Member stores and discount stores: similarities and differences
By Wang Ziwei @ Retail Observation
In recent years, we have witnessed the strong resurgence of physical retail: when combined with the consumption upgrade of the middle class, we have seen the emergence of paid membership stores similar to Costco, and when combined with consumption downgrading, we have witnessed the rapid expansion of various types of near-expiry and discount stores.
One is consumption upgrade, the other is consumption downgrade, and their common characteristic is low prices, which is very interesting. So besides low prices, what are the similarities and differences between member stores and discount stores? Let's do a brief analysis.
First, let's give a brief definition of the member stores and discount stores mentioned in this article:
Member stores generally refer to stores specifically created for members. Their characteristics are large in size, and customers must become members and pay a fee before they can enter the store to make purchases. Examples include Costco, Sam's Club, Hema X member store, etc.
Discount stores can generally be divided into two categories: soft discount and hard discount.
According to the perspective of Qiucheng Capital, soft discount refers to achieving ultra-low prices by selling leftover goods, overstocked goods, and financial collateral, claiming that the products themselves are insufficient. Examples of soft discount include Dollar General, TJX (with clothing as the core product), Japan's Don Quijote (parent company PPIH), and China's Miniso. These are listed companies in the United States, Japan, and China, as well as HotMaxx and Hi-Tech Shopping, which have become popular in recent years in China.
Hard discount refers to reducing SKUs and operating costs, building a vertical supply chain, and launching private brands to lower the retail prices of channels. The main examples are Aldi in Germany and BIM in Turkey.
【One】Similarities: The essence of retail
Now that we have defined them, let's talk about the similarities first:
The prices of goods are relatively low. This is what consumers see when they visit member stores and discount stores. In essence, they are both about the rapid circulation of goods, with the speed of cash inflow being faster than the speed of paying suppliers.
From a financial perspective, it means that the cash conversion cycle (CCC) is low or even negative, and free cash flow (FCF) and net cash flow generated from operations are positive. Therefore, even if the net profit of these retailers is negative, they can still operate well.
At the same time, supply chain management is also fundamental for them. How to obtain better products (even "buy out" specific products or categories) at lower prices and better terms (or other terms) in the background is something they must consider clearly. And they must do better than traditional retailers in certain details.
So, regardless of how low the prices are, member stores and discount stores follow the essence of the retail industry, only the methods are different.
Now let's discuss the differences. This article mainly starts from the perspective of the form of goods and the unique design ideas in the stores, and tries to answer how they use different combinations of goods and store designs to achieve the same result - "low prices"?
You will find that the strategies of member stores, hard discount stores, and soft discount stores are completely different.
【Two】Member stores: Purchasing champion products in bulk, occupying the mind with private brands
Let's take Costco as an example of a member store. This is also a case that "Retail Observation" has been researching in recent years.
Costco opens its stores in the suburbs, and consumers must drive there. It is suitable for family shopping, with a large average purchase amount (over $100 in the United States), but the frequency of visits is 2-3 times every 2 weeks. It meets consumers' hoarding needs.
Unlike traditional retailers, Costco only has about 4,000 SKUs in its average 14,000 square meter stores. So Costco's logic is to select champion products, purchase them in bulk from suppliers at lower prices and better terms, and during the sales process, the markup does not exceed 13%, giving consumers a sense of getting a good deal.
In addition to selecting champion products from traditional brands, Costco also earns higher gross profit through its private brand Kirkland Signature, which has better quality than traditional brands. This puts pressure on traditional brands (including price pressure and promotional pressure). Currently, the sales of its private brands account for about 30% of the total sales, making it one of the highest-selling brands globally.
For Costco's strategies and business model, this article will not go into too much detail. You can refer to the historical articles and analysis of "Retail Observation".
【Three】Hard discount stores: Dominating with private brands, reducing meaningless costs by any means necessary
Let's take Aldi in Germany as an example of a hard discount store. BIM in Turkey is also very similar, and recently, Mexican hard discount retailer BBB Foods ($TBBB) is also seeking listing on the US stock market. Interested readers can discuss with "Retail Observation".
Hard discount stores have many similarities with member stores, but the difference is that hard discount retailers generally open stores in communities and focus more on daily purchases: although the average purchase amount per customer is ordinary, the frequency of visits is high, resulting in a higher average revenue per user (ARPU).
