Recently, the data for the first half of the year came out, as expected, very poor. The media used alarming but accurate figures. For example, a self-media outlet said that 66% of listed FMCG companies saw performance declines. How should we view this data? Of course, there is an expected conclusion: consumption downgrade, poor macro environment. It seems to explain everything. If we look at the data in reverse, 34% of listed companies are growing. What I'm more interested in is: Who is growing against the trend? What did they do right to achieve growth? If our stance is not to make excuses for poor performance, then rather than analyzing how many companies are declining, we should analyze why the growing ones are growing. Following this line of thought, the conclusions are quite different. I'll first state the conclusions, then explain the analysis process. Conclusion 1: On the surface, the macro environment is poor, but in reality, endgames are forming in various sectors. The so-called endgame is how many players can ultimately survive in each industry or field. Those who cannot find a place in the endgame must switch battlefields as soon as possible. What is an industry endgame? It is the "Rule of Three and Four" proposed by Bruce Henderson, founder of Boston Consulting Group. More on that below. Conclusion 2: The formation of an endgame inevitably involves brutal involution. The essence of involution is "causing a batch of enterprises lacking survival capability to die," and a poor macro environment accelerates the formation of the endgame. Pay attention: A poor macro environment accelerates the formation of the endgame. Conclusion 3: During the formation of the endgame, vibrant new battlefields will open up; it is the right time to switch battlefields. As the saying goes, when God closes a door, he opens a window. There is always a way out, but not the original path. I believe these conclusions will influence the recent decision-making direction of various enterprises. Giants Must Fight on Two Fronts Still, find clues from the data 1. First, look at comprehensive data. In the first half of 2024, GDP grew by 5%, total urban retail sales grew by 3.6%, and FMCG grew by 2.3%. The first two figures come from the National Bureau of Statistics, and the FMCG data comes from Kantar. Overall, low growth. This is a basic feature of a mature market; don't expect high growth to be endless. 2. Next, look at the semi-annual reports of listed FMCG companies. According to statistics from New Distribution, among 108 listed FMCG companies (excluding baijiu), 57 saw revenue decline, accounting for 52.7%; 53 saw net profit decline, accounting for 49%. The decline ratio is not low; listed companies are mostly high-quality enterprises in the industry, indicating that the macro environment is indeed poor. 3. Then analyze individual companies. Most industry giants (top 3) saw revenue growth, such as Master Kong (0.7%), Uni-President (6%), Nongfu Spring (8.4%), Haitian Flavoring (9.18%), Wanchen Group (392.45%), China Feihe (3.7%), Dongpeng Beverage (44.19%), Anjoy Foods (9.42%), Angel Yeast (6.86%), Three Squirrels (75.39%), Qiaqia Food (7.92%), Wanglaoji, Yanjin Shop, etc. There are also many giants that declined, but two industries are particularly notable. First, the beer trio: Budweiser APAC (-7.28%), China Resources Beer (-0.53%), and Tsingtao Brewery (-7.06%) all declined; second, the dairy trio: Mengniu Dairy, Yili, and Bright Dairy all declined. The dairy industry is affected by the deep adjustment after the pandemic. Only beer is unexpected: the three giants declined, but the waist-level growth rate is not low, and the long-tail craft beer is growing rapidly. Other giants that declined include Yihai Kerry, Shuanghui Development, and Sanquan Food. The declining giants are in industries with higher concentration, and even if sales decline, their industry position is not greatly affected. This analysis is interesting. What does it mean? It means that the worse the macro environment, the higher the industry concentration. Why does industry concentration increase when the macro environment is poor? There are roughly two reasons:
First, as long as giants participate in involution, paying the price of promotional policies (profits), they can relatively stabilize or increase sales.
Second, because giants have the ability to upgrade product structure, and product structure provides more substantial policy resources for involution. I call this approach "dual-front warfare" for giants: competing downward to maintain increment, while upgrading product structure upward. In fact, most giants are doing exactly this. Giants with declining sales are precisely those lacking in product adjustment, fighting on a single front, with poor results. Giants' dual-front warfare stems from the following logic: First, competition in a normal environment, although it involves survival of the fittest, changes industry concentration slowly. A poor macro environment is equivalent to raising the industry's break-even point by one level in the short term, pushing many small and medium enterprises into the loss zone. So, when the macro environment is poor, enterprises have two choices: First, giants pursue share growth, putting sales growth and profits in a secondary position; second, small and medium enterprises operate desperately, and a slight misstep leads to disappearance. Second, the goal of giants is industry position, which is determined by market share. Giants generally do not have survival issues, so in difficult times, if market share and sales growth conflict, which is more important? Of course, market share. Dangerous growth for giants: sales are growing, but share is declining. Sales growth masks the decline in market share. Growth that secretly pleases giants: sales may not grow, but market share is growing. Third, in difficult times, as long as giants use policy resources, they can grab industry stock. So, giants competing downward is a normal phenomenon. When giants engage in involution, consumers get cost-effective purchases. This tactic is very effective. Many people now oppose involution, but I think that's wrong. I oppose single-front involution, but I endorse dual-front involution. I have experienced several cyclical crises and have seen many giants succeed by doing this. Fourth, the most technically challenging task during a crisis is to upgrade product structure, to be reborn during the industry trough. As long as there is involution, there will be blood loss. Blood loss is not scary; what is scary is the lack of new hematopoietic function. The new hematopoietic function is upgrading product structure. Generally, during cyclical crises, attention to the crisis exceeds everything else. However, the industry's forward trend does not stop because of the crisis; it is just masked by the crisis. For example, I have always emphasized paying attention to consumption upgrading in the era of shrinking volume. At this time, the other front of dual-front warfare—continuous upgrading of product structure—becomes the decisive factor. Fifth, what should the upgraded product structure look like? It is not high-end, nor luxury, nor segmented or niche, but new mass. Giants can launch many products, but their position is established by products aimed at the mass. A certain