Retail stores are severely oversupplied, but competing on low prices is a misconception! This is a conclusion drawn from my in-depth exchange with Mr. Zhang Zhiqiang. Who is Zhang Zhiqiang? He is known as "China's No.1 in Category Management," and the book Category Management, published in February 2024, was written by him and Dr. Brian Harris, the "Father of Category Management," specifically for the Chinese market. On the last day of 2024, I visited Mr. Zhang in his Beijing office, and we talked for nearly three hours. Much of what he said inspired me deeply, such as:
"Existing consumption is insufficient to support so many retail stores; a large portion will be eliminated."
"When retail is oversupplied, one thing is extremely important: you need to know how customers choose stores."
"Category management is about relationships—between products, and between products and people—while hit products are a concept detached from relationships."
"What customers want is not the cheapest. For example, Sam's Club: customers don't go there because it's cheap."
"In the U.S., the earliest adopters of category management included brands like Coca-Cola, Procter & Gamble, and Unilever. As retail changes, suppliers must change accordingly."
When I say competing on low prices is a misconception, I don't mean price is unimportant or that low prices lack competitiveness. Rather, the dimension of price should be considered within the framework of category management.
My exchange with Mr. Zhang centered on industry transformation, and we had in-depth discussions on hot topics. Store closures, discounting, and store renovations—what exactly is wrong with China's retail? Why has the Chinese retail industry collectively missed out on category management, which is a fundamental skill? What is the core philosophy of category management? Why should upstream suppliers also learn it? This article shares the core content of our exchange with you.
Retail Saturation: Knowing How Customers Choose Stores Is Extremely Important!
China's retail has changed dramatically in the past two years, with declining performance, store closures, discounting, and supermarket renovations. In your view, what exactly is wrong with China's retail? At the start of our exchange, I posed my question, wanting to know how Mr. Zhang views the current state of Chinese retail. This is an important question; Chinese retail is indeed facing difficulties, but if we don't understand the fundamental issues, we won't find a way out. Mr. Zhang said that we are at a historic turning point of store oversupply. To understand this, we need to briefly review the history of modern retail. Whether it's hypermarkets, supermarkets, or convenience stores, this kind of shelf-based, self-service modern retail developed alongside industrialization and urbanization. When large numbers of people gathered in cities, modern retail emerged. But there's a pattern: the number of stores initially lags behind urban population growth, but once it develops, it inevitably enters a phase of oversupply. This happened in the U.S. In the mid-to-late 1980s, U.S. retail entered a phase of saturation and oversupply. By around 1990, the number of stores peaked and then gradually declined. Now China's retail has entered a similar phase. My personal perception is that it was already saturated around 2016, and this is an irreversible process. After the U.S. entered the store oversupply phase, what changes occurred, and what can we learn from them? I asked. After U.S. retail reached saturation, we saw several phenomena:
First, industry consolidation accelerated. For example, from 1990 to 2000, there were over 10,100 acquisition offers, with more than 1,000 successful ones, meaning the number of stores dropped sharply.
Second, many companies were eliminated, but those that survived became more efficient, with higher sales per store.
Third, retail began to shift from "understanding products" to "understanding customers." People started to realize that understanding customer behavior is far more important than products.
This is also what will happen in China next. For us, it's important to understand the operating methods and survival rules of the retail saturation era. What do you mean by operating methods and survival rules? How does that relate to the category management you talk about? I continued to ask. Mr. Zhang continued to explain. First, we need to understand a core issue: What does store saturation and oversupply mean for us? In the past, you could open a store and make money, but now consumers have too many choices, and they can choose not to choose you. At this point, one thing is extremely important: you need to know how customers choose stores. What is their basic logic for choosing a store? Why do they pass by you but not come in, and go to another store instead? This relates to the concept of category management. Of course, it's not everything for good retail, but it's a starting point and foundation. This was first proposed by Dr. Harris in the U.S., and it was quickly recognized by the retail industry. Over the past 30 years, it has become a fundamental skill in the retail industry, integrated into daily operations. Since 2016, I've been introducing Dr. Harris's courses to China, but frankly, when retail was making money easily, people didn't pay much attention. However, in recent years, we've found the industry's demand for category management increasingly urgent. In early 2020, some companies said they saw a Japanese version of Category Management and asked if it could be translated into Chinese. After discussing with Dr. Harris, we felt the previous version needed updating, and the Chinese market has its own characteristics. Could we write a book specifically for the Chinese market? So we spent nearly two and a half years, iterating the content 5-6 times, and finally published Category Management in China in February 2024. After publication, it was widely recognized by the industry, and I think this is very valuable.
