The Brand Owner's Dilemma The dismal performance of the FMCG market in Q2 2024 is evident to all industry practitioners. Many brand owners who were unprepared (even some major brands) have lost their footing and fallen into a growth dilemma: Products aren't moving at the terminal, brand owners face immense pressure to grow performance, and sales teams in every region are running themselves ragged without seeing any volume. Desperate to meet KPIs, they resort to the short-term fix of forcing inventory on distributors. Many distributors are already reeling from the impact of retail discounting, with their businesses severely damaged. When brand owners add to the pressure, distributors find it impossible to make a profit, face the risk of warehouse overflow, and may even go on strike. To hit performance targets, sales teams are forced to reopen accounts, but new accounts require time to build rapport and may not effectively serve the local market. The likely outcome is that forcing a month's worth of inventory could cost the entire year's remaining business, ultimately leading to a decline in revenue rather than growth. When a brand owner's business contracts, investment in market resources inevitably shrinks. Under cost-cutting, reversing the growth dilemma becomes even harder. In an era of shrinking volume, the market's collapse is faster than many practitioners expected, making business already difficult. Many brand owners struggle to maintain price systems in the existing market, hesitant to embrace the new growth from discount channels. Caught in this dilemma, they are forced into extreme actions. But frankly, in this environment, there's really no need for brand owners to force inventory, because it simply doesn't work anymore!

The Root Causes and Transmission Chain of the Current Problem The most fundamental difference between today's market and the past is the complete reversal of supply and demand dynamics. In recent years, supply and demand have shifted dramatically: oversupply, leading to capacity clearing. In the previous era of incremental growth, market demand kept expanding, and inventory forced by brand owners eventually found its way through various "drainage" channels, always having a path to absorption. But times have changed. Consumer income and expectations have both declined, and the market has entered an era of shrinking volume. The market itself already showed signs of overcapacity. The disorderly expansion during the pandemic exacerbated the oversupply, causing a large amount of product to pile up in the distribution chain. In the past, forcing inventory on distributors, who couldn't absorb it, and then processing it through e-commerce platforms was a tacitly accepted practice by regional sales. But now, many distributors report that warehouses are full, and e-commerce platforms are no longer accepting goods. This is a variable that affects the entire industry chain. As the overall business pie shrinks, someone has to be eliminated. It's not hard to understand: when consumer income and expectations decline, retailers are the first to sense the crisis and make changes, thinking about survival and development, figuring out how to sell goods. In practice, they find that unless they sell truly exceptional products (membership warehouse model, differentiated product assortment), they must sell goods cheaply enough (discount retail model, efficiency-leading strategy). Note: Of course, some have tried to build large-scale channels for near-expiry products, but the model ultimately had issues. Unfortunately, no matter which approach retailers take to meet new challenges, it's a disaster for most distributors. Good products are scarce, and only a few distributors can handle that business. Most distributors can't get a piece of that pie and are forced to find ways to sell goods cheaper. But discount retail itself optimizes the distribution chain; selling cheap means competing on cost leadership, eliminating those who aren't cost-competitive. That's one reason distributors are having a tough time. Of course, if retailers and distributors are struggling, brand owners are no better off. It's still the same issue: changes in supply and demand affect the entire industry chain. Brand owners face many problems; here are a few common ones. First, discount retail channels—this wave of discount snacks and the gradual emergence of discount supermarkets—directly impact brand owners' price systems. How to balance and maintain them? Beyond price systems, these channels also impact the businesses of distributor partners in the existing ecosystem. Many distributors are quitting because they can't make a profit. How to maintain the distribution system? Traditional offline retail channels are shrinking, and new growth is concentrated in new retail scenarios. How to learn the new rules of the game and seize opportunities? Note: These new retail scenarios include not only membership warehouses and discount retail but also instant retail and community group buying (many may misunderstand that community group buying is failing, but many local groups have seen impressive growth in recent years). Facing such issues, brand owners need to make many changes. If they still cling to old ways, focusing only on their own immediate business and harming partners, the consequences will inevitably backfire.

The Way Out for Brand Owners What strategies do brand owners have? Let's start with the conceptual. Given the current environment, it's crucial to face reality. In an era of shrinking volume, not only does demand contract, but supply will also inevitably shrink, meaning a significant portion of brand owners will also be eliminated. This is a process of competitive elimination. The rules of elimination are the same as those Wang Xing summarized when he was building Meituan: cheap beats expensive, quality beats poor quality, serious beats careless, patient beats impetuous, diligent beats lazy, and reputable beats disreputable. That's why the term "quality-price ratio" has been repeatedly mentioned in recent years. Those who can continue to develop now must be products that balance price and quality and can effectively reach consumer scenarios. If any aspect isn't done to the extreme, they may be outcompeted by peers. Especially for those brand owners who have enjoyed the era's dividends for years but mistakenly attribute it to their "brand power," this is a wake-up call: the current market no longer allows for unreasonable brand premiums. Mentally, they must also be open—openness has been one of the few winning strategies over the years. Admittedly, China's retail transformation since the era of large supermarkets has been turbulent, but each time, its impact on the overall retail market has been limited. Many believe this time is no different. But we must not fall into cognitive inertia. At least in studying global retail changes, we see that discount retail is a completely different situation. Since ALDI's inception in 1946, this model, which has lasted 78 years, has been penetrating worldwide. I've seen many bosses who rejected discount snacks, believing low prices aren't sustainable, and thus didn't patiently study the real reasons for channel changes, ultimately missing the best opportunity to embrace the dividend. Later, even spending ten times more effort to catch up proved futile. Now for the practical side, here are several specific measures to address current problems. First, the most obvious issue is discount retail impacting price systems. This isn't the first time we've faced this; e-commerce already went through it. The solution is clear—it's just a matter of whether you're willing to overcome inertia and do it. Within the existing product system, the available means are clear: differentiate in packaging, specifications, contents, and even flavors to avoid price comparisons as much as possible. New channels have their own rules; just answer the assigned topic. Note: As for profit, it's designed through the product itself; whether and how much profit exists depends entirely on your own capabilities. As for the impact of retail channel changes on the distribution system, there's no way around it—it's inevitably a state of contraction and team restructuring. For distributors, this is also a test. Second, believe in the industry chain's ability to evolve. Any excellent distributor partner will adjust their business in response to market changes and find ways to sell goods. Most importantly, brand owners should avoid extreme inventory pressure, which drives away excellent partners... If brand owners still seek growth, they must return to the most fundamental product strength. After over 30 years of development, the Chinese FMCG market has a very complete supply (and is very competitive). Big single products have likely hit their growth ceiling by now, and new big single products are needed to drive growth. Therefore, to go further, brand owners must have strong innovation spirit and capability, constantly trying to create good products that the market recognizes.

The Iteration Happening at Every Level of the Supply Chain in a Shrinking Market Of course, navigating cycles and practicing these principles is not easy. But everything has two sides. Although the current competitive environment is harsh, from another perspective, brands that survive and thrive in such an environment, having passed the market's cruel elimination, are the ones with true product strength. Now is the best time to test a brand owner's internal capabilities.

From August 20-22, 2024, the "2024 6th China FMCG Conference" with the theme "Navigating the Era of Shrinking Volume" will be grandly held in Shanghai. At that time, we will invite senior executives from leading FMCG brands and retailers, as well as regional major distributors, to discuss the following topics: the dilemma and way out for brand owners in a shrinking market / how brand owners, distributors, and retailers can build symbiosis / directions and paths for brand growth / changes in brand channel models in the current market, etc.

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