Over the past decade, the retail industry has undergone many changes. Hypermarket formats have been overshadowed by community supermarkets and convenience stores, and it remains undecided whether premium supermarkets or discount stores are more competitive. With the frequent emergence of new formats such as Hema Fresh, Super Species, and unmanned convenience stores, cross-format competition among retailers has become an inevitable trend. Many retailers have implemented cash direct procurement and developed private labels, attempting to achieve performance breakthroughs by enhancing product strength.
However, few have paid attention to the supplier community upstream in the retail industry, which is the driving force behind optimizing category management and achieving quality upgrades.
In terms of industry scale, suppliers are tending towards centralized and large-scale production. Taking the towel category as an example, according to industry research reports, total production in 2015 reached 903,000 tons, a year-on-year increase of 3.18%. However, the number of towel manufacturers with an annual output of around 3,000 tons decreased by nearly 50 between 2010 and 2015. These manufacturers with weak production capacity and low quality were gradually eliminated, and "low-quality, low-price" products subsequently faded from the mainstream market.
Entering 2017, some suppliers began to disclose product costs to retailers and provide customized production for them. For example, Ningbo Qifulong Footwear lists the costs of shoe uppers, linings, midsoles, outsoles, patented products, embroidery and decoration, trademarks and packaging, as well as labor and wastage costs, for each pair of shoes, allowing purchasers to freely combine them. In categories such as home textiles, plastic products, and tableware, suppliers like Yongliang Towels and Huiji Trading have also promoted cost transparency.
This means that retailers' procurement costs are no longer closely linked to company size or purchase volume. Large chain retailers like Hunan Bubugao and regional retailers with around ten stores will receive the same factory price, which is a significant advantage for small and medium-sized retailers.
Secondly, customized production enables retailers to tailor products precisely based on local consumption levels, customer preferences, format positioning, and other factors, thereby enhancing product cost-effectiveness and differentiation.
The author believes that manufacturer transformation is the behind-the-scenes hero driving retailer transformation, prompting physical store operators to compete on products without differentiation. At the same time, they build B2B platforms, using sales data from partner stores as analysis samples to assist physical stores in inventory management, forming a closed-loop industry chain.
Retailers seeking to upgrade from the source of products cannot ignore the decade-long transformation of manufacturers.
"Low-quality, low-price" products result in a lose-lose situation for suppliers and retailers
Ten years ago, customers were more price-sensitive, and manufacturers were mostly small-scale, so the overall environment made "low-quality, low-price" products dominate the market.
Take a plastic slipper as an example. Suppliers adding industrial calcium carbonate to raw materials to increase product weight is an open secret in the manufacturing industry. Worse, some use recycled rain boot plastic or needle tube plastic to make slippers, which often have a pungent smell. "In fact, they are bullying consumers who don't know that quality slippers have no smell at all. Customers only see the low price but don't know where the quality is lacking," Lin Ping, general manager of Ningbo Qifulong Footwear, told the author.
Under the traditional procurement model, retailers were unwilling to bear the risk of unsold goods, requiring suppliers to reserve payment periods and exchange mechanisms. Coupled with multiple additional costs such as entry fees and channel fees, most retail enterprises defaulted to "low-quality, low-price" products. Because the sell-through rate of new products and mid-to-high-end products was difficult to guarantee at that time, suppliers could only provide low-priced goods to retail enterprises for a long time to avoid the risk of large-scale exchanges.
However, "low-quality, low-price" products are obstacles limiting the development of retailers and suppliers. For most retail enterprises, before 2010, they typically used traditional procurement models, where purchasers sat in offices waiting for local suppliers to deliver goods, enjoying both extra fee income and the return guarantee of actual sales. It seemed all benefits and no harm, but in reality, it prevented individual retailers from differentiating themselves from local competitors.
Suppliers, on the other hand, found it difficult to improve performance. Qifulong Footwear was a slipper supplier for Bubugao, and for three years after its establishment, sales hovered around 14 million yuan. Lin Ping attributed the root cause to low-quality products. "In the early days, quality was not required, and piece-rate workers on the assembly line could produce three to four hundred pairs of slippers a day. Now, with improved manufacturing capacity, Qifulong strictly controls daily personal output to 100 pairs, showing that production at that time prioritized quantity over quality. At the same time, the loss from defective products during production was huge, and the labor, financial, and time costs of handling these waste products were all consumption points."
The first step in eliminating "low-quality, low-price" products was the implementation of cash direct procurement by retail enterprises. When Pan Yuanpei, then global procurement director of Bubugao, inspected the Qifulong factory, he told Lin Ping, "The product quality is too poor. As long as you explain the costs clearly and improve quality, we are willing to pay."
To this end, Lin Ping adopted two production models: one for enterprises like Bubugao that practice "cash direct procurement," enhancing the control of both the purchaser and producer over product development, production, and selection under a buyout operation. The other was to supply traditional products to enterprises that still used "payment period procurement."
Running these two models in parallel, Lin Ping actually extended the transition period for product upgrades, but the transformation remained difficult. On one hand, order volumes decreased, and annual sales of 14 million yuan put sudden pressure on the company's capital chain. Especially when retail enterprises made demands for product development and upgrades, Qifulong's production capacity, investment, and R&D often fell short.
It wasn't until around 2014 that suppliers who upgraded product quality began to profit. "Almost suddenly, many retailers started purchasing mid-to-high-end products, catching many manufacturers off guard. Our advantages stood out, and that year we achieved sales of 45 million yuan, a year-on-year increase of 221%," Lin Ping recalled.
