This year, retailers continue to have a hard time. We are facing a circulation revolution Chinese retail has raised the banner of price destruction, which has had a huge impact on the circulation system. The old circulation system is collapsing, and the new one has not yet been established—this is the current situation facing our industry. The entire Chinese circulation industry is undergoing revolutionary changes. Japanese circulation expert Professor Shuji Hayashi, in his 1962 book "Circulation Revolution," proposed a viewpoint that I strongly agree with. He believed that retail revolution inevitably triggers the reorganization of the entire supply chain system, and this reorganization is the circulation revolution. The basic characteristics of the circulation revolution are: consumption revolution inevitably triggers retail revolution, retail revolution inevitably triggers changes in circulation organizations, changes in circulation organizations inevitably trigger changes in trading systems, and changes in trading systems inevitably trigger the shift of circulation dominance. We can trace back China's first circulation revolution. In the 1990s, China was experiencing a demographic dividend and rapid economic growth. The entire society urgently needed mass production and mass consumption. The hypermarket format was the most suitable for the social consumption of that time. Therefore, the emergence of hypermarkets was a historical necessity, and foreign retailers represented by Carrefour entered the Chinese market at that time. According to the viewpoint of circulation revolution, consumption ultimately transmits to the trading system. At that time, the domestic circulation system indeed underwent profound changes. In 1995, Wahaha launched a regional distribution system, from first-level agents to distributors and then to retailers. This was the first time Chinese manufacturing entered the circulation system, or rather, the first time manufacturing controlled wholesale enterprises. Distributors are wholesale enterprises. The revolution in the trading system, as everyone knows, was the birth of entry fees. Retailers collected entry fees, promotion fees, and display fees from distributors, and imposed strict payment terms; in exchange, manufacturers and distributors held the pricing power for the goods they supplied in hypermarkets. To balance their costs, distributors also incorporated the entry fees they paid into the product prices, which is the fundamental reason why our hypermarket prices have remained high for a long time. In this process, manufacturers and distributors held pricing power and controlled the stores. The ownership of goods belonged to distributors; if sold, distributors and retailers shared the profits; if not sold, retailers returned the goods to distributors. This is the legacy of the first circulation revolution over the past twenty-plus years. This legacy still plagues the development of the retail industry, making its ecosystem very fragile and unable to withstand the impact of online channels. Today, especially after the pandemic, consumer demand has changed, with a pursuit of cost-effectiveness and health, giving rise to a new round of consumption revolution, especially consumption stratification. For enterprises, consumption stratification means that the market must be segmented. In China, every segmented market has huge development potential and can give birth to small giants. Returning to the chain of circulation revolution, retail revolution and changes in trading systems, as responses to new consumer demands, are bound to happen. The era of mass production and mass consumption is over; the one-stop hypermarket will dissatisfy consumers at all levels. This format will not only be eliminated in China but also in Japan (the GMS format), and Ito-Yokado has been forced to sell itself. Therefore, in the future retail revolution, retailers need to position themselves in segmented markets, serving only a portion of customers rather than all customers. Including the biggest challenge facing China's retail industry in the next decade, I believe, is population aging, declining birthrates, and smaller family sizes. In Beijing, each household has only 1.9 registered residents; last year, the number of newborns nationwide was only 9.02 million. China's population aged 60 and above exceeds 300 million, and by 2035 this number will approach 500 million. Human history has never seen such rapid aging. Its flip side is severe low birthrates; our total fertility rate is lower than Japan's, barely higher than South Korea's. Aging and low birthrates, coupled with deflation, Japan entered such an environment 20 years earlier than us, so we need to look at how Japan has developed. Lopia's meat products sold at its Taiwan branch, Source: Lopia New Taipei Zhonghe Store official Facebook It can be seen that the new generation of leading Japanese retail companies basically emerged after 2000. Business Supermarket opened its first store only in 2003, and Lopia began to gain momentum in 2016 and is now Japan's fastest-growing supermarket. These companies developed under deflationary conditions, crossing over the old GMS hypermarket model and innovating in formats. Japan's current market segmentation is so refined that several supermarkets can coexist on the same street without interfering with each other. For example, the rising My Basket targets single male customers with 24-hour operations, disrupting the 7-Eleven format; Seijo Ishii, specializing in single women and white-collar women, has over 1,000 stores in Japan and is also very formidable. From historical patterns, the retail industry undergoes major changes almost every decade. In Japanese retail, since the 1960s, Daiei was once number one, but it went