Hello everyone, I am Zhao Bo, founder of New Distribution. I want to thank brand owners, distributors, and service providers from all over the country for taking the time to travel to Shanghai for the 6th China FMCG Conference, the 3rd China FMCG Hard Discount Conference, and the 3rd China FMCG Distributor Conference.

Today, my topic is quite interesting: "The 'Shrinking Volume Era' Is an Inevitable Stage for the Birth of Great Companies."

Why this topic? Over the past two years, you may have felt that business is not easy. When the New Distribution team discussed the conference theme, we delved into the changes of this era and their impact on individuals. We believe that how to transform in the shrinking volume era is a major issue facing every enterprise and organization.

The FMCG industry has encountered some challenges in growth. In the first half of this year, the entire FMCG industry faced significant challenges. In June, New Distribution conducted a statistic, analyzing the revenue and profit data of 137 listed FMCG companies. In Q1 2024, 82 companies saw revenue growth, 55 saw declines, 89 saw profit growth, and 45 saw profit declines. In terms of growth rates, whether revenue growth or decline, it was a small fluctuation within a range of about plus or minus 10%. However, we found three phenomena.

First — there is a significant polarization: the good are exceptionally good, and the bad are severely declining.

Second — revenue growth without profit growth: most companies' growth is driven by huge investments in expenses.

Third — internal and external differences: from the first half data, foreign companies' financial reports are generally better than domestic ones. On one hand, it's brand power and marketing & management systems; on the other hand, it's continuous insight into the market environment.

Overall, in Q1 2024, the performance of China's A-share FMCG listed companies showed a "K-shaped divergence" characteristic. Most companies showed growth in revenue and profit, especially in net profit. However, a considerable number of companies faced declines in revenue and profit, reflecting intensified competition and market uncertainty. Especially in the past two years, with economic downturn, cautious and divergent consumer spending, retail is developing towards omni-channel. To meet market demand, brand owners need to continuously launch new products and packaging, and optimize their supply chain capabilities through digitalization. Similarly, distributors' businesses face corresponding challenges. Distributors have encountered rising costs, channel impacts from various new online retail models, intense offline market competition, and increasing demands from manufacturers and consumers, making profitability more difficult.

From April to July, New Distribution surveyed 302 distributors nationwide, covering 14 categories, with scales ranging from 5 million to over 300 million. Based on this data, we gained insights that will be officially released at the Distributor Conference the day after tomorrow. I'll share some macro data here; detailed content will be shared by our colleagues and partners on the 22nd.

From the survey data, in Q1 2024, only 55% of distributors achieved their brand sales targets for the first half, with an average achievement rate of 98.1%. Among them, water and beverage market demand was relatively stable and strong, with distributors achieving sales targets better: 72.6% completed sales targets, with an average achievement rate of 103.3%. Snacks and grain, oil, and flour had lower achievement rates, indicating greater market uncertainty or competitive pressure.

From a revenue perspective, in the first half, 62.9% of distributors saw no revenue growth, and 81.8% saw no profit growth. Overall, revenue declined by an average of 1.6%, and profit declined by an average of 6.5%.

From a cost perspective, distributors faced rising cost pressures in the first half of 2024, especially significant increases in personnel costs and promotional expenses. Among them, 63.3% of distributors saw personnel costs increase, and 36.1% reported increased sales expenses. Paper products had the largest increase in labor costs, while convenience and subsidiary food saw the largest increase in sales expenses.

Summary of reasons for revenue decline — downstream sales downturn, intense market competition, and new channel impacts are the main reasons for revenue decline. However, summarizing reasons for profit decline, overall sales decline, intense market competition, and increased costs are the main factors. Summary of reasons for revenue growth — adding products and categories, increasing sales points and business regions are the main factors. Profit growth reasons: overall sales increase, optimized product mix, and optimizing low-profit channels and customers are the main factors for profit improvement.

Facing market difficulties, omni-channel operations, capability upgrades, expanding new channels, transforming to B2b, and management improvement have become urgent operational capabilities for distributors.

Summary: From the survey data, market pressure and opportunities coexist. We must clearly see that the decline in volume and profit has become the market norm. The current shrinking market is more complex, more challenging, and tests operational and innovation capabilities; it also shows polarization, with both brands and distributors experiencing the Matthew effect. In a shrinking market, manufacturers and distributors should get used to competition and involution, improve capabilities, optimize operations, and continuously innovate to actively respond to market changes and challenges.

1. Decline in volume and profit has become the market norm; 2. The shrinking market is more complex and challenging, testing operational and innovation capabilities; 3. Polarization: both brands and distributors show the Matthew effect; 4. Manufacturers and distributors should get used to competition and involution in the shrinking market; 5. Improve capabilities, optimize operations, and continuously innovate to actively respond to market changes and challenges.

