Preface: Recently, I visited a beverage distributor, and here is a conversation I had with him. A: Mr. Liu, why did you initially choose to become a distributor in the beverage market? B: The beverage market has low entry barriers, it's easy to develop retail points, and it's relatively easy to get started. A: Do you think the beverage market is easy to do now? B: It's tough this year; there's so much inventory in the warehouse, it's worrying. A: Since the market is tough, have you considered doing other markets? B: I plan to try condiments in the second half of the year. A: How did you choose the condiment market? B: During this pandemic, I realized that condiments are essential goods, and there is no obvious off-season. I already have many retail points, so it should be relatively easy. A: Have you thought carefully about how to do it? For example, which segment of condiments, or which brands or channels? B: I haven't thought that far; I'll just find a big brand. First, let's review the "range 1.7" concept. In market competition, the ratio of market shares between competitors is called the "range distance," indicating the strength comparison. If the ratio is above 1.7, it is said to exceed the "range distance." Based on the critical value of 1.7, three dividing points can be derived, dividing the market into four patterns: Markets evolve from fragmented → oligopolistic → relatively monopolistic → completely monopolistic. The milk category once had over 30,000 brands, but as competition intensified, market concentration increased, and now only about 1,000 remain. In the future, there will be even fewer brands, gradually concentrating. Any category starts fragmented, with many players, but eventually consolidates. What does this mean for distributors? At which stage is it easier for distributors to make money? In a fragmented market, it is the early stage of development. At this time, the market grows rapidly, penetration is high, and many entrants join. As long as you enter, you can benefit from the market growth dividend. Everyone can make money, but it's hard to make big money; market shares are low, so profits are limited. Early distributors were in fragmented markets, enjoying the initial dividend period, with few leading brands and consumer brand awareness not yet established. Simply put, if you have people, vehicles, and capital, you can do it; making money is relatively easy, but the scale is small. In an oligopolistic market, it is the hardest stage to make money. Capital enters, top-ranked brands start spending money and resources to grab share. At this stage, although the market is growing rapidly, the intensity of competition increases, profit margins decline, and entrants often see revenue growth without profit growth, making it increasingly difficult to make money. Because there is no absolute leader yet, everyone is buying market share, but no one can completely defeat the other. Coca-Cola and Pepsi are the best examples. In the cola segment, these two are oligopolies; they compete, but neither can completely defeat the other. Due to the duopoly competition, many retail points face a choice between the two, often having to reject Pepsi if they accept Coca-Cola. Being their distributor is relatively harder to make money, with low profit margins and incomplete coverage of retail points, which significantly impacts sales. In the relatively monopolistic and completely monopolistic stages, after intense competition, leading brands emerge. Oligopolies appear, brands gain pricing power, profit margins increase, and price stability is basically achieved, making money easier again. For example, when Wanglaoji gained a monopoly position in the herbal tea market, anyone who distributed it made money; no competitor could beat it. Distributors who represent it can make money, and with sufficient capital, you can defeat any competitor. Therefore, for distributors, if you want to enter a market, there is a core principle: the NO.1 principle. Continuously become NO.1 in each segment, and eventually become NO.1 in the overall market. -02- How to Choose Key Markets In summary, four words: "细分、大、高、强" (segmentation, size, growth, strength). "细分" (Segmentation): Segment the market. As consumer awareness improves, market segmentation is a trend. Both channels and products are gradually segmenting. For example, tea drinks can be divided into red tea, green tea, jasmine tea, green plum tea, and dozens of other flavors. Similarly, the restaurant channel can be segmented into Chinese restaurants, Western restaurants, hotpot restaurants, etc. Therefore, when distributors choose a market, it must be a segmented market, an intersection of a specific product and a specific channel. For example, in the beer category, high malt concentration, high alcohol content, and high-priced products for the hotpot restaurant channel. Identify one or several key segments as the company's target markets. Based on the needs and desires of customers in these segments, design the correct pricing, promotion, and distribution systems, and provide customized services. Then increase investment to become the leader in that segment, gradually growing the business, and eventually enter other promising segments. "大" (Size): Find segments with large sales volume or profit potential. If a segment has no sales space or profit space, you can make small money in the short term, but it's hard to become an industry leader relying on such a market. For example, the domestic olive oil market is less than 4 billion yuan. Although the growth rate is okay, demand is limited, and there are not many sales channels; it can only be a supplementary category. For example, the beauty brand Perfect Diary was founded in 2017, and from January to November 2019, sales reached 27.676 billion yuan, with a valuation of $1 billion as a unicorn. Aside from its marketing tactics, what is the logic behind it? People's living standards continue to improve, per capita disposable income further increases, young women pursue fashion and beauty, and the cosmetics industry market size is over 400 billion yuan, with sufficient capacity. "高" (Growth): High growth potential. Market size determines how big your company can become, while market growth determines how far your company can go. Only with sufficient upward space does it make sense to continue. No one wants to spend a lot of money and effort only to buy a ticket on the Titanic. FMCG distributors should be clear that Master Kong's 1-yuan water once dominated the bottled water market, but now 1-yuan water has almost no growth. As consumer consumption concepts improve, its elimination is inevitable. Most categories today are in a stock market. If you cannot find incremental growth within the stock, this segment has no future. In an upward channel, even if you stand still, you can develop; in a downward channel, even if you try hard to run upward, at best you can barely maintain the status quo. "强" (Strength): Large market share and relative competitive advantage. This last word is about brand selection. After distributors choose a market, the key step is the brand. First, the brand must have awareness; terminals and consumers must have sufficient recognition of the brand. Nowadays, consumer awareness has been educated to a certain extent, and brand awareness is deeply rooted. Changing it cannot be done in a short time. I have conducted in-depth visits to the beverage market and found that consumers basically have designated brands when buying bottled water. When asked why they don't try other brands, most consumers say they have formed a habit. Secondly, when entering a new segment, you must have a well-known brand to open the market; otherwise, everything is empty talk. Second, compared with competitors, the product must have core competitiveness. Distributors must clearly recognize that internet development promotes efficient and transparent information transmission, making it unlikely to profit from information asymmetry. Therefore, the products distributors choose must have core competitiveness. Compared with competitors, what advantages do they have, and can they establish product barriers? These must be carefully considered. -03- Summary In the past, the market environment changed slowly, and although distributors had fewer choices, there were dividends, so it wasn't too difficult. Now, the market environment changes every year, and distributors have more and more choices, but the market develops faster. It is inevitable that distributors who cannot keep up will be "cleared out." For distributors, finding new growth points and new segments is the only way to ensure they continue to grow and strengthen in the market. Author Bio: Liu Huaming, Partner at SMI Consulting, Senior Consultant, MBA from Sun Yat-sen University. Committed to helping consumer goods companies open up marketing channels and specialize in solving regional expansion challenges.