A Disruptive Channel Model Innovation: How It Is Shaking Up the Dairy and Beverage Industry?

"The FMCG industry is getting more and more competitive." In recent years, such sentiments are often heard. It was thought that business would improve in the first year after the pandemic restrictions were lifted, but the market poured cold water on those hopes. According to the "2022-2023 China FMCG Distributor Operating Conditions Survey Report" released by New Distribution, 60.6% of distributors reported a decrease in operating revenue compared to the first half of last year, with 31.9% seeing a decline of more than 20%; 51.7% reported a decrease in profit, with 16.9% experiencing a reduction of more than 20%. Among all FMCG categories, distributors in the dairy and beverage industry are probably facing the most intense competition and the highest level of involution. In the current environment, distributors find it unprofitable to push big single products, new products have low sales, and with the economic downturn and slow offline response, they can easily end up with unsold, near-expiry, or even expired products. Dairy and beverages are short-shelf-life products; ambient dairy and beverages have a shelf life of about 6 months, while low-temperature products have even shorter shelf lives. Dealing with such products alone costs a significant amount each year. Faced with mountains of inventory, paper-thin gross margins, and rising labor and operational costs, dairy and beverage distributors seem to have few options. But whenever the market reaches extreme levels of involution, a major innovation emerges. According to New Distribution, in the past two years, a disruptive channel model innovation has been stirring up the dairy and beverage industry. Recently, New Distribution invited the operator of this model, Li Lei, President of Liaocheng Haojiayi Bio-Dairy Co., Ltd., to discuss how to break through the survival困境 of dairy distributors through business model innovation. How to Break Through the Survival Dilemma of Dairy Distributors Over the three years of the pandemic, China has accelerated its entry into the discount era. Consumers, especially young ones, have begun to pursue extreme cost-effectiveness. The era of making easy money by simply代理 a good brand is completely over. A wave of new channels under the banner of "low prices" has emerged, including e-commerce, community group buying, and discount stores. Most of them bypass distributors and negotiate directly with manufacturers. The living space for traditional distributors is shrinking, and many are gradually fading from the stage of history. Recently, I visited a dairy distributor who represents a first-tier brand. The business scale is 40-50 million yuan, and one would think they should make at least 1 million yuan in profit a year. However, the distributor said they are just a poor worker; even after including target achievement rebates, they only earn 1-2 percentage points a year. For this 40 million yuan business, considering accounts receivable and working capital, about 4 million yuan is needed to drive it. After deducting employee wages, only 400,000 yuan in net profit remains. In contrast, many listed companies have profits of ten or even dozens of percentage points, but their distributors earn 400,000 yuan a year while needing 4 million yuan in capital to drive the business. Li Lei said, "Business competition is about win-win, not one-sided victory. It's not that if the company is strong, we can be aggressive; that's called 'the big store bullies the customer.' Large enterprises with such high profits should first ensure their ecosystem partners make money. That's the basic logic of business." From a market perspective, distributors mainly do business with offline retail stores, but in recent years, traditional supermarkets and small shops have seen continuous declines, even facing the risk of closure. Observing the business formats that are still growing in today's market—platform e-commerce, interest e-commerce, community group buying, discount stores—it's not hard to see that they all share two common points: Extremely simple business models, returning to the essence of business. No pile of fees like in hypermarkets; as long as you have extreme prices and extreme products, you can cooperate. Extreme supply chain, returning to user-centricity. With the economic downturn, consumers prefer high-quality, low-priced good products. In the traditional distribution model, products pass from the manufacturer through distributors to terminal stores and finally to consumers. Due to the low efficiency of the entire chain, each level adds a markup. If you want to sell at a lower price, you either integrate the supply chain to reduce product costs or shorten the chain. One High, One Low, One Model User-centricity brings an extreme supply chain Within Haojiayi, Li Lei defines himself as the Chief Product Officer. He believes the underlying logic of marketing is to make good products; a good product beats all marketing. He established the "One Low, One High, One Model" product strategy: Either lead in cost, making extremely low-priced good products; or lead in R&D, making product innovations; or lead in model, creating new business models. One Low: Cost Leadership, Making Extremely Low-Priced Good Products Haojiayi has always been committed to letting ordinary people spend the least money to buy the best products. In 2018, Haojiayi introduced the Peppa Pig IP and launched a Peppa Pig lactic acid bacteria drink, sold in packs of 5 bottles at a retail price of 12 yuan. With a household-name IP and an attractive price, the product was a hit upon launch. Previously, the lactic acid bacteria category was not well-received in local supermarkets due to low sales. After Peppa Pig lactic acid bacteria opened the market and reached a certain scale, Haojiayi started from raw materials, processing plants, and packaging plants to streamline the chain and compress costs through large-scale procurement. Later, in 2022, they launched Changpao lactic acid bacteria, selling 15 bottles for 9.9 yuan. Good quality and extremely low prices led to sales of 120,000 yuan in 4 days, and at Jiajiayue supermarket, they achieved 800,000 yuan in one promotion period, with a single store selling 120,000 yuan, turning a small category into a big one. This established the concept of providing consumers with extremely low-priced, high-quality products through supply chain integration. Changpao's cup yogurt, with 90% raw milk content and 3.0g protein per 100g, leads the 4.9 yuan era of 100% raw milk cup yogurt. % Coffee, using Arabica coffee beans and imported milk sources, 0 sugar, 0 fat, 0 calories, 9.9 yuan for 4 boxes to achieve coffee freedom. At Laiyoupin, it achieved a monthly sales of 288,000 boxes. Wen Chake sugar-free tea, using a 37g high-end bottle packaging, aseptic cold filling, original leaf extraction, 0 sugar, 0 calories, 0 energy, 3 yuan for tea instead of water—you can buy a bottle of tea for the price of a bottle of water. One High: Product Innovation, R&D Leadership In Haojiayi's product line, besides high-quality low-priced products, there are also innovative products with R&D leadership. For example, the additive-free whole grain and tuber drink—Sangu San Shu—one bottle is equivalent to about 100 grams of whole grains and tubers, providing scientific diet and balanced nutrition. They also set the industry standard for whole grain and tuber drinks. Self-owned factory, professional R&D team. Currently, they have developed 10 innovative products, such as millet pumpkin yam drink, corn latte, high-fiber coffee, and black sesame oat milk. Since 2023, all products have no preservatives added, and they print "If you wouldn't give the product to your parents, don't give it to consumers" on the packaging. In addition to developing unique categories, they also developed a unique bottle shape—Patriotic Bottle, Burning Explosion Can. Ran Tongxue uses Chinese premium ingredients and fine coffee. Combining Western learning with Eastern application, let national trend coffee ignite. One Model: Business Model Innovation According to Li Lei, the initial pricing for Changpao yogurt was 9.9 yuan. Because the product was good and profit margins were high, distributors responded quickly, but after distribution, there was little reaction at the terminal. Analyzing the reasons, besides intense competition in the price band, consumers were not willing to pay that price. So they thought: if the product could return to a normal price, such as 4.9 yuan per cup or 9.9 yuan for two cups, this price would be unbeatable at the terminal. But after a series of tests, they found it didn't work.

