---
title: "Deep Distribution Loses Growth Momentum: How FMCG Brands Plan Growth for the Next Decade"
description: "Deep distribution efficiency has failed. With 5.2 million mom-and-pop stores in China, the market is highly fragmented and multi-tiered. The essence of the deep distribution system that supported FMCG growth for decades was mass production, mass communication, and mass distribution, driven by efficiency. However, this model is now failing due to high costs, single-channel coverage, and the rise of new retail. Brands like P&G have seen revenue declines, and the traditional HBG theory (big brand, big media, big channel) is no longer effective. The article discusses the need to restructure distribution models, focusing on digitalization, integrated online-offline supply chains, and organizational changes to adapt to future growth."
author: "赵波"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2019-05-30"
language: "en"
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# Deep Distribution Loses Growth Momentum: How FMCG Brands Plan Growth for the Next Decade

> Deep distribution efficiency has failed. With 5.2 million mom-and-pop stores in China, the market is highly fragmented and multi-tiered. The essence of the deep distribution system that supported FMCG growth for decades was mass production, mass communication, and mass distribution, driven by efficiency. However, this model is now failing due to high costs, single-channel coverage, and the rise of new retail. Brands like P&G have seen revenue declines, and the traditional HBG theory (big brand, big media, big channel) is no longer effective. The article discusses the need to restructure distribution models, focusing on digitalization, integrated online-offline supply chains, and organizational changes to adapt to future growth.

