A while ago, I visited the market in Tibet. Local supermarkets in Lhasa and Nyingchi are all learning from Pangdonglai. They have a wide variety of fresh, bakery, and cooked food products, beautiful displays, and lower shelves, greatly improving the shopping environment. It's clear that offline supermarkets are optimizing and upgrading, but there are still many problems. In my personal opinion, the underlying logic of supermarket operations remains confused. When visiting Nyingchi Baiyi Supermarket, a local distributor told me that many of Baiyi's goods were shipped from Zhengzhou Bairong Market, where they have a procurement department at the Zhengzhou Bairong wholesale market. In fact, situations like Baiyi's are very common today. Many local chain supermarkets are engaging in direct sourcing or setting up procurement departments in large wholesale markets, paying cash for goods. Examples include Chengdu's Huafeng or Hai Bawang, Zhengzhou Bairong, and Hunan Gaoqiao. In the northeast, Biut has established Zhenshimei in Shenyang to handle centralized procurement for Biut and other chain supermarkets in the three northeastern provinces. Luoyang Dazhang also directly purchases many products from manufacturers, as does Hubei's Yasi. To get first-hand prices from manufacturers and reduce operating costs, many supermarkets are directly sourcing or establishing supply chain companies to purchase goods, and they have achieved some results. The shift from distributor supply to direct sourcing is significant. Before direct sourcing, three questions must be considered:
Does the supermarket's operations team have the capability to manage products?
Can the procurement team handle product selection and promotion?
Which is more efficient: direct sourcing or distributor supply?
But today, many chain supermarket owners only look at gross margin changes when considering direct sourcing, believing that direct sourcing yields higher gross margins than distributor supply—in other words, that direct sourcing prices are lower. I believe that to compare prices, you must factor in the payment terms, promotional expenses, and costs of handling old-date products that distributors bear, as well as the distribution costs of direct sourcing. If you pay distributors cash on delivery, charge no fees, and don't require them to handle after-sales, I'm sure all distributors would lower your supply prices. Direct sourcing is a trend, but do all products need to be directly sourced? How do you evaluate the efficiency of direct sourcing versus distributor delivery? How should new products be sourced? When adopting a direct sourcing strategy, how should procurement KPIs be set? How can supermarket operations be improved? These need systematic consideration; otherwise, the cost of direct sourcing may be higher than distributor supply!
What to Source?
When I visited markets in Shandong, Henan, and northern Jiangsu, I saw many local supermarkets displaying unbranded products on their best shelves, end caps, and stack bases. The dates showed they were near expiry and being sold at special prices. Sales staff said these were directly sourced items. This kind of direct sourcing sacrifices profit and brings negative reviews: poor product quality and lack of freshness. How to avoid these problems?
- Analyze your supermarket's sales data before direct sourcing:
- Sales share, turnover rate, and gross margin for each major category;
- Sales share, turnover rate, gross margin, shrinkage, and fees for secondary categories. With this data, combined with your shelf space and other display resources, as well as the number of brands and SKUs already in the store, plan how many brands to introduce in each secondary category, how many SKUs per brand, which categories can be eliminated, which categories need fewer brands, and which brand SKUs should be delisted. The basis can be the sales share of each category, or you can consider gross margin and turnover rate alongside sales share. The goal is category completeness, not a large number of brands. For categories with low sales share and low turnover, limit the number of brands and SKUs; don't just look at gross margin.
2. How to Avoid Pitfalls in New Product Selection
Many supermarkets directly source a pile of miscellaneous brands, thinking these are new products because they are not yet available in the local market. Of course, they are new, but are they new products your supermarket needs? Before selecting new products, first assess the composition, spending power, and preferences of consumers around your supermarket: Are the surrounding residents mainly civil servants or old residential communities? Is it a high-end community or affordable housing? What is the proportion of young people? This data analysis is a prerequisite for introducing new products. With this data, you also need to visit excellent supermarkets in similar cities to see which new brands and products they are selling, the sales data of these new brands and new products from old brands, and the purchase prices. I believe procurement staff can obtain this data. With it, direct sourcing accuracy will improve significantly. After determining the new brands and products to introduce, also check the live-streaming prices on Douyin and Xiaohongshu, product selling points, sales data, and consumer reviews to select the best-selling items from these brands. When introducing a new brand for the first time, focus on core items. Once sales data is good, gradually increase SKUs. Calculate your gross margin by comparing the prices you get with Douyin sales prices. With this preparation, the success rate of introducing new products will greatly increase.
