Introduction: Low prices have become the industry benchmark, forcing manufacturers into price wars.
Author | Zhao Shengnan
Review | He Wen
Layout | Wang Hai
Since the beginning of this year, "low prices" have gone wild in the FMCG industry!
Both online and offline, everyone is promoting "high cost-performance."
Online e-commerce platforms have returned to "low-price" competition. Taobao Tmall, JD.com, Pinduoduo, Douyin E-commerce, as well as Meituan Flash Purchase and JD Daojia, among other major online platforms, are all focusing on low-price channels. This can be seen from this year's "Double 11" shopping festival, where all major shopping platforms are pushing the concept of "low-price good products."
Back when Pinduoduo first appeared, many looked down on "slum-style consumption," but now they have been proven wrong. Pinduoduo even surpassed Alibaba in market value after releasing its third-quarter earnings this year.
Looking offline, competition among snack discount stores is almost crazy, with frequent discounts like 8.8% off or 5.5% off.
Traditional retail players are transforming into discount stores, and non-retail players are crossing over into discount retail. The discount army is growing, and various FMCG discount stores have taken root.
Wherever full-category community discount stores appear, local mom-and-pop shops complain bitterly.
During a recent market visit to Anhui, I heard the founder of a community discount store say that just a few months after opening, the owner of the neighboring mom-and-pop shop came to complain: "Why can you sell so cheaply? When will you restore the original prices? People from the nearby neighborhoods all come to buy from you, and I have no business left."
A low-price atmosphere pervades everywhere.
Low Prices Become the Industry Benchmark
Manufacturers Forced into Price Wars
With the proliferation of low-price strategies across channels, manufacturers have ultimately been unable to escape.
High-end snack brands that rely mainly on their own channels, such as Three Squirrels and Bestore, have suffered poor performance due to the low-price trend.
According to public financial reports, Bestore's revenue in the first half of 2023 was 3.987 billion yuan, down 18.55% from 4.895 billion yuan in the same period of 2022. Three Squirrels' revenue in the first half of 2023 was 2.893 billion yuan, down 29.67% from 4.114 billion yuan in the same period of 2022.
Discount stores, community group buying, and instant retail platforms commonly adopt the strategy of "using big brands to attract traffic." As channel fragmentation intensifies, FMCG brands, regardless of their brand awareness, cannot escape the characteristics of "high substitutability and low switching costs."
During my market visits, I also observed that in the same location, discount stores always have more foot traffic than ordinary small shops.
If you don't join emerging channels, your sales will be taken by competitors in the same category.
Coupled with industry-wide overcapacity, manufacturers who can't hold out are forced to compromise on low prices and join the price melee.
In December this year, Bestore announced its first largest price reduction since the brand's founding 17 years ago, with an average 22% reduction on 300 hot products and a maximum reduction of 45%.
Three Squirrels took countermeasures earlier, implementing a "high-end cost-performance" strategy at the end of 2022, reducing prices on some products while maintaining the same quantity.
The price reduction strategy has been remarkably effective.
Through price cuts, Three Squirrels achieved during this year's Double 11: the highest number of visitors and orders on Tmall's main site in the large food category, a 30% increase in Tmall buyers, and a 40% increase in Taobao Live sales. On Douyin, sales exceeded 100 million yuan during Double 11, ranking first on four Douyin lists, including the nut snack industry and short video sales rankings.
Whether from data or phenomena, low prices seem to be becoming the industry benchmark. Manufacturers cannot stay aloof, but do all brands that join the price melee have the capability to offer low prices?
Do All Brands Have the Capability to Offer Low Prices?
How do brands currently involved in low-price discounts achieve low prices?
One approach is long-term low pricing through supply chain optimization and efficiency improvement.
Facing low-price pressure, large brands with the ability to optimize their supply chains can achieve price reductions without compromising quality. For example, Three Squirrels has always advocated "high-end cost-performance," reducing costs by optimizing all links without lowering quality, and passing the savings to consumers.
This preserves brand image while increasing sales.