Selling the Right Products Is More Important Than Selling Cheap
I read Category Management twice. Many people think these four characters mean managing products well. Before reading your book, I thought the same, but it's actually not that at all. No! Mr. Zhang said, in fact, many people misunderstand these four characters. People often ask me: does "category" mean large, medium, or small categories? No. The "category" we talk about is a unique concept: it's a group of highly related, substitutable products that correspond to a certain customer need. Take canned food as an example.
There are fruit cans and meat cans. We usually classify them together and place them together. But from the customer's perspective, they are completely different. Customers consume fruit cans more like snacks, while meat cans are closer to main dishes on the dining table. From a category management perspective, in terms of display, fruit cans should be closer to snacks, and meat cans should be closer to roast chicken and cooked food. You don't look at categories from product names, processing, or packaging methods; you need to understand from the customer's perspective and reclassify. That is to say, most people talk about categories from a supply perspective, while your categories are from a customer perspective. I summarized. Yes, customer perspective, that's very important! As we just said, when retail is saturated, we need to think about how customers choose stores. Then we must ask: how do customers perceive and evaluate a store? Generally, if you ask customers how a store is, they evaluate it from aspects like product completeness, price, and quality. But how do they evaluate these aspects? No customer sees the entire store; they come with needs and see one category at a time, not the whole store. That is, customers perceive your store through categories. For example, a store had a category with 100 SKUs, and after our adjustment, it was reduced to 60-something. But customer feedback was that the products were more abundant, quality was better, and prices were cheaper. This is what category management studies. In the past, we just put products on shelves without considering customer needs or relationships between products; in fact, many products were ineffective. So the logic is: when stores are oversupplied, think about how customers choose stores. Customers' store choice depends on their evaluation of the store, and categories are the basic elements of that evaluation. My thinking is clearer now. Yes, it's categories, not price. Price is a lower-level element of category management. Mr. Zhang continued. Getting low prices from suppliers and selling cheap is, of course, important. But for retail, selling the right products is far more important than buying cheap! I always mention Sam's Club. Customers flock to Sam's not because it's cheap. Competing on low prices—everyone can do that, but in the end, it's unsustainable. You need to work on category management, adjusting category by category to give customers a good experience. This involves four basic tasks: product assortment, pricing, promotion, and display. Based on these, you achieve good operational efficiency.
