After more than 30 years of rapid growth, China's economy has slowed down and entered a period of stable growth. Almost all FMCG categories are experiencing oversupply, with severe overcapacity. Products have shifted from scarce competition to saturated competition, and the market has moved from universal growth to squeeze-style growth. A large number of star companies have seen sales decline, such as multinational giants P&G, Hershey, and Nestle; beverage giants Wahaha, Coca-Cola, Pepsi, and Yangyuan; instant noodle giants Master Kong and Uni-President; beer giants Yanjing and Tsingtao; and bakery giants Panpan, Gangrong, and Youchen. When the nest is overturned, how can any egg remain intact? In the next five years, at least 30% of FMCG companies will go bankrupt or close down!
1 Cash Flow Chain Breakage Kills a Batch Many companies collapse not because of insufficient scale, not because products are not selling well, not because gross margins are too low, and not because they are not profitable. They die because their cash flow chain breaks. It's like a seemingly healthy person who dies suddenly from excessive blood loss. Companies that go bankrupt due to cash flow chain breakage share two common traits:
1. Heavy use of leveraged funds, i.e., bank loans, leading to high financial costs. Common practices: acquiring land and building factories, mortgaging land and properties for loans, and using bank loans as development capital. When the macroeconomic environment continues to improve and companies grow rapidly, the risks of such leveraged funds are hidden. When the economy enters a downturn and macro-control measures are implemented, banks call in loans, and companies immediately collapse.
2. Companies never have crisis management plans. All planning assumes rapid sales growth and continuous profit increases, never considering what to do if sales decline and losses occur.
There is an interesting joke circulating on the internet: Wang Sicong asks Wang Jianlin, "Dad, how much money do we have?" Wang Jianlin says, "You can't spend it all in three lifetimes!" Wang Sicong then asks, "Dad, how much do we owe the bank?" Wang Jianlin says, "We couldn't pay it back in eight lifetimes!"
In fact, many entrepreneurs around us have more money than they can spend, but the money is the bank's. When banks don't call in loans, they are all high and mighty; when banks call in loans, they are all miserable.
The author once served an edible oil FMCG company with a net profit margin of 40%. This company also ventured into real estate and mining, and the boss owned three helicopters. Due to a mistake in a real estate project and the bank calling in 200 million yuan in loans within six months, the group's cash flow chain broke, ultimately dragging down the highly profitable edible oil subsidiary.
Economic cycles cannot have only prosperity without recession, and business development cannot have only growth without decline. Too many entrepreneurs are immersed in the explosive growth path of the past 30 years of reform and opening up and are reluctant to face the reality of severe macroeconomic adjustment. When the macroeconomy enters an adjustment cycle, companies that use high leverage will be the first to fall, such as listed companies: Nanjing's Yurun Group, Liaoning's Huishan Dairy, Shenzhen Angel Food, Hunan's Xinyijia supermarket chain, Hebei's Zhongwang Food and Wugudao, etc.
2 Bosses' Empiricism: Success Hinders Success, Killing a Batch This type of company collapse is a case of "success and failure both stem from the same person." People are products of their times, and their driving force for enterprises is also time-bound. Entrepreneurs who started businesses in the 1980s and 1990s are now between 60 and 70 years old. Their existence made the company what it is today, but their existence also means the company has no tomorrow. Because they have always been successful, they strongly believe in their experience. Experience is very useful when the market environment, competitive environment, and consumer trends are stable, but after 2008, things changed every year, or even several times a year. Their past successful experience has become the reason for their current failure.
Management is people-centric, marketing is product-centric, and products are consumer-trend-centric. But bosses of this age only trust their own intuition and judgment.
They ignore changes in consumer needs and habits. Wahaha's Nutri-Express was China's best-selling beverage product, with annual sales of 26 billion yuan at one point. Starting in 2015, it experienced a cliff-like decline. Zong Qinghou attributed the decline to negative online reports causing consumers to be afraid to buy. But Master Kong's green tea, black tea, Coca-Cola, JDB herbal tea, Gangrong steamed cake, and Youchen pork floss cake also saw sales decline without negative reports. The main reasons for the sales decline are: first, better products appeared, and consumers shifted their purchasing power; second, the extreme abundance of products grabbed part of Nutri-Express's market share. Consumer demand changed, but your product didn't innovate or iterate around consumer needs. If you don't decline, who will?
They ignore channel evolution. A snack food company was very proud of its continuous sales growth for over a decade. But its channel was single: only supermarkets. Starting in 2016, sales declined. So the company spent more money on more display racks and more promotions, but still couldn't stop the decline. China's supermarket boom was from 2000 to 2014. During this period, companies with decent products that stuck to supermarkets saw sales grow. Because this industry was the channel's windfall; when the wind comes, even pigs can fly. But entering 2015, large supermarket sales began to decline, largely due to changes in consumer shopping habits. The competitive landscape of channels changed, but this company still clung to the supermarket channel and didn't expand into traditional channels or e-commerce. It would be strange if you didn't decline!
