In the first half of 2023, almost every business unit, including manufacturers, distributors, retailers, and platforms, was in a pessimistic atmosphere, full of difficulties and talk of consumption downgrading. This was especially true for the B-end. What is the B-end? It refers to distributors (big B) and retailers (small b). I have relatively little contact with retailers, so I won't discuss them here. I have more contact with distributors, and only a very few are doing well. It must be admitted that the B-end is truly cold, so cold that many distributors have lost confidence. In 2023, when it comes to business difficulty, the FMCG industry's distributor community takes the lead. We feel it firsthand on the front lines; manufacturers' policies are hard to implement through the channel, and we feel that too. However, we also see other phenomena: first, the National Bureau of Statistics reported an 8.2% growth in total retail sales for the first half of the year; second, the first-half financial reports of leading FMCG companies are generally good, with many achieving double growth in revenue and profit. In the first half of this year, while coaching companies, I also felt the "B-end cold." So, I turned to the C-end, going C-first then B, and the results were surprisingly good. The method I used is what I proposed in recent years: "bc integrated promotion." To explain the difference between statistical data and public perception, the National Bureau of Statistics used the term "temperature difference" when releasing the first-half data, which was ridiculed by self-media. Where is the "temperature difference"? From my recent frontline experience, I think "B cold, C hot" is the temperature difference. Manufacturers, distributors, retailers, and platforms are all B-end, and their feelings are correct: the B-end is cold. At the same time, the National Bureau of Statistics data is also correct. Although there is consumption downgrading, in the FMCG field, the C-end as a whole is not cold. This is evidenced by data from various industries. Because distributors are fragmented, although the B-end is cold, its voice is hard to be heard. In 2023, B is cold, C is hot, and distributors are tragic! B-end cold: Three major factors In 2023, after the end of the three-year pandemic, distributors suddenly became the focus of China's commercial transformation. This is rare in business history. Roughly three factors have affected distributors. First, the pandemic's aftermath has hit distributors the hardest. At the beginning of 2023, manufacturers were highly active, deploying personnel and resources intensively, but the terminal was still cold. As a result, distributors became a "barrier lake," caught between manufacturers and distributors. Manufacturers pushed goods to distributors, and distributors couldn't push them down. Of course, this problem is only temporary, but it only takes one more straw to break the camel's back. Second, the end of internet commerce has reached "channel transformation," and channel digitalization is affecting distributors. The internet once claimed to "disintermediate" and eliminate middlemen. Although it didn't eliminate middlemen, it gave rise to a new type of distributor—platform merchants—which has had a huge impact on traditional distributors. At the same time, internet commerce has produced a large number of new retail formats, and their demand for one-stop supply chains cannot be met by traditional distributors. Third, the sudden outbreak of supply chain transformation in 2023 is affecting distributors in a "declared without warning" manner. This includes private labels, discount retail stores, platform-based distributors, and the chain-ization of BC-class stores. Distributors probably didn't even realize they would become the most affected business group in 2023. For so many years, e-commerce stole the spotlight, and the pandemic stole the spotlight. At the beginning of the pandemic's end, manufacturers were stealing the spotlight. Among the three factors, the pandemic's aftermath is temporary, the end of internet commerce is expected, and supply chain transformation is somewhat unexpected. All three factors are negative, so distributors are really having a tough year! Others steal the spotlight at the peak of the wave. In 2023, distributors stole the spotlight but in a tragic way. Distributors: Channel thinking has reached its end In marketing, I have always been optimistic. This time, I cannot be optimistic about the future of distributors. If the C-end is hot, why can't the C-end heat be transmitted to the B-end (distributors)? This reflects the huge changes in China's channels. Let me use an analogy. Previously, the C-end had 10 pies, supplied by 2 B-ends. Now the C-end has 12 pies, but the B-end has 5 or even 10. So, doesn't every B-end feel like there's not enough to eat? This is the first reason for the B-end cold: the diversification and fragmentation of the B-end. China's channels initially had only one type: "large wholesale," through which all FMCG flowed to the terminal. Around 2000, supermarkets (KA) rose strongly in China. This was like the channel going from one to two. At that time, the circulation channel was also lamenting "hard business." As long as new channels divert traffic, old channels will lament "hard business." This is a rule. Around 2010, when e-commerce rose, it also diverted traditional traffic. Thus, the circulation channel and supermarkets simultaneously lamented "hard business." Because the mainstream channels went from two to three. Around 2020, there were more circulation channels. Let's count