?
Third, the current controversy is how to identify which categories are worth doing under a specific site selection, and how to further optimize these categories.
In this track, investors are generally starting businesses, and when building a business model, they may adhere to the concept of certain investment fields far more than the pursuit of the positioning of the business itself and the cognitive level of consumers, which will have some impact on the idea of evolution and iteration of the system.
But in fact, after the store has selected the location and store model, the iteration space is actually very small, according to our experience, we have not seen any company's store, 3 years ago it was the same, 3 years later it iterated into a completely different look.
The prerequisite for some discount stores to make low-cost products today is low cost, but how to achieve low cost every day? What is the answer on the operational side? So far, we haven't heard a good answer to this question in terms of systematic answers.
In our view, the direction and goal have always been clear, and the certainty of growth does not need to be questioned, but in the process, the underlying values of the enterprises have been repeatedly tested, and the enterprises are kept simple, not shortcuts, and adhere to long-termism.
It also means that compared with some franchise chains that have opened thousands of stores in a year, it seems to be "bitter" a lot, but we believe that under the compound interest of scale and the compound interest of ability accumulation, deep barriers will be built and gradually become long slopes and thick snow.