In the first half of 2018, operating revenue reached 36.9 billion yuan, a 21.21% increase compared to the same period in 2017. This is the first mid-year report card for Eternal Asia after joining hands with Shenzhen Investment Holdings (深投控).
Recently, Eternal Asia released its 2018 semi-annual report. The financial report shows that during the reporting period, Eternal Asia's total operating revenue was 36.900 billion yuan, up 21.21% year-on-year; total profit was 461 million yuan, up 14.91% year-on-year; net profit attributable to the parent company was 342 million yuan, up 3.63% year-on-year. Notably, this is the first annual report disclosed by Eternal Asia after Shenzhen Investment Holdings' strategic equity investment. Despite the impact of domestic economic conditions and financial market fluctuations, it is clear that Eternal Asia's overall financial position is sound, and its development continues to show a growth trend.
So how does Eternal Asia, which is deeply rooted in supply chain, respond to changes in the domestic FMCG industry? After strategically partnering with Shenzhen Investment Holdings, what changes will occur in Eternal Asia's deep supply chain construction? Recently, New Distribution exclusively interviewed Chen Fangquan, Executive President of Eternal Asia's 380 Ecosystem, hoping his views and insights can bring some food for thought.
1 Change and Constancy
After decades of development, China's FMCG distribution channel structure has reached a historic turning point. On one hand, new business models such as new retail, new technology, and new logistics are impacting traditional business structures; on the other hand, rising operational costs including labor and materials are testing the survival capabilities of all participants in China's FMCG industry.
Chen Fangquan, Executive President of Eternal Asia's 380 Ecosystem
"Although various emerging channels and distribution methods have appeared in China's FMCG distribution structure, resulting in a coexistence of traditional distribution methods and emerging digital channels, overall, traditional distribution structures and distribution levels still dominate, and the circulation status of the FMCG industry has not undergone fundamental changes; it remains a brand- and capital-driven, quasi-smallholder economy industry," said Chen Fangquan.
Circulation consists of various links: first, brands; second, circulation links; third, the financial environment; and fourth, infrastructure construction including warehousing, distribution systems, and information technology. Chen Fangquan told New Distribution that as the social economy advances, the various circulation links do not develop in sync, leading to the current situation where channel construction in the FMCG industry is still primarily driven by major brands.
Looking back at the development of China's retail industry, since foreign hypermarkets represented by Walmart and Carrefour entered China, they have to some extent driven the development of the entire retail format. However, the current situation where the market competes upstream in the supply chain rather than being market-oriented and consumer-service-centered indicates that China's entire retail format still has many underdeveloped areas. Coupled with the uneven development of various regions and the complexity of urban structures, traditional distribution channels still dominate China's overall FMCG distribution structure.
Traditional distributors face strong brand owners upstream and strong retailers such as KA and hypermarkets downstream. Coupled with the imperfect financial structure and environment in China, this has led to a large number of distributors "surviving in the cracks," with their survival conditions not optimistic.
2 Dilemma and Way Out
The shrinking living space for distributors is both a challenge and an opportunity for the entire FMCG distribution industry. It means traditional distributors must make changes, and the industry as a whole is bound to undergo a relatively large-scale integration. Currently, a large number of native B2B platforms have emerged, including internet giants like Alibaba and JD.com, which have extended their development tentacles offline. On one hand, this proves the importance of offline distribution business; online e-commerce cannot develop independently without offline entities. On the other hand, it also means that many centralized e-commerce enterprises are facing development bottlenecks in their online businesses and urgently need new growth points to break through development constraints.
In Chen Fangquan's view, no matter how the product categories and business models under the new retail system change, the overall model of China's supply chain has not undergone fundamental changes, nor has a business environment for industrial interaction been fully formed. Regardless of social development, the starting point of industry transformation must be to make the entire distribution chain more responsive, more convenient, more efficient, and more cost-effective. In contrast, many online e-commerce companies' business models are not much more efficient than traditional offline methods.
What role does Eternal Asia play in the traditional FMCG distribution channel?
"Through the new distribution system, Eternal Asia has reduced the circulation links in FMCG, truly achieving a channel structure from brand to Eternal Asia to retail stores," Chen Fangquan emphasized. Eternal Asia is also the first supply chain enterprise that can truly cover so many regions and achieve nationwide response.
Among the various participants in the supply chain, there is always a phenomenon of upward or downward bargaining. In the past, traditional distributors were small and scattered. As upstream brand owners and downstream retailers become increasingly powerful, distributors' voice in the entire supply chain has become lower.
At the same time, because traditional distributors bear the function of capital reservoir in the entire distribution channel, they face excessive capital occupation and thus lower capital returns. Additionally, distributors' business models are relatively simple and their operating models are traditional, directly leading to difficulties in obtaining formal financial capital support during daily operations. Moreover, the small and scattered state also leads to non-standard internal management and operations, incomplete infrastructure such as warehousing and distribution, and difficulty in achieving intensive development.
