The buzz around 'overhaul' has been evident over the past six months. Once-glamorous supermarkets have, at some point, become traditional industries—needing transformation and adjustment.

In the last two months, I have visited several suppliers involved in supermarket overhauls. Their downstream clients include those assisted by Pangdonglai and those initiating their own overhauls. They all expressed that this overhaul is not a fleeting trend but a golden opportunity for China's supermarket industry.

During my visits, I noticed that more and more internet-famous and imported products are appearing on physical shelves. Behind this phenomenon, we see: the long-established, brand-led regional distribution networks are facing significant disruption.

Stale Shelves, E-commerce Impact The Decade of Supermarket Resistance to Change In earlier years, foreign retailers entered China, with chains like Carrefour solidifying the business model of China's supermarket industry for over two decades. Then e-commerce began to sprout. In 2003, Taobao launched; in 2009, the 'Double 11' shopping festival was created. Since then, global shopping records have been broken annually on that day. Now, with live-stream selling and Pinduoduo, online shopping has become mainstream. The prosperity of e-commerce is a result of an efficiency revolution, but also of inflated offline prices and stagnant product offerings. In China, despite regional differences, the products on supermarket shelves are generally similar. Take the daily chemical category, for example. In the personal care and cleaning section, you'll find big-name products like Yunnan Baiyao, Zhonghua, Darlie toothpaste, Head & Shoulders, Rejoice, and so on. A daily chemical distributor in Zhengzhou told me: "Why is it getting harder for supermarkets to develop? Before this year, no matter which supermarket you went to, the products on the shelves were almost identical—old and outdated were their hallmark. For instance, before Yonghui's overhaul, the personal care section sold brands like Pechoin and Inoherb. Which young person would buy those now? They wouldn't even look, let alone buy." Nelson Lichtenstein wrote in The Big Box Era: The Future of Retailing: "Big-box stores didn't fall because they were defeated, but because they refused to adapt and were forgotten."

That book was published in 2009, based on the retail industry's challenges from e-commerce. From 2009 to last year, that judgment still holds. It's not that consumers abandoned offline markets, but that offline operations didn't give consumers the right to choose. A daily chemical distributor from Hebei said: "In Shijiazhuang, supermarkets around 2,000 square meters have been unchanged for over a decade, with the same SKUs. But with the current overhaul craze, supermarket owners are visiting and learning, gradually realizing the need to introduce internet-famous and imported products." The relationship between manufacturers and distributors, and between retailers and suppliers, has formed a high-barrier community in the offline product assortment, making it difficult for new brands to enter. Offline retail has the same products across thousands of stores, with a severe lack of self-selection. Chinese supermarkets have been stuck in their ways for over a decade. 'Big and comprehensive' was the label for supermarkets a decade ago, but the products haven't kept up with the times, failing to refresh. So 'Pechoin' and similar brands have sat on shelves for over a decade. It's not that 'Pechoin' and others are bad, but supermarket shelves can't only have them.

Supermarkets Proactively Seek Change Adjusting Product Structure is Key Supermarkets that realize their product structure must change have this year shouted the slogan of returning to the essence of retail. I recently visited several overhauled stores. Take the overhauled Yonghui, for example. Pangdonglai's private-label products have become the biggest traffic drivers. In the early stages of an overhaul, supermarkets need traffic-driving products and gimmicks to give consumers a reason to enter the store. With highly homogeneous products and the same products across thousands of stores, if there's no novelty in the product mix and they only claim to have overhauled, actual foot traffic won't change much. This has been seen in some supermarkets that failed in their self-initiated overhauls, and I won't elaborate further. The addition of Pangdonglai's private-label products has brought some traffic to these overhauled stores. Consumers attracted by Pangdonglai's products find that the supermarket's product structure is indeed different; products previously sold online are now on the shelves. To get closer to younger consumers, these stores' product structure adjustments show two characteristics:

First, strengthen the share of first-tier brands;

Second, introduce best-selling imported brands.