"Reduce sales volume, reduce items, increase gross profit" Category management guided by suppliers
Affected by the impact of hypermarkets and the rise of community commerce, many retailers have begun to expand fresh food, reduce non-food items, streamline categories, and select individual products as important strategies to improve sell-through rates. In the process of optimizing category management, manufacturers also play the roles of gatekeepers and backstops, providing support to retailers in production, selection, and sales.
Take Fujian Guan Supermarket as an example. They streamlined non-food categories in their Fuzhou Aoti Sunshine store. For the hair dryer category alone, Guan Supermarket only carries one Philips product at around 120 yuan and one Flyco product at around 30 yuan, aiming to help customers choose and increase purchase probability. Under consumption upgrades, the difference between 50 yuan and 60 yuan is not significant to consumers, and it is not uncommon for them to abandon purchases due to difficulty in decision-making.
The industry usually focuses on the optimization of category management in store operations but overlooks the first screening by suppliers at the production source. For example, in the "2017-2020 China Towel Industry Market Survey and Investment Prospect Analysis Report" released by China Commercial Industry Research Institute, Yongliang Towels, ranked fifth in market share, offers two models for customized production for retailers. For the same 50-gram loop towel, Yongliang's production cost is usually higher than the market average of 2.4 yuan, while ordinary factories can achieve around 2 yuan.
To this end, Yongliang opens its own assembly line production to large chain retail enterprises, emphasizing production capacity, efficiency, and quality. For retail enterprises with smaller purchase volumes, Yongliang cooperates with partner assembly lines, supplying the same quality mesh yarn and gram standards. Due to equipment differences, they typically compress procurement costs by 10% to 20% for retailers, with differences mainly in smaller production capacity and longer delivery times, but little difference in quality.
Secondly, some manufacturers assist stores in improving overall gross margin by reducing product items and upgrading product structure. Qifulong once helped Meitehao Supermarket with product selection, focusing on store manager opinions with procurement opinions as secondary. Qifulong first assisted the store in planning the price range for slippers, such as 9.9 yuan, 29.9 yuan, and 39.9 yuan. For slippers of the same type and price, Qifulong only allowed the store to purchase one single item, thereby increasing consumer purchase rates.
Additionally, Qifulong suggested that Meitehao change the salary structure for shelf stockers, adding a 1% commission on slipper sales to the original 2,000 yuan base, prompting manufacturers, procurement, and stores to form a joint force in procurement, supply, and sales.
For slow-moving products, some manufacturers have changed the exchange system to assist with promotions. Huiji Trading is a manufacturing enterprise in Dongguan producing plastic products, tableware, and stainless steel items. They planned clearance promotions for Dongguan Jiarong Supermarket, using product combinations in a four-square-meter display to achieve daily sales of 100,000 yuan for two consecutive weeks.
Building a cost-transparent B2B platform Promoting undifferentiated competition among retail enterprises
Lin Ping believes the time has come for suppliers to disclose costs. First, because production technology and online sales technology have gradually matured, laying the foundation for Qifulong to disclose costs. Second, because retailers' sense of crisis is intensifying, and premiums and homogeneous products in the circulation process are no longer allowed. "In the next two to three years, most stores will achieve 70% private label share in the slipper category, or even 100%, and differentiation will become the core competitiveness."
Since 2017, they have publicly disclosed production costs and clearly marked that manufacturers earn a 5% profit in the factory price, for purchasers to calculate costs.
Taking a customized slipper with a retail price of 39.9 yuan as an example, retailers can see that the production cost consists of 1.7 yuan for the upper, 1.2 yuan for the lining, 0.6 yuan/1.3 yuan for different midsole materials, 3.2 yuan for the outsole, 0.9 yuan for antibacterial and deodorant technology, 0.4 yuan for embroidery decoration, 1.05 yuan for trademark and packaging, and 4.1 yuan for labor and wastage. "At the same price, purchasers can choose combinations such as emphasizing outsole quality over decoration, emphasizing standard features over deodorant technology, or fully equipped options."
On this basis, manufacturers represented by Qifulong have built B2B platforms. On one end, they connect with retailers. For enterprises with large volumes and self-built operations and data systems, Qifulong cooperates by integrating slipper category data, while regional retail enterprises can fully access their operating systems.
On the other end, they link manufacturing enterprises, selecting one manufacturer with the strongest quality for each item to cooperate. This platform becomes a distribution center for receiving orders and improving overall production capacity.
At the same time, suppliers use data transmitted through channels such as WeChat, Alipay, facial recognition, and store public Wi-Fi to monitor store sales in real time. Compared to big data from platforms like Taobao and JD.com, this data is more micro and precise. Manufacturers and retailers can use it to analyze customer group structure, activity index, spending power, product preferences, and achieve behavior tracking.
They divide products into 50 SKUs of factory-customized items, around 200 SKUs of factory volume items, and 800 SKUs of factory standard items, which can provide gross margins of over 80%, 15%-25%, and 40%-50% respectively for stores. This allows retail enterprises to no longer be constrained by procurement scale.
In other words, this manufacturer transformation integrates logistics construction, distributor services, product planning, store data collection, procurement solutions, display combinations, warehouse management, and new product development into self-built B2B platforms. They dismantle the deep distribution system and integrate roles such as distributors into the platform. At the same time, they expand retailers' operational space in terms of price and products, potentially pushing retail enterprises into undifferentiated competition.
Source: Third Eye View Retail (ID: retailobservation) -END-