FMCG Marketing: The Era of Channel Prosperity Is Over

Reviewing the history of China's FMCG industry, the most representative aspect is the development of its marketing channels. In less than four decades, countless individuals have grown from novices to elites, from starting from scratch to becoming wealthy, growing alongside the channels. They adhered to the principle of 'position determines action' and fully practiced 'winning at the terminal' and 'the terminal is king.' However, when 2013 arrived, they suddenly realized that the world they knew was no longer what it used to be. The once-winning strategies—channel refinement, terminal interception, human wave tactics, and promotional push-pull—while still effective, were yielding unsatisfactory results for the same cost. Behind the ever-increasing sales figures were fiercer competition and harder work: more personnel, longer leverage chains, larger capital, higher risks, yet profits were regressing. In the blood-red ocean, we saw only countless failures, but no single success story. This situation easily reminds one of a metaphor: Once upon a time, a farmer raised a group of pigs, feeding them twice a day at sunrise and sunset. So, a great pig philosopher concluded: sunrise and sunset mean food is coming. It was true in the past, it is true now, and it will always be true. This truth was verified day by day and became part of the world's rules. However, one day, at sunrise, the food did not come. Before these clever pigs could come up with a new theory, they had already become people's luxury lunch. What changed is not the world or the environment; perhaps our understanding of the world was wrong from the start. Was the channel prosperity we experienced over the years truly an inevitable law of economic development? Or was it driven by market laws or other factors? Are we like those pigs in the farm who thought they had grasped eternal truth? We really should consider this question: Is channel prosperity a thing of the past? The Past and Present of Channel Prosperity Before we discuss whether channel prosperity is over, we must first understand what channel prosperity is and what it has experienced over the past few decades. In 1978, when reform and opening-up began, FMCG was among the earliest commodity types incorporated into the new economic order. The market faced by FMCG marketers was naturally fragmented. It was naturally fragmented because China's FMCG market at that time was broken both geographically and socially. First, geography. The fragmentation of market geography is a problem that large countries have more or less faced. For example, in the United States, products from Florida might be sold to New Mexico, but they would never appear in New York's market. However, in the 1930s, through the construction of highway networks, the United States achieved initial connectivity across regions, and since then, its market has been highly integrated. That is why so many big brands were born. In contrast, in China, in the early reform period, on one hand, there was vast territory; on the other hand, there was an underdeveloped transportation and logistics system, like a huge and slow beast. If you pricked its tail with a needle, it would say 'ouch' only next Saturday. Under such geography, an integrated market was out of the question. Second, social structure. In the 1980s, China's urbanization level hovered around 10%, meaning that FMCG faced a market with a very low concentration, with 90% of the consumer population in rural areas. We know that urbanization is a necessary process in economic development because cities are the most optimized resource allocation structure, enabling a flat market model with single-point radiation. But in China at that time, due to the vast rural market, the development of FMCG channels had to adopt a fragmented sales network with dispersed points, each independently building its own radiation area. The fragmentation of the market produced two results: First, it created a pyramid-shaped distribution system with many levels. Manufacturers found it difficult to directly reach the terminal. Often, a product had to go through provincial agents, municipal agents, county agents, secondary wholesalers, tertiary wholesalers, retailers, and even more levels before reaching consumers. Each level weakened the product's price competitiveness and diluted profits. Second, in China's local FMCG industry, there never emerged industry giants like Coca-Cola, Nestlé, or Procter & Gamble that spanned categories, regions, and consumer groups. The reason was that China's fragmented market structure consumed a large amount of enterprise resources in the channel field. Any new product launch or cross-category innovation required huge costs and long cycles, making vertical expansion in categories extremely difficult. For most domestic enterprises, they could either make one category national or do well in multiple categories in one market, but it was really hard to spread multiple categories across the national market. Thus, for