From the proliferation of B2B platforms in recent years to the deepening offline expansion by e-commerce giants like JD.com and Alibaba, changes in the retail landscape have always kept distributors on edge. As the crucial link in the supply chain closest to consumers, the direction of terminal retail directly determines the survival and growth of distributors. Despite having weathered many close calls, in 2017—a year of significant retail transformation—distributors must confront a stark reality: the crisis has arrived.

Giants Enter the Fray, Accelerating Retail Landscape Shifts

In recent years, the moves by e-commerce giants like JD.com and Alibaba to expand into traditional channels have been widely discussed, and the recent buzz about Tmall's plan to franchise one million Tmall convenience stores has reached new heights.

Alibaba requires franchise stores to be at least 50 square meters, with a deposit of 10,000 yuan, an annual technical service fee of 3,999 yuan, and a minimum monthly purchase amount of 10,000 yuan. In return, stores receive the "Tmall" brand authorization, boosting brand recognition and attracting foot traffic; they can enjoy up to 4,800 yuan in super red packets annually, stackable with other retail platform discounts; and they receive a smart store system and related hardware, fully integrating with the internet.

If one million stores were to join, Alibaba would collect 14 billion yuan in deposits and service fees, with annual turnover conservatively estimated at over 100 billion yuan—a substantial cash flow. Bailian, a typical retail channel player, has also made efforts to reposition itself: large stores of 3,000–5,000 square meters are shrinking, while community stores of several hundred square meters have become hot commodities.

Tmall convenience stores feature dedicated Tmall counters highlighting best-selling products.

Going forward, Bailian will adopt three development models: lifestyle centers of 3,000–5,000 square meters, neighborhood stores of 500–800 square meters, and new convenience stores under 200 square meters. Commercial neighborhood stores, located in business districts, focus on dining and immediate sales, while community neighborhood stores, located in residential areas, emphasize fresh produce, snacks, and daily necessities. These signs indicate that major players are accelerating their deep layout of retail terminals, ushering in a new phase of competition in the retail market.

Convenience, Premium Products, and Fresh Food to Drive Retail Upgrades

The influx of giants will inevitably trigger changes in traditional channels. The days of waiting passively are over; attracting foot traffic is now the key to competition. So where does traffic come from? In terms of category structure, low-value products drive traffic to high-value products, and fast-moving products drive traffic to slower-moving ones, with fresh produce being the most typical example.

With the acceleration of the real estate industry, the density of wet markets has decreased significantly, and parking around them is inconvenient, causing great trouble for consumers. Additionally, the faster pace of life means many consumers get off work late and may not have time to visit wet markets. Coupled with value-added services like online ordering and offline delivery, consumer demand for fresh produce in community stores has grown robustly, making it a popular category in stores.

Similarly, community stores of 300–500 square meters have strong growth potential; if they can cover 1,000–1,500 households, they can thrive.

In terms of category structure, besides fresh produce, community stores will also stock many premium items, with imported products accounting for over 30%. Domestic products are also trending toward premiumization, and single categories will have broad coverage; for example, bottled water will span a price range from 1 to 10 yuan, reaching a wider consumer base. In contrast, general merchandise will be streamlined, focusing only on fast-moving daily necessities, accounting for about 5% of the assortment.

Fresh-food-themed stores like Hema Fresh are popular among consumers.

Overall, these stores are not large in area but are well-stocked, with roughly 4,000–5,000 SKUs and annual turnover reaching 13–15 million yuan. In first-tier cities, if a store's sales per square meter fall below 20,000 yuan per square meter per year, it will likely be eliminated within two years; aiming for 40,000–50,000 yuan per square meter per year is necessary for survival, with 100,000 yuan per square meter per year as the ultimate goal.

Two Strategies to Enhance Distributors' Bargaining Power

Changes in the retail landscape mean that distributors, as suppliers, will also face new challenges. In the next 3–5 years, how can they adapt to the new retail environment?

Become a Qualified Supplier in the New Environment. Many distributors have done well regionally but may lack port resources; the entry of giants will shrink their living space. However, whether it's JD.com or Alibaba, after seizing ports, they may not handle delivery themselves. If they need suppliers, they will certainly select those that are qualified in certain aspects. Becoming a qualified supplier is a viable path. What makes a supplier qualified?

On one hand, having a warehouse of a certain scale is a major advantage and a primary condition for becoming a qualified supplier; renting or having too small a warehouse cannot meet the growing delivery needs of e-commerce giants. Moreover, from a macro perspective, warehouses have become a scarce resource in many cities, while demand for urban delivery is increasing. Therefore, whether from an investment or survival standpoint, owning a warehouse of a certain scale is a sure-win proposition.

On the other hand, distributors must either be large in scale or have a say in a specific category. For example, in bottled water, controlling the most popular local brands while also promoting new products gives them stronger bargaining power. In the future, single-product supply may no longer exist because retail terminals are becoming more powerful and may force you out for various reasons. Distributors acting alone are weak; forming alliances could be a good approach, though it is difficult to implement in the Chinese market.

Hold Mature Brands. Looking at the development of terminal stores, once stores of 300–500 square meters become mainstream, space will be limited, with only 5,000 SKUs. Every position will become prime real estate; promotional staff and end-cap displays will disappear, and marketing methods will change accordingly. Scenario-based marketing will become the trend, and promotion will become increasingly difficult. At that point, consumers will prefer familiar brands. It is advisable for distributors to plan ahead, strengthen brand promotion efforts, build brand equity in their regions, and when selecting products in the future, choose companies skilled in promotion to reduce sell-through pressure.

Moreover, with the standardized development of retail terminals, formal procedures like VAT invoices will also spread. These changes will increase operational difficulty for distributors who are not adept at change. It is particularly important to remind traditional distributors not to rely on terminal service advantages with a sense of complacency, because services cost money; if profits cannot support terminal services, the service advantage will cease to exist.

The wave of retail transformation is sweeping in, and the pace of change is faster than the industry imagined. The crises and opportunities facing distributors are already emerging. Facing the future retail environment, if pessimistic, a batch of distributors who cannot meet new demands will be eliminated; if optimistic, the new environment creates new development opportunities that require effort to adapt and embrace. Only by carefully analyzing and grasping the core market demands can one remain unbeatable in the tide of change.

Source: Food Board

The 2017 (Third) FMCG + Internet Conference will be held in Chongqing in November 2017. Centered on the theme "New Forces, New Ecosystem," the conference will invite 1,000+ distributors, 500+ brand owners, 200+ B2B platform founders, and 100+ investment and financing institutions to jointly explore new chapters of cross-industry integration!

Click the links below to review the highlights of the first and second FMCG + Internet conferences:

2016 "FMCG + Internet" Summit Forum

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