Category Management Is the Foundation, Far from Everything
Mr. Zhang, my understanding is that category management wasn't important in the past because people could make money without it, but now that's no longer possible. So, for Chinese retail to find a way out, what role will category management play? Category management is the foundation, far from everything. It's the starting point, not the end point. What do I mean? Let me give an example. Category management is more about front-end product planning, but doing retail well involves many aspects, such as back-end supply chain management, corporate process management, etc. But conversely, if front-end planning is wrong, no matter what you do back-end, it's meaningless. This is what I mean when I say retail operations are fundamental skills; it's the starting point and foundation. Speaking of fundamental skills, Mr. Zhang, my understanding is that everything called a fundamental skill sounds easy, but truly achieving and doing it well is very difficult. I added. You're right. Category management is a technique, a philosophy, and a practice. The philosophy is easy to understand, but doing it well requires persistence. It's not like a set of martial arts moves that you can learn once. It takes time, requires repeated practice, and needs companies to internalize it based on philosophy and practice, eventually becoming their own systemic capability. Moreover, it's not suitable for self-study; it's best to have a coach to guide you, with opportunities for collision and discussion. It's also a top-leader project. If the boss doesn't lead and support, the company can't do it well. I have a question: how does Chinese retail compare to foreign retail, say, the U.S.? My judgment is that China lags the U.S. by 30 years. Because our current stage is similar to the U.S. in the early 1990s. We are just beginning to emphasize category management. Mr. Zhang said. Category management is the starting point of retail operations; it's a fundamental skill. If foreign retail companies are at the university level, then even excellent local Chinese companies might only be at the elementary school level. I often cite an example. Sam's Club is a U.S. company that opens stores in China, hires Chinese employees, sells Chinese products, and makes money from Chinese people. Can Chinese companies do that? But this doesn't mean we need 30 years to catch up; in fact, far less. Because we can adopt the concepts, technologies, and experiences that others have developed. Many companies are now starting to adjust their product structures and imitate leading peers. That's good, but imitation is just the starting point; you need to build your own systemic capabilities. And we should have a broader vision: when can we open stores in the U.S., hire American employees, sell American products, and make money from Americans? I believe such excellent companies will emerge.
Category Management: Suppliers Should Learn and Embrace It
Retail is starting to do category management around customer needs, which will inevitably impact its suppliers. In the past, retail put products on shelves; if you paid a fee, you could display and sell. In the future, this logic won't work. So from this perspective, suppliers—whether manufacturers or intermediaries—must also learn category management. I have further thoughts on category management. You're right. Mr. Zhang said. Why should suppliers learn category management?
First, retail stores are oversupplied. Customers first choose the store, then choose products. If you don't understand how stores choose products, how can you gain opportunities in stores? Especially when upstream is also oversupplied.
Second, as a supplier, the more you know about how customers choose stores, the more you can actually help stores, and you can take the initiative in cooperation with stores.
Let me add one more point: category management is about relationships. It focuses on the relationship between products and between products and customers. Nowadays, everyone loves to talk about hit products and big single products, but this is detached from the "relationship" dimension. Upstream suppliers need to understand stores, customers, and category management, and think about future product development.
Moreover, let me provide a fact: when category management emerged in the U.S., besides the retail industry, proactive adopters included upstream brands like Coca-Cola, Procter & Gamble, Unilever, and Kraft Heinz, as well as intermediaries like Super Value. They clearly understood that when retail is reshuffling, suppliers must change too, and category management is one of the most effective methods. For example, P&G in the 1970s and 1980s acquired many categories and organized by brand teams, but later found resources were duplicated, so they shifted to category-based organization, compressing items. Behind this is the logic of category management at the retail end. In the U.S., the elite groups of consumer goods companies and retail companies are in the same circle. The top manufacturers and top retailers have increasingly close relationships, forming a super club. For manufacturers, either you have enough influence over consumers that retailers must carry your brand, or you are on the same side as retailers and do OEM for them. The U.S. situation is worth observing and thinking about for China's FMCG industry. In the mid-1990s in the U.S., from factory to consumer was called the supply chain, with a PUSH logic. Category management changed retail companies; consumers were pulling, with a PULL logic. Mr. Zhang, what you're saying is consistent with the changes we see in the FMCG industry, just like the theme of our March conference in Chengdu: "New Order · Symbiosis." We call it the reconstruction of order. I added. In the past, it was brand-led, pushing products to consumers. In the future, it's about aggregating consumer needs and satisfying them. The former is a "push" logic; the latter is a "pull" logic driven by consumers or customers. This change has already begun. Different roles in the industry chain—including manufacturers, retailers, and intermediaries—need to deeply understand what's happening in the industry and future trends. Clarify your transformation direction, define your future ecological position, find your partners, and jointly drive industry evolution. This is the posture that the strong should and can show.
【New Order · Symbiosis】
The 10th China FMCG Innovation Conference
Time: March 17-19, 2025
Location: Chengdu, China