The Zhitong Finance App learned that Cinda Securities released a research report saying that consumption pursues cost performance and returns to product usage attributes, and China's discount business has developed rapidly since 2023. The rise of the discount industry is in line with the rising trend of cost-effective consumption in the context of consumption classification. Compared to overseas, the discount industry usually emerged against the backdrop of a slowdown in macroeconomic growth. The bank believes that in a context where the retail development of traditional supermarkets in China is being blocked, the rate of online consumption of physical goods is slowing down, and the online and offline consumption structure has reached a relatively stable level, the layout of the discount industry may be transformed into a new growth opportunity. Recommended attention: Chongqing Department Store (600729.SH), Jiajiayue (603708.SH), Hongqi Chain (002697.SZ).

Cinda Securities's views are as follows:

Hard discount leaders have the characteristics of low gross profit, low cost ratio, high turnover, high ROE, and strong performance resilience.

The bank takes the financial data of Costco, a leading discount retailer, as an example. Its gross margin of product sales has stabilized at 10-12% for the past 10 years, which is lower than the gross margin level of 20%-25% of traditional retail leaders at home and abroad, and has achieved cost-effective positioning through a certain degree of terminal price concessions. However, its ROE continued to lead traditional supermarket standards, and was further improved in 2021-2022. In FY2022, its ROE was 28.31%. During the same period, traditional supermarket giant Walmart was 15.23%, and Jiajiayue was 2.64%. Looking at the breakdown, Costco's high ROE core comes from a significantly lower cost rate than its peers, a net interest rate that is at the average level of the industry and rising steadily, and higher turnover efficiency than its peers. Moreover, under changes in consumer consumption attitudes and fluctuations in the macroeconomic environment, Costco's business model is more resilient. Costco and Sam's Club had better revenue growth than those of traditional merchants, and they all experienced an acceleration in growth after FY2020, while other comparable companies have all slowed/declined to varying degrees.

Gao Ping efficiency is one of the core driving forces supporting performance growth and store expansion.

Costco's revenue growth was contributed by revenue from ping efficiency, store expansion, and membership fees. Sam's Club's store volume has been stable over the past 5 years, and revenue growth was mainly contributed by increased floor efficiency. In a discount business with low gross margin, store profits are mainly achieved by high turnover and high floor efficiency. The efficiency of FY2023 Costco reached more than 20,000 US dollars, and Sam's Club was about 13,000 US dollars, and the overall trend has continued to improve over the past 5 years. The core driving force for store expansion comes from the success of the single-store model. Costco achieved a higher ROE than that of its peers, with a net interest rate not lower than that of its peers (contributed by high efficiency, low cost rate, and membership fee revenue) and significantly better turnover efficiency, supporting global store expansion.

Moreover, as the scale effect becomes apparent, the bank expects a trend of further optimization of net interest rates and ROE.

What are some things worth learning from when it comes to hard discounts for local businesses? The bank summarizes the following four points: 1) Streamline SKUs to improve individual product operation efficiency and procurement bargaining power. The number of community hard discount SKUs is the most streamlined, such as about 600 SKUs, about 800 SKUs, Xiaobai Snacks discount stores have about 1,100 SKUs, Aldi has about 1,800 SKUs, and Walmart supermarkets can reach 20,000 SKUs. 2) Focus on high-frequency demand categories, develop own brands, and strengthen direct procurement from the source. 3) Leading cost control capabilities to maximize labor efficiency. Costco's human efficiency is significantly superior to Walmart and Target, and there is a clear trend of increasing year by year due to large-scale effects. FY2022 Costco's per capita income generation and per capita profit generation were 750,000 US dollars and 20,000 US dollars respectively. The per capita income generation was 2-3 times that of Walmart and Target, and the per capita profit generation was more than 3 times that of Walmart and Target. 4) Following the trend of household miniaturization in China, small community-based stores are more likely to have high turnover and rapid replication.

Investment advice: The bank believes that the core competitiveness of the discount industry lies in the retail enterprise's own operating ability, brand effect, and upstream supply chain layout and integration capabilities. Leading companies such as Costco have a deep moat and continue to expand in scale. Leading local companies may transform into the discount business format or have a certain first-mover advantage. It is recommended to focus on Chongqing Department Store, Jiajiayue, and Hongqi chains, which have begun to test the waters of the discount business.

Risk factors: risk that macroeconomic growth falls short of expectations; industry competition increases risk; risk of weak terminal demand.