a long time, China's market channels exhibited typical smallholder economy characteristics. What is a smallholder economy? We know that China has traditionally been an agricultural society with a tradition of intensive cultivation, using 7% of the world's arable land to feed 22% of the world's population. Chinese farmers were obsessed with increasing yield per unit area, missing one historical opportunity after another. The same was true in market channel construction. In a fragmented market, what operators could do was, like farmers, make the most of limited space: aggressive promotion, terminal interception, refined market management, and human wave tactics. Operators focused on every detail: display, customer relations, team, promotion, shelf management... all for the division of existing market share, with a pathological focus on resources. This model is the so-called Chinese-style marketing, which presents a low-end refinement and a short-sighted acuity. Over the past thirty years, this marketing model has achieved considerable results. We often see phenomena where a brand that even industry insiders barely know can achieve sales of several hundred million yuan, simply because it does well in a few or even one region; highly homogeneous products, even imitations, thrive in their respective advantageous markets; consumers moving to another city have to choose new brands because they cannot buy the brands they trusted before. How We Gradually Fell into Path Dependence The first path Chinese-style marketing relied on—the terminal is king If your only tool is a hammer, you will see every problem as a nail. Not enough market share? Refine the terminal, deep marketing. Do displays, customer relations, shelf management. Not enough human resources for refined management? Add people, use human wave tactics. Everyone uses human wave tactics, and your advantage is not prominent? Use promotions, give policies, lower prices. In short, do everything that can impress the next level of the channel, do it more, do it finer. On this one acre of land, whoever is more diligent gets higher yield, leading to slogans like 'win at the terminal' and 'the terminal is king.' The second path Chinese-style marketing relied on—management by objectives How to evaluate whether each investment is worthwhile? Of course, it is the cost-benefit ratio. If an investment cannot bring immediate returns, then it is redundant. This is a principle many successful companies believe in. Under this guidance, quick results, obvious results, and direct results become the most critical basis for investment. What kind of investment meets these conditions? Naturally, the closer to the channel and terminal, the shorter the transmission process, the more it meets the standard. Extreme management by objectives directly leads to marketing managers emphasizing sales over market. The third path Chinese-style marketing relied on—model market How to quickly open up a new market? Naturally, replicate the model of the original market, including terminal management, cost control, objective and process control, resource allocation, platform construction, channel composition, etc. When this method is faithfully reproduced, as long as there is no fundamental difference in structure and nature between the original market and the target market, success is theoretically within reach. In fact, the model channel model and the model market are two completely different concepts. Not every brand's maturity can support the foundation for building a model market, so many enterprises have stopped on the path of building model markets at all costs. The Avalanche of Channel Prosperity In 2013, the air was filled with ominous signs. In supermarkets, a promotional activity used to bring several times the return. However, starting from 2013, special displays and promotions increasingly seemed like a conspiracy. Spending thousands of yuan, the gross profit was not enough. If you didn't do it, the fixed costs were still there, and worse, the hard indicator of market share was also there. If sales were poor, the product would become increasingly marginalized and eventually disappear. Manufacturers and distributors hated the exploitation by supermarkets but had to rely on them. Conversely, if supermarkets did not exploit suppliers, they could not survive. The market forced supermarkets to transform from profit-making institutions into platform institutions. The same problem existed in the distribution channel. Manufacturers could not deliver products to consumers themselves. Distributors at all levels undertook the distribution functions that manufacturers were unwilling to bear, naturally taking a portion of the profits. Terminal refinement also required costs, and various activities required substantial investment. Under competitive pressure, terminals would not let consumers bear these costs, so they had to pass them up the chain. In the end, everyone on this long chain bore the cost, and no one made money, becoming brothers in adversity in the supply chain. We know