From March 14 to 16, the 9th China FMCG Innovation Conference, themed 'Supply Chain Revolution', was held in Chengdu. During the conference, over a hundred sharing guests, along with more than two thousand manufacturer and distributor representatives from across the country, explored the two core propositions: 'Where is growth?' and 'How to achieve growth?'. Among them, Mr. Ren Wenqing, COO of New Distribution and chief editor of the China Snack Hard Discount White Paper, delivered a significant presentation on March 15 at the 2nd China FMCG Hard Discount Conference, titled 'Through Hard Discount, Looking at the Transformation of FMCG Distribution Models and Its Impact', which sparked strong reactions and high resonance among the many manufacturers and distributors present. The following is the full text. Thank you all for attending the conference. I am Ren Wenqing from New Distribution. In December last year, we held the first China FMCG Hard Discount Conference in Zhengzhou. After that meeting, we decided to hold the second Hard Discount Conference in Chengdu in March. Some people said the frequency of our conferences was a bit high. Honestly, I initially thought so too—how much new stuff could there be to talk about? But over the past two or three months, my thinking has gradually changed. Why? Over the past period, I have been traveling on business, meeting many people: entrepreneurs in discount retail, investors, brand owners, distributors, factory owners, and traditional retailers. I found that many people do not understand or agree with hard discount. Some say hard discount is nothing new; it has existed abroad for a long time. Some say discount stores will ultimately just be one of the sales channels for FMCG. Some say, don't forget the previous B2B and community group buying... I understand what they mean—you keep talking about hard discount and transformation, but the industry has new hot topics every few years, and in the end, things remain the same. Regarding hard discount, New Distribution has done a lot of work over the past six months. We released the 'Snack Hard Discount White Paper' and held the industry's first conference themed on hard discount. When everyone talks about hard discount, it may give the illusion that the future belongs to discount retail. But that is not what we mean. The retail industry will not be all discount stores in the future. Referring to data from developed markets, it may not even become the dominant retail model. Why should we pay attention? Because hard discount is the surface; behind it is the transformation of the FMCG distribution model, which is what we truly need to understand and focus on! You might say, isn't that a bit grand? Let me share my thoughts. Hard discount is not equal to discount retail It is a manifestation of systemic change Before the Chinese New Year, two news items caught my attention: On January 12, Costco's first store in South China opened, with customers flooding in. As of the opening day, the number of membership cards issued exceeded 140,000, ranking first globally. On January 17, Walmart announced that it had upgraded 29 domestic stores last year, halving the number of SKUs, with 80% of products co-developed with source factories. Such renovations will continue in 2024. These two news items seem unrelated to hard discount, but if you truly understand the term 'hard discount', you will know they are strongly connected. This involves how we should understand hard discount. Hard discount is an imported concept. Germany's ALDI is the originator of this model. With the rise of snack stores and discount supermarkets in recent years, this concept has become popular. Based on my observations, when mentioning hard discount, many people first think of discount stores. This is understandable, as they are tangible and visible, and the current industry changes originate from the retail end. But equating hard discount with discount stores is like collapsing a three-dimensional world into a point, causing us to miss deeper things and misjudge many matters. Using the well-known iceberg model, low prices, storefronts, displays, and decoration are all things we can see above the water. But we must figure out what is below the iceberg. To explain this, I will use the framework of 'point, line, surface, body'. Point: At the retail level, individual discount stores are what we easily see; they are the manifestation. Their business philosophy is: 1) reduce intermediate costs; 2) reduce brand premium; 3) consumer sovereignty. Retail based on the concept and logic of hard discount can be considered hard discount retail. Line: Any retail is just a place for selling; products are not produced there. Behind it is the commodity circulation chain. So hard discount can also be understood as a distribution model. Compared with existing distribution models, the core remains three points: 1) reduce intermediate costs; 2) reduce brand premium; 3) consumer sovereignty. Surface: We need to understand this from the perspective of the FMCG industry. The most upstream is production, and the most downstream is demand. The current state is that upstream supply is excessive, downstream demand is diverging, and consumers are becoming more rational... Body: At a more macro level, we are in the Chinese economy, with GDP growth slowing, household debt ratio rising, and population entering a phase of negative growth... Using this framework to explain, I mainly want to say:

  1. What is hard discount? In a retail system, it is a business philosophy; from an industry perspective, it is a distribution model. Discount retail stores are just the manifestation of hard discount at the retail end.
  2. Based on the concept and model of hard discount, it can be understood in a narrow and broad sense. Snack discount stores and discount supermarkets are narrow hard discount; warehouse membership stores, live streaming, and even Pinduoduo can be considered broad hard discount.
  3. Hard discount is a concept that should be understood in a three-dimensional and systematic way. When we talk about hard discount now, we cannot separate it from the FMCG industry or the Chinese economy, as these are the soil for the emergence and development of hard discount.