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**The efficiency of deep distribution has failed**
China has 5.2 million mom-and-pop stores. Due to highly fragmented channels, the market spans from first-tier to sixth-tier cities, with broad and deep market levels, forming a multi-tiered three-dimensional market. Because of the large population, vast area, and information asymmetry, consumers are particularly susceptible to channel behavior, resulting in low self-awareness.
Therefore, the essence of the deep distribution system that supported the FMCG industry's development over the past decades is: mass production, mass communication, and mass distribution. Manufacturers and distributors joined forces to expand production and sales scale, sharing the benefits of economies of scale, with efficiency at its core.
Today, almost all brand owners are gradually feeling that deep distribution costs are too high, and channel coverage is too single, unable to cover online and new retail scenarios. **To cover online e-commerce and the endless new retail scenarios, companies have also established "new retail departments," but it seems more like a patch for a Windows system. Whenever a new channel emerges, a patch is applied.**
Behind the patching lies a contradiction between value and demand:
> 1\. The contradiction between consumers' pursuit of a better life and the inability of big brands to meet their fragmented and differentiated needs;
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> 2\. The contradiction between the massive online products and traditional distribution channels, which cannot meet the diverse retail distribution needs.
The most typical example: P&G, whose revenue began to decline from fiscal year 2012, dropping from $82 billion to $65.06 billion in fiscal year 2017. This figure is lower than the $68.2 billion in 2006.
In 2015, after Ma Rui Si became CEO of P&G China, he conducted market research and did three things: 1. Product premiumization; 2. Marketing digitalization; 3. Sales omni-channelization. After three years of effort, in 2018, they delivered a good report card, with fiscal year 2018 revenue of $66.8 billion, halting the decline of previous years and starting to recover.
Looking back at P&G's changes over the years, the problem is not simply brand aging or intense competition; the deeper core is the failure of the "HBG concept" that P&G people have always believed in. That is the real problem.
**The three most important elements in HBG theory: 1. Big brand; 2. Big media; 3. Big channel.** Only big brands have more consumers; only big media can constantly remind consumers of you; only big channels can make it easier for consumers to buy. The product of these three is the market capacity of the product.
It was applicable in the past, but now it may be invalid. Big brands, big media, and big channels can no longer meet the ever-changing consumer needs. This is not just P&G; in the past, all domestic FMCG giants were "believers" of HBG theory, so this is not a problem faced by a single enterprise but an industry-wide issue.
**The channel model urgently needs restructuring**
In 2017, P&G conducted a "salami-slicing" cost-saving experiment on its brand department, deliberately cutting advertising expenses in a certain quarter to see how much impact it would have on sales.
For example, in the second quarter of 2017, P&G cut $100 million from its original advertising budget. The results were surprising: neither product sales nor volume growth declined due to the reduction in advertising investment, and there was even no ripple. From this, P&G drew at least two conclusions:
> 1\. If advertising spending cannot measure actual effects, it may mean that a lot of money is wasted;
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> 2\. P&G's biggest problem is not the brand but the sales channels.
Clearly, the current channels are in a state of excessive fragmentation, but most brand owners' distribution models are still limited to traditional hypermarkets or super-large channels like Tmall, as well as traditional mom-and-pop retail stores, completely ignoring channels that can bring a lot of additional traffic.
The more serious problem is that although channel coverage is not extensive, there is a lot of bickering between departments to which channels belong. The most typical is online special pricing and offline complaints, eventually forcing companies to implement "different product" sales.
**On the surface, this method seems to solve departmental conflicts once and for all. But on a deeper level, the problem is not solved; instead, it increases production costs, reduces production efficiency, disperses market expenses, and disrupts consumers' brand perception.**
In addition, in the traditional distribution chain, due to rising social costs, brand owners and distributors can no longer afford a large number of professional terminal service personnel; distributors' profits are declining day by day, and costs are rising day by day. The previously stable interest structure, even if not broken by outsiders, will collapse internally due to rising costs.
To make matters worse, new retail is coming on strong, with online-offline integrated distribution and digital distribution becoming prevalent. These are capabilities that traditional distributors do not possess.
In summary, the limitations of the existing channel model are:
> 1\. Online and offline are separated, company departmental walls are severe, and there is no coordinated combat across land, sea, and air;
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> 2\. The existing distributor system cannot operate innovative retail channels;
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> 3\. Offline channels are difficult to support the distribution of niche long-tail products;
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> 4\. Products cannot be integrated online and offline;
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> 5\. Traditional channels have data gaps, distribution data is opaque, and there are large distribution blind spots;
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> 6\. Channels accumulate a large amount of inventory, with low turnover and low capital efficiency...
Facing internal and external pressure, companies have shifted from whether to do it to how to do it. Undoubtedly, every enterprise must think based on future consumer and market needs, and how to redesign the channel model.
**Designing the structure of channel digitalization**
If you want to break the interest pattern of the traditional distribution value chain, either the brand owner actively restructures its own value chain, or it is restructured by strong B2B by cutting off the relationship between distributors and small stores.
From the brand owner's perspective, if you want to achieve rapid growth, you must consider actively restructuring the value chain. New Distribution will hold the 2019 China FMCG Conference in Shanghai in August this year, where we will also discuss: What is the strategic framework that can support the sustained growth of the FMCG industry for the next decade?
If we look from the perspective of the next decade, it is imperative for brand owners to build a new digital-based distribution system.
Continuing to think along this dimension, what conditions are needed to build a digital distribution system:
> **1. Precision marketing:** Able to provide consumers with segmented products and services for different consumption needs;
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> **2. Ubiquity:** Able to integrate online and offline, efficiently reach consumers, making products readily available;
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> **3. Network-wide delivery:** Able to achieve one-stop fast delivery for 2B and 2C;
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> **4. Digital management:** Transparent links, accurate data, efficient turnover, able to achieve rapid turnover of long-tail products, avoiding the bullwhip effect caused by information lag;
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> **5. Leverage scissors:** Achieve greater gains with very little human input.
Undoubtedly, this is a huge topic. But this article only discusses two issues around channels: 1. How to achieve a supply chain system for fast delivery of products online and offline; 2. How to build an integrated operation system for channels, market, and marketing.
**1. How to achieve a supply chain system for fast delivery of products online and offline**
To solve online-offline integration and full-scenario reach, brand owners can first try the separation of three flows (logistics, capital flow, and information flow), where warehousing and logistics may prioritize the "one inventory" strategy.
One inventory means: **Build a unified consumer-centric omni-channel supply chain online and offline, manage it with data, and achieve digital integration of logistics, capital flow, and information flow across multiple platforms and the entire chain.**
The purpose of one inventory is very clear: 2B2C can achieve efficient and flexible digital delivery, ensuring high turnover, low cost, and accurate delivery of all products.
**2. How to build an integrated operation system for channels, market, and marketing**
Some deep distribution brands still need ground personnel to maintain a large number of terminals in the short term. After the separation of "people and goods," they can consider expanding distribution (or direct sales) and increasing but making distribution smaller.
**Under the large distribution system, distributors become professional sales companies, carrying local operations and services. Terminal business personnel use digital management tools for unified management, and through professional market operations, achieve integrated online and offline marketing in the region.** We have seen many domestic brand owners attempt similar actions.
**At the organizational level, gradually adjust from the existing divisional system to a staff system; expand headquarters functional departments, collect information across the entire network and chain, conduct integrated analysis, and serve marketing; strengthen the middle platform, break up the marketing, sales, and supply chain departments, and reorganize them. Through the large middle platform, unify fragmented channels to achieve integrated marketing.**
At the business front end, local sales companies restructure online, offline, and social channels, breaking the boundaries of channels and products. **Based on consumer needs and product characteristics, rebuild distribution teams, design a "special forces system," and based on user behavior and scenarios, use small teams to flexibly solve operational service issues in regions and segmented channels.**
**Summary**
The success of channel digitalization depends on three "online" aspects: **Full-chain transaction online, ensuring real-time and accurate data; real-time service online, 24 hours, meeting user needs at all times; full-scenario marketing online, ensuring users can access product information anywhere.**
Behind this is a systematic project, from product positioning, packaging, specifications, and price design, to the design of information systems, logistics systems, and financial systems at the supply chain end, to the construction of innovative marketing systems at the consumer end (communication, fans, communities, full-network three-dimensional integration, promotional innovation), and organizational restructuring at the organizational end. We need to restructure the value chain in multiple dimensions, including thinking, models, organization, products, and operations.
Due to space limitations, we cannot delve into the deeper details of the FMCG industry value chain transformation. Interested friends are welcome to attend the 2019 China FMCG Conference. At this conference, New Distribution will invite many domestic consulting experts, industry teachers, technology companies, and marketing company founders to discuss the underlying logic of trillion-dollar growth in the next decade.


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