that the root of such problems lies in price wars. Can we avoid price wars? It is possible, but the premise is that you have other resources, such as brand resources, product differentiation, or extreme experience of homogeneous products. The problem is, if you have none, others will start price wars. If they do, they will die sooner or later; if you don't, you will die immediately. Thus, FMCG companies collectively face the deadlock of 'doing it means seeking death, not doing it means waiting for death.' E-commerce is Just Another Round of Channel Prosperity When competition in traditional channels has become white-hot, we naturally turn our attention to e-commerce. Liangpin Shop, Three Squirrels, Baicaowei, Zhou Hei Ya... one internet miracle after another seems to point the way forward. However, when Hao Xiang Ni acquired Baicaowei, exposing its financials, people discovered that behind the glamorous appearance of internet food companies were bloody financial data. From sales data, Baicaowei's main costs were platform promotion fees, platform commissions, and express delivery fees, which together accounted for up to 69.8% of sales costs. In 2013, 2014, and the first three quarters of 2015, Baicaowei's operating revenues were 229 million yuan, 612 million yuan, and 815 million yuan, respectively; net profits were -104,700 yuan, -6.4579 million yuan, and 14.2353 million yuan. Some might say, 'Look, it made a profit in 2015.' But don't forget, that was only the first three quarters, and there were still Double 11 and Double 12, the months with the highest sales but also the biggest losses, which had not yet been counted. Taking Baicaowei's 2014 sales data as an example: assuming an express fee of 6 yuan per order, its annual order volume was approximately 6.87 million orders, with an average order value of 89 yuan per order. The cost of raw materials and purchase price was about 68.56 yuan per order, leaving a gross profit of about 22.96%. Out of the remaining 20.43 yuan gross profit per order, the platform took 4.24 yuan for promotion fees and 2.24 yuan for commissions, plus 6 yuan per order for express delivery, and 8.97 yuan per order for salaries, management, rent, taxes, etc., resulting in a loss of 1.02 yuan per order, leading to an annual loss of over 6 million yuan. Who made the money? Over three years, express delivery made 100 million yuan, and the platform made 116 million yuan. And it's not just Baicaowei. Leisure food e-commerce companies like Three Squirrels and Liangpin Shop share common characteristics: they focus on popular categories like nuts for low-price competition, buy traffic promotion at high costs, and exchange for sales 'great leaps' of over 100 million yuan, but behind that are dismal profit margins, even falling into the situation of 'working for the platform.' Look at Alibaba's 2015 financial report, with a profit margin of over 40%; Baidu, over 20%. The fact is, e-commerce is just another round of channel prosperity. Autopsy of Channel Prosperity The decline of channel prosperity is not because those in it did something wrong, but because this prosperity was a product of an undeveloped market, characterized by information asymmetry and channel obstruction. Channel prosperity relied precisely on these two factors. Once the market began to flatten, channel prosperity started to decline. It is undeniable that after 2010, although the market had initially achieved flattening and China's urbanization rate had exceeded 50%, some enterprises that did not focus on products and brands still had room to survive. The reason was that rapid economic growth brought a large market increment, and the rapid urbanization process provided structural opportunities for these enterprises. Once high economic growth ended, these pigs on the wind would fall. The slowdown in economic growth took away not only the increment but also the existing stock. How to explain the prosperity of e-commerce? Why, after channels became highly flattened, did some internet brands achieve huge sales but still fail to make profits? Again, it's path dependence. These enterprises grew not by innovation and experience but by the prosperity of new channels. I'm not saying they didn't provide innovation and experience, but they used these not for brand premium but for channel competition. This is a freak born of the capital boom. Regardless of profitability, first build traffic, and leave monetization to the capital market. This is the thinking of media, not of product. For the entire capital chain, there will always be a sucker to take the fall, but no one believes they are the last in this game of hot potato. Then the capital winter came. And then there was no 'then.' What Should We Do in the Post-Channel-Prosperity Era? When the economic downturn cannot be reversed in the short term and channel costs remain high, what can we do? From the above reasoning, we can draw some conclusions. We need healthy development The current market is full of disorderly competition because the pigs in the sky haven't all