In the FMCG industry, retailers are not only the bridge between manufacturers and consumers but also a driving force for the entire industry's development, responsible for completing the 'last mile' of delivering products to consumers—a crucial step.

On August 20, 2024, at the 6th China FMCG Conference hosted by New Distribution, Mr. Meng Fanzhong, Chairman of Beiyoute Commercial Group, delivered a significant presentation titled 'Lost and Found: Return to the Essence,' which resonated with many attendees.

Beiyoute currently operates over 70 chain stores with annual sales of 5.5 billion yuan, providing employment for nearly 10,000 people. Mr. Meng has also received honors such as one of the National Top Ten Outstanding Youth Entrepreneurs.

New Distribution is pleased to present the highlights of his speech for our readers.

What's Wrong with Large Supermarket Chains?

Today's discussion focuses on the theme 'Lost and Found: Return to the Essence.' This title was chosen because the supermarket industry is currently facing difficulties, and the root cause of its decline is its deviation from the essence of its core business.

In recent years, the supermarket industry has generally experienced a downturn, described with terms like 'darkest moment,' 'crossing hurdles,' 'starting over,' 'major reshuffle,' and 'enduring the winter.' What exactly is happening to large supermarket chains?

Let's look at a set of data: among the top 30 supermarkets listed above, in the top 10, except for Walmart/Sam's Club which achieved 10% growth, all others showed declining trends.

Beyond the top 10, Dazhang and Xinyu Lou grew by 10%, while the rest grew by no more than double digits. The red boxes indicate negative growth; 21 out of 30 companies had negative growth, but Beiyoute's sales grew by 18.3% last year.

So why has the supermarket industry fallen into such a state? To find answers, this year I led our company's executives to Japan, Europe, and the United States to understand the real situation of global retail.

We found that despite a domestic narrative that membership stores and discount stores will dominate the market, the reality is that traditional large supermarket chains remain the mainstream globally.

Whether in Belgium, France, the Netherlands, the UK, or Spain, supermarkets hold the largest share, with Carrefour, Tesco, etc., being the biggest players.

Looking at China, data shows that small stores account for 50% of the market, online for 30% (with FMCG only 20%), and chain supermarkets for less than 20%. This shows that China's commercial structure differs from Europe and the US.

Looking back, before foreign supermarket chains entered China, the market consisted of small shops and wholesale outlets with limited space and product variety. When foreign supermarket brands entered China around 1995-1996, they brought one-stop shopping experiences and efficient, low-cost operations, which were seen as symbols of industry progress. Why has it changed today?

Over the past two decades, some foreign supermarkets, led by Carrefour, introduced unnecessary business models that led the Chinese supermarket industry astray, doing many things they shouldn't have.

Essentially, supermarkets make money by selling goods at a markup. But a series of fees—entry fees, end-cap fees, display fees—increased operational burdens, leading to the gradual decline of supermarkets.

Although some foreign supermarket brands have withdrawn from China, their influence persists. Many manufacturers still pursue this misguided path. Currently, 99% of brand manufacturers believe that supermarkets should sell at higher prices than small shops, which is why large Chinese supermarket chains are on the road to decline.

But many foreign supermarkets have already died in China; can we continue down this path?

Do Large Supermarket Chains Have Value?