  4. Hard discount is not a simple change at the retail level; it is a manifestation of systemic change. It is the result, not the cause, but it will in turn accelerate industry changes. The concept itself is not important; the key is to see through the concept to what is happening behind it! Macroeconomic and industrial chain changes are the cause The emergence and development of discount stores are the effect What is happening? We have many descriptions, such as discount stores breaking manufacturers' price systems, traditional supermarkets' business declining, and more distributors unable to continue their business. These are negative descriptions. But there are also positive descriptions, such as consumers being able to buy better products at lower prices; factories that previously could only do OEM for brands now have the opportunity to face consumers directly. Putting these two descriptions together, combined with our framework above, how should we understand? Let me share a personal experience. In 2014, for a period, I would drive 20 kilometers every weekend to the Sam's Club store in Yizhuang, Beijing. At that time, there was only one Sam's store in Beijing, and warehouse membership stores were far from as popular as they are now. Why did I go to Sam's? Because they sold things that couldn't be bought elsewhere. At that time, traditional supermarkets were thriving, and warehouse membership stores were just sprouting. But over time, in the past two years, traditional supermarkets have declined, while warehouse membership stores and snack discount stores have become popular. Why? From a consumer's perspective, it's actually simple. Today, if you walk into any traditional supermarket, the displays and products are mostly the same, failing to stimulate your desire to buy. Most importantly, after discount stores, warehouse membership stores, and live streaming developed, consumers suddenly discovered: It turns out that the market doesn't only have the things on supermarket shelves, and prices don't have to be that expensive! Before the New Year, I visited a factory that supplies a product to Sam's. The ex-factory price is 63 yuan, and Sam's sells it for 69.9! Besides Sam's, they also do OEM for various brands, and those brands sell at least double the price. They have R&D capabilities and product realization capabilities. They launched their own brand and entered various snack store systems. The same product, they sell for 6 yuan at the terminal, while the brand that outsources to them sells for 10 yuan. Now, the product selection logic of leading snack systems is either to bring in brands that can drive traffic or to find source factories with manufacturing capabilities. As snack store penetration further increases and consumers are educated, a large number of such factories will find their new positions in this transformation. Returning to the essence of the FMCG industry, isn't it about agricultural resources, processed through industry into products, and then delivered through the channel system to meet consumer needs? Changes at the retail end are the direct factors driving industry transformation, such as the rise of supermarkets, e-commerce, live streaming, and hard discount chains. But changes in supply and demand are the fundamental forces behind the transformation of commodity distribution models, and behind the supply-demand changes is the systemic change of the entire economy. As early as over twenty years ago, there were attempts at hard discount retail in China, but they yielded no results. Hard discount became an industry hotspot in 2023, but they actually sprouted and developed gradually over the past decade. What other changes have occurred at the retail end in the past decade? Warehouse membership stores have developed, live streaming e-commerce has developed, Pinduoduo has developed... Are these coincidences? Combined with the 'point, line, surface, body' framework, these are all manifestations. With suitable soil, seeds can take root and grow. Macroeconomic and industrial chain changes are the cause; the emergence and development of discount stores are the effect. Don't get it reversed. I know many people have doubts, saying it's a bubble driven by capital, low prices mean no good goods, and it disrupts the existing order. But with this systematic observation and thinking, we know those are point-level issues that do not affect the trend. Over the past year, discount stores have had a huge impact on the industry, greatly affecting brand owners, distributors, and retailers in the FMCG supply chain. I call it the pain during the transition from the existing order to a new order. It is not decided by any party, nor does it shift according to any party's will. The transition from old to new order is both a challenge and an opportunity. What does that mean? New Order: Organize and mobilize consumers Find good products for demand I used to work for a German company. Every time I went to Germany, I would bring back many things as gifts, which were good-quality and low-priced goods bought at supermarkets. Are the goods in our supermarkets good-quality and low-priced? It's hard to say because there's no comparison. But after snack discount stores became popular, we gained a sense. Initially, our question was: Why are they cheap? Cheap goods must be of poor quality, right? Then we found that their quality is not bad. Later, we found that not only are they not bad, but they are even better than those in supermarkets. Actually, we asked the wrong question. We should ask: Why can't goods in traditional retail stores be cheap? Why must bottled water sell for 2 yuan, not 1.2? Why must Red Bull sell for 6 yuan, not 5? What's the reason? The reason is that under the old order, they had to sell at such high prices. In this system, brands must price high because they need to leave profits for distributors, hire sales personnel, pay for supermarket entry fees and barcode fees, hire promoters, buy displays, and buy end-cap displays. Brands say these are rules set by supermarkets. Supermarkets say prices are set by you; I need profits, that's correct. The question is, why are supermarkets willing to pay various back-end fees? Why are brands willing to pay? Because in the process of market penetration, they must seize terminals and intercept consumers. Because brands