Most small and medium-sized brands lack the ability to optimize their supply chains and can only achieve low prices by continuously reducing quality, or even cutting corners.
A snack brand stated that if discount stores didn't pressure prices so much, the current product quality could be better, but they have no bargaining power when negotiating with discount stores.
"Originally, the company adhered to a high-quality route, but now we are forced to divide products into low-end and high-end series. Whatever price the channel procurement offers, we produce products of corresponding quality; otherwise, orders are pitifully few," said another brand executive.
When prices are squeezed to the extreme, you can imagine the quality!
It's important to note that after three years of the pandemic, companies are already under enormous pressure. The market environment in 2023 has not improved with the easing of the pandemic; instead, it has become more difficult.
Take Zhangzhou as an example. A manufacturer revealed to me a real situation: among nearly 1,000 food factories in Zhangzhou, business has generally been sluggish this year. In October, many leading companies operated only 5 to 6 days. In the past two months, more than 60 factories have closed, and many companies' goals have shifted from "seeking growth" to "survival."
When survival becomes the primary goal, how can quality be a priority?
Lowering prices is easy, but not everyone can do it. Achieving "low prices" by reducing quality or cutting corners is like drinking poison to quench thirst; it is unsustainable.
The Unwinnable Price War
To Advance or Retreat?
Although the quality of domestic products has greatly improved compared to the past, the continuous compression of costs makes it hard to be certain that the "landmine" of food safety won't explode.
Take pastry brands as an example. Some high-end brand pastries used to sell for 19.8 yuan per jin, but now they have dropped to 12.8 yuan per jin in snack stores, with supply prices typically between 8 and 8.5 yuan, leaving razor-thin margins.
Without the ability to optimize costs, if they want to continue cooperation, they have no choice but to cut corners.
Of course, most brands have not yet reached the point of having to cut corners.
But even if they maintain quality, getting caught in the low-price involution still leads to problems such as price system disruption and profit damage.
Some brands have already awakened and are unwilling to sink deeper into the price quagmire.
On December 26, Wang Xiaolu announced that "because Hema cannot sell chicken feet series products according to the company's standard price system, the company will stop cooperating with the Hema system from that day onward. All current cooperating distributors/dealers are prohibited from supplying the Hema system. Once discovered, they will be dealt with according to the cross-regional sales policy."
Wang Xiaolu has developed to a point where it has some ability to contend with channels, but many small and medium brands are aware of the need to resist but are powerless.
Take a snack manufacturer in the Sichuan-Chongqing region as an example. Initially, due to poor existing business, they chose to enter the snack discount channel.
Although the snack discount channel boosted the company's sales, over time they found that they had volume but no profit.
Many snack discount stores typically place small one-time orders, only a few hundred items, and require that cartons not be damaged, leading to relatively high logistics costs.
In addition, many snack stores also charge unloading fees, sometimes 0.25 yuan per item or 0.15 yuan per item.
As a result, this snack manufacturer repeatedly communicated with the channel, hoping that snack stores would stop pressing down on ex-factory prices, but to no avail, and they had to "grin and bear it" for now.
A brand manufacturer told me: Initially, they thought cooperating with distributors yielded low profits, so it was better to supply directly to terminals. But after a period of cooperation, they discovered that the various additional fees charged by terminal snack stores actually made direct supply more costly.
In contrast, distributors are more humane and flexible. For example, if the same issue of damaged cartons arises, they can first store the goods and then send the cartons, or communicate with the distributor to use cartons from other manufacturers as substitutes, saving many unnecessary hassles.
There are even many southern brand manufacturers choosing to go overseas, shifting to the Southeast Asian market.
A bulk snack manufacturer told me the reason for shifting to Southeast Asia: "Alas, for upstream manufacturers like us, as long as we can sell goods, it's the same anywhere. Bulk snacks have weak brand power to begin with. Now even large manufacturers can't control their price system, let alone us bulk manufacturers. We can't compete domestically."
Facing the increasingly intense price war, besides direct confrontation, changing the battlefield offers other possibilities.