Dear friends, hello. Seeing this letter is like seeing me. I am Yuan Lai from New Distribution. Today, let's talk about hard discounts. Recently, there has been much discussion about hard discounts and snack discount stores. I believe many distributors can truly feel this in the frontline market.

2.5 yuan Master Kong iced black tea, sold at 1.98 yuan; 4.6 yuan Nongfu Spring Oriental Leaf, sold at 3.63 yuan; 2 yuan Nongfu Spring natural water, sold at 1.19 yuan; 13.5 yuan Lee Kum Kee Choy Sun oyster sauce, sold at 9.32 yuan... Today, we are not discussing why snack discount stores and warehouse discount supermarkets can sell at such low prices, what the underlying business logic is, or whether such formats can sustain in the future. The hard discount business model itself is not the focus of this article. The focus is on the impact and shock of the rise of discount retail formats, represented by snack discount stores and warehouse discount supermarkets, on local distributors. Let me state the conclusion first: The arrival of hard discounts will accelerate the reshuffling of local distributors. Large distributors will grow larger, while small distributors will become fewer and gradually be eliminated. In fact, even without the emergence of the hard discount model, local distributors are already undergoing a reshuffling, but it would not be so fast; it would be a slow process. Just as the pandemic catalyzed instant retail. 1. Where exactly is the impact on distributors? 2. How should distributors respond to hard discounts? Impact on Distributors A couple of days ago, I discussed hard discounts with a distributor from the north. In the past six months or so, more than 100 snack discount stores have opened locally. Some are nationally known, some are local startups. These 100-plus snack discount stores, under the banner of low prices, have forced local KA system supermarkets to respond head-on: they have fully benchmarked the prices of products in snack discount stores to match them, thereby declaring their sovereignty. The distributor boss lamented: "The low prices of snack discount stores and the low prices of local KA system supermarkets have disrupted the entire market, breaking the ecological balance previously established between local supermarkets and mom-and-pop stores." Therefore, we believe that the low prices of snack discount stores are just a phenomenon; what it brings is a series of reconstruction of the supply chain in offline retail formats. In the past, the emergence of online e-commerce only took away market share and sales. The total capacity of the category decreased slightly, but the relevant elements and relationships did not change. Today, the emergence of snack discount stores has completely affected the business of local supermarket systems, independent supermarkets, and even mom-and-pop stores. Low-price discounts have forced these traditional retail formats to respond. This response strategy is not through better environmental experience, more differentiated products, or better operational services, but directly through price reductions. Price responses directly involve the backend procurement and sales system of supermarkets, as well as the roles in the pipeline chain of wholesalers, distributors, and brand owners. In summary, the core impact on distributors is threefold:

  1. Snack discount stores and warehouse discount supermarkets take away business from surrounding supermarket stores, causing distributors' business to decline directly by 20%. 2. To cope with low-price competition, local system supermarket stores fight back. The short-term strategy is to benchmark low prices and continuously require distributors to lower prices to jointly respond to changes. The long-term strategy is to build an efficient supply chain. Either source directly from the origin and gradually establish a private label product system, or internalize distribution agency into the product procurement and sales system, i.e., direct operation cooperation. 3. To cope with low-price competition, independent supermarkets (300-500 m2) adjust and optimize trade terms to reduce procurement costs. Previous payment terms, rebates, after-sales, etc., gradually shift to low-price cash models. At the same time, in the category structure of store operations, they continuously reduce the proportion of snack food (standard and bulk) categories and increase the proportion of fresh fruits, general merchandise, and daily necessities. Whether it is a direct decline in business, bypassing distributors to build their own supply chain systems, or adjusting category structures and changing zero-supply trade terms, these undoubtedly bring huge business challenges to distributors. Faced with these seemingly irreversible impacts and changes, what should distributors do? Distributors' Response Measures Specifically regarding distributors' response measures, we must first answer a question: Should distributors open stores or join franchises? My thinking is: If a distributor has good local resources, such as store location