"What Eternal Asia has done in recent years is to build a relatively efficient distribution economic model for traditional distribution channels, while also establishing a rapidly responsive network in the consumer goods distribution industry. However, because the thinking of most industry practitioners lags behind to some extent, we have adopted a self-built + integration approach to complete the integration of traditional advantageous channel forces. To date, Eternal Asia has integrated more than 300 excellent regional distributors nationwide, helping them undergo comprehensive transformation and upgrading in business models, systems, and concepts. What Eternal Asia ultimately aims to achieve is to output supply chain services, information systems, financial technology, store management, industry experience, and other capabilities through this large-scale infrastructure construction, thereby establishing a comprehensive commercial platform that integrates production, sales, and finance in the distribution industry. "
Regarding the rapidly developing B2B in the FMCG distribution channel, Chen Fangquan believes that burning money is not advisable; price wars cannot bring long-term store stickiness or healthy industry development. Most B2B platforms invest heavily in warehousing, distribution, ground promotion, and product aggregation, which Eternal Asia started doing ten years ago. Although Eternal Asia has also invested significant capital in this process, it has been around business financing, developing in conjunction with local distributors.
In the traditional distribution network, the channel remains a brand-driven distribution system. Currently, Eternal Asia, which started from distribution, has completed the construction of a basic control model and infrastructure composed of more than 300 high-quality distributor resources nationwide. What is Eternal Asia's strategy as it enters its second development stage?
"Starting from 2018, our internal 380 has gradually evolved from a brand-driven distribution model to a service model oriented towards terminals and consumers. Eternal Asia will provide comprehensive commercial services that integrate production, sales, and finance for industry participants, allowing finance to support the development of the entire industry. For the vast number of small and medium-sized brand owners who lack strong supply chain channels like major brands, Eternal Asia can help them achieve brand growth at lower costs."
Chen Fangquan believes that the most fundamental change of new retail compared to traditional retail is because "people" have changed; the change in "people" has driven changes and innovation in retail. On one hand, the younger generation has become the main consumer group; on the other hand, industry practitioners are also undergoing generational changes, directly leading to changes in the entire supply chain distribution industry. Therefore, Eternal Asia has proposed a new distribution strategy. Currently, new retail species under the mainstream new retail, such as Hema Fresh, are driven forward by capital, while the vast number of small and medium-sized industry practitioners lack the ability and opportunities for such transformation and upgrading. Capital generally does not pay attention to these small and scattered formats, but Eternal Asia is willing to help these small and medium-sized enterprises grow together and complete the transformation and upgrading of new industries and new retail.
3 Next Ten-Year Plan
After two months of due diligence, Eternal Asia officially announced Shenzhen Investment Holdings' strategic equity investment on August 14. This event has been widely interpreted as a landmark event in the history of China's supply chain development, and China's supply chain construction will also usher in a new situation of mixed-ownership reform with state capital.
Analyzing the reasons for Shenzhen Investment Holdings' investment in Eternal Asia, Chen Fangquan believes there are mainly two reasons:
As a state-owned enterprise, Shenzhen Investment Holdings serves as a bridge between the Shenzhen government and the market. Investing in the supply chain industry aligns with Shenzhen Investment Holdings' strategic need to build "three major industrial clusters": financial services, science and technology parks, and emerging industries and high-end services. The development of the supply chain is not only an enterprise issue but also an important part of national strategies in technology, economy, and people's livelihood.
Shenzhen is the bridgehead of China's supply chain development. Among all enterprises in Shenzhen, besides its achievements in production-oriented supply chains, Eternal Asia has also taken the lead in establishing a deep consumer-oriented supply chain, making it a well-deserved leading enterprise. Since launching the 380 strategy in 2009, Eternal Asia has established a nationwide logistics network and FMCG distribution channels, thereby achieving rapid response across the entire supply chain, which other supply chain companies do not possess.
"The supply chain is a social infrastructure. Now that Eternal Asia has state capital investment, it not only strengthens our capital strength at the capital level but also helps participants in various industries pay more attention to cooperation with us, providing broader cooperation space for us and all supply chain participants. It also facilitates our innovation in the entire FMCG distribution channel and the rapid implementation of various market policies. In the long run, cooperation with Shenzhen Investment Holdings is also conducive to spreading our supply chain service philosophy throughout the industry in the next decade, sharing our supply chain service experience and capabilities with the entire industry, and then integrating the supply chain into broader regions and fields."
After nearly 20 years of development, Eternal Asia has built a traditional supply chain centered on breadth and a deep supply chain with 380 as the main advancement strategy. Chen Fangquan said: "In the third decade, our goal is to spread our supply chain to more fields, provide more supply chain construction services, and promote the transformation and upgrading of industry services. In addition, Eternal Asia will focus on terminal and consumer services, connect more brand owners to promote the upgrading and changes of the entire distribution industry, and truly achieve the strategic goal of new distribution and linking the entire industry chain. "
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