Source: WeChat public account "Weizhi" (为之)

The consumer goods market has been in a cold winter for two years now. From a macro perspective, it seems the bad news is far from over.

There is no mahjong game without reshuffling, even Sichuan mahjong. Under the overturned nest, some consumer goods companies are having a hard time; this is a normal reshuffling reaction, and their previous round of the game has come to an end.

In the past 30 years in China, a company's sales growth has relied on a combination of four forces:

  1. Market base: the huge market capacity nurtured by a large population base and continuously increasing per capita consumption power;
  2. Category penetration rate: from non-use to use, the proportion of users in the population is increasing;
  3. Category upgrade: from spending less to spending more, per capita contribution is continuously increasing.
  4. Expansion of market share: through brand positioning, product mix, and segment market operations, to occupy the market and gain share from other brands.

It is unrealistic to expect rapid growth in the population base. The country's two-child policy has come, but it's no use. People have looked at too many phones, their endocrine systems are generally imbalanced, and their fertility is severely compromised. Those who relied on China's demographic dividend or category user growth to drive sales in the past have been feeling nostalgic for the past two years. Typical examples include candy, beverages, infant formula, liquid milk, instant noodles, biscuits, sanitary napkins, shampoo, etc., all of which are bottleneck enterprises. The penetration rate of these categories in the population has reached a certain level; it is difficult to attract new users, and it is also difficult to get people to use more, so category development has become sluggish.

In the past several years, China has been enshrined as the "world's incremental engine" in the international divisions of Fortune 500 companies, but now the situation is not optimistic. David Taylor, CEO of P&G, said grandly at the 2016 Consumer Analyst Group of New York conference: "In China, our second-largest market, no core category is adding users, and most are even declining."

Growth is stagnant, but profit targets must still be met. Some companies choose a hard price increase, like pulling a carrot out of dry soil: "I'm raising prices, what can you do about it?" Or they raise prices with dignity by launching high-end new products: "We've upgraded, so it's a bit more expensive!" But there is a limit; not all brands can support such high premiums, so this tactic quickly reaches its end. As a result, hard friction between brands becomes more intense, marketing expenses increase, gross margins cannot be further improved, and operating profit margins generally decline steadily.

The topic of e-commerce cannot be avoided. The intensifying brand competition mentioned earlier is accelerated by e-commerce. The challenge of e-commerce is not just adding a channel; it is a revolution against traditional channels. Traditional enterprises think this is a newcomer competing for market share, thinking they are naughty, but in fact, they come with a mace to smash your skull and a red brick to hit the back of your head. The brand theories, marketing methods, and distribution channels of the industrial age are caught off guard and trembling in the face of e-commerce's fast, cheap, and ubiquitous consumer communication.

The good days for "small but beautiful" brands have arrived. With e-commerce platforms, they quickly occupy fragmented demand segments, so small that big brands can't see them or look down on them, and so numerous that big brands can't fight them all. They are rapidly eroding the market share of big brands. To make it more vivid, you can imagine scenes from the animal world, with Zhao Zhongxiang's narration. And this is just the beginning; it will become more troublesome later. Big brands remain big and blue-chip, but not like "this time last year in this door."

E-commerce now seems warm and joyful, but this wave of e-commerce will eventually ebb, after all, they are also in the game and will be reshuffled. E-commerce companies are preparing for a rainy day, looking for a soft landing. For example, breaking the online-offline boundary and getting more involved in the real economy. JD.com invested in Yonghui, Alibaba invested in Suning and acquired Intime, etc. There are many such news. The B2B business in the consumer goods field is just beginning, but the trend is clear and the momentum is huge. JD New Channel, Alibaba 1688, etc., are coming with a murderous aura, with a clear goal: to replace distributors.

At any stage, professional managers come and go between companies. Situation 1: Those who jump between bottleneck enterprises are like security guards changing posts within a small area, giving the property company a pretext for various dark policies. It's easier to act in a strange environment, and the psychological pressure is less. These brothers and sisters should adjust their mindset, believe in the industry cycle. What you lose is growth; what you have is the big picture and stability. As long as the board doesn't bubble randomly and the general manager's reflex arc is long enough to withstand pressure, your days are still normal. If you are the general manager, then you deserve no sympathy; you took the money, so the worry is deserved.

