The workings of a hard discounter

(Second of 3 parts)

MANILA, Philippines — In neighborhoods across the country, the rise of hard discount stores like DALI and O!Save is reshaping the way Filipinos shop for everyday essentials. Known for their bare-bones approach and no-frills shopping experience, these stores promise affordability without compromising quality – a concept that has quickly gained traction among cost-conscious consumers.

But what exactly makes these hard discount stores tick?

The answer lies in their unique business model, one rooted in a global retail phenomenon that began in Germany and has since disrupted markets worldwide. Analyzed extensively in the EFMI Business School study “Retail disruptors: The spectacular rise and impact of the hard discounters,” the unique features of this model are unpacked, offering insights into its rapid growth and influence.

A hallmark of this approach is the limited assortment of products offered in hard discount stores. These outlets prioritize essential items, making it easier and faster for customers to shop. This strategy not only simplifies decision-making for consumers but also reduces inventory and storage costs for the retailer. The streamlined product range ensures that space and resources are used efficiently, contributing to the overall affordability of items.

The physical setup of hard discount stores further underscores their focus on efficiency. Stores are typically compact, occupying smaller spaces compared to traditional supermarkets. This setup lowers operational complexity and overhead expenses, such as rent and utilities, making it easier to manage day-to-day operations with fewer staff members.

Another standout feature is the ability of this model to scale rapidly. Standardized layouts and operational processes allow companies to replicate stores with ease, enabling swift expansion into new markets.

Additionally, the low costs associated with opening and running these stores mean that new branches can achieve profitability in a relatively short time.

However, the model is not without challenges. Its reliance on high sales volumes to offset low prices makes it vulnerable to disruptions in demand or supply chains. Any significant dip in customer traffic or interruptions in inventory flow can have a considerable impact on profitability.

How hard discounting began in Philippines

The hard discount model made its debut in the Philippines with the launch of DALI in February 2020. Operated by DALI Discount AG, a Swiss international hard discount retail chain, DALI’s local operations are managed by its Singapore-based subsidiary, HDPM Sin Pte. Ltd., through a local entity known as Hard Discount Philippines Inc. (HDPI). The chain quickly gained attention for its no-frills approach to retail, focusing on offering essential goods at affordable prices. DALI’s entry into the market introduced an entirely new shopping experience for budget-conscious consumers, especially in urban and suburban areas.

DALI’s growth has been noteworthy, with the retailer reporting a revenue of P9.2 billion in 2022, which more than doubled to P22.3 billion in 2023. However, the expansion has not been without its struggles.

The company incurred significant losses during the same period, posting P898.4 million in losses in 2022 and P1.9 billion in 2023. These figures reflect the financial hurdles that come with scaling up in a competitive market while maintaining the promise of low prices.

A year later, in 2021, another hard discount retailer entered the market: O!Save. The retailer is operated by OSave Trading Philippines Corp., a wholly owned unit of Singapore-based HD Retail Holding Pte. Ltd. and a company where the Gokongwei Group is a shareholder.

Positioned as a direct competitor to DALI, O!Save leveraged its local understanding of consumer needs to offer a similar no-frills, low-cost shopping experience. O!Save has seen substantial growth in its revenue, which rose to P6.02 billion in 2023 from P1.06 billion in 2022. Despite this progress, the retailer faced its own financial challenges, with losses amounting to P408 million in 2022 and increasing to P912.25 million in 2023.

O!Save’s entry into the market signals a growing demand for hard discount stores in the Philippines, and its competition with DALI highlights the changing dynamics of the retail sector.

Straight to the manufacturer for lower costs

The secret of hard discounters to maintaining low prices is dealing directly with manufacturers. In this way, they are able to cut expenses in branding and source products with a higher quality at a lower cost. This is how private labels work.

DALI houses at least 62 private-labeled products and 33 for O!Save. Such products are labeled HDPI. and O! Save Trading Philippines Corp. Aside from their private labels, both stores also source from Philippine manufacturers such as Gold Label Resources Inc. and Mana Superfoods for O!Save and Rombe Philippines Inc. for DALI.

Aside from that, hard discounters also import products, especially from countries abundant in certain raw materials which can contribute to further lower prices. For example, a kilo of French fries can be bought cheaper in DALI as it is imported from India. According to the Observatory of Economic Complexity, India is the 12th largest potato exporter in the world. Meanwhile, most chocolate spread products are produced in Turkey as it is the 11th largest exporter of chocolates in the world. Alcoholic drinks such as wine and beer are usually sourced from European countries like Belgium, Spain and France.

It is also noticeable that some private label products resemble the packaging of its national brand counterparts. DALI used this tactic with its line of condiments Rajah Puro but this led to copyright disputes.

Such resemblances are intentional, according to The Wall Street Journal’s “Why Aldi is America’s fastest growing grocery store,” as it tricks customers into thinking they are buying the same quality of product but for a lower price.

‘No questions asked’ return policy

Both DALI and O!Save promote customer-friendly return policies to make shopping easier and more appealing. Both stores claim to offer a “no-questions-asked” return policy, promising full refunds for products that don’t meet customers’ expectations. This straightforward promise is part of the store’s appeal, especially for people looking for a hassle-free shopping experience.

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Andes and Maligmat are third year journalism students at the Polytechnic University of the Philippines College of Communication. The three-part report is an output for their business journalism course under the guidance of Prof. Aileen Camille Dimatatac.