First- and Second-Tier Brands, It's Time to Wake Up!

"I hope first- and second-tier brands will reposition chain supermarkets; this is our common future." On August 19, at the main forum of the 7th China FMCG Conference held in Shanghai, Mr. Meng Fanzhong, Chairman of Beiyoute Commercial Group, delivered a keynote speech titled "First- and Second-Tier Brands, It's Time to Wake Up!" From a retailer's perspective, he combined the practices of Beiyoute Supermarket and Zhenshimei Supply Chain to deeply analyze China's current retail environment, the situation of supermarkets, and the role of brands, bluntly stating that brands urgently need to change their perception and cooperation methods with supermarkets. The following is his on-site speech (partially abridged), compiled by New Distribution for readers.

The Root of Supermarket Decline & Beiyoute's Practice of "Replacing Distributors" Only brands with large sales scale and strong channel capabilities can be called first- and second-tier brands, and only they have distributors in various cities and counties. Smaller enterprises basically do not seek distributors in various cities and counties. Some emerging brands now directly cooperate with online platforms or certain enterprises, no longer looking for distributors. Therefore, distributors in various cities and counties are also struggling to survive. Today, from the perspective of a supermarket, I will share with you why Chinese supermarkets have ended up in the current situation.

The positioning of chain supermarkets by first- and second-tier brands is the root cause of the decline of chain supermarkets over the years. As leading brands, it is not difficult to find that they do not take on the responsibility of driving sales in chain supermarkets, but rather treat supermarkets as showrooms, display cabinets, advertising spaces, new product promotion grounds, and high-price image walls, positioning Chinese chain supermarkets in this role. Why has Beiyoute developed relatively quickly and steadily in recent years? In 2019, we identified the most fundamental problem in the supermarket industry. That year was the third year Beiyoute moved from Hegang to Harbin. For six consecutive months, Beiyoute experienced declining sales and gross profit, even suffering losses for half a year. In painful reflection, we discovered a serious problem: the price at which distributors supply supermarkets is higher than the price they supply to small shops. A small shop with annual sales of no more than 2 million yuan can get a lower supply price, while Beiyoute, with annual sales of 2.8 billion yuan, cannot. The unreasonable price system directly exacerbated the decline of supermarkets. So in 2019, we began to break this positioning. We could not accept that distributors supplied goods to a small shop with annual sales of 2 million yuan at a cheaper price than to Beiyoute, which had already achieved 2.8 billion yuan. That year, I began to change this. Through market research, we adjusted our store prices to be no higher than small shops, and required distributors' supply prices to be no more expensive than those to small shops. This single change allowed Beiyoute to survive. In 2023, we realized that distributors in various cities and counties are all small distributors, representing only one or two or three brands, with small scale but high operating costs, resulting in high markup rates. The average markup rate for these small distributors supplying our chain supermarkets was as high as 20%, the same as the gross margin at the retail end, which was shocking to us.

Therefore, in 2023, Beiyoute began to incubate large distributors; we are going to start changing distributors. Beiyoute is not "removing distributors" but "replacing distributors"—replacing these small distributors with an average markup of up to 20 points, and supporting large distributors like Zhenshimei that only add 5 points. These two major changes have enabled Beiyoute to flourish in recent years. Before Beiyoute left Hegang, in 2015, its sales were 1.3 billion yuan. This year, it is about to break 10 billion yuan in sales, with an average compound annual growth rate of 22.6% over the past 10 years. In 2023, we started Zhenshimei, a company formed by more than 20 retail enterprises. With the help of Zhenshimei, Beiyoute broke 5 billion yuan in 2023, reached 7.4 billion yuan last year, and will exceed 10 billion yuan this year. The core reasons for Beiyoute's rapid development in recent years are two: first, the adjustment of the supply chain system; second, the ability to adapt to the trend of widespread decline of large supermarkets in Northeast China (such as Walmart, Yonghui, Hualian, etc.) and the reshuffling of the market, seizing market opportunities.

