The following is the speech content of Mr. Chen Yu, founding partner of Binfu Capital, at the 5th FMCG + Internet Conference hosted by New Distribution, organized and published for readers.

Binfu Capital was established in 2015, with a fund management scale of about 1 billion yuan. Our main investment directions include three major areas: modern services, consumption upgrade, and advanced technology. Among them, 2B services for channel digitalization are the focus of Binfu Capital's investment. Over the past three years, we have also invested in four or five companies in this field, including B2B platforms, SaaS tools, and service-oriented enterprises. We have had gains and losses in these investments. I would like to take this opportunity to share our insights with you.

Today, my topic is "Alternative Paths for Channel Digitalization." Previously, we have looked at many B2B platforms. If we consider these platforms as the traditional path of channel digitalization, then today we summarize past experiences and lessons and look forward to the future path. Hence, the subtitle is "The Future of B2B Services."

This picture is familiar to all of you. Over the past three years, every B2B platform company has shown this picture: In the past, there was a traditional tiered distribution system between brand owners and terminals. These traditional distributors are often described as scattered, chaotic, and poor. Therefore, B2B startups use IT technology to build platforms, provide information flow, and establish a purchasing and sales platform from small terminal stores to brand owners. In addition to information flow, they also provide product flow (including logistics) and capital flow. In fact, this entire path imitates the growth path of Alibaba Taobao in the 2C field, using IT technology to transform the original distribution system and achieve higher efficiency.

But over the past few years, many B2B platforms have not survived. Some went bankrupt midway, some ran away, and some are struggling to support themselves.

Let's summarize the three traditional paths of B2B:

First, self-building. Build information flow, product flow, and capital flow all by yourself, directly competing with traditional distributors.

Under this path, several problems are often encountered. First, does this self-building approach have economies of scale? Information platforms may be relatively easy, but we find that traditional distributors are also using convenient communication tools to achieve rapid information transmission. It seems that this form is not sufficiently economical of scale. In addition, in terms of logistics, many platforms have built their own logistics systems, from warehousing to trunk lines to last-mile delivery. But we also find that many distributors can use third-party logistics to achieve the same purpose. Moreover, in recent years, with the development of e-commerce, the coverage density of third-party logistics has become increasingly fine, and marginal costs have become lower and lower. In the end, we find that self-built logistics may not be more efficient than third-party logistics.

In terms of compliance costs, B2B platforms invested by investors will basically enter a standardized operation state at a certain stage, with the ultimate goal of going public. However, under the current Chinese tax environment and local governance environment, they may be at a disadvantage compared to traditional distributors. Distributors are flexible in operation, but platforms may not be able to do the same.

In terms of expansion to other regions, many entrepreneurs who build their own B2B platforms may be able to compete with local traditional distributors in their own provinces or regions with resources. But once they enter unfamiliar places, they encounter many problems. In summary, the self-building B2B platform path targets the scattered, chaotic, and poor traditional distribution channels. I can build a more efficient platform than you, but I will encounter the above three problems.

Second, mergers and acquisitions. If you can't beat them, acquire them. Use capital to acquire local distributors, connect them through capital into a large platform, and achieve unified scale operation.

But in practice, we have also encountered some problems. We observed that mergers and acquisitions are easy, but business control is difficult. In addition, after the merger is completed, if many local distributors are merged, how can I integrate and synergize? If they still operate independently, each doing their own thing, without synergy, cross-regional sales and price chaos will still occur.

Another point is whether there is performance growth. Is it simply moving the original distributor's local business to the platform to form a larger GMV, or is there performance increment on the original basis? Performance increment is an important indicator to judge whether efficiency is truly improved.

Summarizing the first two paths, we find that they are both capital-consuming. Whether it is self-building or mergers and acquisitions, strong capital investment is required. Before 2017, these B2B startups could relatively easily raise funds to support their progress. But after 2017 and 2018, funds faced difficulties in raising capital. In 2018, the total amount of RMB funds raised decreased by 58% compared to 2017. This transmitted to entrepreneurs, making financing difficult. With continuous capital consumption, the future prospects are not optimistic.

Third, empowerment. Do empowerment without spending money, do not build warehouses, do not merge, use IT technology to empower small distributors and retail stores.

So some people thought of a third path: do empowerment without spending money, do not build warehouses, do not merge, use IT technology to empower small distributors and retail stores, and use this method for digital transformation. Of course, in the process, problems still arise. Usage habits: traditional distributors and traditional small stores, especially in third- to fifth-tier cities, do not have the habit of using software for procurement and sales.

On the other hand, if you only provide them with a tool software, where is your core value? Based on the above two points, where is your revenue space? Small and medium-sized enterprises in China generally lack the habit and willingness to pay for software services. Therefore, in this process, providing software tools actually does not generate much revenue, and may not even cover the IT development costs.