From the perspective of goods, the biggest difference between Aldi, BIM, and member stores is that Aldi and BIM focus on private brands, with their sales accounting for usually over 60% (BIM was 65% in 2022, while Aldi is usually around 90%).
Aldi's approach is to select cost-effective products from a wide range of lesser-known brands, cooperate with the suppliers of the same brand, and establish a complete factory inspection and quality control system to ensure the quality of products in real-time.
In the development of private brands, Aldi sets a series of quality standards that are higher than general legal requirements. Suppliers who cooperate with Aldi not only need to ensure compliance themselves but also ensure that their upstream suppliers comply with all the standards and requirements of the entire supply chain.
When the products arrive at the distribution center, Aldi uses a series of testing methods to test all the goods, including any visible defects, packaging conditions, specific filling quantities, minimum shelf life, and even temperature.
After the products arrive at the stores and before they are shelved, the employees conduct further inspections, including visible damage to the products. Even for products already displayed on the shelves, regular testing is conducted for fungal infections, packaging damage, shelf life, etc.
In terms of after-sales, Aldi offers unconditional returns if consumers have doubts about the quality of the products. Once quality issues or potential health risks are discovered, Aldi immediately recalls the products and requires suppliers to provide explanation reports and further action plans.
Although the requirements are strict, Aldi treats its suppliers well, and suppliers are willing to cooperate with Aldi for several reasons:
First, Aldi has a high purchase volume for individual products.
Second, Aldi establishes long-term and equal partnerships with suppliers. Once suitable partners are found, most orders are usually for a minimum of 10 years. With Aldi's stable and large purchase volume, suppliers can plan their production and do not need sales departments or advertising, saving a lot of marketing expenses.
Third, Aldi actively helps suppliers upgrade their supply chains. It has launched the "Aldi Factory Upgrade" program, which includes free training for local employees in business skills, communication skills, and how to protect themselves in emergencies.
Fourth, and most importantly, Aldi does not delay payments to suppliers. Generally, payment is made within a week after the products leave the factory.
There is also a hidden detail here, just like member stores, hard discount retailers also treat their employees well. The employees have a high rate of lifelong employment. Through strict training, employees can have multiple skills (for example, 4-5 employees in stores with an area of 500 to 800 square meters can handle multiple tasks, including purchasing, inventory, cashiering, cleaning, etc.). This reduces the number of store employees, and the cost savings can be passed on to consumers.
From the perspective of store design, Aldi tends to be more minimalist and reduces costs in every aspect. There are many examples of this. I will list a few:
First, Aldi does not have a customer service phone number. Aldi's explanation is that they return all the money saved to consumers, so there is no one to answer the phone in the store. If you have any questions, there are 3-5 employees in the store who can provide assistance at any time. You can find this information in the Q&A section on Aldi's official website.
Second, Aldi did not use POS machines in the early days because, after rigorous and effective training, the store employees can memorize the prices of products and calculate and enter them quickly. For products with prices ending in 0.05-0.09, the payment is rounded up to 0.05; for products with prices ending in 0-0.04, no charge is made (an interesting case is that many employees have said that they sometimes can't keep up with the pace after their vacation because they have to memorize the prices of products).
Third, there are multiple barcodes on a single product packaging, so they can be scanned directly without having to find the QR code by flipping the packaging. In addition, Aldi has developed its own barcodes because those "traditional barcodes" require fees.
Fourth, there is no one to help customers pack their items at the checkout.
Fifth, customers need to use a coin to unlock and use a shopping cart. After returning the cart to a specific location, they can retrieve the coin. This reduces the number of employees in the store.
【Four】Soft discount stores: Diverse product logic
The products in soft discount stores are the most interesting. In addition to private brands, they can usually be divided into two categories: end-of-season and near-expiry products from well-known brands, and a mix of products from lesser-known brands.
Let's take TJX, Dollar General, and Japan's Don Quijote as examples:
TJX, a clothing retailer, has a inventory turnover period of only 50-60 days, which is 50% of traditional department stores, in an era when the clothing industry is plagued by inventory.
The core of TJX is that although it deals with clothing leftovers, its 1,000+ buyers only purchase leftovers from well-known department stores. After completing the selection, TJX buys them outright (without retaining the right to return the goods or requiring suppliers to provide traditional retail subsidies or delivery discounts), pays quickly, and forms a close relationship with suppliers. Through its distribution network, it supports the purchase of discounted goods and global business, achieving the right product, right stores, right time.
