From October 9 to 11, the 5th China FMCG Conference and the 1st China FMCG Distributor Conference were successfully held at the Shenzhen Denghui International Hotel. On the main venue on the 9th, Mr. Hou Xiaohai, Chairman of the Board of China Resources Beer (Holdings) Co., Ltd., delivered a wonderful sharing session themed "Rebuilding Enterprise Capabilities, Creating a New FMCG World". Combining the changes CR Beer has undergone in the new world in recent years, the results of its explorations, its response methods, and Mr. Hou's personal reflections, he provided a profound interpretation of how enterprises can rebuild their capabilities in the new world. To this end, New Distribution has compiled Mr. Hou's brilliant speech into an article for readers (with some deletions). "A Changed World": The Dawn of a New FMCG World In its development over recent years, China Resources Beer has proposed a new term: "New World of the Alcohol Industry." The so-called "new world" refers to the entire consumer sector, including the alcohol industry, entering a completely new world. The environment, consumer demographics, consumption patterns, brand promotion, product design, and channel changes have all undergone fundamental transformations. At a higher level, the new world also encompasses significant changes in the national and global business environment. We believe that after many years in the consumer goods industry, we have now entered a completely new world, different from the one we have inhabited for years. Viewing today's consumption from the perspective of the new world allows us to clearly see the trends of change and development, and also makes us more aware of what we should do today and what goals we should achieve tomorrow. So, the first part I want to share with you is "A Changed World." Why do we say the world has changed? Over the past three years of the pandemic, we felt that the world had suddenly undergone major changes. After the pandemic, this year we truly feel that the world we live in has changed. We must use the fundamental point of "a changed world" to think about problems; we must not assume we are still in the past world. N Forces of the New World According to our analysis, there are N forces driving fundamental changes in the world, and N forces have made today's world significantly different from the past. These N forces have made today's consumer goods, FMCG, beer, and baijiu different worlds from the past. 1. Global upheaval. Every event that has just occurred makes you feel the extreme turbulence of this world. The change in the global landscape has just entered its first half, and it is expected that there will be major changes in the next 5-10 years. A few days ago, we saw the sudden outbreak of war between Palestine and Israel. The contradictions, conflicts, and divisions among different political systems, ethnic groups, and camps in Europe, America, China, and the West increasingly make us feel that this is vastly different from the past globalization, integration, world family, free trade, and large markets. Moreover, I believe this upheaval will profoundly affect consumer goods. 2. China's new era. The 18th National Congress of the CPC opened a new journey, and the 19th National Congress entered a new era. China's politics, economy, national governance, and culture have fully entered a different era. This era is vastly different from the one we experienced for most of the past; it is not just an upgrade but a deep-seated change, and also a fundamental change from weak to strong after 30-40 years of reform and opening up. Does it affect consumption? It has a huge impact. Today's high-quality development, consumption upgrading, new technologies, ecological and environmental protection, compliance and legality, and national governance have all changed a lot. For our lives, it may be a major, leapfrogging, and transformative change. 3. Technological revolution. Technological change has never impacted us as profoundly as it does today. From manual labor to machines, electrification, automation, digitalization, and digital intelligence, today's technology is emerging in a concentrated, leapfrogging manner. Especially from the internet to artificial intelligence, this rapid change has just begun, and it is likely that even more disruptive technologies will emerge in the next 5 years. In the past, the internet changed humanity; now we suddenly find that AI might replace humans. In the past, major technological iterations took ten, twenty, or a hundred years, but now it might only take ten years. Current business models and consumer markets are likely to be profoundly impacted by technology. Many management methods, employment mechanisms, manufacturing models, and even marketing methods, as well as how consumers consume, live, and survive, will be closely linked to technology. In the past decade, countless people predicted the future, but many predictions turned out to be wrong. This world is showing unimaginable, unpredictable changes, turbulence, and iterations. 4. New consumer generation. The number of young people is decreasing, and consumption concepts are undergoing profound iteration. Young people's demands for brands, products, and scenarios are vastly different and difficult to tap into. But young people are changing consumption and the economy. The number of young people is decreasing, while their demands are diversifying and becoming more personalized. So, the future consumer world may face greater pressure and change. The Z generation is just beginning; cars, electronics, housing, and everything in the future may be different from what we see now, because today's young people are just starting to drink their first case of beer or taste their first sip of baijiu; they have not yet dominated consumption in this world. But the world always moves forward; we will grow old, and they will grow up. From today, ten years from now, the world will be theirs. Whether what we do today is relevant to them, and whether our business models are focused on them, will determine whether we can still stand here five years from now. 5. Industrial transformation. It