Editor's Recommendation: Are you regretting missing the last train of the old era, or are you glad you caught the first train of the new era?

As is my custom, I will only discuss the FMCG sector. If 2023 went smoothly, then in 2024, don't change direction or methods; continue as before. This is a common approach to annual planning. If 2023 did not go well, but similar companies performed well, then you need to think about what problems your company has. Solve whatever problems exist. If most peers had a rough time in 2023, then it's a different issue—not looking inward, but outward, to see if the macro environment has changed. Internal problems affect only one company; only the macro environment affects all companies.

There are also two types of macro environmental changes: one is short-term impacts, like the pandemic, which disappear once it ends; the other is trend impacts, affecting the next five or ten years. If it affects one year, you can catch up; if it affects five or ten years, it's an era. Missing an era means you can't catch up. In 2024, we face the beginning of a new era.

Judging the Era

How to face 2024? It depends on our judgment of the era, what should be done in this era, what can be done, and how to get things done. How important is era judgment? Let me give two examples. During the New Democratic Revolution, Mao Zedong made an era judgment: "China is a semi-colonial and semi-feudal society." Initially, I thought it was just a slogan, but later I realized it was a crucial era judgment, and the historical process of the Chinese revolution is related to it. At the beginning of reform and opening up, Deng Xiaoping proposed the era judgment of the "primary stage of socialism." The historical process of reform and opening up aligns with this judgment. Summarizing an era in one sentence is indeed difficult. But if a one-sentence era judgment can truly unify thinking and summarize trends, then it is very important to distill a highly condensed phrase. In 2023, hard discount in leisure snacks was very hot. What signal does it send? I believe that hard discount in leisure snacks is merely "the first shot of the supply chain revolution." 2023 is both the first year of hard discount in China and the first year of China's supply chain revolution. If hard discount in leisure snacks only affects a small category, then the supply chain revolution affects all business links, and no company can escape. In the face of major environmental trends, all companies are passive. The initiative lies in whether they can quickly keep up with trends and proactively adapt.

Supply Chain Revolution

What does the supply chain revolution mean? Many people have heard about the "supply chain decoupling" between China and the U.S. from the media; that's an international supply chain issue, vital to China's survival. The supply chain revolution discussed here is about domestic supply chains, equally vital to companies. To clarify the supply chain revolution, let's review the commercial changes since reform and opening up, which I simply divide into three eras.

1. The Era Dominated by Brand Owners

Before 2010, it can basically be seen as the era dominated by brand owners. Media topics and cover figures were entrepreneurs from brand owners like Zhang Ruimin and Liu Chuanzhi, and they held the discourse power. The result of the brand-owner-dominated era was: through the dual-drive model of brand and channel, giants emerged in various industries, and these giants also carried weight globally, greatly increasing industry concentration. The channel revolution influenced this era. FMCG brand owners established a channel system covering over 6 million retail terminals and over 8 million catering terminals nationwide through dealer miniaturization and deep distribution. It was this channel system that connected China's vast and disparate markets.

2. The Era Dominated by Platform Companies

Since Taobao rose, media topics and cover figures shifted to entrepreneurs from platform companies like Ma Yun, Ma Huateng, and Zhang Yiming. After a decade of platform dominance, traffic concentrated on a few large platforms, and platform traffic growth approached its limit. Online retail share lacked incremental growth; even new platforms only redistributed platform traffic. The revolutionary platform era is nearing its end. In the platform era, a group of world-class internet platforms emerged, with very high concentration, and a few large platforms achieved traffic monopoly. When the total national time is fully divided among platforms, the platform era ends. Currently, changes among platforms are just traffic shifts; total traffic has not increased. Meanwhile, the boundary between online and offline has become clearer. For some categories, offline growth exceeds online.

3. The Era Dominated by Retailers

In the previous two eras, the outcome was the emergence of oligarchs, an inevitable result of an era. Over decades of reform and opening up, although there were major developments in the retail sector, the share of the TOP 100 retailers fell from 12% in 2012 to 6% in 2022, halving in ten years. Brand owners established a channel system reaching terminals directly, and platform companies built internet platforms reaching users directly. Retailers seemed to have discourse power in terminal negotiations, but only in negotiations with distributors. The supply chain revolution is the complete opposite. Starting from retailers, it establishes a supply chain system that reaches the source directly. Some might say, doesn't reaching the source mean directly finding manufacturers? Not at all. Reaching the source means replacing many functions previously undertaken by brand owners. This is the truly significant impact. Marketing theory has always taught us to have user thinking and stand from the user's perspective. In fact, all user thinking is merely the process where the dominant party of an era uses the banner of users to integrate the channel (supply chain). Brand owners use the banner of consumer orientation, and platform companies use the banner of user thinking. Retailers integrating the supply chain also need to use the banner of users (consumers). So, is there a difference between supply chain and channel? They are the same thing, described from two different standpoints. From the brand owner's perspective, brand owner → distributor → retailer is the channel. From the retailer's perspective, production workshop ← brand owner ← retailer is the supply chain.