TJX calls its purchasing strategy "opportunistic": on the one hand, it makes better judgments on current trends through a relatively "lagging" purchasing cycle; on the other hand, the purchasing team achieves ultra-low purchasing costs by buying up suppliers' overstocked inventory and canceled orders.
The buying team is always active in the supplier market to purchase seasonal goods. The stores have fixed new arrivals every week, with fast product updates, low risk of unsold inventory, and a purchase and sales cycle generally shorter than 3 months. Essentially, the buying team selects two types of products: what you need and what you don't know you need but would be happy to discover at a high discount.
At the front end, these products are directly placed in the stores and once sold out, they are gone. So for consumers, every visit to the store is like a treasure hunt for low-priced items. If you don't buy it today, it may be gone tomorrow, which greatly improves the turnover capability of the products. This also explains why TJX is among the top 10 retail companies globally in terms of market value, with a market value exceeding $100 billion.
Dollar General is the largest dollar store in the United States and is seen as a model of "the worse the economy, the better the business." It has achieved over 30 years of consecutive same-store sales growth, spanning the dot-com bubble in the early 2000s, the subprime mortgage crisis in 2008, and the COVID-19 pandemic in 2019, and still offers over 2,000 items priced at $1 or less.
Dollar General's logic is to open stores in small towns that large retailers (such as Walmart and Costco) do not cover. It currently has over 19,000 stores across the United States, with an average store size of 678 square meters and 10,000 SKUs. Its financial report states, "Core consumers come from low-income, fixed-income families who usually do not receive services from other retailers." Therefore, it meets the daily needs of low-income communities in small towns in the United States. Its essence is a logic of providing cheap products to poor people and a logic of small quantities and high gross profit.
From the perspective of goods, Dollar General sells various non-well-known brands, which gives Dollar General strong bargaining power with suppliers. It is worth noting that these products meet various immediate needs, and although they appear cheap, the cost-effectiveness is actually average.
Don Quijote in Japan is also similar. It started by selling end-of-season and slightly flawed products and internally referred to them as "Spot Products" (including seasonal and special products, such as second-hand luxury goods).
From 2002 to 2008, during the economic downturn in Japan, many companies went bankrupt, and Don Quijote seized the opportunity and acquired a large number of cheap leftover goods.
Around 2010, Don Quijote required 40% of its inventory to be leftover goods and 60% to be regular goods. Now, the proportion of leftover goods has decreased. With the increase in the number of stores, in order to find sustainable low-priced goods and meet the potential customer needs that were not covered in previous purchases, Don Quijote launched its "Passionate Price" series of private brands in 2009, which accounted for 18.2% of its sales in the 2023 fiscal year.
At the front end of the stores, due to limited space, a "compressed display" method is used, which has been used to this day: 1,000-3,000 square meters of space can accommodate 40,000-60,000 SKUs, filling up the roof and aisles. Hand-painted advertising posters are used in large quantities, along with cheerful music played in a loop, creating an atmosphere of impulse shopping and a sense of treasure hunting.
In terms of product selection, Don Quijote tries to meet various consumer needs with a rich variety of products. It offers low-priced food and daily necessities as well as higher-priced electronics and imported brands. On its official website, Don Quijote defines itself as a "comprehensive discount store that offers a wide range of products from daily necessities to high-end brands, providing customers with a fresh and exciting shopping experience."
【Five】Conclusion
In summary, the low prices of member stores are achieved by purchasing champion products in bulk from the back end and using methods that allow consumers to hoard goods in the front end. Hard discount stores achieve low prices by controlling private brands. They treat employees and suppliers well and reduce various unnecessary costs and expenses in the stores, ultimately achieving very low gross profit and high turnover.
On the other hand, the products in soft discount stores are more diverse. They are essentially creating a treasure hunting experience, either by attracting consumers with end-of-season and near-expiry products from well-known brands or by attracting consumers with a mix of products from lesser-known brands. The result is high gross profit and relatively high turnover.
This article is an excerpt from a 200+ page industry research report by "Retail Observation". Many details can only be briefly mentioned in this article, and there are many other companies worth discussing, including listed companies such as Miniso in China, business supermarkets in Japan, and many non-listed players such as Hao Te Mai and Hi-Tech Shopping. There are also many details worth considering.
If you are interested in this field, feel free to discuss with "Retail Observation".