Situation 2: Some people jump into these enterprises from outside. This requires blind optimism and the courage to challenge yourself. Treat it as a training experience. I won't explain further. "All roads are the only way," just accept your fate.

Situation 3: Those who jump from such enterprises to internet technology companies like Tencent, JD, Alibaba, Vipshop, Yihaodian, are like little pigs standing at the风口, blown into the air, wearing pink polka-dot swimming trunks, full of vigor. I can picture it in my mind; it's warm, cute, and inspiring. I wish you all a fragrant flight.

Categories are difficult, enterprises are difficult, competition is fierce, and e-commerce is challenging to a duel. Looking at these together, consumer goods enterprises and channels are deeply conflicted. Everyone is discussing where to go next. In the spirit of watching the excitement without fearing the trouble, I'll share my views.

Let me share my thoughts

This part is more boring than the previous; proceed with caution. If you can't read on, it means this matter is not relevant to you right now. Fortunately, there are not only boring articles in front of you, but also exciting columns like Tencent News and others' Moments.

Trends in the Evolution of Distributors

1) Channel profits are insufficient to support a multi-tier distribution network.

  • Impact from e-commerce and logistics providers: The traditional distribution chain, through distributors, secondary distributors, wholesalers, and finally to the terminal, thrives on information asymmetry and regional monopoly. The more closed the information, the greater the channel benefits. These two points are quite fragile in the face of the internet and logistics networks. Brand manufacturers cannot defend the original channel benefit structure.
  • The profit dilemma from brand manufacturers: Hit by the three forces of market downturn, industry competition, and rapid e-commerce development, brand manufacturers' operating profit margins continue to decline, leaving less and less price difference space for intermediate links.
  • The multi-tier network can't continue: Each link must obtain its own returns. When input-output is not ideal, that link will exit the game; this is a basic economic law. Intermediate links will inevitably continue to exit, and channel flattening is an inevitable trend.

2) If you can't support multiple tiers, you must shorten the value chain; this is the process of "flattening." Flattening is inevitable, but there will be phased layouts, not a leap to the level of regional monopolists. There are two approaches:

  • Dispersed flattening: A "mountain king" style of flattening, upgrading the original secondary distributors and wholesalers to distributors, dividing the market into smaller pieces.
    • Typical practice: Originally there were 60 distributors in 1-2 tier cities; now open 220 new distributors in 3-4 tier cities, upgrading the original secondary customers to primary customers.
    • Advantages: Fully guarantees the interests of distribution customers, giving them enough motivation to develop the market;
    • Disadvantages: 1) Increases management difficulty for the enterprise; 2) Weakens the enthusiasm of large distributors; 3) Increases the difficulty of market price control.
  • Scale flattening: A "warlord" style of flattening, where fewer large distributors control the market, and large distributors manage lower-level markets through branches.
    • Typical practice: Reduce 710 distributors to 130, or even fewer.
    • Advantages: 1) Easy to manage, after all, fewer objects to manage. 2) High market service level, after all, these large customers' service awareness and service levels are relatively better.
    • Disadvantages: A new round of internal multi-tier network emerges. The head office wants profit targets, and branches also need to support themselves. No one will do low-profit work, and coverage services in lower-level markets may not be good.

3) Flattening will inevitably lead to scaling.

  • From dispersion to concentration is a development law: The result of market development is inevitably toward scaling and concentration, eventually becoming relative monopoly. This is an economic law; no explanation needed.
  • Capital intervention accelerates the process: Capital is a strong medicine that makes people enthusiastic about business: many enterprises with capital at their backs, such as Eternal Asia, the famous "supply chain finance enterprise," are acquiring distributors nationwide, greatly accelerating the scaling development of distributors, artificially ripening them. Today, these ripened distributors stroke their beards and thank Eternal Asia for helping them develop early; tomorrow, they will join brand manufacturers in cursing the unfair distribution of benefits. That's a story for later.
  • Ultimately, it's a market for a few big players: The total capacity of China's FMCG market is 1.5 trillion yuan. If offline accounts for 2/3 (in fact, in 2015 it was 96%, with e-commerce raising a haze of dust, lively but less than 5% share), that's about 1 trillion yuan. If a scaled distributor maintains a scale of 20 billion yuan, 50 distributors nationwide would be enough.