Summarizing the above three paths, we encounter various difficulties in practice. We are reflecting on where the future path of B2B platforms lies. Why has the previously envisioned use of technology to launch a dimensionality reduction attack not appeared?

Returning to the essence of business, why does the channel exist?

We believe that when a brand owner wants to sell products to consumers, what is initially needed may not be a channel, but a terminal. They need a scenario to reach consumers. The brand can control this terminal itself and do direct sales, but direct sales faces a very big problem: if the product faces a very wide range of consumers, how can I quickly establish and control these terminals, and even after establishment, how to manage them? These issues are challenges for brand owners.

Therefore, a large number of brand owners actually adopt a form of cooperation with others to achieve this goal. They need distributors to help brand owners establish connections with these terminals and provide services to them. The essence of distributors or channels is to assist brand owners in supporting and managing terminals as service providers.

The existence of distributors is essentially the externalization of the brand owner's marketing function. This should have been done by the brand owner itself, but due to economic costs and management capabilities and other reasons, it is handed over to others. Distributors themselves are the externalization of the brand owner's marketing function.

Under this conclusion, distributors are essentially not just traders. Although many distributors started in trading, first, they help brand owners solve information flow problems. Information such as products, prices, promotions, and publicity needs to be transmitted layer by layer through the distribution channel to terminals and meet consumers. Of course, sales, inventory, competitor information, and customer relationships need to be transmitted from bottom to top back to brand owners, so that brand owners know the current competitive landscape in the market. This is the first thing distributors need to do.

There is also product flow and capital flow. Warehousing, distribution, display, returns and exchanges, advance payment, and settlement. Because there are so many layers in between, brand owners cannot directly settle with terminals, so distributors need to settle. All of these together are what distributors do. Distributors are not just traders but also service providers for brand owners.

Looking back, why have B2B platforms not achieved a dimensionality reduction attack? Because to replace distributors, you cannot escape the above tasks. Some things may be solved through IT technology, but some are not easy to solve and still require human relationships. Therefore, we believe that B2B platforms still have a long way to go.

The difficulties mentioned earlier are some temporal difficulties and some essential difficulties. How to go in the future? Let's return to this picture. The channel is the externalization of the brand owner's marketing function. In this picture, there are many roles, including terminals and distributors. Many things B2B platforms have not done well, so you cannot beat them. Many SaaS companies serve distributors, but few companies think of directly serving brand owners.

Among the companies we invested in, after repeated discussions, we have seen many changes. We observed that if you only focus on transactions, you may not do services well; but if you truly do services well, you will eventually get transactions. So the alternative path we see is to serve brand owners well, thereby promoting the digitalization of the entire channel. This may be a new path. Why does it work? First, brand owners have pain points, and channel efficiency is facing challenges. What are the specific pain points?

First, e-commerce is accelerating penetration efficiently.

In the entire FMCG industry in 2018, the e-commerce penetration rate exceeded 20%. This number was only a little over 10% in 2015. It doubled in three years, and the speed continues. E-commerce operation efficiency is very high. First, it achieves a closed loop of traffic, from traffic acquisition to traffic conversion, to transaction formation, to retention and repurchase. The entire process is closed-loop operation.

In addition, online scenario changes and iterations are very fast. From the early Taobao to later content marketing, information flow platforms like Weibo, WeChat, and Toutiao, and then Pinduoduo, such scenario iterations are very fast, including WeChat business and mini-programs.

Online data is highly enriched. Consumers' behavioral touchpoints online can be recorded, such as when they watched an ad, how long they watched, how many people clicked, and who clicked. E-commerce knows that this data can be accumulated for big data analysis and operation. Especially now that platforms are highly concentrated, brand owners get no benefit from the platforms. For example, looking at Alibaba's advertising revenue, its proportion has been increasing in the past two years. This indicates that the cost of selling goods on it is getting higher and higher, and you may eventually have no money to earn. This is the threat of e-commerce.

Second, terminal scenarios are complex and diverse.

Although offline terminals are still the main force, with online penetration at 20%, offline still accounts for 80%. But offline terminals are also undergoing changes. First, KA (Key Accounts) are transforming into new retail. We conducted a statistic: among the top ten KAs nationwide, except for foreign brands, about two-thirds are more or less connected with Alibaba or Tencent. The most typical is RT-Mart, with Alibaba as a shareholder. Yonghui, with Tencent as a shareholder. These KAs were originally one of the main offline sales sources for FMCG brand owners, but they are actually being touched by e-commerce platforms.

It is conceivable that if future hypermarkets are controlled by Alibaba and Tencent, the online scenario will inevitably appear. In addition, new types of terminals are constantly emerging, such as community group buying, unmanned vending cabinets, concerts, and sports events. These have become new terminals for offline user reach. Brand owners originally lacked contact with these terminals and lacked understanding. The most traditional offline small b (small stores), brand owners lack management over them, with layers of traditional distributors in between.

Third, the information chain is long and fragmented everywhere.

