The following is the speech content delivered by Hong Kai, Vice President of E-commerce at Nielsen Greater China, at the "FMCG2019·China FMCG Conference" hosted by New Distribution, organized and published for readers. In recent years, many new practices have emerged in both retail and FMCG. There are many practices. Today's sharing aims to stand at the forefront, first looking at consumer changes from the consumer perspective. China Consumer Trends Outlook In China, we believe that over the next three to four years, the entire market will be driven by five major factors. The first is the lower-tier market. Everyone is now rushing into lower-tier markets. How long the dividend of lower-tier markets will last is a question we are very concerned about. The second is whether China is experiencing consumption upgrading or downgrading. What background does the rise of Pinduoduo represent? The third is demographic changes. Demographic changes will actually affect the growth of many categories in the next two to three years. The fourth is that Chinese consumers' demands are becoming more diversified, leading to many new practices. The fifth is that consumers increasingly prefer domestic brands. Nielsen's latest report found that in China, consumers increasingly prefer domestic brands, which is a very interesting phenomenon. 1. Lower-tier Market Dividend Period Compared with upper-tier markets, the lower-tier market still has significant opportunities in terms of e-commerce penetration and consumer numbers. But today I want to say that we can see the overall national trend. Over the past two to three years, a large number of companies have been exploring opportunities in lower-tier markets. First, over the past 15 to 20 years, the growth rate of urban population in China has been significantly faster in upper-tier markets, even in recent years. Second, we can look at the ratio of economy to population. The so-called economy-to-population ratio is the proportion of GDP produced in a region relative to its population share globally. Upper-tier markets have an advantage, and this gap is widening. Third, the trend of population concentration is also increasing in first- and second-tier cities. Why have we seen greater opportunities in lower-tier markets over the past two to three years? If you look at government policies, in the previous planning cycle, including the one before, the government's main approach was to drive population to third- and fourth-tier cities. At that time, the urbanization strategy was called the small and medium-sized city policy, relocating a large number of rural residents to those areas. But if you look at the government's renewed emphasis on metropolitan area development, emphasizing urban circle development, and second, emphasizing bay areas, the government has realized that continuing to drive population to third- and fourth-tier cities has limited impact on overall economic upgrading. So you will see that in the next two to three years, population will continue to move to large and medium-sized cities. 2. Consumption Upgrading or Downgrading? Is there so-called consumption downgrading in China as a whole? If you look at Europe or the United States, once an economic crisis occurs, consumers really start to downgrade consumption, meaning household spending decreases. But we find that whether in first- and second-tier cities or third- and fourth-tier cities in China, almost all households are increasing spending, and very few are actually cutting back. However, we can see that consumers in upper-tier and lower-tier markets behave differently in spending. Although theoretically everyone is doing consumption upgrading, upper-tier consumers have shifted more money to services and are more careful with their spending, while lower-tier consumers are still increasing their spending index on consumer goods. So for different markets, everyone is actually upgrading consumption, just in different directions. This is our own survey data. We can see that whether in first-tier or fourth-tier cities, the number of households increasing spending is very large, and those cutting back are very few. We can also see that in upper-tier cities, people are increasing investment in children's education and lifestyle services. In lower-tier markets, consumers are increasing spending more on daily necessities. You can see some social platforms selling very cheap items. You can see vacuum cleaners priced at 300 yuan on social platforms. Many are sold to rural areas. Those from fourth-tier or rural areas know that rural households rarely bought vacuum cleaners before because floors were cement and cluttered. If you used a small-power urban vacuum cleaner, it would easily break. But you will see that vacuum cleaners sold on social platforms have very high power, possibly twice that of your home vacuum, and are very fault-tolerant, able to suck up anything. But for rural people, this is not downgrading; it is actually upgrading their consumer goods. 3. Significant Demographic Changes Population changes: China's population is shrinking quite rapidly. The post-70s and post-80s are a population peak, while the post-00s are shrinking. We also believe that the post-90s are currently in a good consumption period: they have just started working, have little work pressure, and parents can provide considerable support. But we also see that in the next two to three years, or three to five years, they will enter a state of semi-stagnation in personal consumption for two reasons: First, they have begun to enter family life. They need to increase spending on children or their families, which will affect spending on personal consumer goods. Second, their parents are entering retirement. In China, the pension replacement rate is relatively low, so the support parents can provide is expected to decrease. Similarly, we are also optimistic about the post-60s and post-70s. They are about to enter retirement and are relatively asset-rich in China. Demand for retirement-oriented consumption will grow in the future. The overall population trend in China is toward smaller families. Chinese families have been shrinking. By 2016-2017, the average household size was about 3 people, meaning a couple with one child. The traditional extended family is gradually disappearing. This has brought significant changes to retail. First, the replenishment cycle has become faster because when a large family goes shopping, they usually buy on a weekly basis. Second, you will find that the traditional main battlefield for replenishment is shrinking. Young people or small families are less willing to go to hypermarkets for replenishment. They will replenish at nearby convenience stores or community supermarkets. This is also a trend. Third, time allocation varies greatly between generations. We can see that compared with the post-60s, the post-90s spend very little time in offline stores. If you are a post-90s in Shanghai, you might spend two hours commuting, work more than eight hours a day (ten hours in the internet industry), sleep about seven hours, leaving only about four hours of free time. For post-90s, a lot of time is spent watching dramas, scrolling Douyin, or playing Honor of Kings. So the time left for offline stores is decreasing. But conversely, for post-60s, post-70s, and post-80s, offline scenarios are an important part of their leisure time. This trend will still bring great pressure to offline retail. As post-90s become the household decision-makers, they gradually lose the habit of going to physical stores. 