is very rapid, with fierce competition and big fish eating small fish. 6. Post-pandemic impact. The pandemic has a significant impact on us today and in the future. It will have a certain impact on the economy, industrial chains, consumption suppression, changes in consumption patterns, health concerns, interpersonal relationships, the relationship between people and society, and the components of the economy. This is something that consumer goods companies must deeply consider. We may not see the future clearly, but at least we must think about it. N Characteristics of the New World The "new consumer world" has several characteristics; these may be the fundamental forces or trends revealed in the new world. These trends represent the mainstream of the new world. First, high-quality development. No matter how China's economic situation fluctuates, the theme of high-quality development will not change. From nothing to something, from something to more, from more to better, from better to long-lasting, consumption iteration is the change of high-quality development. The entire national industry is moving toward high-quality development; China is not an exception, and the world is like this. As long as per capita GDP exceeds $8,000, a wave of high-quality development and consumption upgrading begins. Why? Because extensive development can no longer generate higher value. Those engaged in low-quality development, although still alive, will find it very difficult to survive. High-quality development includes many aspects: business models, product iteration, profitability methods, employee compensation, corporate profitability, market value, operational cost savings, intelligent manufacturing levels, EHS management, and so on. Second, consumption upgrading. Currently, no force can change the trend of consumption upgrading in China, and I hope there won't be one in the future. Although consumption recovery after the three-year pandemic still needs a certain period, the force of consumption upgrading will remain surging. Consumption upgrading and downgrading coexist; both high-end and economy segments are growing. In the general trend, consumption upgrading is the mainstream, the biggest dividend, and the biggest trend. In the current situation, most enterprises are upgrading their high-end and mid-range products, with low-end moving to mainstream, mainstream to mid-range, and mid-range to high-end. Upgrading is wave-like; consumption upgrading is not about upgrading to a Porsche or Huawei X5; it is about upgrading from pickled vegetables to kimchi. Consumption upgrading is driven by people, population, economic development, and per capita income. It should be said that this upgrading is not just about price but also about quality. When buying a house now, we want the best community and environment, and who we live with is important; that is consumption upgrading. When buying a car, I want an electric one with digital features and a sense of experience. Many people say the economy is bad now, so we should launch low-priced products; this is not in line with the trend, and it will be difficult to win in market competition because you are not on the side of the trend. Third, changes in consumer demographics. Besides Generation Z, we must also look at the middle class and the elderly; these are the three main consumer forces. The middle class and Generation Z are the two major groups that consume alcohol. The middle class in China is growing rapidly; although assets have shrunk this year, it is still a huge group, with 500 million middle-class people. Fourth, technological development. The development of technology and technological progress is something every consumer goods company must pay attention to. Whether products have technological content, whether manufacturing has technological standards, and whether management is empowered by technology are all very important. Fifth, supply chain internal circulation. This is the internationalization I just mentioned; internationalization has become an option that requires more careful consideration, and internal circulation is what should be done well first in the new world. Sixth, involution. Involution has become a hot word this year, not only individuals complaining, but also evident between industries. These characteristics actually remind everyone: Has your company paid attention to these six aspects in business development? Is it engaged in high-quality development? Has it made efforts in consumption upgrading? Has it conducted in-depth research and layout for the rise of Generation Z, the middle class, and women's power? How is the degree of technology-driven and supply chain perfection in your enterprise? The world has changed; both beer and baijiu have entered a new world, and Chinese consumer goods have entered a new world. The "new world" we talk about is that everyone has entered this new world; the land and environment China is in have entered the new world. It is not that China Resources Beer is the new world and other beers are the old world. No matter who you are, you have entered a completely different space, and this space is what we consider the new world. Many people cannot clearly see the current environment, always live in the past, rely on past experience, depend on past competitive capability paths, and are unwilling to change themselves. Many of the things we think and see are what we hope to see, not the real world. We thought recovery after the pandemic would be good, but reality is not like that. China Resources Beer's Active Exploration In 2017, China Resources Beer launched the 3+3+3 strategy, which is the blueprint we constructed after the world changed. Because the company is relatively large, the industry is relatively traditional, and in the past it focused on mainstream beer, with many employees and abundant but unbalanced production capacity, we started a longer cycle, using three 3-year periods and three steps to achieve transformation. In fact, we hope to lead this company from being a beer leader in the old world to a leader in the new world of beer; this is the 3+3+3 blueprint we planned. Now, six