selection, or has already opened three to five supermarkets, they can consider joining a snack discount store as an investment and business extension. At the same time, it is also a way to observe market and category changes. But here, one reminder: if you do not want to give up your distribution business, do not treat it as your main business and invest 100% of your energy; let your partner manage it. There is a fundamental logical difference between distribution and retail businesses. Unless you no longer want to do your distribution business and plan to go all in on snack discount stores. Do not think that with the arrival of snack discount stores and such low prices, traditional surrounding stores will have no future. Rest assured, even if the "10,000-store model" of snack discount stores succeeds, independent supermarkets and mom-and-pop stores will still have room to survive and operate. It is just that life will not be as good as before, just like the business status of distributors. If you have resources, open a few stores as an investment. If you do not have resources, seriously think about how to adjust and optimize your own trading business. Distributor bosses have limited time and energy. You can only do one thing well; you cannot do everything! Back to the distribution business itself. First, the decline in supermarket business is inevitable, with a 15%-30% decline in snack food standard products. Bulk categories will decline even more significantly. Fighting is useless; only hedging works! 20% of local business is gone. It is not that your operational capability is insufficient, nor that you have not served downstream customers well; it is that the capacity of mainstream offline channels is shrinking. Adjust your mindset and accept it. Dig deeper into other channels to generate incremental growth to hedge. Businesses you previously looked down on, found tiring, and not very profitable, such as township stores, unit canteens, and campus stores, pick them up quickly. In the past, the team's energy was focused on traditional supermarket channels; now, besides watermelons, you also need to pick up sesame seeds. For independent supermarket stores, such as 300-500 m2 supermarkets, deeply bind with them and provide one-stop FMCG standard product supply chain. Through the expansion of multiple categories, scale supply, and reducing store procurement costs, become a super supplier. In the past, supermarkets dared not rely on a single supplier for fear of pricing power issues. But now, to cope with competition from hard discount retail stores, they have to reduce procurement costs and improve supply chain efficiency. How can one become a super supplier? Snack food, condiments, and daily chemicals are the three core categories that distributors can independently control and operate in the future. With local supply chain resources in these three categories, one can truly stand firm. Summary In a city, a distributor with a scale of 100 million yuan and a net profit of 3 million yuan used to have a good operating status, with 40-50 people, and did not need to think about cross-category or cross-channel expansion; steady growth of the plate was enough. In addition, a distributor with a scale of 10 million yuan (agency for one or two brands) and a net profit of 300,000 yuan could also survive. In the past, both types of distributors, 100 million and 10 million, could coexist harmoniously and live well. But now, with the business grabbing of snack discount stores and the "de-distributorization" of regional supermarket systems, a 100 million yuan distributor, to maintain profits and stabilize the team, has to think about grabbing business. The existing market is limited, so they can only grab the plate of 10 million yuan distributors. At this time, because the external environment is harsh, 10 million yuan distributors are already suffering, and with the grabbing by peers, they eventually have to give up! Back to the beginning, the arrival of hard discounts has accelerated the reshuffling of local distributors. Large distributors, through seizing and deep digging, grow larger. Small distributors become fewer and gradually are eliminated. Finally, around the topic of hard discounts, New Distribution will hold the 2023 China FMCG Hard Discount Conference in Zhengzhou from December 5-7, 2023, gathering hard discount chain brand entrepreneurs, FMCG head brand executives, outstanding national FMCG distributors, traditional retail enterprises, as well as service providers and research experts, to deeply discuss the hard discount business model. Distributors do not have to join or open hard discount stores, but they must pay close attention. How will the development of hard discount chain stores affect the supermarket system stores that account for the most of your business in the future? How will traditional retail systems respond, and how will first-line brand manufacturers adjust? Obtain their adjustment policies in advance and follow up promptly. The earlier you follow up, the more dividends you will get!