The hidden side of Daiso’s rapid growth... Suppliers say "the only profit is from labor costs"

If it's not domestically produced earthenware, it will all explode in the microwave. The raw materials are different.

On the 17th of last month, I met Kang Seok-chil (72), the CEO of Boryeong Ceramic, a tteokbaegi (earthenware pot) manufacturer in Boryeong City, Chungnam. Mr. Kang has been supplying tteokbaegi to Daiso for over five years. In February, he posted a promotional video on YouTube titled "Mass production process of Daiso tteokbaegi worth 5,000 won," which gained him fame. The video received numerous comments such as "I thought it was Chinese because it costs 5,000 won, but my trust has increased," and "It's really cheap compared to the effort put in."

 

On this day, Mr. Kang emphasized that to improve the quality of earthenware, heat-resistant clay made from domestically sourced raw materials should be used. He said, "Our company's earthenware is made from heat-resistant clay using Boryeong mud as the raw material, which allows it to withstand high temperatures well. Products containing synthetic substances tend to break easily even with a little heat. Foreign companies, such as those from China, also purchase Korean raw materials."

In a factory covering approximately 300 pyeong (1 pyeong = 3.3㎡), a total of five people, including CEO Kang, were responsible for the pottery manufacturing process. CEO Kang said, "Many think that like other household and kitchenware, tteokbaegi can be produced automatically, but that's not the case. Each step requires human hands." From kneading the clay and removing bubbles during the kneading process, shaping the tteokbaegi, to applying glaze containing Boryeong mud on the dried surface, all steps involve manual labor. After firing in a kiln at 1250°C for about 16 hours, it takes approximately 4 to 5 days to complete the final inspection of defective products, producing about 1,000 tteokbaegi per day.

Currently, Daiso accounts for 70% of Boryeong Ceramic's total production volume. When asked if the profit has increased significantly thanks to Daiso's YouTube videos, CEO Kang replied unexpectedly, "Not necessarily." Despite rising raw material prices, Daiso keeps the selling price at 5,000 won, causing the profit margin to decrease each year. He revealed, "Only about half of the 5,000 won goes to the manufacturer. After deducting fixed costs like labor, there is nothing left."

The reason we have no choice but to continue supplying Daiso is because securing other sales channels is difficult. He said, "In the past, orders from other distributors came about once a month, but these days, they come about once every three months. Due to the economic downturn, many restaurants have closed, and the situation for small and medium-sized distributors, excluding large retailers like Daiso, is also poor."

 

The secret to Daiso's ultra-low price policy lies in 'constantly finding alternative suppliers.' Due to increased costs such as raw material prices and labor costs, if a company that supplies 1,000 won products says, "We absolutely cannot continue supplying," usually the distribution company raises the selling price to maintain the existing relationship. However, Daiso reportedly changes suppliers by 'finding alternative companies at all costs.' This creates a supply market structure close to a 'demand monopoly market,' where there is only one demander exercising monopoly power.

Mr. ㄱ, who runs a cleaning supplies manufacturing company, has been pushed out of this competition. It means he used to supply to Daiso but has now ceased the transaction. Mr. ㄱ said, "Recently, labor costs and the prices of plastic raw materials have increased significantly. Recently, companies that supplied to Daiso have often given up because they can't make a profit." The costs for sample work for new product launches and logistics costs for handling defective products are also borne by the suppliers.

Mr. N, the CEO of a manufacturing company supplying kitchenware to Daiso, said, "I made a new product sample to match the 1,000 won selling price, but if Daiso doesn't approve it due to quality issues or other reasons, the manufacturing company has to bear all the costs of developing and producing the sample." "These days, when I visit Daiso's logistics center, I notice a significant increase in imported goods from China and other countries. Domestic companies are under severe cost pressure and are stopping their deliveries, so it seems Daiso is expanding its overseas suppliers."

Nevertheless, small and medium-sized manufacturers still want to establish Daiso as a trading partner. Amid the recent economic downturn, Daiso is virtually the only offline retailer capable of large-volume deliveries. Supplying to Daiso ensures at least covering fixed costs such as labor expenses. "Anyway, we can keep the factory running," says Mr. N.

Another representative of a household goods supplier, Mr. ㄷ, also said, "We're not supplying to make a lot of profit; Daiso is one of the good distribution channels for maintaining factories through a low-margin, high-volume strategy." He added, "Online channels like Coupang do not purchase as much as Daiso does. Also, since we operate our own fulfillment center, manufacturers have to lower their unit prices further."

 

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The most eye-catching thing I saw in this article was that I should buy Boryeong earthenware..

 

I need to buy a good quality, domestically made earthenware pot~

 

It probably isn't an advertisement article for classical strategies... Hopefully not, haha.