Over the past 40 years, China's distribution channels have undergone dramatic changes. We are at a crossroads of accelerating brand elimination, continuous channel iteration, and emerging new technologies, with rapid change.
On August 19, at the 7th China FMCG Conference, Wu Dinian, founder of Mingdi Investment/Mingdi Empowerment, reviewed the 40-year evolution of China's channels under the title 'Channel Transformation X Product Innovation.' Using the growth of companies like Master Kong as a starting point, and drawing on his decades of practical experience traveling across China's urban and rural markets, he outlined the upgrade path of wholesale and retail, as well as the core driving forces behind it.
The following is a transcript of his speech (with some deletions), compiled by New Distribution for our readers.
I joined Master Kong in 1994, when the company's annual sales were only just over 400 million yuan. In 2000, as National Sales Director for the Instant Noodles Business Group, I led the achievement of 7 billion yuan in sales and participated in planning major channel transformations such as 'channel refinement.' In 2001, I returned to my hometown and led the strategic transformation of Yashili, steering this traditional preserved fruit company into the infant formula track, ultimately increasing annual sales from 370 million to 7 billion yuan, making it a leading brand in the industry.
I have traveled to nearly 10,000 townships and over 1,200 counties across China. You could say I have measured the capillaries of China's market with my own feet. Even now, I visit an average of 10 towns, 2 counties, and 1 prefecture-level city each month, continuously sensing changes at the grassroots.
China's 40-Year Wholesale and Retail Upgrade Path
Looking back, the evolution of China's channels is essentially the reconstruction of the distribution system and business model innovation. I divide it into five stages, each with a ten-year cycle:
Stage 1 (1980-early 1990s): Foundation Period
At the beginning of reform and opening up, state-owned enterprises transitioned to market economies. Shenzhen gave birth to China's first batch of wholesale markets and mom-and-pop stores. Hong Kong, Taiwanese, and foreign investors flooded in, the income of migrant workers rose rapidly, consumer demand exploded, and a large number of small retail outlets emerged. The supporting supply chain began to form, and wholesale markets came into being—from Shenzhen and Guangzhou, extending along the Beijing-Guangzhou line to Changsha Gaoqiao, Zhengzhou Bairong, and others.
For example, Pangdonglai's success is precisely because it is rooted in cities and counties, backed by mature first-tier wholesale markets like Zhengzhou, with a very strong supply chain.
The core of this stage was solving the problem of 'availability,' but brand owners had almost no awareness of the terminals.
Stage 2 (mid-1990s-early 2000s): Refinement Period
Brand owners began to take proactive control of channels. In 1998, Master Kong took the lead in implementing 'channel refinement.' After a pilot in Nanjing, it quickly replicated across the country. We divided China's 2,800 counties into five levels by population size, and prefecture-level cities into four levels, improving channel efficiency through standardization and formatting, and deploying sales teams for in-depth service.
During the same period, Coca-Cola and P&G were also making similar attempts, but mainly focused on first- and second-tier cities. As a local enterprise, Master Kong went directly to the grassroots. During this period, the distributor group began to grow rapidly.
Stage 3 (mid-2000s-early 2010s): Impact Period
Urbanization drove hypermarkets to become the main channel, and e-commerce began to sprout. Foreign supermarkets like Walmart and Carrefour entered, and local enterprises like Yonghui rose, but expansion from South China to East China still took time. Distributors began to be squeezed by KA channels—supermarkets had high markup rates, high back-end fees, long payment cycles, and strong retail power, so brand resources began to tilt toward KA.
Stage 4 (mid-2010s-early 2020s): Disruption Period
E-commerce exploded, social media rose, and convenience stores ran wild. The popularity of smartphones drove traditional e-commerce to mobile, and both foot traffic and sales in traditional KAs declined. Channel fragmentation had already begun to show.
Stage 5 (2020-present): Integration and Reconstruction Period
The pandemic profoundly changed consumption scenarios. New business models emerged, driven by big data, AI, IoT, and modern logistics. Traffic in first- and second-tier markets peaked, and companies began to turn to third- and fourth-tier markets, but the environment is extremely fragmented and diversified, with 'omnichannel operation' becoming a key term.
An obvious trend is that the number of distributors is decreasing, but efficiency is improving. For example, Master Kong has reduced its distributors by the thousands, but total sales have not declined.