bankrupt in 2000. Older players like Mycal and Yaohan have also exited the stage. Now is a period of great transformation, and there are certainly huge business opportunities. Who will become number one is unknown, just as we didn't know about Alibaba in 2000 or JD.com in 2005; behind them must be ambitious entrepreneurs creating new models. But what we can see is the future direction. This direction is multi-variety, small quantities; multi-variety and small quantities is the core business model for next-generation metropolitan retail. Multi-variety, small quantities is the new business model The reason for multi-variety, small quantities is also based on China's population structure trends of aging and low birthrates; retailers need to provide consumers with new life solutions. I believe this solution is still mainly food supermarkets. Under the segmentation approach, food and non-food will separate, each developing toward high specialization and refinement. Non-food will enter the drugstore sector, becoming a new format. For example, if a consumer buys a skin cream and wants to know if it affects the skin, a hypermarket salesperson cannot answer, but a drugstore must, because drugstores have pharmacists. Returning to food, multi-variety, small quantities has several requirements. First, all fresh products should undergo deep processing. Meat sold in Japanese offline retail is cut by parts; a cow is divided into 35 parts, yielding 35 ways to cook, so one cow can be sold at the price of four cows. But in our domestic supermarkets, meat is still roughly chopped and placed there; one cow can only be sold at 1.5 times the price. Second, the rapid development of 3R foods. Japan's Life supermarket offers over 100 SKUs for a single bento box, 16 SKUs for rice balls, and 12 SKUs for chicken wings, divided into single, double, and triple portions. Life's 2,000-square-meter stores have over 17,000 SKUs, with an extremely rich product range that meets the needs of different people in small families. When I was in Japan, I lived next to the supermarket; my fridge was empty, and I went to the supermarket every day, buying and eating on the spot. I bought single or double portions of meat, stir-fried it, and ate it. But in our domestic supermarkets, the scenario is buying two jin of meat, cutting it into small pieces, eating a little, and freezing the rest. Domestic supermarkets are still ingredient-oriented, requiring long cooking times. This is the model left over from the hypermarket era and the demographic dividend era; it was fine in the past, but now it cannot meet the needs of aging and low-birthrate consumers. Many people now don't want to eat fish, not because they don't like it, but because it's too troublesome. If you buy it at the supermarket and ask them to clean it, they are reluctant and might mess it up, at most scraping off the scales and removing the innards; you still have to wash and prepare it at home. For example, with hairtail, you have to cut off the head yourself, and it gets very fishy. Since the supermarket knows consumers only eat the middle section, why can't you prepare it well, cut the middle into three segments, or even marinate it so I can just pan-fry it at home? Small quantities are the same; for example, a two-person household wants to use a small piece of radish for soup or a quarter of a cabbage for a meal; why do you have to sell me a whole radish and a whole cabbage? With multi-variety, small quantities, it's okay to sell at a slightly higher price; compared to preparing it yourself and wasting leftovers, it's actually the most economical. The fruit platter I bought at Life was a small box with 8 types of fruit—pear, apple, orange, tangerine, cantaloupe, grapes, etc.—one piece of each, just enough for a girl's lunch, covering all nutrients, and each fruit was from the best origin and the tastiest, costing about 10 RMB. These are not just my personal feelings; they are demands that current consumers place on supermarkets, but supermarkets cannot yet meet them. Consumers are not without money; they have money but nowhere to spend it. If supermarkets can't meet their needs, why would they go to the supermarket? Through deep processing and classification, supermarkets can actually achieve very high gross margins. Life supermarket has 55% gross margin on processed foods and 31% on fruits and vegetables, which domestic supermarkets cannot achieve. 3R products sold at Life supermarket, Source: Life official Facebook Moreover, with aging and low birthrates, e-commerce will enter a very stable development period. The labor dividend has disappeared, and delivery must return to its service nature rather than being as cheap as it is now. If we truly enter the era of multi-variety, small quantities, such as on-site processing and specialized services, e-commerce cannot provide these. Another point to emphasize is that consumers' demands for multi-variety, small quantities are also demands for convenience, freshness, and health. This is not the same as the retail dining trend in some domestic supermarkets. There is a fundamental difference between dining and on-site processing: on-site processing mainly provides customers with the healthiest food. The best on-site processing in Japan is Western-style food, such as salads and Mediterranean diets, combining 8 types of vegetables. The future development of Western-style food is also the most growth-oriented. Japanese supermarkets also have strict food inspection methods, and all processing—for example, this was baked at 4 o'clock, this at 5 o'clock, and the best-before time to the minute—is clearly labeled. If a supermarket has a food poisoning incident, it's huge negative news. But dining is not like that. The dining trend in our domestic supermarkets, selling