From brand owner to consumer, the information chain is long and fragmented everywhere. From top to bottom, promotions are difficult to manage effectively. When brand owners conduct promotional activities, they distribute promotional prizes downward, but cannot guarantee that promotional items reach terminals and are displayed. Distributors may take a lot in the middle. Some buy-one-get-one prizes are directly sold as products by distributors. There is a lot of waste in promotional placement itself.

Even if there is placement, market effects are difficult to feedback because information needs to go up through layers of distributors, and it cannot get through. Therefore, traditional brand owners hire market research companies to investigate how many people participated in the event, how many people saw it, and what their feedback was. But such surveys are often lagging. In addition, surveys are sampled and cannot represent the whole, and research costs are very high, ultimately making results difficult to evaluate. Customer data is difficult to collect and apply. I sell a lot of water, but I don't know in what scenarios consumers bought it, and whether they will repurchase after buying. Marketing processes are difficult to form a closed loop, with fragmentation from top to bottom.

Therefore, in summary, brand owners have a need to digitalize channels and achieve data-driven omni-channel marketing.

What is omni-channel marketing?

1. All media. Online and offline, human media (all personnel including terminal promoters), object media (products, packaging), and scene media (all consumption scenarios that can reach users). These were originally not digitalized and relied on human management. Can they be digitalized?

2. All processes. The entire process from brand placement to sales to user operation achieves digital integration, with data connectivity for consumer lifecycle management.

3. All channels. From the first-tier distributor to terminals, from offline to online, all scenarios form a digital closed loop. This is the omni-channel marketing that brand owners hope to achieve, and it is also the vision of brand owners' digitalization. Brand owners most hope to connect all these data paths, so that they can have the opportunity to compete with online platforms like Alibaba and Tencent in the future. If they return to e-commerce, brand owners may have no chance at all.

How was the concept of omni-channel marketing proposed? It is based on the consumer decision path. The process from a consumer's awareness of a brand to the final purchase is from awareness, to interest, to desire, to action, and finally to brand loyalty. The marketing activities we do basically correspond to the above process.

First, brand marketing makes consumers aware and interested. In channel marketing, from interest to purchase desire, conversion in the sales link, and through after-sales service, brand loyalty is formed. The corresponding activity intentions are first ad reach, traffic conversion, transaction completion, and finally customer care.

These paths have been fully connected online, forming a closed loop. Various technologies have also formed online, such as ad tech for advertising placement. Five years ago, our investment focus was on precision marketing and precision placement based on advertising. But in recent years, everyone has focused on marketing technology, so-called MarTech. There are many marketing actions to be done online, such as conversion, repurchase, and retention. These online technologies are already very mature, but can they be used offline to transform traditional offline channels, from distributors to terminals?

In fact, some chain retail terminals have begun to try to achieve digitalization through marketing technology and ad tech. The ultimate goal is to improve return on investment. In the past, brand owners knew that 50% of their advertising was wasted, but they didn't know where it was wasted. The purpose of digital marketing is to save that 50%.

The most important thing is that brand owners have budgets. We roughly estimate that a typical brand owner spends about 30-40% of sales on marketing. Large brand owners usually have two major departments: marketing and sales. The marketing department is divided into brand marketing and channel marketing. Brand marketing manages placement, and channel marketing manages channels. The channel marketing department and sales department are jointly responsible for channel strategy placement and execution. Every year, a considerable amount of expenses is lost in the channel. Brands will hope to use digital methods to improve the efficiency of channel strategy placement.

Let's do a simple calculation: According to the FMCG industry's 4 trillion yuan in sales, based on gross margin discounts, there may be 2 trillion yuan at brand owners. At a ratio of 10%-15%, there may be hundreds of billions of yuan in channel placement expenses each year.

So, summarizing the analysis, regarding the alternative path for channel digitalization: serve brand owners, become a technology provider for channel digitalization, help them manage channels. In fact, they themselves have channel control capabilities, but the efficiency is not very high. Can we help them improve efficiency? Use MarTech technology to enter brand owners. In this process, accumulate data with an effect-oriented approach. If the cost-effectiveness ratio improves, I can make money. In the process, I accumulate a large amount of channel data and consumer data. At the appropriate time, do precision distribution. If you hand over the goods to me, I can definitely sell them well. This may be a path.

Brand owners doing this themselves may not be economical. Unless large enterprises like P&G may invest themselves, small and medium brand owners with annual sales below 5 billion yuan do not have the willingness and capability. This may be achieved through technology platformization.

Another path is that the original distributor, through its own efforts, achieves high digitalization, enters through distribution transactions, polishes products, accumulates data, and realizes the transition from product to platform.

Finally, a summary of channel digitalization: First, channel digitalization must find the real demand; second, the ultimate goal of channel digitalization is data-driven omni-channel marketing, ultimately serving the externalization of brand owners' marketing capabilities; third, channel digitalization is a long-term evolution process.

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