Channels are always evolving toward lower cost and higher efficiency—from wholesale markets and mom-and-pop stores to convenience stores, e-commerce, interest e-commerce, and instant retail. In the future, wholesale markets will also move toward smart agricultural wholesale, competing on data and logistics capabilities.
Looking at the past 40 years, four core elements have always driven channel transformation:
Demographic changes, such as Generation Z bringing new consumption scenarios;
Upgrades in transportation and infrastructure;
Rapid technological iteration;
Urbanization process.
Retail Industry Transformation: A Four-Dimensional Reconstruction of Capital, Technology, and Consumption
First, why has traditional KA become so difficult?
Model aging and cost structure imbalance: Stores opened early face aging scenarios and slow online expansion. Their model of 'high front-end markup + high back-end fees' makes terminal retail prices uncompetitive, while frequent and excessive promotions shift losses to brand owners, further damaging supplier-retailer relationships.
Internal management and capital mismatch: High rents, low operational efficiency, and even internal corruption raise operating costs. More critically, many traditional supermarket owners misappropriate cash flow that should be paid to suppliers for other investments, causing serious payment arrears, making it difficult to obtain best-selling products and good sources, creating a vicious cycle.
External channel squeeze and category flight: They face not only multiple pressures from traditional e-commerce, interest e-commerce, community group buying, chain convenience stores, and premium supermarkets, but also the continuous 'flight' of core categories—from early clothing, home appliances, and mother-and-baby products to today's daily chemicals and snacks. These sales-supporting categories are shifting to other more efficient channels.
Function substitution: In the past, hypermarkets had the social and leisure functions of a 'small complex,' but now they have been completely replaced by real urban complexes (such as Wanda Plaza) and rich online entertainment options.
Next, look at the urbanization process, market fragmentation, and channel reconstruction.
Urbanization stratification and channel sinking: China's urbanization rate rose from 17.9% in 1978 to about 67% in 2024, and cities at different tiers have evolved distinct channel forms.
First-tier cities: dominated by membership stores (like Sam's Club), instant retail (like Meituan Flash Purchase), and dense convenience store networks.
New first-tier/second-tier cities: mainly renovated hypermarkets, community fresh food stores, and chain convenience stores.
Third- and fourth-tier cities: dominated by local leading supermarkets, with the beginning of chain convenience store sinking.
County towns and townships: the market is occupied by local leaders and traditional supermarkets, while emerging local community stores are growing rapidly, with an estimated 100,000 new openings.
All this so-called speed is underpinned by disruptive empowerment from transportation and technology.
Then, Generation Z redefines consumption logic. The new generation of consumers shows distinct characteristics:
Extreme efficiency: 30-minute ultra-fast delivery becomes the standard.
Circle identity: consumption becomes a way to find community belonging.
Health revolution and experience upgrade: more attention to ingredients and health, seeking interaction and pleasure in the consumption process.
C2M customization: shifting from 'passive acceptance' to 'active participation,' desiring personalized products.
Based on this, I summarize the core laws and the focus of future competition.
Matthew effect deepening: Leading companies, with capital and technology advantages, continue to widen their moats, and market concentration will continue to increase.
Growth engine shift: The growth dividend in third- and fourth-tier markets still comes from further urbanization.
Technology driven by Generation Z: The needs of the mainstream consumer group force technological iteration and business model innovation.
Future competition will focus on three cores:
The radius of humanized service: On the basis of efficiency, whoever can provide warmer, closer community-based services will win the market. This is especially important in urban markets.
Localized supply chain capability: Whether one can build a flexible, efficient local supply chain for the unique needs of regional markets determines the depth and response speed of the channel.
Return to the 'dialogue between people and things': Competition will eventually transcend the simple game of traffic and algorithms, moving toward a brand era that truly understands consumer needs and establishes emotional connections with products.
Snack Chain and Channel Reconstruction
The explosive growth of snack channels is essentially an efficiency-driven price revolution. They rise strongly with prices 30% to 50% lower than traditional supermarkets, behind which is the extreme compression of brand premiums and channel profits.
This directly triggers a layer-by-layer collapse of industry profits—terminal price pressure transmits to the agency level, and gross margins drop from 25% to 8%. What does that mean? Distributors are getting harder because efficiency is increasing, gross margin space is shrinking, and if efficiency and costs cannot be further reduced, it will be difficult to survive.