them: 1. Community group buying (group stores); 2. New retail discount stores; 3. Flash warehouses; 4. "Terminal dual stores" formed by full-chain digitalization—offline stores + online stores; 5. Platform-based distributors (B2B + distributors); 6. Convenience stores. Even B2C model platform e-commerce has spawned multiple formats such as graphic e-commerce, live-streaming e-commerce, interest e-commerce, short-video e-commerce, community social e-commerce, and private domain e-commerce. Under the innovation of a large number of new B2C models, Alibaba has been severely diverted, and its share has dropped sharply. That's why Ma Yun said, "Who isn't having a hard time?" To summarize simply: The circulation channel evolved from one main channel (before 2000) to two main channels (before 2010), then to three main channels (before 2020), and then to "three main channels + more than 10 capillary channels" (after 2020). For the above channel changes, Zhao Bo, founder of New Distribution, has a diagram that visually describes this. I call this situation channel fragmentation. Channel fragmentation is an inevitable result of retail diversification. With so many new channels appearing at the same time, the result is that traffic in every traditional channel is bound to be diverted. If it were just new channels diverting traffic, it would still be manageable. For every new channel, you enter it. The key issue is: Some new channels require "one-stop supply." Traditional KA and small stores may have dozens of suppliers visiting daily, but new channels only require one supplier that can provide "one-stop" service. Traditional distributors must have channel thinking; new retailers require distributors to transform into supply chain thinking. Moreover, many distributors are affected by two factors from manufacturers: first, small regional agency, with limited sales area. Otherwise, it's cross-regional selling; second, many distributors can only do specific channels, not all-channel distributors. In the context of channel diversification and fragmentation, perhaps C-end demand hasn't changed, but every B-end's sales have been affected. Supply chain transformation may be a disaster for distributors Recently, in a live connection with Zhao Bo, founder of New Distribution, I said: Distributors were not "killed" by the internet, but supply chain transformation will really "kill" a considerable number of distributors. Currently, there are four forms of supply chain: first, private labels; second, hard discount stores; third, platform-based distributors; fourth, chain-ization of BC-class stores. The manifestation of supply chain transformation is: direct supply from manufacturers. The essence of supply chain transformation is: de-branded super cost-effectiveness. Since supply chain transformation is direct supply from manufacturers, manufacturers and retailers deal directly, bypassing distributors, and distributors are the most affected. Distributors are not at fault, but they have become the direct "revolution" target of the supply chain revolution. Let's look at the impact of supply chain transformation on distributors item by item. First, the impact of private labels. Currently, private labels are mainly retailer private labels; distributor private labels are negligible. Retailer private labels include those of large KA and alliances of small and medium-sized retailers, such as Ant Alliance, which has 108 retailers and 5,000 SKUs. Private label product categories are often mainly long-tail products. Although they account for a small amount of distributor revenue, they are key products for profitable product portfolios. As long as it's a private label, it must be directly supplied by the manufacturer, bypassing the distributor. This squeezes distributor sales. Next, look at hard discount stores. Hard discount is not the common supermarket discount, but achieving "absolute cost-effectiveness" without discounts. The hard discount stores that broke out in 2023 are "snack discount stores," also directly supplied by manufacturers, bypassing distributors. It is said that the impact on retailers around distributors is about 30%. Retail categories traditionally have long channels, high gross margins, and low brand loyalty, making them important categories for distributor profitability. Then, talk about hard discount stores again. Since World War II, the United States has entered the era of pan-discount stores, and most retail business models have the shadow of discount stores. For example, Walmart in the US is a discount store. Because Western countries like the US only discount at specific times, and discounting is the only promotion method, unlike China where promotions happen every day with various tricks. Hard discount means absolute cost-effectiveness. Pan-hard discount means most retail is hard discount. Finally, talk about BC-class chain-ization. KA drives volume, BC stores drive profit. As a profit strategy for distributors in the past decade or so, it has been affected. The purpose of chain-ization is still direct supply from manufacturers, because small BC-class stores do not have the ability to find direct supply from the source. For supply chain transformation, I have three judgments:
First, China's 10-year supply chain revolution may complete what took the US 90 years; Second, distributors that the internet didn't eliminate will be eliminated by the supply chain revolution, especially those outside first-tier brands; Third, the scale of business affected by the supply chain revolution is similar to e-commerce, exceeding about 1/4 of total physical retail sales.