Redefining the Sphere of Influence

No matter who dominates the commercial era, growth must be achieved. Growth is either quantitative growth, value growth (quality growth), or both. China's FMCG industries have bid farewell to quantitative growth for ten years. Except for industries like drinking water and dairy, which still have significant growth space, other FMCG industries have basically no growth. From a quantitative perspective, China has roughly gone through three stages: incremental → excessive → shrinking. In the incremental stage, consumption quantity grew due to rising consumption capacity. In the excessive stage, as consumption capacity rose to a certain level, there was overconsumption as compensation for past underconsumption. For example, drinking baijiu regardless of health. In the shrinking stage, when excess reaches a certain point, it returns to normal, called the shrinking stage. As FMCG is a necessity for clothing, food, housing, and transportation, consumption quantity is limited and cannot grow indefinitely. The consumption limit is determined by the body's capacity. Don't view the current shrinking as abnormal; it's a return to normal. Even if some categories temporarily rise in quantity, it's just a sideways movement, a rebound, not a reversal. So where is future growth? It must be quality growth. However, after the supply chain revolution, a new price band controlled by retailers has emerged, and the brand owners' system band needs to be redrawn. Whoever occupies the new price band will occupy an era. Below is a brief introduction to the full price band spectrum.

I. Private Label Price Band

1. Private labels replace cheap generic brands. This price band was previously occupied by low-end cheap brands; in the future, it will be the main price band for private labels and hard discount. Brands overlapping with this price band should withdraw as soon as possible.

2. In Europe, private labels account for 38% of retail share; in the U.S., 18%. In China, private labels are currently less than 5%, and future retail share may fall between the U.S. and Europe. Hema's private labels currently account for 35%.

3. Private labels cannot simply be seen as a reaction to consumption downgrade; they represent a new lifestyle and identity, a business model that transcends cycles. The president of TreeHouse Foods' retail division said, "For millennials, shopping for value is part of their identity."

4. Private labels will also be stratified. Typical private labels have a three-tier structure: good, better, best. Although European private labels now have high value-added, the proportion is still low.

5. Private labels must thoroughly transform the supply chain. In the book "Procurement Management and Operations Practice" written by the PSCC procurement and supply chain expert team, it is mentioned that typically, negotiating price reductions with suppliers only yields 5%-10% cost savings; streamlining processes and informatizing transactions can reduce management costs by 10%-20%; and 70%-85% of cost optimization space comes from areas like technology R&D, marketing, and consumer services. Note especially that technology R&D, marketing, and consumer services were previously functions undertaken by brand owners. China's supply chain revolution will roughly go through three stages: retailer-distributor game → retailer-brand owner direct game → retailer-OEM deep cooperation.

6. Some small and medium-sized enterprises think they can OEM for private labels. But know that the lower the end, the more scale matters; SMEs without scale advantages have no cost advantages. Additionally, with major brand factories having severe excess capacity, OEM for private labels has more cost advantages. Can SMEs survive with differentiation at the low end? Differentiation is more suitable for the high end.

7. Private labels and hard discount have just entered China and will undergo localization. While learning from European and American private label development experience, note that localization may completely change them.

II. Mass Market Brands

1. What are mass market brands? We used to view P&G and Coca-Cola as high-end brands, but now we know they are just mass market brands in developed countries, and they have entered the mass market list in China. Mass market brands are brands consumed by the general public, unrelated to high-end.

2. Even if hard discount becomes popular, mass market brands remain retailers' traffic products and tools for optimizing profit margins; private labels find it hard to erode their space. The key is whether your user stickiness is strong enough in the mass market brand price band. Generally, first-tier brands have no problem, but it's hard to say for second-tier and below.

3. Above mass market brands is mainstream upgrading. Mainstream means still mass, with a broad consumer base. Upgrading means the price band moves forward. For example, ten years ago, the mainstream price band for mineral water shifted from 1 yuan to the current 2 yuan, and now there's a trend toward 3-4 yuan. During this mainstream upgrading, brands in the 1 yuan price band were marginalized.