4. Rise of Personalized Consumption Personalized consumption demand is growing. First, you can see that across China, because China is very large, consumer differences between regions are significant. Why are rural consumers very concerned about the durability of home appliances? If it breaks, repair is a painful process, unlike in cities where you can call and the manufacturer comes quickly. The second issue is planned vs. unplanned purchases. Unplanned shopping is a prominent feature among Chinese consumers. This is due to rising income. One reason for the rise of social e-commerce is that people are doing a lot of unplanned shopping, such as when friends recommend products. The third issue is the rise of new products. FMCG new product iterations are very fast, including personal care, packaging, and clothing. Many sales are driven by new products. Last month we went to Tmall and saw that in several categories, more than half of the incremental sales came from new products. They continuously launch new SKUs to drive consumer spending. This is a very typical feature. Consumers are very likely to try new products due to packaging innovation. Even investing one yuan in product innovation or packaging innovation is better than spending 50 yuan on traffic. 5. Why Domestic Brands Are Popular Consumers' preference for domestic brands is increasing, and in terms of market share, domestic brands are performing better. First, in terms of emotional and brand recognition, consumers are increasingly willing to resonate emotionally with domestic brands. Second, domestic brands have better flexibility. They do better in packaging aesthetics, cost-effectiveness, quality, and adapting to domestic needs. We also believe that in the future, domestic brands will have more opportunities in these categories. With this in mind, what changes are occurring in retail? Changes and Responses in the Retail Industry In the future retail environment, the importance of consumers will significantly increase. It is urgent for brand owners and retailers to strengthen their ability to operate around "people." First, whether retailers or brand owners, everyone used to be channel-oriented, prioritizing channel occupancy. In the future, the value of people will grow, and consumer value will grow. Now everyone is starting to do business around consumers. Second, traditional boundaries have been broken. We know that post-90s are less willing to buy in physical stores, but retail must consider how to transcend its boundaries. If you still do business based on your location, you will find that hypermarket sales are declining. Third, how to integrate online and offline is very important, especially for omnichannel marketing and traffic interception. How to make post-90s consume without leaving home is a typical practice. Traditional supermarkets have excellent sales per square meter because they can draw customers from five kilometers away, which is hard for traditional supermarkets to achieve. Many post-90s are gradually moving their replenishment needs online. This chart well illustrates the replenishment characteristics of post-90s: more and more post-90s are buying snacks, fruits, and vegetables online with increasing frequency. These are all staple categories for traditional household replenishment, but they no longer go to supermarkets and buy directly online. Research on the Impact of Social Media on Retail Under consumer drive, social media is a very hot topic. We also see that social media is not a new thing. In China, there has been a lot of social interaction in the past. Some people tried it five or ten years ago. Why is it so hot now? We categorize it into distribution social, content social, and group buying. Consumers no longer rely on social fission for group buying; many directly open apps to group buy. 1. Social Distribution E-commerce All brand owners are now doing distribution. Two weeks ago, I talked with some leading dairy companies. They are using WeChat business channels or distribution models to sell products. In distribution, the core is to expand sales nodes forward and drive those nodes to sell goods along their routes. Is there a ceiling? We have been studying this issue. The biggest ceiling we see now is which groups can be mobilized to do this business. Our research shows that the overall mobilized group is still biased toward middle- and low-income people. It is difficult to use this income group to reach middle- and high-end consumers. First, those willing to become sales nodes and participate in distribution generally have incomes between 5,000 and 10,000 yuan. Second, the biggest ceiling of this model is that it is difficult to do upward sales. It can only do peer sales, generally selling to people similar to themselves. This is understandable. For example, if you put a person earning 5,000 yuan in a group with a person earning 50,000 yuan, they might chat a bit initially, but after a day or two, they have no common topics. This is the bottleneck of social e-commerce. 2. Bottlenecks of Social Distribution E-commerce For consumer goods, it is crucial to retain sufficiently high gross margins to incentivize your nodes. Not every category is suitable for this model. With one layer of sales nodes, you need to leave about 30% to 50%; with two layers, about 70%; with four layers, the markup is about six times. There is a certain divergence between price and value. For example, categories like women's beauty, weight loss, and slimming, and elderly health and wellness are more suitable for this approach. 3. Social Content E-commerce Another model is doing business under the KOL model. Social content e-commerce is increasingly emphasizing closed loops. Let me give you an example from our discussions with a global top skincare company. They are increasingly putting all budgets for their second- and third-tier brands into KOL marketing. They no longer do traditional brand marketing, such as advertising on CCTV, subway stations, or newspapers to build their brands. For their second- and third-tier brands, they have completely stopped doing this and are investing entirely in KOLs. Last year, 12% of their budget was allocated to KOLs. This is a very high number, as cosmetics spend a lot on marketing. Second, they increasingly emphasize the unity of brand and effect. For many leading brands, including some new brands, this is a great opportunity. In our research, this content model is the easiest way to achieve sales in first- and second-tier cities among all social models. 4. Bottlenecks of Social Content E-commerce Of course, there are problems. This model also brings typical social characteristics, namely the width of product categories is not very wide. Our market research shows that about 70% of products suitable for KOL promotion are beauty, personal care, and apparel. These three categories also have the highest return on investment, while other categories are weaker. Second, data fraud is very serious. If brand owners do this, it is very important to control data and sales processes. Due to time constraints, I will share this much today. Thank you all.