Membership 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 downgrade, 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 membership stores and discount stores? Let's do a brief analysis.
First, let's give a brief definition of the membership stores and discount stores mentioned in this article:
Membership stores generally refer to stores specifically created for members. Their characteristics are large in size, and customers must become members and pay a fee to enter the store to make purchases. Examples include Costco, Sam's Club, and Hema X Membership Store.
Discount stores can generally be divided into two categories: soft discount and hard discount.
According to the perspective of Qi Cheng Capital, soft discount refers to achieving ultra-low prices by selling end-of-line products, overstocked goods, and financial collateral due to insufficient product supply. 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 recent popular companies in China such as HotMaxx and Hi-Tech Shopping.
Hard discount refers to reducing SKUs and operating costs, building a vertical supply chain, and launching private label brands to lower the retail price of channels. The main examples are Aldi in Germany and BIM in Turkey.
【One】Similarities: The essence of retail
Now that we have finished defining them, let's talk about the similarities first:
The prices of goods are relatively low. This is what consumers see when they visit membership stores and discount stores. In essence, they both involve 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 less than 0, and free cash flow (FCF) and net cash flow from operations are positive. Therefore, even if these retailers have negative net profits, they can still operate well.
At the same time, supply chain management is also fundamental for them. They need to consider how to obtain better products (even "buy out" specific products or categories) at lower prices and better terms (or other conditions) from suppliers in the background. They must also excel in certain details compared to traditional retailers.
Therefore, regardless of how low the prices are, membership 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 product form and unique store design, and tries to answer how they use different product combinations and store designs to achieve the same result - "low prices"?
You will find that the strategies of membership stores, hard discount stores, and soft discount stores are completely different.
【Two】Membership stores: Purchasing champion products in bulk, occupying the mind with private label brands
Let's take Costco as an example to talk about membership stores. 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 $100 in the United States), but the frequency of visits is 2-3 weeks. It meets consumers' needs for hoarding.
Unlike traditional retailers, Costco only has about 4,000 SKUs in its average 14,000 square meter store. Therefore, Costco's logic is to select champion products, obtain lower prices and better terms from suppliers through massive purchases, and during the sales process, the markup does not exceed 13%, allowing consumers to feel like they are getting a bargain.
In addition to selecting champion products from traditional brands, Costco also earns higher gross profit through its private label brand Kirkland Signature, putting pressure on traditional brands (including price pressure and promotional pressure). Currently, the sales of its private label brands account for about 30% of the total sales, making it one of the highest-selling brands globally.
For Costco's strategies and business model, this article will not go into too much detail. You can refer to the historical articles and analysis of "Retail Observation".
【Three】Hard discount stores: Dominating with private label brands, reducing meaningless costs by all means
Let's take Aldi in Germany as an example to talk about hard discount stores. BIM in Turkey is also very similar, and recently, Mexican hard discount retailer BBB Foods ($TBBB) is also seeking listing on the U.S. stock market. Interested readers can discuss with "Retail Observation".
Hard discount stores have many similarities with membership stores, but the difference is that hard discount retailers generally open stores in communities and focus more on daily purchases. Although the average purchase volume per customer is ordinary, the frequency of visits is high, resulting in higher average revenue per user (ARPU).
From a product perspective, the biggest difference between Aldi, BIM, and membership stores is that Aldi and BIM focus on private label brands, with their sales accounting for usually over 60% (BIM was 65% in 2022, while Aldi is usually around 90%).
Aldi selects cost-effective products from a wide range of lesser-known brands and cooperates with the suppliers of these brands. At the same time, it establishes a complete factory inspection and quality control system to ensure the quality of products.
In the development of private label brands, Aldi sets quality standards that are higher than general legal requirements. Suppliers cooperating with Aldi not only need to comply with these standards themselves but also ensure that their upstream suppliers comply with all 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 products, 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, 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 very high purchase volume per item.