The Marginalization of Brands in Mainstream Supermarkets Currently, the major mainstream forces in Chinese supermarkets include membership-based systems represented by Sam's Club, the "Fat Donglai reform" systems represented by Yonghui and Bubugao, Hema, and industry newcomers represented by Tao Xiaopang and Xianfeng Life. Their common feature is strengthening private brands (PB) and enhancing processing capabilities (such as 3R and bakery), while first- and second-tier brands are gradually becoming "supplements and decorations" in these formats. Take Sam's Club as an example. Recently, there was an incident involving products like Orion, and the products were even removed from shelves. This shows that in the membership store system, first- and second-tier brands may even lose the opportunity to "show their faces." Hema's advantages lie in bakery and PB; Yonghui, Bubugao, and other "Fat Donglai reform" systems also strengthen PB and 3R. In these formats, the role of first- and second-tier brands is getting weaker. Previously, processing generally accounted for no more than 10% of the share, with the rest being fresh produce and standard products. When the share of bakery increases and processed categories increase, the share of standard products will naturally be compressed. In the process of compression, first- and second-tier brands are left with only supplements and decorations. Compared with the former, Beiyoute's current processing share is not high, and PB is just starting, so it still mainly relies on first- and second-tier brands. However, through the supply price reform in 2019 and the Zhenshimei supply chain upgrade in 2023, Beiyoute is still doing well without relying on PB and processing. This shows that supermarkets do not necessarily have only one path of "strong processing + strong PB," but need to find a suitable development model based on their positioning. Currently, in Northeast China, Beiyoute has more than 90 stores, and there are many other supermarkets scattered across the Northeast, but they do not have strong processing or PB, and these enterprises are declining. Naturally, first- and second-tier brands are also having a hard time in them. Of course, these supermarkets can learn from Hema, Yonghui, etc., but after the change, they also make first- and second-tier brands supplements and decorations. For brands, such changes at the retail end will also cause their decline. When the display positions in hypermarkets are no longer for first- and second-tier standard products, will the public recognize them? No one advertises for them, no one endorses the brands, won't the volume in small shops decline? So this is what we need to think deeply about. Including doing private brands, actually since we started doing it this year, we have seen some problems and feel there are many hidden concerns. Are small-scale retailers suitable for PB? Is it PB if it is purely for increasing gross profit? Are channel players more professional in products than brand companies? Will PB become the next "pre-made dishes"? I don't know what the future of PB will be, but I still hope to return to the most basic business logic.

Returning to Business Logic and Future Thinking The decline of China's supermarket industry is closely related to the positioning errors of first- and second-tier brands. To revitalize the supermarket industry, we must return to business logic: The larger the scale, the lower the purchase price. This is basic business common sense. Why can a small shop get a lower supply price than a chain supermarket? This violates logic. Eliminate fee negotiations and directly reduce purchase prices. For a long time, brand companies have set up a large number of fees, such as entry fees, barcode fees, and ground promotion fees, accounting for about 8% of sales. These fees are often intercepted layer by layer by distributors or procurement. If this part of the cost is directly converted into a reduction in supply prices, allowing supermarkets to "buy cheap and sell cheap," gross profit will naturally increase, and sales will naturally grow. Only with low operating costs and low purchase costs can supermarkets afford to sell cheaply, thereby attracting customers and achieving growth. This is the real business logic for supermarket survival. First- and second-tier brands must reposition their cooperative role with chain supermarkets and support the alliance and integration of prefecture-level city distributors. Japan has 10 large wholesalers, while China has at least 200,000 wholesalers. If we can gradually integrate into one large distributor per prefecture-level city, efficiency will be greatly improved, costs will significantly decrease, retailers can survive, and brands can enter a virtuous cycle. Although there is competition among brands, in the face of life and death, repositioning chain supermarkets and uniting with supermarkets is the most important. The channel has deteriorated to the point where it cannot be worse. The core of future competition should return to product quality, R&D capability, and brand value, rather than channel games. Looking to the future, Beiyoute currently has 95 stores, and by the end of this year, it will open 105 stores. The "Double Hundred" task will definitely be completed. Currently, Beiyoute supermarket stores are mainly located in sub-provincial cities such as Harbin, Shenyang, Dalian, and Changchun. Next, Beiyoute will continue to sink into more prefecture-level cities, county-level cities, and county towns in Northeast China. By 2035, Beiyoute's goal is the "Northeast 501 Plan," that is, stores exceeding 501 and sales exceeding 50.1 billion yuan, to thoroughly penetrate and strengthen the supermarket business in Northeast China. As Beiyoute and more supermarkets become strong in the region, they will surely become the sales drivers for first- and second-tier brands. I hope first- and second-tier brands will reposition chain supermarkets; this is our common future.