The advantages of large supermarkets should lie in scale, efficiency, and cost control. However, in reality, they sell at higher prices than small shops and convenience stores. Where is the advantage? What is the logical relationship between them? Supermarkets attract customers with a wide range of products and low prices; their only disadvantage is inconvenience. Small shops win on convenience—you can buy downstairs—but they have limited product variety and higher prices. However, supermarkets now charge various display and entry fees, leading to shelves filled with slow-moving products, turning them into advertising spaces for brands. Therefore, having many SKUs does not mean having a full range of products. For example, a supermarket may have 18,000 SKUs, but if only 5,000 sell in a month, then only those 5,000 are actual products; the remaining 13,000 that don't sell are not products but advertising displays. Only when products sell are they considered sales; if all 18,000 SKUs sell, then it's a full range. So many supermarkets don't actually have a full range because they stock many unsellable items. Additionally, supermarket prices are not cheaper than small shops, and they are less convenient, so their survival logic is gone. If you don't die, who will? Returning to small shops and convenience stores, their advantage is convenience, but due to small size and limited variety, they should logically be more expensive, yet sometimes they are cheaper than supermarkets. This is because even large supermarket chains may not have a significant advantage in procurement channels; their purchase prices might even be higher. Many outsiders ask me, 'You open supermarkets in Northeast China; can you compete with foreign large chains?' But I want to tell everyone that these companies source from the same channels as small shops, sometimes even at higher prices. Many outsiders are surprised: with such scale, how can they have the same purchase price as small shops? But this is the so-called channel that manufacturers promote and insist on. Under this logic, many manufacturers have discussed with me that supermarkets should sell at higher prices because they believe supermarket costs are high. So whose costs are actually higher? The first major cost in retail is labor, and the second is rent. First, labor costs: supermarket employees work all day, while mom-and-pop shop owners sit playing games waiting for customers, so actual selling time is short; thus, labor costs are higher in supermarkets. Second, rent: small shops are in street-facing storefronts, while supermarkets are often in basements or the back of second floors in malls; small shop rent is more expensive. From these two perspectives, supermarket costs are relatively lower, so they should sell cheaper. Regarding procurement, if a company aims for scale, it should achieve economies of scale. If a small shop and a company with annual sales of tens of billions have the same selling price, what's the point of scale? From the customer's perspective, if supermarket goods are more expensive than the convenience store downstairs, customers won't bother traveling far to buy. Thus, supermarkets become a backup choice, not the first choice. When supermarkets become a backup, their living space shrinks. Customers need a 'one-stop/full-category' shopping experience with 'good quality and low prices.' If supermarkets can achieve this, customers will choose them even if it's a bit inconvenient. However, now customers in a store of several thousand square meters buy only one or two items and leave because supermarket prices are relatively high. Part of the reason is that local supermarkets have been influenced by foreign enterprises in their operations; brand owners and distributors believe supermarkets should sell at higher prices, leading to the core problem of business decline. So, do large supermarket chains still have value? If all supermarkets closed, leaving only small shops, how would new products be launched? Small shops can only sell 1/10, 1/5, or 1/3 of a brand's products, while large supermarkets sell all series. For new product promotions, large supermarkets provide space for publicity; how would small shops promote? If large supermarkets disappeared, would brands benefit? Obviously not. Do consumers need us? After all, supermarkets have large areas, one-stop shopping, full categories, good quality, and low prices. When many supermarkets close, nearby residents often say, 'It's a pity; it's inconvenient to shop now.' Why haven't membership stores become mainstream in the US, or discount stores in Europe? Because customers have a need for product variety that no single specialized format can satisfy. These formats all need to exist, just in different proportions. In various countries, supermarkets account for over 50%, but in China, they are less than 20% and declining. So it's not a problem with the format itself, but with management and business models. 'Being needed is what creates value.'

Beiyoute has developed well in recent years precisely because we 'woke up early.' In 2019, when Beiyoute expanded from Hegang to Harbin, comparable store sales and gross profit declined for six consecutive months, and we became very alert. So we decided to find the problem. After investigation, we found that although customers said Beiyoute had good service, quality, and environment, 95% of our employees didn't shop with us. Comparing with small shops, we found our prices were even higher than theirs. So we conducted a large-scale price adjustment, benchmarking against small shop prices to match them. After benchmarking, we reduced prices on over 4,000 SKUs, and more frighteningly, over 300 SKUs had negative gross profit after matching small shop prices—meaning small shops' selling prices were lower than our purchase prices. Starting in 2019, we decided to change, never allowing our goods to be more expensive than small shops. We adjusted prices and costs, implemented daily delivery, and reduced costs and increased efficiency. For example, some high-performing stores with annual sales over 300 million yuan have no warehouses and use hourly workers for restocking, significantly reducing costs. Through these measures, Beiyoute survived and continued to grow. In 2019, our sales were 2.8 billion yuan; in 2020, 3.58 billion; in 2021, 4.22 billion; in 2022, 4.56 billion; last year, over 5.4 billion; and this year, we expect at least 6.8 billion, with growth every year. This is not accidental; just before the pandemic, we identified the problem and adjusted our strategy in time, allowing us to survive. Now, when some well-known domestic and foreign large supermarket chains close stores in Northeast China, Beiyoute is taking over those locations and maintaining healthy development.

How Can Large Supermarket Chains Turn Around?