years have passed, and we have achieved changes in five aspects. From scale to quality: this year's high-end beer is over 2 million tons, close to 25%, a fundamental change; six years ago, high-end beer accounted for only 5%-10%. Enterprise value and brand value have fundamentally changed; the company's market value has risen from 40 billion to a peak of 200 billion. Corporate profitability has grown from over 1 billion to over 5 billion, which is a very difficult change for the beer industry. Moreover, against the backdrop of a 25% decline in overall beer industry sales over six years, Snow has only seen a slight decline, basically maintaining a base of 11 million tons. Management efficiency and cost control capabilities have improved, organizational culture has changed, and employee morale, cultural atmosphere, competitive ability, and organizational capability have all greatly improved. The exploration of the "new world of beer" has achieved some success. In the first half of the year, China Resources Beer actually had the fastest growth and best development in high-end beer. In the second half, although facing certain consumption pressure, starting from September, Snow Beer's high-end products returned to double-digit growth, and our growth rate is still not low. Uncertainty in the Development of the New Consumer World The new consumer world has encountered new problems this year, reflecting that the new consumer world is constantly changing, dynamically developing, and not yet fully formed. The global upheaval faces the same problems. An important feature of the new consumer world and the new world of baijiu is uncertainty. In my decades of experience with consumer goods, 90% of the time the industry's certainty was high, but in the past two or three years, extreme uncertainty has far exceeded certainty. So, whether an enterprise can judge where uncertainty lies, respond to it, and find strategies within uncertainty is the real test of the enterprise and the core of its competitive advantage. Whoever can respond to change, find strategies suitable for their own development amid change, and find their own differentiation, personalization, and development land will be the one who benefits, leads, surpasses competitors, and achieves growth in uncertain times. Difficult Recovery 1: Major Upheaval Intensifies Change Difficult recovery is beyond doubt. As everyone here knows, the major upheaval intensifies change and profoundly affects the overall consumer environment. Difficult Recovery 2: Tortuous Post-Pandemic Recovery The post-pandemic recovery is obvious. At the beginning, everyone was optimistic; the first quarter was particularly good, the second quarter was not ideal, and the third and fourth quarters showed slight pessimism in the industry. Recovery is tortuous. How did this recovery change come about? In fact, our economy and consumption had accumulated a lot of suppressed consumption in the past, which was not released, but after the first quarter of this year, it was fully released. The Chinese economy is under certain pressure, with declining income, shrinking assets, and government intervention to rescue the real estate market. In today's era, the economic situation is relatively severe and tortuous; we must get out of this trough. The central government's policies also need time to settle and penetrate before they have a significant impact, so the improvement of the overall consumption fundamentals is relatively stable. Difficult Recovery 3: Multiple Impacts on the New Consumer World Now it is not consumption downgrading; it is consumption contraction, consumption differentiation, and consumption personalization. Consumption contraction is the biggest phenomenon. What is consumption contraction? It means spending less, such as poor travel. Is it really poverty? It is just being poorer than before, but we still have a large market base and momentum. However, the reduction from more to less brings another factor of consumption contraction: the sense of security and expectations for the future. The central government has always said our expectations are insufficient and need to be raised; this is what it refers to. It is not that people truly have no money, but that they have less money, and less money brings contraction; insecurity and lack of confidence bring contraction. In comparison, the operating pressure on small brands is more obvious. The possibility of being chosen is lower, and the probability decreases, so consumption differentiation is very obvious. So, I say the new consumer world is facing multiple impacts. Restaurant sales are declining, retail sales are also declining, and high-end and mid-range are not downgrading but shrinking simultaneously. The lower tier is shrinking more, but their volume is still relatively large, still a pyramid-shaped consumer goods structure. The lower tier's shrinkage is greater, so many people are doing promotions. Promotions can solve part of the problem, but not the big problem, and they harm the brand. This year, not many enterprises achieved growth. Has consumption really downgraded? In the beer industry, economy beer and low-price beer are still declining, and they are the part with the largest decline. The more people drink economy beer, the greater the consumption contraction. Many people propose promotions and launch affordable products. Although many affordable products seem to grow rapidly, in fact, the growth of affordable products does not mean that economy beer is also growing, because these are not the same concept; economy beer is shrinking faster. Differentiation is also important. Some people live well, others do not. Some can consume high-end products, while others can no longer afford them. After the tide recedes, do you have excellent brands, products, channels, and marketing? Consumers can choose you. In the past, in the era of flooding, anything worked. But now it is different; big brands, good brands, and personalized brands are the way to go today. Responses to the Development of the New Consumer World 1. Challenges Finally, I want to talk about the growth pressure we face. Last year, when