giant said that single products below 10 billion are not considered big products. New mass has two prerequisites: one is the greatest common divisor of the mass (not segmentation); the other is one level higher than the old mass. If an example is needed, the recent surge of Nongfu Spring's Oriental Leaf is one. Big Heads, Waists, and Long Tails The distribution of enterprises in an industry can be roughly divided into big heads, waists, and long tails. Many industries in China have already experienced increased concentration. What is industry concentration? It is usually expressed as CRn. For example, CR4 and CR8 represent the market share of the top 4 and top 8 in the industry. The higher the CRn share, the higher the industry concentration. In the early days of an industry, tens of millions of enterprises emerge. Then elimination gradually begins; some industries eliminate 90% of enterprises, some 99%, and some even 99.9%. This process is very brutal. Having been in marketing for over 30 years, I have witnessed quite a few industry concentration processes and am used to it. Many people are terrified of this industry downturn, but it is actually not the worst. From listed companies, there are both big heads and waists, and offline we see many long-tail enterprises. Traditional long-tail FMCG enterprises are active in low-tier markets, especially township markets. Of course, some are now active on e-commerce platforms. Any cyclical downturn is completely different for enterprises in different positions. For giants (big heads), it is just a difficulty; for waist enterprises, it is a disaster; for long-tail enterprises, it is a matter of life and death. My observation of this cycle is: Giants' positions are stable, waist shares decline, traditional long tails are nearly disappearing, and new long tails are emerging. The overall conclusion is that we are closer to the industry endgame. Industry Endgame: The Rule of Three and Four Boston Consulting Group is a well-known strategic consulting firm that has proposed many strategic thoughts, including the "Rule of Three and Four" proposed by founder Bruce Henderson. The Rule of Three and Four tells us what the industry endgame looks like. Below are excerpts from the first two paragraphs of Henderson's famous article on the Rule of Three and Four: In a stable competitive market, there will never be more than three significant competitors, and the largest competitor's market share will never exceed four times that of the smallest. This rule is determined by two conditions: between any two competitors, a 2-to-1 market share ratio seems to be an equilibrium point. At this equilibrium, it is impractical and counterproductive for either competitor to increase or decrease market share. This is an empirical conclusion drawn from observation. A market share less than one-quarter of the largest competitor's makes effective competition impossible. This is also an empirical conclusion, but it is not difficult to infer from the experience curve relationship. Typically, these two conditions ultimately lead to a market share sequence where each competitor's market share is 1.5 times that of the next, and the smallest competitor's share is not less than one-quarter of the largest's. Mathematically, to satisfy both conditions simultaneously, there should be no more than three competitors. The Rule of Three and Four is empirical data, but it has been tested over decades and is very reliable. In the process of an industry moving toward the Rule of Three and Four, there will inevitably be a "clearing out" process below mass products. The so-called clearing out means the mass death of small and medium enterprises. A more detailed description is as follows: First, in the future, there will be no high, medium, or low tiers in industries. High, medium, and low tiers are historical products. As giants engage in involution, the medium and low tiers will gradually be eliminated. Of course, it may take some time, but not long. Especially now that leisure snack chain stores are going to the countryside, the impact on small and medium brands is greater. Second, in the future, there will only be mass, segmented, and niche markets. When many multinational brands entered China, such as Coca-Cola and P&G, we once regarded them as high-end brands. Now we know they are mass brands in Western countries, targeting the majority of Western consumers. Is mass high-end or low-end? Mass is mass; it is neither high-end nor low-end, because the classification of high, medium, and low disappears. Small and Medium Manufacturers Switch Battlefields Low-end will disappear. When I first expressed this view a few years ago, many disagreed. Now more and more people agree. Because the lower the end, the more scale advantage is needed. In the future, only mass will have scale advantage. How can small and medium enterprises without scale advantage survive? When God closes a door, he opens a window. What is the opposite of mass? It is segmented and niche markets. Segmented and niche markets are not product grade classifications, but lifestyle classifications, meeting the special needs of a minority. For example, in beer, at the beginning of reform and opening up, almost every county had a brewery. Later, it concentrated to the top 5, with CR5 as high as 92.5%, and many small and medium breweries were either acquired or closed down. Now craft beer is surging, with more enterprises than at the beginning of reform and opening up. The popular IP-based craft beers all have personality. Craft beer does not survive in traditional channels, but in circles, online, and special channels. Now craft beer is combining with supermarkets represented by Pangdonglai, and developing rapidly. Every industry will have battlefields similar to craft beer. These battlefields have low concentration and are new long tails. Industry Endgame If growth cannot change industry position, growth is meaningless. This sentence may confuse many people. Because we have always lived in growth, not understanding that growth is only important at certain stages. Giants are determined by industry position and market share. What determines share is mass products. Therefore, giants must fight on two fronts: inward involution to eliminate waists and long tails; upward attack on product structure to occupy the future mass. For giants, the only strategy is scale, and scale strategy can only be determined by mass. So, giants only see the current mass and the future mass. Adjusting product structure is also for the future mass. Waist enterprises can only differentiate strategically; they cannot compete for mass. Not all sales are meaningful for survival; grabbing a bit of sales in the mass short-term is easily eliminated by giants' involution. So, they must find differentiated markets that determine survival value. Low-end long tails have almost disappeared, or moved online. Online low-end is only short-term survival and not sustainable. On the contrary, the era of shrinking volume accompanies the rise of another segmented market: the rise of segmented and niche markets. Segmented and niche markets are of little value to giants and waists, and in the internet age, giants find it hard to play in segmented and niche markets. Compared to the past low-end long tails, this is fertile ground.