How can large supermarket chains turn around? Some previously suggested eliminating distributors. Over the past two years, we've been studying this and finally figured out that eliminating distributors is not realistic. Retailers and distributors have different roles; there are too many brands and retail stores in China to have direct end-to-end cooperation. Even though Beiyoute's sales are approaching 7 billion yuan this year, we cannot directly cooperate with all brands; we still need distributors. The key is what kind of distributors we need—we are looking for and relying on 'large distributors.' What is a 'large distributor'? Last year, we went to Japan, where there are only ten large distributors serving all retail enterprises and over 100 million people. They add only 3 percentage points to the manufacturer's price for retailers. If our distributors did the same, could they survive? Obviously, it would be difficult. So we are looking to rely on 'building a new supply-demand pattern with high efficiency.' We searched for large distributors but didn't find any, so we had to unite and establish our own distribution company—Zhenshimei Supply Chain Management Company, currently operating mainly in Jinan and Shenyang. We also hope to cooperate with distributors in Shandong, Hebei, and Northeast China to work together. We also feel that brand owners prefer to cooperate with exclusive distributors. But the problem is that brand owners, to control distributors, don't allow them to cooperate with competing brands, which limits their scale and efficiency, making it impossible to supply retailers with just a 3-5 percentage point markup. It's not that distributors add too much; it's that their costs are high and efficiency is low, so they can only survive with high markup rates. Brand owners need to understand: why is everyone in a price war? At a recent meeting, a 'triple loss' situation was mentioned—brand owners lose, distributors lose, and retailers lose. The reason is the lack of efficient large distributors. Brand owners can be large, with sales of 1 billion, 10 billion, or 100 billion; retailers are also sizable, with 10 billion or several billion; but are there large-scale distributors? Few distributors exceed 1 billion, almost none exceed 5 billion, and 10 billion is unheard of. So how can the supply chain be unblocked? Therefore, we hope distributors will unite, and brand owners will support this unity, because unity brings scale, scale brings efficiency, and costs can be reduced. In Japan, from factory to store, it only goes through large wholesalers, with each step adding 3 percentage points, logistics and distribution adding 5 points, and retailers adding 15 points, totaling 23 points from factory to consumer. Online, regardless of the type, it's 30 points, with a gross profit of 3.5 points, and last-mile delivery to home, totaling 33.5 points to the consumer. Finally, for supermarkets and convenience stores, from factory to distributors nationwide, the markup is as high as 20 points, plus retailers' 20 points, resulting in 40 points to the consumer—much higher than Japan and also higher than online. So in China, many things can be bought cheaply online because the 20-point distributor markup is too high, giving online an opportunity. In Japan and Europe, online is no more than 20%; only in China is it so high. It's not that online is doing well; it's that physical retail has problems. Zhenshimei Supply Chain Management Company is trying to solve this. Currently, the Jinan and Shenyang warehouses have 32 companies, with a total scale of 22 billion yuan. We hope that through economies of scale, logistics, and efficiency, we can reduce costs and supply retailers with just a 5-point markup. We tell manufacturers that we're not taking their cheese; we just hope they accept this high-efficiency model, which can force the entire industry to progress. Just like the transition from horse-drawn carriages to cars, high-efficiency models inevitably replace low-efficiency ones; this is the law of social development. We need to unite, form scale, and improve efficiency.

Please look at the 'Product Circulation Markup Nodes' chart inserted above. Currently, Zhenshimei has established provincial warehouses in Shenyang and Jinan. Our model is as follows:

Add only 5 percentage points to prefecture-level retailers. Logistics costs only 3 percentage points.

Retailers add another 18 percentage points.

This way, the final price to consumers is 26 percentage points.

If we treat prefecture and county wholesalers as distribution warehouses and adopt no-inventory wholesale—that is, after ordering, goods are dispatched directly from Shenyang or Jinan to various cities—then we don't need to manage inventory or warehouses. Delivery costs only 2 percentage points, leaving 4 percentage points of profit, and no significant capital investment. The final price to small shops is 30 percentage points, 10 points cheaper than the previous 40 points. Once scale is larger, we can directly cover prefecture-level cities, like in Japan, where Zhenshimei only adds 2 points for fees, 5 points for distribution, and retailers add 20 points, totaling 25 points to the consumer. This is what we, as retailers, including Beiyoute, are striving to achieve. In 2019, we faced a life-and-death challenge; if we hadn't done this, we wouldn't have survived. And it has proven to work—we survived and developed well. So, looking back, we hope distributors and brand owners will also adapt to the times, replacing high efficiency with low efficiency, and low cost with high cost, so that society can progress and develop. Through this transformation, we can turn crises into opportunities in an era of shrinking volumes, allowing everyone to live better!

PS: For those interested in the on-site speech content, please follow the recent posts on the 'New Distribution' WeChat official account; we will compile and publish the guest speeches for our readers.

Click Read Original to view more about the 6th China FMCG Conference and the 3rd China FMCG Hard Discount Conference & the 3rd China FMCG Distributor Conference...__