I said growth is the first strategy, it was during the severe pandemic, and I felt that growth was very important. This year, growth still faces pressure. In the beer industry, growth was not a pressure during the three years of the pandemic, but after the pandemic, growth has become a pressure. The contradiction between scale and quality. Do you want quality or scale, or is scale part of quality? This philosophical proposition needs to be thought through clearly. What quality do you want? What scale do you want? Do you want scale with high-quality development, or scale with marginal benefits and profits? In this era, it is not about "killing" others to survive; now it is about paying equal attention to scale and quality, but scale cannot be rough or infinitely expand at the bottom, because it is easy to make the enterprise lose cash and lose development momentum. Investment and M&A. Now is not a good time for investment and M&A, but it is also a good era; acquisition costs are the lowest, and targets are the best. This will appear in the next two to three years, but the returns and whether capital can support it are tests for everyone. So this year, the test of investment and M&A is very tangled. Long-term vs. short-term. Everyone wants to be a long-termist, but how to do it this year? In fact, there is no right or wrong between long-termism and short-termism. Without the short term, there is no long term; only the short term certainly means no long term. So long-termism and short-termism must be clearly defined: what is for the long term and what is for the short term. You cannot only consider this year, nor can you "die" today for long-termism; only by surviving can there be a future. Sharp decline in enterprise value. Capital market stock prices are very poor, capital is flowing away. How is enterprise value reflected? Is it swayed by these capital market factors? Entrepreneurs must have determination; enterprise value is not market capitalization; it is only a part of the performance. The business atmosphere is filled with unease and irritability. When people meet and chat, there are few optimists and many pessimists, few positive and many negative. These are big challenges this year. Bad news spreads widely, good news does not move. So in the business atmosphere, can we raise confidence and be more positive and optimistic? This is also important. 2. Opportunities In today's era, many entrepreneurs are pessimistic, but we are all optimistic, because our optimism comes from the fact that opportunities are still great. These opportunities have not changed. The grand blueprint of Chinese-style modernization is advancing rapidly. After that, the new atmosphere and new actions of the central government are very clear to everyone. The resilience and elasticity of the Chinese economy and its development trend have not changed; the general trend is still on our side. And the pandemic has finally passed; this is a major positive. The state has already introduced many policies for the economy and consumption. Although the efficiency and effectiveness still need time to show, they are very important for the future support of the Chinese economy. In September, the national economic data improved. The eight-day Golden Week verified that consumption still has huge room for elastic growth, so hope is still very great. Including population, it is still large. China's huge market comes from its population. As long as this market does not have subversive problems, consumer goods must be China's best industry and best business, because there are so many people who need to eat, drink, and live, and the state says we should have a better life. 3. Breaking Through To break through, I have roughly listed a few points: First, return to basics: return to scale and the fundamental base. In the past good times, we always pursued the best, but now we have to return. Returning is an important word. Baijiu should return to baijiu, not luxury goods, collectibles, or collateral. Return to the fundamental base, fundamentals, and basic characteristics; return to the essence of business. Those who rely on opportunism or other models have problems. Return to basic capabilities; long-term development of an enterprise requires doing the fundamental base well and doing basic management well. Second, focus. Now, attacking on all fronts, diversified operations, full-series development, and comprehensive impact are all problematic. You need to focus on your core lifeline. Some things are not of major significance, or not of particularly great practical significance, or not meaningful in the long term; they can be put aside. You can do subtraction in management and business; this is very important. Third, reduce costs. This era must be like this: the more money you earn, the lower the cost of spending, the better. But it is not about shoddy work. Snow Beer started living a hard life in 2020 and has been doing so for three years. After the pandemic recovery, we still live a hard life, and next year we will also live a hard life, because now is a period of tortuous economic development and fluctuating pandemic recovery. Fourth, invest cautiously. Investment should look at the national trend. We should invest in what the country develops, lays out, and supports. Do not invest against the trend; this is very dangerous. Finally, I want to say: Adhere to long-termism. Long-termism and optimism are two isms that consumer enterprises must especially adhere to during periods of economic recovery fluctuations and low consumption. Why? As long as people exist, consumption will exist; this is long-term. There is no reason not to be optimistic. What needs to be done now is to analyze the uncertainties in the new consumer world, respond to them, and gain core competitive capabilities amid uncertainty. PS: Friends interested in the on-site speech content can follow the recent posts on the WeChat official account of "New Distribution". We will compile and publish all guests' speeches for readers. Click Read the original text to see more about the 5th China FMCG Conference and the 1st China FMCG Distributor Conference...