4) B2B platform enterprises with e-commerce and logistics genes will quickly seize market share.

  • In the data age, business is inevitably based on efficient and equal information communication. E-commerce and logistics enterprises have such genes.
  • Only integration at the logistics level can bring true value.
    • Weifang has more than 300 vehicles from various consumer goods distributors delivering goods; after integration, it may need no more than 100 vehicles. The savings create real value.
    • Distributed B2B platforms, if they cannot integrate logistics and only collect information from terminals for distributors, I don't see any future for them. They cannot create substantial value for society, so they are just a transitional product. Due to poor quality and lack of patience, my judgment criteria for such things are simple and crude: if a tool is better with it and fine without it, it's basically nonsense, won't last long, and not worth investing in; if a person is better with them and fine without them, you should cherish them, because such fate can truly warm your life.
    • Flattening and scaling will eventually evolve into a "brand manufacturer - B2B platform - shopper" model. B2B platforms, or "platform merchants," must simultaneously possess internet trading, logistics networks, and supply chain integration capabilities, trinity. Their efficiency will inevitably be much higher than that of individual, isolated distributors.
    • Platform merchants will evolve into enterprises similar to Japan's large general trading companies (sogo shosha), dominating channel business behavior. Sumitomo, Itochu, Mitsubishi, etc., these large platform merchants have established an efficient vertical distribution system for Japan's FMCG market, with 92% of retailer purchases coming from them. Will China be like this? At least it's one possibility.

Changes and Impacts in Retail Channels

1) Wholesale markets: Wholesale markets mainly dealing in FMCG are being greatly impacted by B2B platforms, with their scale and numbers rapidly decreasing. China's market has too much depth; wholesale markets will not completely disappear. After all, minority pastoral areas need ironware, salt, and ham sausages. Wholesale markets have significance as a natural distribution supplement for 5-6 tier areas, but they are not worth brand investment.

2) Traditional small stores: They are being rapidly integrated by institutions and becoming chain franchise stores. Investment institutions are heavily investing in chain convenience stores, using capital to promote mergers and acquisitions, accelerating the chain-ization of traditional small stores. Those brand manufacturers who rely on traditional small stores will have to face the challenge of channel reshuffling. In 1-2-3 tier cities, traditional small stores, mom-and-pop stores (I've always thought these three people opening a store is a perfect combination), grocery stores, and sundry shops will gradually become a folk custom scenery. Some people go to Lugu Lake to see the walking marriage, some go to suburban villages to experience grocery stores and understand what business looked like in the past: "Child, you see, this is the traditional independent small store without centralized procurement. The bald fat man sleeping in the rattan chair in the corner is the owner." "WOW, Mom, this is so cool." Some enterprises have formidable traditional channel coverage systems, such as Master Kong, Coca-Cola, Wrigley, etc., with thousands of grassroots sales representatives forming various grassroots organizations like sales offices, covering traditional small stores without missing a drop. These skills are gradually becoming awkward, like the photography darkroom techniques I mastered as a child—developing film, developing, fixing, enlarging, glazing—now they don't even count as intangible cultural heritage.

3) Chain convenience stores: Community-based CVS and small supermarkets are the stars of tomorrow, becoming the most important "KA" of the future. The "last mile" has heated up chain convenience stores, and their importance has been recognized by the industry. For brand manufacturers, this business is now tangled: everyone knows its importance, but current sales are not large. Investing early affects short-term performance; not investing early loses market opportunities. This is the time to test the enterprise's vision. Regardless of your wishes, in China, chain convenience stores are bound to eventually become retail overlords. Chain convenience stores, chain pharmacies, community baby stores, and personal care stores—these formats will eventually have a cross-border fight in the community. The outcome is uncertain because the biggest influencing factor is national policy. Based on foreign development, it's more economical to integrate chain pharmacies, personal care stores, and community baby stores. Don't you think a pharmacy selling children's care and personal care products sounds more reliable? If one day the state issues a regulation that infant formula can only be sold in pharmacies, and at the same time, the non-drug part of pharmacies is opened up more, my speculation will be realized overnight. Nothing new, just like Personal Care Stores in the US.

