As 2023 draws to a close, New Distribution has been actively engaged with distributors throughout the year.

In May, preparations began for a distributor membership organization, leading to the official establishment of the Distributor Membership Club in June, which recruited over 200 outstanding regional distributors in less than two months. In August, preparations started for the first China FMCG Distributor Conference, which concluded successfully in October, where the club was upgraded to the Tower Alliance. In September, a survey on the operating conditions of Chinese FMCG distributors was initiated, involving nearly 300 distributors, and the "2022-2023 China FMCG Distributor Operating Conditions Survey Report" was officially released in October. In December, plans are underway for the first member representative assembly of the Tower Alliance and the formulation of key activities and work content for 2024.

Throughout this year, New Distribution has visited numerous distributors and explored various regional markets. Taking this opportunity, we would like to summarize and share the market phenomena and changes we have observed and heard.

Regional Trade Landscape: Accelerated Mergers and Integration, Distributors Moving Towards Supply Chain Management In a previous exchange with a regional major distributor, a viewpoint was shared: "The core competitiveness of a distributor lies in being able to thrive even without any single brand, by managing their own supply chain." During our market visits, New Distribution has observed that when distributors reach the top tier in their region, supply chain management becomes an inevitable trend for continued growth and expansion. The logic is simple: A distributor's business growth comes from two sources: first, coverage of blank areas; second, increased output per store in existing coverage. Both ultimately depend on supply chain development. Developing new outlets requires having good products that precisely meet store needs. In the past, many distributors struggled to increase store coverage, largely due to insufficient product supply. For example, if a distributor only handled daily chemicals, many mom-and-pop stores might not sell well in that category, and even if they entered the store, they would eventually be removed. To increase output per store in covered outlets, the most direct way is to maximize shelf space in stores. However, store shelves are limited, and the shelf space for each subcategory is generally fixed. If you don't have enough SKUs, stores won't allocate shelves for identical products unless you spend money without regard for cost. Of course, returning to business fundamentals, supply chain management for distributors is about compressing costs and improving efficiency. To achieve scale coverage of small stores while supporting labor costs, distributors must achieve scale distribution and increase the proportion of sales from small stores. Distributing 10 brands versus 100 brands incurs roughly the same basic cost per salesperson, but terminal maintenance costs are significantly reduced. The sales cost of a salesperson visiting terminals can be divided into four parts: time costs for travel, display, and sales, plus transportation costs. Travel time and transportation costs are shareable. Regardless of how many products are distributed, as long as they enter the store at the same time, these two costs remain unchanged. This means the more SKUs entering the store at the same time, the lower the shared cost per SKU. When you have more SKUs in the store and a higher share of shelf space, your bargaining power at the terminal increases significantly, and there is greater room to compress display fees, maintenance costs, and other expenses. Distribution efficiency also improves. In the past, a salesperson selling a dozen brands was the limit; now, can one salesperson sell 200? Using digital tools and platforms to achieve terminal coverage helps salespeople distribute more products more simply and efficiently. At the same time, when your supply chain is sufficiently rich, your negotiating power and bargaining power upstream also increase. Moreover, based on your coverage and operational capabilities, many brands will proactively approach you. New Distribution predicted in a previous article that in a fourth- or fifth-tier city, the distributor landscape will consist of 1-2 full-category supply chain platform companies, about 10 category-focused distributors centered on a specific category, and about 30 brand-focused distributors centered on warehousing and distribution plus a specific brand. When mergers and integration conclude, 50 distributors in a city will suffice.

Retail Market Changes: Hypermarket Business is Tough, Small Store Business Has Potential According to data released by the National Bureau of Statistics of China in the first half of the year, total retail sales of consumer goods reached 22,758.8 billion yuan, a year-on-year increase of 8.2%. By retail format, among retail units above the designated size, convenience stores, specialty stores, brand stores, and department stores saw retail sales increases of 8.2%, 5.4%, 4.6%, and 9.8% respectively, while supermarket retail sales decreased by 0.4% year-on-year. From the data, supermarket snack sales were the only category to decline year-on-year. Looking at another set of data, among the top 10 listed supermarket companies by sales, 4 were in a net profit loss state, while the remaining 6 were barely profitable. The above data sufficiently demonstrates that traditional physical supermarkets are facing increasingly severe challenges and are entering their most difficult period. During our market visits in the first half of the year, New Distribution visited many distributors and observed core stores in these regions. The most headache-inducing issue for distributors is the hypermarket business. Although the business scale seems large, when the data is pulled out, most are not profitable, or even in a loss state, and distributors also bear the risk of hypermarkets going bankrupt. The current situation in many markets is that capable distributors don't want to do hypermarket business, while those without strength can't do it—they lack sufficient funds to even cover advance payments. In stark contrast, terminal small store business has become an opportunity for distributors. In the past, distributors operated based on distribution logic, measuring store importance by single-store output, which led to a long period of neglect for small store business. Because the output of many terminal stores is indeed very low. Moreover, demand is scattered; each order might be a box of beverages, a few packs of snacks, a few bottles of soy sauce, etc. Distributors are accustomed to shipping full boxes and cases—in other words, they are used to making quick money and are unwilling to earn troublesome money. Small stores require breaking bulk and picking goods, with low output, so it's normal not to want to do it. But in reality, the potential of small store business is enormous. The depth of China's offline market is too great, and the market will still need a large number of community small stores to serve consumers in the future. Even if single-store output is low, the quantity is there; as long as scale is achieved, volume will naturally rise. As traditional hypermarket formats fall into difficulty, distributors must also think about new market growth. Although small store business is small and fragmented, the market space remains. It is foreseeable that competition in small store business will intensify in the future.