pig head meat, braised pork elbows, and chicken feet, is not healthy eating; it's drinking snacks. Zero-supply relationship from game to alliance You say fresh deep processing is difficult, but it's not a matter of difficulty; as long as there are business opportunities, everyone will do it, driven by interests. Last year, the center of retail was Hema, and this year it's Pangdonglai; they certainly have positive significance for the retail industry. Hema's greatest contribution is promoting exploration and change in retail, but it messed itself up; Pangdonglai tells everyone to have consumers in mind, improve product quality, respect employees, and improve the employee environment. These are beneficial improvements. But all their changes are still based on iterations or modifications of the hypermarket format, without revolutionary changes. For example, the current adjustment removes 88% of products and adds first- and second-tier brands. What are first- and second-tier brands? If an enterprise relies only on first- and second-tier brands, it absolutely cannot survive. First- and second-tier brands have no regionality and usually have very low gross margins; they cannot achieve sustainable development, so many enterprises don't make money after adjustment. What about other brands? There are many high-quality products with geographical indications in various regions of China; can you call them generic or fourth- and fifth-tier brands? We cannot make such judgments. For example, some retailers lead everyone to negotiate net prices with manufacturers. But net price is the result of game-playing and destructive negotiation. Retailers and manufacturers mix together, bargaining over prices; a batch of goods is agreed at one price, but that's a one-off deal, and next time you have to renegotiate. I also asked the sales director of a well-known domestic grain and oil brand: if a large retail enterprise demanded net prices, how much could the price drop at most? He said at most 5%. Moreover, net price is only at the commercial flow level; at the logistics level, you still need their distributor to deliver the goods. The supermarket gets this 5% price reduction, but entry fees and promotion fees are gone, and no one provides payment terms; can you survive? In short, Chinese supermarkets that grew up under the entry fee system are far from achieving sustainable development through price differences alone. If you destroy the old entry fee system, you need to establish a new one. Manufacturers pursue efficiency, retailers pursue customer needs; how can efficiency and needs be connected? A new middle layer is needed. This is the change in trading system mentioned in the circulation revolution. We see many distributors now facing difficulties, abandoning their responsibilities as intermediaries, either exiting or changing careers. But some intermediary institutions are rising. I happened to see materials from supply chain companies that provide services such as origin warehouses, sales-area warehouses, and direct delivery from sales-area warehouses to stores with pre-packaging, fresh cutting, and clean vegetables. Including the development of intermediary wholesale enterprises like Ant Alliance and Baoting Hui, and retailers like Guanpaike are also making beneficial explorations. The rise of the intermediary layer in the future is a major trend and contains huge business opportunities. A retailer, especially a small or medium-sized one, cannot connect with hundreds or thousands of manufacturers on its own; it needs intermediary wholesale organizations to help solve commercial and logistics issues. Intermediary enterprises play more of an intermediary service function, like Japanese wholesale enterprises, adding only 2.5% markup. They provide comprehensive services to upstream and downstream enterprises, such as data services, brand promotion, payment collection, and new product development for brand owners; and for downstream, store services, site selection, layout, display, private brand development, and 52MD services. Only by doing the intermediary layer well can the total transaction cost of society be reduced. The rise and transformation of wholesale enterprises play a very important role in this retail revolution. This also means that retailers must abandon the mindset of game-playing and establish long-term strategic relationships with manufacturers. Costs should no longer be shifted between each other but optimized through consultation at each link; this is society's requirement for us. Japan's Life supermarket has established trading relationships with 90% of its suppliers for up to 20 years. Aeon has maintained trading relationships with 2,900 suppliers for almost 40 years. Their transaction costs are very low; the retailer just sends an order, and the other party delivers the goods to the store, providing various in-store services. China's circulation revolution may also last a long time. In the next ten, fifteen, or twenty years, we may see Chinese supermarkets enter a new situation of flourishing and competition. This is a major trend; retail revolution will inevitably promote the transformation of the intermediary layer and changes in the trading system. In such a great era, there are challenges and huge business opportunities. Retailers should not believe that a god-like person will come to save you, nor should they believe in the idea of getting rich overnight. This industry has developed over thousands of years; whether in the internet era or the AI era, there is a basic law in retail that remains unchanged: retail requires long-term accumulation of knowledge and experience. This industry is like a plant; it adapts to changes in the external environment, keeps pace with the times, and survival of the fittest.