The future way out lies in repositioning and deep transformation. Distributors may upgrade to regional supply chain service providers, building B2B platforms serving small and medium terminals; or they may deepen their focus on high-threshold categories such as short-shelf-life and cold chain, moving toward specialization and regionalization; some may become local landing service providers for live-streaming e-commerce. In addition, those relying on special channels such as schools and prisons can also find survival space in niche tracks.
Evolution of Online Channels and Communication
From shelf e-commerce to omnichannel retail, media and communication channels have undergone disruptive reconstruction.
In this process, we also face deep contradictions: traffic is increasingly decentralized, consumer decision-making paths are fragmented, platform roles are constantly alienated, and data has become the 'gold' of the new era—whoever holds data holds the initiative. But along with this come loss of price system control, high traffic costs, and accelerated user content fatigue...
The 20-year evolution of online channels is a process where transaction costs approach zero infinitely. Information gaps, logistics gaps, and payment gaps are each erased by technology, and business competition returns to the essence: either create price advantages through extreme efficiency like Pinduoduo, or achieve brand meaning premium through emotional connection.
Product Transformation Revelations
Products and services are always everything for a brand. In the FMCG industry, high-frequency consumption and user repurchase are the underlying logic. Based on the classic 4P theory, we can reconstruct it like this: on the left, play with price; on the right, do promotion; brand is the top, channel is the foundation.
A recent McKinsey report reveals four key shifts in consumer behavior:
Time is more valuable than money: the premium of convenience stores is essentially the cost of time;
From 'buy when you see it' to 'buy when you trust it': trust becomes new traffic;
From 'I want to understand you' to 'you come to understand me': consumers expect to be deeply understood;
Save money on survival, spend money on life: consumers will compare prices of tissues but are willing to pay a premium for emotional value.
These shifts mark a fundamental reconstruction of business logic: in the past, we relied on the push logic of 'big single product + big channel + big marketing,' but now we have entered the 'pull era'—starting from precise audience and scenario needs, through data-driven and channel combinations, to achieve large-scale reach and conversion.
Opening up omnichannel data and making consumers 'product managers' is easier said than done. Lei Jun did it; Xiaomi's initial product managers were fans.
Channels are also forcing product innovation toward customization. The attributes of different channels determine the logic of product differentiation:
Membership stores (like Sam's Club and Costco) pursue 'quality-price ratio'—'quality' comes before 'price.' Sam's Club is not about 'expensive things,' but 'helping the rich save money.' It reduces decision costs for quality-conscious families through strict selection and high turnover;
Hard discount stores/snack stores (like Aldi and Snacks Busy) achieve extreme efficiency and price advantages through minimal SKUs, de-branding, and private labels;
Instant retail (like Meituan Flash Purchase and JD Daojia) provides 'fast and accurate' home delivery services for 'time-sensitive' people, essentially 'reconstructing consumption scenarios with immediacy.'
Regional retail benchmarks like Pangdonglai, on the other hand, deeply cultivate local markets, selecting the best products for city and county consumers, all reflecting clear business logic and strategic positioning.
Future Revelations and Trends
Looking ahead, three major trends are very clear:
- Hyper-personalization;
- Sustainable consumerism;
- The rise of AI-native brands.
For sustainable consumerism, for example, Mastercard once ran a marketing campaign when the Statue of Liberty needed repairs but there was no money. Mastercard came up with an idea: for every card opened, they would contribute to the fund to repair the Statue of Liberty. This was cause marketing, and it was very successful. I believe China will produce many classic cases in cause marketing.
Additionally, some suggestions for brand owners:
Break down departmental walls and promote an omnichannel 'one chessboard' strategic plan;
Invest in a data middle platform to cultivate a data culture and usage capability within the enterprise;
Establish agile innovation mechanisms: small team operations, rapid iteration, digital processes;
Set up special teams for emerging channels like Sam's Club, Pangdonglai, and instant retail to achieve rapid response.
The golden age of China's FMCG is not over; it has just arrived in a different way. Over the past 40 years, we have relied on channel expansion and refinement for growth; in the future, growth will belong to those brands that truly understand consumers, make good use of data and technology, and can innovate products at the 'speed of light.'
Remember: there has never been so-called new retail or old retail; there is only one kind of retail, called 'retail that understands consumers.'