New Formats and Models: Snack Hard Discount and Lightning Warehouses Accelerate Expansion This year, two new retail formats have been very popular: snack hard discount and Meituan Lightning Warehouse. Undoubtedly, these two new formats have had a significant impact on distributors' businesses. First, let's look at snack hard discount. New Distribution conducted a survey for the "China Snack Hard Discount White Paper: FMCG Industry Insights 2023," involving over 100 distributors, and 52% of them reported a decline in business due to the impact of snack hard discount. Why such a big impact? The most direct reason is lower prices. For example, a bottle of C'estbon water that sells for 2 yuan in regular stores sells for 1.2 yuan in snack stores, and a bottle of Eastern Leaf tea that sells for 6 yuan sells for 2.7 yuan in snack stores. Snack hard discount stores can offer prices 20-30% lower than traditional supermarkets and mom-and-pop stores on average, and even 60-70% lower for beverages compared to traditional channels. Distributors need to understand that behind the snack hard discount model, the reason prices are so low is essentially the extreme optimization of the supply chain. On one hand, through extreme product selection, they increase inventory turnover, achieving low gross margin and high turnover. On the other hand, by compressing supply chain links, they reduce costs. This is what New Distribution referred to in previous articles as the integration of distribution and retail. From a terminal perspective, snack hard discount is a supply chain revolution, essentially high efficiency replacing low efficiency. Now let's look at Lightning Warehouse. Lightning Warehouse is a format derived from the instant retail model, a convenience store-type front warehouse, with the core of solving the mismatch between online consumer demand and offline product supply. A simple formula: Lightning Warehouse = Convenience Store (+ Department Store) + Pure Online Sales + Hourly/Half-Hour Delivery. Like offline convenience stores, Lightning Warehouses serve consumers around the physical store. The core advantages of Lightning Warehouse lie in three points: first, fulfillment timeliness, providing quick satisfaction; second, coverage radius, covering 3-5 kilometers around the warehouse; third, product supply, with 4,000-5,000 SKUs per warehouse, basically meeting consumers' daily needs except fresh produce in one stop. Consumers' shopping habits are shifting online, and combined with these advantages, it will inevitably replace some offline traditional store business. Whether it's snack hard discount or Lightning Warehouse, the impact on the local trade system is inevitable. Distributors need to think ahead about how to survive the transformation and even benefit from it.

Internal Organizational Transformation: Eliminating "Extensive" Models, Strengthening "Fine" Management Recently, I communicated with a distributor from the southwest. He had been in business for over a decade with consistently low sales growth, but starting in 2020, he implemented fine organizational transformation, established talent screening and management systems, and created a compensation and performance system centered on net profit sharing. As a result, his business has doubled in growth over the past three years. Distributors are a group that continuously evolves with market changes. From the 1990s to today, distributor businesses have gone through four stages: workshop-style operation, family-style operation, team-style operation, and enterprise-style operation. The core of enterprise-style operation is fine management. In the past, when demographic and market dividends still existed, distributors could rely on extensive management, doing good distribution and coverage, and sales tasks would basically be completed. But today, the market has entered an era of intense competition in a zero-sum game. The pie is fixed; whoever is more efficient and capable will have the advantage in the market. Behind efficiency improvement is the standardization and digitalization of business processes, such as standard procedures for salespeople entering stores, standard processes for warehouse operations, and financial internal control systems. Behind capability improvement is the management system for talent development and team building. For example, a distributor from Guiyang shared that they established an internal talent ladder promotion system, from picking to driver to salesperson, fully achieving self-sufficiency in sales staff and avoiding the risk of hiring external salespeople. In the current market environment, survival of the fittest, and fine management for distributors is an inevitable result of market development.

Final Thoughts After a round of exchanges with distributors this year, I have a deep impression: market changes are fast and complex, but most distributors are slow to react. By the time they realize it, the market has already been eroded. Because the emergence of a new change inevitably follows a cyclical growth, the reaction time given to distributors is the same. But whoever pays attention earlier and responds earlier will be the one to survive the changes, and even grow stronger.