Opportunities:

1. The fundamentals of China's economy have not changed; 2. Market depth is sufficient: sinking, western development, and moderate diversification into categories with low industry concentration; 3. Optimize operations to reduce costs and increase profits; 4. Strengthen management and deepen channel control; 5. Brand strengthening, omni-channel operations, and digitalization; 6. Innovation and iteration; 7. Going global.

Customers have new jobs to be done. Let's first talk about a model — the Malik Curve model. This is a management model proposed by Fredmund Malik, a European management scientist and founder of the "St. Gallen Management School," in his book "Transition: Thinking in a Complex New World." The "Malik Curve" is very similar to the "Second Growth Curve," but the double S-curve of the "Malik Curve" has an overlapping area, which is the essence of the "Malik Curve." The "Malik Curve" is divided into two parts by "today": the left curve represents existing business, the so-called "old world"; the right curve represents future business, the "new world." In the transition zone, previously key resources become meaningless, but people still subconsciously hold onto them. What is the handle for new business? How to determine strategy? It is also explored in uncertainty, full of chaos.

This morning, I saw a video from a tech blogger about a visit to Stanford for exchange learning. He heard a professor at Stanford Business School talk about a recent experiment they did:

1. Give you $5 and 2 hours, then see how much money you can maximize; 2. You can pause for two minutes to think about how many ways you can make money.

Most people in the world might think of buying balloons with the $5 and spending two hours selling them. Stanford students are some of the smartest kids in the world; they didn't do that. They thought: $5 is an anchor value. If you really only use $5, no matter what you do, you can't make more money. But we are talents from Stanford Business School; we can do consulting and training for companies, so someone used two hours to earn $100. The most impressive: some thought that not only $5 but also the two hours are anchor values. If you get stuck in these two hours, you can't earn more. But our school is Stanford; not everyone is qualified to enter and interact with these top students and professors. So someone sold the three-minute presentation slot to an international top headhunting agency, allowing them to introduce their company to these students and professors in three minutes. Guess how much it sold for? $675!

From this case, my inspiration is: $5 and two hours are like our own life experiences, existing resources, and capital. They have made us who we are, but they also limit our thinking, creating a huge inertia to rely on past paths. In this era full of turmoil, change, and even the alternation of old and new cycles, we must have the ability to jump out of rules and paths and re-examine this proposition. Only then can we avoid being bound by history and maximize the use of past resources to do future things.

In the Malik model, there are three layers of meaning:

  1. Existing resources, paths, and capabilities fail, essentially because they are anchored by past paths, resources, and capabilities; past achievements become the shackles of our future development.
  2. At this time, we must learn to think outside the box, re-examine from outside historical rules, and only then have the opportunity to truly transform into a second curve.
  3. The old and new worlds are essentially different rules, not different times and spaces. We must know: under what rules is your mindset anchored?

Returning to marketing itself, we can see that the current market is in the overlapping part of the Malik Curve. The old world business is still being done, but declining significantly; how to obtain the new world is full of uncertainty. From another dimension, if you see these two lines as consumers' past and future consumption behaviors, you will find that consumers' past consumption behavior was based on the logic of survival needs, while the future is based on the logic of their preferred lifestyle. At this stage, all manufacturers and distributors must be clear about a fact: the era has entered the shrinking volume era, and it is no longer possible to achieve greater growth through traffic. Because it is no longer a traffic problem, but a strategic problem. We must rebuild our marketing system around consumers' future lifestyles.

In the past, enterprises provided functional value to consumers for their survival needs; in the future, consumers base on lifestyle, and enterprises must provide emotional value. Consumers change from "I need" to "I like." Because the world has entered the "consumption saturation era." The "consumption saturation era" is a concept proposed by Toshifumi Suzuki, the head of Japan's 7-Eleven. Suzuki observed in Japan: if a person is not full, and there is a pile of food in front of him, he will definitely first choose food that can fill his stomach, leaving his favorite food for last. But if a person is full, his behavior is the opposite; he will first choose his favorite and rarest food. In an era of saturated and surplus goods and services, brands that provide emotional value are more likely to be favored by consumers than those that provide functional value. In the past, consumers valued quality, capacity, and price; today, in addition to these basic functions, consumers value convenience, experience, and appearance. In the past, enterprises only needed to use the HBG model, mass production, distribution, and communication; today, enterprises must re-sort customers' jobs to be done, provide them with super purchase reasons, and around the super purchase reason, do super interest communication to move users. So, all enterprises must redo products and markets based on future lifestyles, changing products from survival tasks to life destinations.

Great companies have all traversed market cycles and economic winters. Let's use a brand as an example to talk about how great brands traverse economic cycles and winters.