They don't believe in the power of professionalism, only their own experience. When a large company launched a new product, R&D personnel tested new flavors with target groups and determined two new flavors. The boss wanted to taste them himself, and the final conclusion was: use whichever flavor the boss thinks tastes good. But the problem is: the main consumers of beverages are young people. Would a 70-year-old man's favorite drink be liked by young people? When I raised doubts, the old man said: "I'm 70 years old with a 30-year-old heart and 20-year-old taste." Alas, when a person desperately tries to prove he's not old, he's already old. When a company with annual sales of over 10 billion yuan experienced a cliff-like decline, someone suggested the boss cooperate with a consulting firm. The boss said: "I built this company from zero to tens of billions. Who knows this company better than me? If I can't solve the problem, can those consulting firms?" Five thousand years of history tells us that reform must use external professional forces. King Wu of Zhou sought Jiang Ziya and established the Zhou Dynasty; Guan Zhong assisted Duke Huan of Qi to achieve hegemony; Duke Xiao of Qin used Shang Yang's reforms to turn weak Qin into strong Qin; Liu Bei visited the thatched cottage three times to invite Zhuge Liang and divided the world into three. Knowing what disease you have doesn't mean you can cure yourself. This is the principle that doctors don't treat themselves.
The second generation can't take over. The father starts the business, and the son ruins it. The father does everything himself, down to the smallest detail. The son becomes president without step-by-step training. The son is ambitious but incompetent, thinks he knows everything, but if you remove the second-generation halo and apply for a job, he probably can't even be a marketing director. If you hand a company to such a person, bankruptcy is only a matter of time. Internet celebrity Luo Yufeng commented that Wang Sicong became the "national husband" for two reasons: 1. Wang Jianlin is his father. 2. He dated many girls and became the national husband. Without the halo of the richest man Wang Jianlin, Wang Sicong is just a decent-looking man. It takes a long time for a company to grow from small to large, but bankruptcy or closure can happen in a few months.
3 Product Innovation Can't Keep Up, Killing a Batch The product evolution path of any company is the same: single product breakthrough -> product enrichment -> product structure -> product update and replacement. That is, products themselves have a lifespan. With the development of the internet and the smooth flow of information, product cycles are getting shorter and shorter. Don't expect your product to become the next Moutai, lasting a hundred years and selling better and better.
A single product breakthrough is the starting point for a company's success, at least the starting point for brand accumulation. It's hard to find a consumer brand in the market that doesn't have a big single product. After the breakthrough, the star product becomes a target, so you must enrich products to protect the big single product. At the same time, to continuously create profitable sales, you must form a high-mid-low product structure. Even BMW and Mercedes-Benz do this. Any product has a lifespan, so product updates and replacements are needed. When your core big single product's sales decline, it's not that your product is bad; it's that better products have appeared. How to innovate and upgrade products is a problem that must be solved. But too many companies are immersed in past glory and can't extricate themselves, watching sales decline day by day without knowing what to do.
4 Severe Overcapacity and Survival of the Fittest Kill a Batch China's overcapacity is not limited to coal, steel, cement, chemicals, and real estate, but also includes FMCG industries, such as food and beverages. Due to low entry barriers, a large amount of capital has entered this industry, leading to severe oversupply. Chinese companies are very efficient at imitation and following. When a product becomes a hit (whether real or fake), a large number of companies follow suit. These followers don't analyze the market space or sustainability; they only think about quick follow-up and quick profits, unknowingly falling into a trap. For example, when Jiangzhong Monkey Mushroom became popular, a large number of biscuit companies launched monkey mushroom biscuits. The first brand's highest annual sales were 7.2 billion yuan, but it still didn't make money. How many of the followers can grow big? When Rio cocktails became popular, many companies followed. Black Cattle Food couldn't resist and quickly followed, hiring Korean star Kim Soo-hyun as the spokesperson for its Dachi premixed drink with a huge advertising fee of 10 million yuan. Black Cattle Food had high hopes for the cocktail project, but it became the last straw that broke the camel's back. When Kaiwei and Shanzhishu hawthorn drinks became popular, many companies followed. The entire beverage market hit the ceiling in 2016. How much future can such thick, additive-laden products (with thickeners, edible gums, sweeteners, potassium sorbate, etc.) have? When an industry's overcapacity reaches a certain level, it creates huge resource waste and non-performing loans. At this point, two types of regulation will cause a large number of companies to fall.
First, administrative macro-control. The current situation of China's coal, steel, cement, photovoltaic, and chemical industries is the future of FMCG companies with severe overcapacity.