fallen yet. Before they fall, blindly competing with them in channels will only send us down a path of no return. At such times, we need to cultivate our internal strengths and make sufficient reserves. The market will eventually return to rationality, whether it's the consumer market or the capital market. Steady progress, not caring about the gains and losses of one city or one pool, is the most basic solution. In the era of channel prosperity, what mattered was development and scale, even if unhealthy; making it big first was more important than anything else because there was still a chance to correct. In the post-channel-prosperity era, healthy development is more important than anything else because there are fewer and fewer opportunities for trial and error. We need to polish our products with heart Lao Gan Ma is a typical example. The truly terrifying thing about Lao Gan Ma is that in its price range, there is no room for other products to survive, so no one is willing to compete with it. Carefully polishing a product is innate endowment; seeing the structural opportunities in the market and precisely entering to catch opponents off guard is acquired cultivation. Less blind following, less impulsive innovation, patiently research products, improve processes, and shift from catering to distributors to catering to consumers. Of course, there is another approach that not all enterprises can learn from, and that is Unified's trial-and-error innovation. When innovating products, they do not rely on existing experience to judge, are extremely tolerant of innovation, and launch a large number of innovative single products for the market to test. Under such an innovation system, the explosive power shown by Tang Daren and Xiao Ming Tong Xue allowed Unified to achieve substantial profit growth while the industry shrank and sales declined. Of course, this model requires an excellent R&D team, strong risk resistance, and excellent channel capabilities, which ordinary enterprises cannot afford. We need to start building our brands We see many enterprises whose only brand capital is a logo, with packaging lacking any distinction, let alone other brand elements. They sold well during the channel prosperity period, but later their growth stalled. Objectively speaking, at the current stage of China's FMCG market, brand investment always seems like a casual move, and it may remain so in the future. But without investment, there will never be returns. 'No spare money, can't invest too much in brand' sounds reasonable, but behind the lack of spare money is mostly indifference to brand. When it comes to brand and positioning, enterprises express high regard, but true high regard is shown through investment. A respectful but distant attitude will never bring brand improvement. In this era, we need to learn to occasionally make casual moves and learn extreme application: overall investment, partial returns; partial investment, overall returns; invest now, reap later; invest later, reap now. We need to adjust our talent structure With the further flattening of channels and increased information transparency, the winning methods of modern marketing have fundamentally changed. Enterprises need talents with structural thinking and new marketing skills, and they also need to upgrade their brand and product awareness. Are You Ready for the Post-Channel-Prosperity Era? Chen Yafeng Sister Miaosi Chen Yafeng: Chairman of Beijing Meisi Meiyu Management Consulting Co., Ltd., one of the Top Ten Planners of Chinese Food, one of the Top Ten Marketing Experts of China's Food Industry, supply chain management expert, practical marketing expert, expert on distributor issues, chief consultant and column writer for several well-known marketing magazines. With 20 years of FMCG experience, she has successfully led several well-known enterprises in business, consulting, and education. In the past three years, she has focused on supply chain integration services, researching brand value models and innovative business models, and is known as a framework designer and implementation commander integrating enterprise management, culture building, brand planning, channel marketing, and customer guidance. This article is from Chen Yafeng-Msmy Management Consulting's Weibo, reproduced with the author's authorization. -END- Click the image to read directly The most professional and practical knowledge base in the FMCG industry 【 Reply with the yellow numbers in the background to view the following keywords 】 | 001 Excellent article selection | 002 Distributor market operations | 003 Terminal visit management | 004 Sales supervisor skills | 005 Sales improvement techniques | 006 Channel expansion | 007 Managing distributors | 008 Distributor development | 009 Distributor internal operations management | 010 Team management | 011 Efficient distribution techniques | 012 Sales manager's eighteen skills | 013 KA operation methods and strategies | 014 First lesson for new salespeople | 015 Internet, brand | 016 Distributor B2B transformation |