Heinz was founded in 1869. Heinz & Noble was founded by Henry John Heinz. Initially, Heinz started with the production and sale of condiments, specifically horseradish sauce. At that time, Henry John Heinz cooperated with his friend Clair Noble to create the first company, named "Heinz & Noble." Their horseradish sauce used transparent glass bottles, which was an innovation at the time, highlighting the product's purity and high quality, quickly winning consumer trust and love. Heinz experienced several major economic crises and cycles and successfully traversed them, eventually being acquired by Buffett in 2013 and merged with Kraft to form Kraft Heinz.

Let's look at the causes of the crisis: macro downturn, category decline, aging management, severely lagging channel strategies, category aging, retailer squeeze, etc. The problems Kraft Heinz faced are highly similar to those many companies face today. But Kraft Heinz did not choose to lie flat when facing the crisis; instead, it responded very actively. Summarizing its secrets to traversing cycles: optimize corporate governance, reduce costs and increase efficiency, strengthen brand premium, flexibly adjust business strategies, focus on core businesses and develop emerging markets, etc., eventually becoming a global leading condiment giant.

Not only Kraft Heinz, but New Distribution also summarized Japan's lost decade and the response strategies of companies during the US economic crisis in the 1970s. Although the problems each company faced were different, without exception, they all became great companies that traversed cycles through product and brand innovation, repositioning, adhering to quality, being consumer-value-oriented, lean operations, continuous expansion, and even globalization.

After talking about brand owners, let's share about distributors. Here, I must mention a company: McLane. McLane Company, founded in 1894, is one of the largest supply chain service companies in the US. It has over 80 distribution centers nationwide, employs over 25,000 people, purchases and sells over 50,000 products to customers, and serves 110,000 outlets nationwide, providing wholesale distribution services to convenience stores, discount retailers, wholesalers, pharmacies, fast-food restaurants, and casual dining restaurants. In fiscal year 2024, sales were $52.6 billion, with pre-tax net profit of $455 million. The compound annual growth rate is 4.65%. I analyzed that since its founding, its compound annual growth rate has been as high as 6.5%, which is a very surprising number. McLane was originally a family business, acquired by Walmart in 1990, and Buffett fully acquired it in 2003, with GMV accounting for about 30% of Berkshire Hathaway.

Reasons for the century-old McLane's ability to traverse cycles:

  1. Trade and retail demand is rigid, maintaining relatively stable income during economic fluctuations.
  2. Strong logistics and supply chain management capabilities, maintaining a leading position in a competitive market.
  3. Continuous process optimization and technological innovation enable McLane to provide quality services at lower costs and higher operational efficiency.
  4. Through acquisitions, technology investment, and business diversification, continuously expand and adapt to market changes.
  5. McLane has maintained long-term cooperative relationships with large retailers, convenience stores, and restaurant chains.

For McLane, I think Buffett's evaluation is the most pertinent. McLane's business model is simple and easy to understand, with stable income and continuous profit growth, efficient operational cost control, and long-term relationships with major customers, giving the business model strong anti-risk capabilities. These are important reasons why Berkshire Hathaway invested and held it long-term. So, the trading business is inherently an industry that can traverse cycles and has strong anti-risk capabilities, but it must be efficiently operated, supply-chain-oriented, and group-based, with integrated supply and marketing.

When studying companies that traverse industry cycles, we found that the trading and retail industry is the field with the most Japanese century-old companies, accounting for about 43.6% of Japan's century-old companies. This is a very scary number. The reasons they can traverse cycles are roughly:

1. Diversified product and service portfolios, refined cost control, and innovative marketing strategies ensure survival during economic downturns and growth during recovery. 2. Good at discovering and developing niche markets, meeting the needs of specific consumer groups by providing unique products and services. Continuous market segmentation and innovation capabilities keep these companies competitive in long-term operations and maintain their market position.

In the same trading and retail field, Japanese companies are significantly different from American companies. Japanese companies place more emphasis on user needs, efficiency, and innovation.

Here's a plug: At the Shenzhen Autumn Sugar Fair last September, New Distribution officially launched the Tower Alliance TOP500 FMCG Distributor Supply Chain Alliance. After nearly a year of development, more than 400 large distributors nationwide have joined. We hope to work with all Tower Alliance members to rebuild a new order in the FMCG circulation field.

What the Tower Alliance wants to do:

  • Reconstruct the underlying structure of China's consumer goods supply chain, aiming to build an integrated production-supply-marketing collaborative operation platform and construct an efficient highway for China's FMCG industry.
  • Link more distributors to huddle together for warmth, develop together, network collaboratively, and amplify value.
  • Use the Tower Alliance's capabilities and resources to empower regional distributors, accelerate their transformation, and become regional supply chain leaders.
  • Network collaboration, information sharing, data empowerment, brand co-creation, collective procurement and sales, and resource integration.