4) Hypermarkets: In many 1-2 tier cities, there is an average of one hypermarket per 70,000 people, which is too many. Retail turnover and gross margins are declining, commercial real estate rents are high, leading to a wave of hypermarket closures. Some basic numbers: In 2013, 35 major retail enterprises closed; in 2014, 201 closed; in the first half of 2015, 121 closed. I don't have the full-year number, but it should be over 200. This trend will continue for two more years, gradually reaching supply-demand balance. Eventually, hypermarkets will shrink to one per 200,000 people, gradually coexisting with shopping malls, similar to the trend of department stores, becoming good places for shopping and leisure, focusing on experience. Hypermarkets will always exist, but their glory days are over. MacArthur's famous speech in Congress, "Old Soldiers Never Die; They Just Fade Away," is dedicated to hypermarkets.

5) Terminal procurement becomes more centralized, with strengthened central control. Regardless of the format, central control management is the trend. The number of regional procurement will decrease, and communication and collaboration between brand manufacturers and headquarters is an increasingly important topic. Almost all customer management follows the KA approach. The days of everyone laughing, smoking, drinking, playing mahjong, sauna, and bathing to boost sales are becoming rarer and more precious. In the past two years, everyone has been talking about JBP; in the future, JBP will become the main communication tool. The KA customer management techniques used for Walmart and RT-Mart are essentially the same when applied to large e-commerce and large distributors.

6) It doesn't matter whether it's e-commerce or not. Next, most large e-commerce companies will get involved offline, and offline retailers will get involved online in some form. At that point, the term "e-commerce" will soon be obsolete. Everyone will return to being retailers. JD, Walmart, Tmall, RT-Mart—there's no essential difference.

Impact of Distribution Channel Changes on Brand Manufacturers

The changes in distributor channels have changed the market ecology, and brand manufacturers must adapt to the new environment.

1) The "market service" model for distributors begins. The "deep distribution" model of brand manufacturers is coming to an end. The era of "enterprise running society" is over. Brand manufacturers are gradually abandoning the "self-built team to cover the market" approach. This business is gradually being transferred to distributors with coverage capabilities and professional market service companies.

2) Platform merchants become super KAs. The biggest "KA" for brand manufacturers becomes Eternal Asia, JD New Channel, Alibaba 1688 Retail Link, etc. They are platform merchants, super KAs. Then, the relationship becomes subtle.

3) The delicate competitive-cooperative relationship between large brand manufacturers and platform merchants. The naive platform merchants don't understand regional business well, have strong idealism, and talk big. Large brand manufacturers, with a normal mindset and without prejudice, say these platform merchants are actually quite annoying. But with capital and industry bigwigs behind them, the probability of success is high, so they must be taken seriously. Large brand manufacturers will worry about these issues:

  • Sales volume: existing or incremental? Will it bring additional sales growth, or just eat the volume of existing distributors?
  • Profit: How to maintain the manufacturer's operating profit margin? These platform merchants have much stronger negotiation power than ordinary distributors, so brand manufacturers have to give them greater policy support. Once platform merchants form relative monopoly, their fee collection will not be lower than Carrefour's, further reducing brand manufacturers' profitability.
  • Capital: How should manufacturers deal with the capital pressure from platform merchants' payment terms? As platform merchants grow, they begin to demand payment terms from manufacturers. The distribution link, which accounts for a high proportion of enterprise sales, has mostly been cash-on-delivery since the mid-1990s. The increase in channel receivables greatly increases the capital burden on brand manufacturers and ultimately leads to a decline in return on investment.
  • Price: How to maintain the price system? Take JD New Channel as an example. Based on JD's usual style, it will definitely use low prices to open the way and achieve rapid terminal expansion. If JD gets competitive prices from manufacturers and bypasses intermediaries, there is a lot of profit space in the middle, and JD doesn't care about short-term returns from New Channel, it will inevitably bring price competition in the channel. Existing distributors, to defend against JD New Channel, will definitely choose price counterattacks. This back-and-forth will push the market price system to the brink of collapse.
  • Management: Cross-regional channel diversion? Cross-regional diversion is inevitable. The balance between platform merchants' national networks and existing distributors' regional networks is a headache for brand manufacturers.