Second, market survival of the fittest. Since 2012, the FMCG industry has begun to naturally eliminate excess capacity. Haven't you noticed that in many development zones, roads are beautifully built and factories are magnificent, but many are not operating, and even factory areas are overgrown with weeds? Hit products have traps; invest cautiously.
5 Cross-Industry Entrants into FMCG Die in a Batch Because FMCG is relatively less affected by macroeconomic changes, a large number of real estate companies, pharmaceutical companies, and coal bosses have entered the FMCG industry in recent years. Evergrande Real Estate made Evergrande water, Tongrentang made herbal tea, Xiuzheng made liver-protecting drinks, and Bawang shampoo made herbal tea. Capital is important for running a business, but having money doesn't mean a company can develop and grow. Evergrande is very powerful, with annual real estate revenue exceeding 100 billion yuan. How did it do with water? It lost 6 billion yuan in three years! Tongrentang and Xiuzheng are giants in the pharmaceutical industry, but after years of struggling in the beverage industry, their sales still don't cover advertising costs. Bawang Group, which makes shampoo, entered the herbal tea industry, spent hundreds of millions on advertising, and quietly stopped the herbal tea project after two or three years. Why can't these wealthy companies do well in FMCG?
- They use outsiders to manage insiders. For example, Evergrande Group did recruit many beverage experts, but the real decision-makers were the bigwigs from real estate. Those who understand can't decide, and those who decide don't understand. Is it reliable to let a house seller sell water? There's a joke: A real estate company that crossed into water, when distributors asked for reimbursement of last month's promotion expenses, the executive said: "When we build houses, we pay suppliers after a year."
- They use successful management experience from their original industry to manage an unfamiliar industry. Different products have different target audiences, channels, and marketing models. Too many cross-industry companies try to apply the management experience of the previous industry to the next one. The process is very careful, but the results are terrible.
- Those used to making quick money and high gross margins suddenly have to make slow money and low margins, which they can't adapt to, lacking persistence. FMCG looks easy, but it's very hard to do.
6 Outdated Business Models Kill a Batch In the past 20 years, four business models have been worshipped in the FMCG industry: Master Kong's channel intensive cultivation, Wahaha's joint sales system, JDB's terminal control, and Fujian Jinjiang's advertising and franchise model. These four models not only benefited these four companies, but many FMCG companies have imitated them. Any business model can only drive a company's development at a certain stage. It's hard to find a business model that can drive unlimited development. Whether it's Master Kong's channel intensive cultivation or JDB's terminal control, both are essentially human-wave tactics. When labor costs were low, these models worked repeatedly. When labor costs kept rising (in 2016, FMCG marketing labor costs were 5-10 times those of 2000), these models reached their end. This is also one of the main reasons for Master Kong's continuous layoffs and the huge losses of Evergrande and Jiangzhong Monkey Mushroom. Evergrande Spring Water had up to 18,000 marketing personnel, with a monthly personnel cost of 180 million yuan, and sales were less than personnel costs. No matter how rich a company is, it can't sustain such a model. It's reasonable for FMCG marketing personnel costs to account for 2%-5% of sales, but some companies that have been operating for many years have personnel costs at 10%-20% or even higher. How can you make money? Brother, do you think you're selling drugs? The joint sales system once made great contributions to Wahaha's development. This model has two prerequisites: first, reasonable channel profits; second, best-selling products. When channel profits become transparent and products go from best-selling to slow-moving, plus malicious inventory loading, this model reaches its end. Fujian Jinjiang's advertising and franchise model was very effective in the era of scarce product competition. Once the CCTV ad aired, you went in with a Santana and came out with a BMW. But in the era of media fragmentation, when TV's main audience is the elderly and children, and the main purchasing power group doesn't watch TV, this model of relying on advertising to drive sales has also reached its end. This is one of the reasons for the collective decline of Fujian FMCG companies. In recent years, Liangpin Shop and Zhou Hei Ya have adopted direct-operated store models, while Ma Dajie and Yanjin Shop have adopted supermarket direct-operation models. How long these can drive companies is unknown. But any model that can drive a company's rapid development at the moment is a good model. As entrepreneurs, you must clearly recognize that models, like products, have a lifespan. Innovation that keeps pace with the times is the kingly way. In the 30 years of reform and opening up, Chinese people's wealth accumulation has shown a wave effect: stock market, state-owned enterprise reform, township enterprises, real estate, etc. The frequency of waves is getting faster and faster. With the advancement of the Golden Tax Phase III and increased tax audits, past ways of making money no longer work. You must keep innovating with the times to continuously drive business development. In the next five years, will your company fall? And in which form?
About the author: Wang Guanqun, top FMCG operator, founder of China's Performance Growth System, author of "Focus: The New Engine for Performance Growth in the Next 10 Years," and current chairman of Beijing Yingxiaoli Enterprise Management Consulting Co., Ltd. Source: Yingxiaoli (ID: yingxiaoli888) -END-