4. In the past, many companies adopted a massive SKU strategy in the mass market brand price band. But in the supply chain era, retailers will tend to reduce SKUs. Therefore, not having a super single product in the mass market brand price band will be very uncomfortable.

III. High-End Price Band

Whether an industry can grow depends on whether it can open the high-end ceiling. Industry shrinkage will continue. Baijiu is doing well despite a 55% decline in sales volume, thanks to Moutai opening the high-end ceiling and giving the industry unlimited growth space. When quantity cannot grow, industry leaders have only two choices: premiumization and brand going global. Except for baijiu and tobacco, which have domestic luxury goods, luxury overall remains dominated by multinational brands.

Limited Choices in the Supply Chain

In the past, the entire price band belonged to brand owners, who could choose any price band. Now, private labels occupy a significant portion of the full price band, leaving limited choices for the supply chain.

I. Choices for Brand Owners

From the brand-owner-dominated era to the platform-dominated era, entrepreneurs had more choices, favoring small and medium-sized startups. From the platform era to the retailer-dominated era, retailers have more choices, but brand owners have fewer.

1. Regardless of scale, gradually move away from the mid-to-low price band. This is the domain of private labels and hard discount. Mass market brands in China's FMCG sector are basically set, being the super single products of industry leaders; besides making super single products bigger, there are few options.

2. Various industries will see a second round of mainstream upgrading opportunities. The classic case in 2023, Oriental Leaf, is a classic example of mainstream upgrading. The window of opportunity has arrived; better to do it wrong than miss it. In 2023, "3-yuan drinks collectively disappear" became a hot search, a signal of mainstream upgrading.

3. There are opportunities in the high-end price band. However, since the high-end price band is not suitable for deep distribution, it is more suitable for penetration models. Therefore, SMEs have opportunities here, while large enterprises' opportunities lie in acquisitions.

II. Choices for Distributors

The current distribution system is a product of the brand-owner-dominated era. After the e-commerce diversion in the platform era (diverting 27% of physical retail share), it will also experience marginalization in the supply chain revolution (possibly accounting for 1/3 of retail share). Distributors will enter a period of high differentiation. Differentiation means a few super distributors will emerge, and a large number of distributors will gradually exit.

1. Platform-type distributors are a must in the future. The emergence of platform distributors changes the long-term trend of distributor miniaturization, and distributors will see regional oligopolization. Platform distributors are "first-tier + B2B second-tier," able to provide one-stop supply to terminals. Agency brands will quickly concentrate on platforms because platforms can supply many small terminals in one stop, and second-tier distributors will gradually disappear.

2. Mass market brand distributors will exist for a long time, but it is highly likely that distributor functions will be decomposed to various large platforms.

3. With the emergence of platform distributors, a large number of BC community stores will become franchise stores of platform distributors. This phenomenon has already appeared in Guangzhou and Changsha.

4. Against this backdrop, it is recommended that aspirants quickly keep up with platform distributors. Most distributors should prepare for orderly withdrawal.

III. Choices for Retailers

The protagonists of the supply chain revolution are retailers. The era truly belonging to retailers has arrived, and a large number of business leaders influencing the world will emerge.

1. The era of pan-hard discount is coming. Hard discount expands from single categories to comprehensive categories, eventually entering the pan-hard discount era.

2. Retailers penetrating the entire supply chain will pay a huge price. The supply chain revolution means retailers will undertake some roles and functions previously held by brand owners and distributors. This extremely tests retailers.

For retailers, the window of opportunity has arrived; either self-revolution or be revolutionized. The tide of the times is unstoppable.

How to Face 2024?

2023 is the first year of hard discount, sending signals to all commercial fields. Is this a small wave or a torrent? Is it others' business or a major event for all swept up by the times? I believe it is a turning point in the era. From the channel revolution led by brand owners to the internet revolution led by platform companies, history has reached the threshold of the supply chain revolution. If you acknowledge the above judgment, then FMCG companies should do two things in 2024.

First, preserve historical stock. After all, stock is the resource accumulated by history. It determines the initial position in the supply chain revolution. Perhaps traditional methods should be used to the extreme.

Second, don't miss the first step on the starting line of the new era—don't lose on the new starting line. Find your position in the new full price band spectrum and step onto the rhythm of the supply chain revolution. How to face 2024? There is no isolated 2024; only 2024 under new trends. First find the right direction, then seek methods.

(This article is based on the sharing of Mr. Liu Chunxiong in the "Bao Yuezhong New Retail Group," with additions and deletions.)