must ensure consumers see themselves, not competitors. We often discuss manufacturer-distributor games and retailer-supplier conflicts. These are real, but from an industry perspective, they jointly determined a commodity distribution system. Overall, this is an order led by brand owners, pushing their products to consumers through the distribution system. There are many high-quality, low-priced products, but they cannot appear on traditional supermarket shelves because they don't understand marketing, don't have sales teams of thousands, and can't afford various fees. Recently, I talked with some factory owners. They said that in the discount store channel, as long as your product is good and the price is good, you don't need to pay various fees or hire people for marketing. Whether it sells well is left to the market to test. Discount stores, warehouse membership stores, live streaming, and even Pinduoduo are broad hard discount. What they do is actually the same thing: organize and mobilize consumers, and find good products for their needs. This is a new order. If live streaming and Pinduoduo are still online consumption, and warehouse membership stores still affect the middle class in first- and second-tier cities, then snack discount stores are truly attacking the hinterland of the existing system. After them, discount supermarkets are emerging in various places, and traditional supermarkets have to respond. When we talk about hard discount, we don't mean that discount stores will dominate the future. Rather, we want to clarify the systemic changes behind it and its impact. In the future, whether it's hard discount chains or traditional supermarkets, one thing will converge: operating products, not shelves. Recently, I communicated with some brand sales heads. They said that during this year's Spring Festival, some leading traditional KA stores were already doing this, jointly developing products. I previously said that the discourse of the era would shift from brand-led channel transformation to consumer-led supply chain revolution. This is what I meant. But actually, I think the term 'supply chain' is not accurate; 'supply-demand chain' is more fitting. How the supply side operates is truly determined by the demand side, which the existing system cannot achieve. This process will not happen overnight, but it has already begun. What does this mean for our FMCG manufacturers and distributors? Shrinking Competition Challenges and opportunities for different roles in the industry Let me show you a chart first. This is NielsenIQ data. In 2023, major FMCG categories, except beverages and personal care, basically saw negative growth, and offline channels only saw growth in beverages. In the past, there was incremental growth; in recent years, we talked about stock; but now it's shrinking. Combined with the industry transformation we just discussed: on one hand, hard discount chains will increase the supply of factory brands through vertical integration. On the other hand, traditional retailers will try to attract consumers by adjusting product mix and streamlining SKUs. This means some products currently on shelves will lose their living space, mainly second- and third-tier brands, those without industrial chain advantages, especially those without manufacturing capabilities. The opportunity here is that a group of factories with manufacturing capabilities will grow in this wave of transformation. For brand owners, think about this question: In the past, it was about advertising in the air, then arming ground forces with sufficient ammunition to occupy terminal shelves and end-cap displays. Traditional supermarkets with back-end models will either die or transform. Will this new product promotion method still work in the future? Brands will definitely exist in the future, no doubt. Even in developed markets like Europe and the US, private labels in retail channels only account for a small market share. But brand owners must learn to think from the retailer's perspective and consider their positioning. The retail era of opening stores and placing shelves, where whoever can afford the fees gets their products on shelves and makes money, is over. The future is about finding target customer groups, doing good category planning, deeply cooperating with upstream, and doing good product assortment to meet consumer needs. As long as this is achieved, different retail models will have their living space. For brand owners, which category do I belong to? How to expand and deepen supply chain resources and capabilities? Which channel to sell through? Which price band to target? What is the consumption scenario? These all require establishing truly close cooperative relationships with retail channels. In the past, the relationship between brands and channels was game-theoretic; in the future, it will be ecological. Brand owners who truly understand this logic will embrace hard discount and actively embrace the industry trends behind it. Finally, let's talk about distributors. From an industry trend perspective, distributors who don't understand consumers will find it hard to find their place in the new order. In the existing order, distributors serve brand owners, doing whatever the manufacturer says. In the new order, consumers are the true deciders. The closer you are to consumers, the less likely you are to be replaced. In the future, there are four forces driving the progress of the new industry order. The first three forces are the retail end absorbing the distribution link, essentially a bottom-up integration of distribution and retail. The fourth force is similar, but led by distributors, a top-down integration of distribution and retail. This is the opportunity for B2B platform-type distributors. Regarding the distributor sector, our 2nd China FMCG Distributor Conference will have more exciting sharing and interpretation. What I have shared is detailed in our '2023-2024 China Hard Discount Industry Map', which is divided into three parts: Systematic Perspective on Hard Discount, Hard Discount Industry Inventory, and From Old Order to New Order. Friends who need it can add my WeChat. Thank you! PS: Click Read Original to view more about the 9th China FMCG Innovation Conference and the 2nd China FMCG Hard Discount Conference & the 2nd China FMCG Distributor Conference...