We hope more manufacturer and distributor friends can join the Tower Alliance, huddle together for warmth, develop together, and jointly build a highway for product distribution.

Finally, I have a few viewpoints to share with you:

First viewpoint, from 7-Eleven, quoted from Toshifumi Suzuki's "Philosophy of Retail": In an economic downturn, the innovation for rice balls is not about being cheaper, but about being more delicious and worth the money... Consumers don't want to spend money, but they don't want to spend it recklessly; they want to spend it on the blade's edge, which is the more rigid of rigid needs, and the less rigid of non-rigid needs. 7-Eleven's core method is not to sell things, but to sell "events." Turn your product or service from a tool for survival needs into a destination for lifestyle. One of the cores of great companies traversing cycles: Insight into customer tasks, return to the essence of value.

Second viewpoint, from Zhong Shanshan's interview with CCTV Dialogue. When asked about products, he mentioned: "You don't have time; you can't really polish a good product." In the interview, he also mentioned that Oriental Leaf didn't make money for the first five or six years, until 2023, when he earned two to three billion in profit in one quarter. The second core of great companies traversing cycles: Use products to solve traffic problems, not use traffic to solve product problems.

Third viewpoint, from Drucker's "Management in Turbulent Times": The greatest risk in turbulent times is not the turbulence itself, but continuing with past ways of thinking and behavioral logic. Our biggest enemy is never the era, but the inertia that cannot be changed when facing this era. To traverse the Malik Curve, you must constantly try to change. In this regard, Uniqlo gives me great inspiration. When the consumption environment is sluggish, Uniqlo's core strategy is not to reduce costs and increase efficiency! On the contrary, Uniqlo ran ahead of the market by constantly stirring things up, achieving a myth of 160 times sales growth and 1500 times profit growth in 20 years.

Fourth viewpoint, is the misreading of the "lipstick effect." From 1929 to 1933, 9,000 banks closed in the US, and millions of people's savings vanished. US GDP fell from $104 billion to about $56 billion. However, during this massive depression, US lipstick sales rose against the trend. Later, people explained the lipstick effect as: in economic downturns, people still have strong consumption desires and will turn to buy cheap luxury goods as a placebo. Looking back at history, people habitually seek universal laws from the ups and downs of economic cycles, pursuing a one-size-fits-all summary of history and prediction of the future. But unfortunately, the causality of industry development is often hidden in subtle details that are not easily noticed. In the 1930s, American women already had the right to vote and economic control (during World War I, a large number of women joined the labor force), and thus had many social occasions. The female employment rate in the US began to slowly rise from 1900 and saw rapid growth in 1920. The Great Depression did not cause women to lose jobs; instead, it pushed the US female employment rate into a steeper growth range. Social progress and technological change made mass production of lipstick possible; at that time, lipstick could be bought for just 10 cents from department stores or retail stores. The flapper style, marked by red lips and smoky eyes, was popular in the 1920s, making women feel naked without lipstick. Therefore, lipstick naturally became a regular in handbags. The deeper guiding significance of the lipstick effect is that during economic downturns, consumers' thresholds are greatly raised, and they have a strong desire for innovation. This is the window for major industry innovation — which categories have significant innovation, and which categories will see significant growth.

Important insights from the lipstick effect:

  • Economic downturns are often windows for major industry innovation.
  • Innovation can significantly drive sales growth across categories, such as the mascara industry's growth during the US economic depression in the 1970s.
  • Due to the absence of innovation, seemingly new things in large categories are actually old, leading to flat development in new cycles.
  • The "lipstick effect" is actually the innovation effect of new technology, not a compensation for economic cycles.
  • Currently, various industries in China are in an innovation window; companies that seize this opportunity are expected to lead the global FMCG industry in the coming decades.

The third core of great companies traversing cycles: Break inertia, continuously iterate, and innovate constantly.

The last viewpoint is a personal insight. Stoicism is a very ancient philosophical school, originating in ancient Greece. Its greatest philosophical proposition is that you must learn to accept things you cannot change, focus on things you can control, and most importantly, learn to distinguish between the two. Pressure, economic downturn, and business difficulties are inevitable stages in the development of countries and enterprises. We are part of the country and the whole, so we must accept and embrace current problems, and then continuously try positively. But this attempt is not as extreme as Cynicism; instead, be an enterprise with the golden mean.

Finally, I wish all enterprises present can traverse cycles, thrive for a long time, and become century-old companies.

PS: Friends interested in the on-site speech content can follow the WeChat official account of New Distribution for recent posts. We will organize and publish all speakers' speeches for readers.

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