How to Promote New Products?
When Sam's Club and COSTCO launch new food products, they pair them with consumer tasting promotions. Pangdonglai and Dazhang also particularly hope suppliers can provide tasting promotions. As long as suppliers provide promotional staff and tasting samples, supermarkets usually offer free space to support. Walmart also does well in new product promotion, using PDQ special displays, display boards, and APP promotional resources to drive new product sales. If a supermarket directly sources from a wholesale market or through a supply chain company, who will promote these newly introduced products? Will the supermarket arrange its own promotional staff, or will it contact the brand's marketing department? If a supermarket only puts new products on shelves without consumer promotion, then direct sourcing is not suitable for new products—they will become dead stock! Influential retail brands like Sam's and Pangdonglai rely on consumer tastings to promote new products. For an ordinary chain supermarket that only spends money buying goods at wholesale markets, it's better not to source new products directly; rely on distributors and brands instead! Because you lack the capability to promote new products.
Shortcomings of Direct Sourcing in Chinese Retail Enterprises
Today, many procurement staff in Chinese retail enterprises don't understand products. Their main job is negotiating fees with suppliers, figuring out how to make suppliers pay more, and extending payment terms. Direct sourcing means the supermarket must bear risks itself and cannot survive by exploiting distributors. The focus must shift from suppliers to consumers: study consumer buying habits, choose products with good value for money that consumers like, and make money by selling products. This shift in retail's underlying logic cannot be achieved overnight. First, supermarkets need a procurement team that understands products, but building such a team is a relatively long process, which also means direct sourcing is a long process and cannot be rushed. Building a professional procurement team is a top-priority project in retail enterprises, as seen with ALDI in Germany, TRADER JOE'S in the US, and Hema and Pangdonglai in China. Today, most procurement staff in Chinese retail enterprises sit in offices negotiating contracts and selecting products from those offered by suppliers. This approach inevitably leads to product homogenization and price wars. In contrast, excellent procurement teams at Sam's and Hema spend much time co-creating products with core suppliers' R&D, product, market, and sales teams, discussing promotion plans. They select ingredients, research formulas, production processes, and packaging together. Products co-created this way have uniqueness and pricing power. They often visit supplier factories to understand product characteristics and production processes, and go to raw material bases to learn about soil and climate conditions. They also regularly conduct collective tests on new or developed products, benchmarking against competitors' products to build their own product advantages... Direct sourcing is not just placing a few people in a wholesale market to select some products.
How to Calculate Direct Sourcing Profits
Products only generate profit when sold. The difference between retail price and purchase price is just gross margin. Many owners only see increased gross margin from direct sourcing without considering whether profit has increased. How should profits from direct-sourced goods be compared with those from distributor-supplied goods? Generally, people consider logistics, distribution, warehousing costs, and capital occupation costs. But the biggest costs are the occupation of display space, after-sales handling, and promotional activity investments. Direct-sourced products are usually given the best display positions, and individual SKUs have larger facing areas than distributor-supplied products. Special display positions like stack bases and end caps are also used for direct-sourced products. These displays have costs. You need to consider whether the sales per square foot of these products are higher than those of distributor-supplied products. If you placed distributor-delivered products in the display positions occupied by direct-sourced products, would they generate more sales and profit? I believe many supermarkets have not done this comparative analysis. Additionally, consumer tastings or other brand promotion activities help product sell-through and improve consumer satisfaction, but these activities cost money. After switching from distributors to direct sourcing, manufacturers and distributors generally no longer support these costs, so they must be included. The biggest risk is handling old-date products. Previously, distributors handled these issues—they would arrange promotions or transfer them to other channels. Now the supermarket must handle them itself. Procurement is only responsible for buying, but these slow-moving products affect the store operations team's KPIs. They can only use the store's best display resources to clear old-date products, which hurts store sales performance and gives consumers a bad impression: the store isn't doing well, and products aren't fresh. Biut's general manager Meng Fanzhong said: Biut is not about removing middlemen, but about removing inefficient middlemen. If middlemen are more efficient than our own operations, why would we remove them? Today, Pangdonglai, Sam's, and COSTCO all have middlemen. So don't mechanically learn from Pangdonglai or Dazhang. Direct sourcing can be done, but you must comprehensively evaluate whether direct sourcing or distributor supply is more cost-effective, rather than mechanically copying.