First, ensure terminal profits; without profits, terminals won't promote.

Second, ensure distributor profits; without profits, distributors won't cooperate.

Third, ensure company profits; without profits, the company cannot operate normally. So, Haojiayi created a new model, learning from franchise and chain stores, charging a service fee based on population. For example, for a population of 500,000, they charge 5 points, i.e., 2,500 yuan in service fees. In the past, distributors bought goods from manufacturers and would first recover their costs in the first few months, barely making a profit. With this model, the distributor's selling price is the same as others' purchase price. The extreme price allows distributors to avoid competition in the market and promote sales. And the more they sell, the more they benefit from economies of scale, saving a lot on procurement costs, improving bargaining power with upstream and downstream partners, and further enhancing price advantages. Extreme Supply Chain Collaborating with Distributors for a "Money" Future Many people wonder how Haojiayi can ensure quality at such extreme costs. Besides having its own factory, Haojiayi has also made innovations in the operating model of the factory. Taking Wen Chake sugar-free tea as an example, the 37g high-end bottle quality far exceeds common brands on the market, but good packaging also means higher costs. In terms of packaging materials, Haojiayi has extended its reach downstream, making its own bottle preforms and also supplying them externally, further compressing costs. In raw material procurement, many large enterprises have certain payment terms, but Haojiayi pays in cash for large orders, so suppliers are willing to offer more favorable prices, compressing costs from the source. "The internet era is coming to an end, and the supply chain revolution is beginning. What we can do is bring down prices, make products with a user-centric approach, so consumers can buy low-priced good products, stores can make money, distributors can make money, and the company can make money. Such an ecosystem is healthy and sustainable." In Li Lei's view, the manufacturer-distributor relationship should be mutually beneficial and jointly pursue a "money" future. Through this disruptive channel model innovation and the low-priced good products brought by an extreme supply chain, distributors can flex their muscles in any channel. Haojiayi brings new models and new prices to help distributors open channels with products and achieve new growth across all channels. Channels that distributors couldn't do before can now be done with extreme prices. The only requirement for distributors is that they are willing to accept the new model and have a certain level of execution capability. "Adhere to user-centricity, always innovate, and die on the road of innovation." This is Li Lei's attitude towards products and business. Similarly, in an era of great change, distributors should seize opportunities for innovation and pursue high-quality operations. At the recently concluded 9th China FMCG Conference, New Distribution, together with brand owners and channel partners, attempted a supply chain restructuring—the "Extreme Supply Chain" Brand Factory Direct Sourcing Fair. More than twenty outstanding brand owners selected over a hundred high-quality products, and based on "factory prices," established a no-tricks, equal procurement cooperation between manufacturers and distributors. The conference has ended, but the "Extreme Supply Chain" Brand Factory Direct Sourcing Fair continues. Interested friends can follow New Distribution's recent live broadcasts or contact customer service via WeChat for inquiries.