Let me speculate on the development path of platform merchants:

  • Early stage: Large brand manufacturers will not strongly support the development of platform merchants; it is extremely difficult for them to balance the relationship between platform merchants and existing distribution networks. Popular mainstream products will not abandon traditional distribution channels in the early stage. So, for a new channel that can only do hot products or non-mainstream products, its appeal to offline terminal stores is very limited. A platform that cannot offer one-stop ordering will not have high terminal usage. Platform merchants will have a hard time at this stage. During this period, they may calm down and compromise, cooperating with distributors to build market platforms, which will develop more smoothly than building complete channel coverage with their own small universe.
  • Mid-term: When the platform merchant's network is built and mature, under pressure from small and medium brand manufacturers to occupy the market, large brand manufacturers will gradually cooperate, likely providing special products for the platform, but always using various means to control their weight in the business. At this point, the customer network and brand manufacturer network are basically built. Platform merchants will turn around to deal with the distributors in the united front. This is a purge. History tells us that distributors cannot be winners.
  • Late stage: Large brand manufacturers gradually differentiate. Some focus on brand building, product R&D, and production, completely entrusting sales to platform merchants.

4) Opportunities and challenges for small and medium brand manufacturers.

  • At this stage, small and medium brands have limited capabilities and can only develop limited regional markets offline.
  • Under the new platform merchant landscape, as long as they enter the system, they can quickly expand deeply nationwide and quickly gain additional incremental volume. Since it's all incremental, there's no talk of disrupting the market system. Small and medium brands will be willing to give platform merchants more benefits, and platform merchants will have greater motivation to support small brands. Small and medium brands that cannot cooperate with platform merchants will be further squeezed in the offline market and forced to invest more resources in e-commerce platforms.
  • Large brand manufacturers are making noise, saying that platform merchants alone cannot educate customers of small and medium retailers to accept unheard-of brands, so sell-through will be poor, and this model won't work. You might as well go to the countryside and see that those stores display a dazzling array of 3-4 tier brands, most of which you don't recognize. The reason is simple: high gross margins.
  • The downstream customers of platform merchants are mainly small and medium retail enterprises. The smaller the terminal, the stronger the influence on consumers. This can be deduced from the number of shoppers per store employee; pharmacies are also a good example. If platform merchants leave enough benefits for terminals, small and medium terminals will be willing to cooperate with them to promote high-margin small and medium brands, and the promotion effect will not be too bad.
  • In short, this platform is bound to be an ecosystem developed and first benefited by the support of small and medium brand manufacturers. In this system, large brand manufacturers are in an awkward position.

5) Platform merchants will inevitably get involved in supply chain and production.

  • To maximize profits, platform merchants will inevitably move toward private labels.
  • Platform merchants will gradually turn brand manufacturers with strong production but weak channels into OEM factories, further weakening the brand effect of homogeneous products.
  • Small and medium brands that cooperate closely with platform merchants may encounter capital problems during expansion and will use the platform merchants' supply chain finance support, eventually developing into equity cooperation.

At the request of many distributor friends, the fourth B-end e-commerce inspection class of this public platform will be held on August 15-18 in Nanjing and Hangzhou to inspect Qianmi.com and Alibaba Retail Link. Distributor friends interested in transformation can join us for on-site inspection:

Activity process: Time: August 15-18

August 15-18

Nanjing·Hangzhou 15th: Report at designated hotel in Nanjing; 16th: On-site inspection of Qianmi.com, then high-speed rail to Hangzhou in the afternoon; 17th: Participate in the "FMCG Distributor B2B Transformation Exchange Summit"; 18th: On-site inspection of Alibaba Retail Link in Hangzhou;

Distributor friends interested in transformation are welcome to join us to learn and inspect on-site:

Organization format

  1. Company visit
  2. Actual market case visit
  3. On-site explanation
  4. One-on-one communication

Participating distributor friends only need to pay a registration fee of 200 yuan. Other expenses are self-paid. Note: This inspection is limited to distributors.

Interested distributor friends can register by long-pressing the QR code below. When adding, please note: "Fourth Class Registration".

Non-participants, please do not disturb.

Group photos from previous inspections: Group photo of the 3rd B-end e-commerce inspection, from top to bottom: Yunbao Shangmeng, Weijie Chengpei, Wanshang Yizhan. Group photo of the 2nd B-end e-commerce inspection, from top to bottom: Jinhuobao, Caiba, Yishang. Group photo of the 1st B-end e-commerce inspection, from top to bottom: Piduoduo, Beiquan, Yishang.

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