How to Set KPIs for Direct Sourcing Departments
The four core elements of supermarket operations are product, pricing, display, and promotion, with product being the core. Direct sourcing targets product and pricing. It can speed up new product introduction and lower retail prices, but you must also consider whether there is space to display new products. Centralized chain supermarkets like FamilyMart, Walmart, and Hema only consider introducing new products when there is display space in stores. The shelf location and number of facings for each product are uniformly set by headquarters. Promotion plans for new products are also planned with suppliers when procurement introduces them. For direct-sourced products, I think caution is essential. Consider four dimensions: new product suitability, price, display, and promotion. What are the best-selling items of the brands you introduce? What are the product's selling points? At what price does it sell best? What advantages does it have over current products? How will you communicate these advantages to consumers? These are all tasks procurement must do. Based on the above analysis, I believe direct sourcing departments need to set standards for direct-sourced products, such as gross margin, turnover rate, and sales per square foot for each category. Essential high-frequency products and traffic drivers can be treated differently. For new products introduced via direct sourcing, if they fail to meet the above three indicators, quickly delist them. Those that meet the indicators can be converted to regular products. Finally, evaluate each buyer based on the overall score of the products they introduce, and assess their product selection ability by the number of products that convert to regular products. Setting these KPIs requires a data collection and analysis system and a data analysis model to quickly evaluate each buyer's performance. Without a scientific KPI assessment system, corruption can easily breed. Simple anti-corruption measures are difficult. With specific product return analysis, you can promptly make reasonable assessments of buyers, forcing them to work within the system. Even suppliers with good relationships can only introduce products that sell well and meet the company's profit requirements, thus protecting the company's interests. Only with scientific evaluation of new products introduced via direct sourcing can you manage these new products well, and combine store sales data analysis to decide how many new brands to introduce and which items from each brand.
Recommendation: Operate New Products Through Distributors
New products fall into three categories: new categories, new brands, and new products. For these, if existing suppliers handle them, operate through existing suppliers to solve promotion and after-sales issues. If they are not from existing suppliers, I suggest choosing a supplier with new product promotion capabilities and having them act as agents for these new brands to introduce new products to the supermarket. This is the typical approach used by excellent local chain supermarkets like Pangdonglai and Xinyulou. For pricing, consider your supermarket's payment terms and fee structure. If you can pay suppliers cash on delivery and charge no fees, I believe distributors will definitely give you low prices and also secure manufacturer promotional resources for new product promotions. This way, supermarket risk is relatively controllable and profits are guaranteed, which is better than cash purchasing at wholesale markets. If the new product gains traction after a period of promotion and meets the company's direct sourcing standards, it can later be converted to direct sourcing, allowing direct cooperation with the manufacturer. If the manufacturer has corresponding business personnel to liaise, then follow-up maintenance of the product is guaranteed.
Recommendations for New Product Promotion
Today, many offline supermarkets do not have a new product zone. New products are placed with old products according to category plans. Better-performing stores place a standing sign in front of or behind the new product shelf, labeling it as new. Even better stores write the product's selling points on the sign. Introducing new products must be accompanied by appropriate display and promotional resources. This is a process of interacting with consumers. Offline supermarkets do business with people around the store. Introducing new products is to give them freshness, create shopping impulse, and increase their visit frequency. If you just place new products on shelves like ordinary products, how can consumers find them among thousands of products? TRADER JOE'S founder, in addition to providing special displays and in-store promotions for new products, also creates a new product guide and mails it to all members. The speed and richness of new product introductions enhance store competitiveness and consumer goodwill. If most consumers like the new products, it can also increase their satisfaction with the supermarket. New products are important, but promoting them is even more important! Supermarket direct sourcing cannot simply look at price levels. You must comprehensively analyze whether direct sourcing or distributor supply is more efficient. Most new products sourced directly by supermarkets end up as near-expiry items. Before direct sourcing, always consider the store operations team's ability to handle new products. If the store lacks new product operation capability, it's recommended to continue using distributors for supply. If the direct sourcing team lacks standards for direct-sourced products and post-sourcing product assessment standards, the final result will be worse than not direct sourcing at all. I suggest local chain supermarkets view direct sourcing objectively, think more, and avoid detours!