The supply chain revolution is not unique to China; developed countries experienced it long ago. But China's territory is too vast. Leading FMCG companies need to cover the national market, and the channel's internal levels + external levels are as high as 6 levels. These 6 levels cause significant channel costs, channel circulation time, and channel management issues. In the future, besides leading brands, a large number of non-first-tier brands may be replaced by private labels. The impact of direct supply from manufacturers on distributors will reverse the channel role of distributors. Some people now have a wrong understanding of the supply chain revolution, thinking it's due to consumption downgrading after the pandemic, hence the preference for low prices, discounts, private labels, etc. This is absolutely wrong. The same period in the US was 1946-1964, and in Japan it was the 70s-80s. It was precisely because of the rise of the middle class, the popularization of adult consumer brands, and consumer information that the "brand disenchantment" supply chain revolution occurred. As I defined earlier, the essence of supply chain transformation is "de-branded absolute cost-effectiveness." The supply chain revolution gives birth to a new era of consumption. Distributors: From channel thinking to supply chain thinking Correct diagnosis, correct medicine, cure the disease. These are the three major processes of diagnosis when encountering problems. Attributing the B-end cold to consumption downgrading is a diagnostic method that is doomed to fail to find the right medicine and cure the disease. Among the three major factors analyzed earlier for distributors' poor business, except for the pandemic's aftermath which is temporary and can only be waited out, the other two types of problems have solutions. Traditionally, we divide distributors into four categories: warehousing and distribution distributors (who don't take orders, only do financing and distribution), brand distributors (focusing on one big brand + several combination brands), category distributors (focusing on a specific category, full-category operation), and channel distributors (focusing on a specific channel). Since this year, New Distribution has reported on many excellent distributors and specifically named a new type of distributor—platform-based distributors. Platform-based distributors have performed well this year. Among the above five types of distributors, the first four are typical channel thinking, while platform-based distributors have supply chain thinking. The characteristic of channel thinking is starting from the manufacturer, with the main function being the extension of the manufacturer's functions in the channel. Whatever the manufacturer promotes, the distributor does the same in the channel. The characteristic of supply chain thinking is starting from the consumer or retailer, becoming the supply chain for the retail end. Whatever the consumer needs, the supply chain supplies. During the rapid development of C-end e-commerce in China, we noticed that B-end e-commerce in the US was already very developed. Because American distributors have supply chain thinking. Even in the era without the internet, they achieved platformization through other electronic means. Some people now call platform-based distributors B2B platforms, which is incorrect. As a platform-based distributor, it can be a first-tier distributor for manufacturers, directly supplying terminals; it can be a second-tier distributor, providing one-stop supply to terminals; it can also do private labels; it can even take the lead in chain-izing BC-class stores and then do private labels. The way out for distributors: Platform-based distributors The dual impact of the internet revolution and supply chain revolution on distributors occurred simultaneously after the pandemic. Therefore, the post-pandemic B cold and C hot, although well-founded, is too tragic for distributors. How can tragic distributors avoid being miserable? Whether it's the impact of the internet on distributors or the impact of the supply chain revolution on distributors, both point to a common response: Participate in supply chain transformation, embrace the internet revolution, and become platform-based distributors. Because of the emergence of platform-based distributors, the era of distributor miniaturization will end. Previously, a county-level distributor reaching 50 million, a city-level reaching 100 million, and a provincial capital reaching 200-300 million was already the ceiling. Now platform-based distributors say that 300 million is just the starting point for platform-based distributors. The number of distributors will greatly decrease, concentrating towards large platform-based distributors. With the emergence of platform-based distributors, it can be predicted that FMCG distributors will undergo several major changes:
First, the number of distributors will greatly decrease, and concentration will increase. Except for first-tier brand distributors who will continue to be strong, other distributors will be more difficult. A region will see several large platform merchants and some first-tier brand service providers. Second, platform distributors may develop in other regions and cross-regional mergers and acquisitions may occur. In this case, super-large distributors will emerge. Distributors will move from fragmentation to large-scale. Third, distributor private labels will appear.
Approximately since the 1970s, a phenomenon has appeared in the US: although distributors' total sales are growing, their share of retail is rapidly declining. The emergence of a large number of direct supply from manufacturers is the main reason for the share decline. The above phenomenon has been observed by the New Distribution distributor manufacturer team. From October 9-11, the 5th China FMCG Conference and the 1st China FMCG Distributor Conference will be grandly held in Shenzhen. On the 11th, a special distributor conference will be held, inviting 12 outstanding national distributors as guest speakers, and releasing the industry's first "Distributor Survival and Development Report." Whether you are a distributor or a brand owner, we believe this will be a professional event worth attending!