Previously, to cover various supermarket fees, some lower-tier brands were priced artificially high, often relying on promotions and discounts to sell, leading to a 'no promotion, no sale' situation. Now, in overhauled stores, lower-tier brands are eliminated, and first-tier brands are evenly distributed on shelves. End caps are no longer used for new product launches or discounts, only for extra product display, with more emphasis on side shelves. Therefore, we see that assisted overhaul stores almost uniformly change their original display layouts. Secondly, products that were once only available online, in premium supermarkets, or in channels like Watsons are gradually entering traditional supermarkets. Supermarkets are beginning to realize that the core of returning to retail essence is selling what consumers want. This inevitably requires a change in cooperation with upstream suppliers. "In the past, cooperation with supermarkets had a minimum payment period of two months, often exceeding half a year, plus various channel fees. How could prices not be inflated? If prices are high, consumers won't come—it's a vicious cycle." Most quality internet-famous and imported products couldn't enter offline supermarkets due to various fees and long payment cycles. Now that supermarkets are proactively seeking change, this brings business opportunities for intermediaries who operate on a wholesale basis.

Overhaul Drives Boom for Zhengzhou Wholesalers Last year, Zhengzhou was another major area for supermarket owners to visit and learn from, besides Xuchang, which also made the Bairong Market lively. "Starting around April or May this year (2024), many owners came to me with photos of product barcodes from Pangdonglai or overhauled Yonghui, looking for goods," said Mr. Wang of Zhengzhou Bairong. "These supermarket owners or buyers have weak product selection capabilities for internet-famous and imported items. In other words, they don't know which products sell well or how to combine products to make money. Consumers are savvy now; they scan codes with their phones. If the price is higher than online, they won't buy in the supermarket." In Mr. Wang's display, many products are labeled 'Pangdonglai same style,' mostly brands not commonly seen, with German, Korean, and Japanese imports taking up the majority. In overhauled stores, I also noticed some bagged juice drinks that have recently become popular online, placed at the entrance end caps. These products were previously only sold in snack store channels or online. The daily chemical and household cleaning sections are also evident; besides first-tier brands, imported products like Kobayashi Pharmaceutical and Lion occupy significant space in overhauled supermarkets. More and more supermarkets are bypassing regional distributors to self-purchase. There are currently two types of situations:

One is that supermarkets have product selection capabilities and directly buy from wholesalers with cash.

The other is that supermarkets lack product selection capabilities and need suppliers with assembly and selection capabilities to provide one-stop services.

Either way, the choice of internet-famous and imported products will inevitably impact regional distribution networks.

Final Thoughts After a year of discounting and overhauls, offline market share is gradually recovering. Some genuine overhauled stores have achieved relatively good results. According to the '2024 China Shopper Report' jointly released by Kantar Worldpanel and Bain & Company, in the first three quarters of 2024, e-commerce's share of FMCG saw its first negative growth, at -0.6%. When supermarkets can offer more cost-effective and differentiated products, helping consumers filter products, they can regain competitiveness. But the path of transformation is not smooth; many challenges lie ahead. For example, the popularity of Pangdonglai's private-label products in overhauled Yonghui stores seems more like consumers transferring their trust in Pangdonglai to these assisted stores. Once labeled as imitators, how to remove that label in the future is another challenge. Additionally, internet-famous and imported products are often short-term hits; whether these products can be updated and replaced in a timely manner is also a major challenge for supermarkets. On the other hand, as supermarkets change their supply chains, the regional distribution networks jointly maintained by FMCG manufacturers will inevitably be impacted, and this is just the beginning. Where will the FMCG distribution order head? How will manufacturers, distributors, and stores build new cooperative relationships? These are core industry issues for the coming years.

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The 10th China FMCG Innovation Conference Date: March 17-19, 2025 Location: Chengdu, China