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 huge 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, just like membership stores, hard discount retailers also treat their employees well. The employees have a high rate of lifelong employment, and through strict training, they can perform multiple roles (such as purchasing, inventory, cashiering, cleaning, etc.) in stores with an area of 500 to 800 square meters. 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, through rigorous and effective training, the store employees can memorize the prices of products and have super-fast mental calculation and input speed, making the payment process extremely efficient. For products with prices ending in 0.05 to 0.09, the payment is rounded up to 0.05; for products with prices ending in 0 to 0.04, there is no charge (an interesting case is that many employees have said that they sometimes can't keep up with the pace after their vacation because they need to memorize the prices of products).
Third, there are multiple barcodes on a single product package, so they can be scanned directly without having to pick up the package and search for the QR code. In addition, Aldi has developed its own barcode because the "traditional barcodes" require a fee.
Fourth, there is no one to help customers pack their purchases 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 label brands, they can usually be divided into two categories: end-of-line and near-expiry products of 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 lies in the fact that although it deals with clothing end-of-line products, its 1,000+ buyers only purchase end-of-line products from well-known department stores. After selecting the products, they buy them outright (without retaining the right to return the products or requiring traditional retail subsidies or delivery discounts from suppliers). They pay quickly and form close relationships with suppliers. Through its distribution network, TJX supports the purchase of discount products and global business, achieving the right product, right stores, right time.
TJX describes its purchasing as "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 products. 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. This greatly improves the turnover ability of the products. That's why TJX, with a market value ranking in the top 10 among global retailers, has surpassed $100 billion.
Dollar General is the largest dollar store in the United States and is considered 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. It 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 that its "core customers 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 groups in American small towns. Its essence is a logic of providing cheap products to poor people and achieving high gross profit through small quantities.
From a product perspective, Dollar General sells various non-brand-name products, which gives it strong bargaining power with suppliers. It is worth noting that these products meet various immediate needs, and although they appear cheap, their cost-effectiveness is actually average.
Don Quijote in Japan is also similar. It started by selling end-of-line and slightly flawed products, which it calls "Spot Products" (including seasonal products 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 amount of cheap end-of-line products.
Around 2010, Don Quijote required 40% of its inventory to be end-of-line products and 60% to be regular products. Now, the proportion of end-of-line products has decreased. With the increase in the number of stores, in order to find sustainable low-priced products and meet the potential customer needs that were not covered in previous purchases, Don Quijote launched its "Passionate Price" series of private label brands in 2009, which accounted for 18.2% of its sales in the 2023 fiscal year.
At the store level, due to limited space, Don Quijote uses a "compressed display" method, which has been used to this day: 1,000-3,000 square meters of space can accommodate 40,000 to 60,000 SKUs, filling the store to the roof and occupying the aisles. In addition, a large number of hand-drawn advertising posters and cheerful music played in a loop create 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 includes low-priced food and daily necessities, as well as higher-priced electronics and imported brand products. On its official website, Don Quijote defines itself as a "comprehensive discount store that offers everything from daily necessities to high-end brands, providing customers with a fresh and exciting shopping experience."
【Five】Summary
In summary, membership stores achieve low prices by purchasing champion products in bulk from the back end and using methods to encourage consumers to hoard goods at the front end. Hard discount stores achieve low prices by controlling private label brands. They also treat employees and suppliers well and reduce various unnecessary costs and expenses in stores, ultimately achieving very low gross profit and high turnover.
On the other hand, soft discount stores offer a more diverse range of products, essentially creating a treasure hunting experience. They either attract consumers through end-of-line and near-expiry products from well-known brands or through a mix of products from lesser-known brands. They achieve high gross profit and relatively high turnover.
This article is an excerpt from a more than 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 HoteMai and Hi-Tech Shopping. There are also many details worth pondering.
If you are interested in this field, feel free to discuss with "Retail Observation."