In 2024, FMCG practitioners are focused on one thing: selling goods! More than one brand executive has told me: as long as there is a channel and sufficient sales volume, factories can provide customized products with flexible specifications, packaging, and even prices. Short-term consumption recovery has not arrived, and in the long term, demand seems to be entering a phase of contraction with no signs of reversal. Currently, retailers are competing fiercely, distributors are competing, manufacturers are competing, and even different departments within manufacturers are competing. As the first quarter of 2024 passes, many manufacturers lament that there are truly no incremental channels left, yet growth targets remain! Everyone is anxious about selling goods. "Sales have been growing over the past two years, but both profit margins and profit amounts are declining." When asked about business conditions, a distributor told me this. Sales growth mainly comes from taking business from competitors, which is considered a very successful distributor. However, increasing revenue without increasing profit is mainly due to rising operating costs and compressed profit margins from manufacturers. To boost sales, manufacturers pressure distributors to stock up while also seeking direct supply to various retail channels, online or offline, further exacerbating price chaos. Distributors face cross-regional dumping and low-price competition from various online platforms. They are competing fiercely with peers, trying to outdo each other. But behind this, there is a trend that many may not realize: retailers are fiercely grabbing distributors' business — this is the truth of industry change. In 2023, discount stores represented by snack stores impacted the market, causing many distributors' businesses to decline sharply, even halving! Because the supermarkets and small shops they supplied lost business to discount stores. But distributors should know that it's secondary that discount stores take away your customers' business; the real problem is that they will transform into distributors and directly compete with you. First, hard discount chains are essentially B2B platforms, supplying not only their own chain stores but also terminals outside the system. This is something some hard discount chains are doing or preparing to do. Second, capable traditional supermarkets, after being hit hard by discount stores, have awakened. They are accelerating the removal of distributors and have taken an action: exporting their operations, management, and products to supermarkets in other regions! That is, retailers are extending upward, acting as B2B players at the product level, grabbing local distributors' business. Traditional distributors may die out, and B2B platform operators are a way out, but know this: who are B2B platform operators' competitors? Definitely not traditional distributors, nor even your local peers, but likely retailers. They have retail-level experience in product management and store operations, plus product supply chains. If they do distributors' work, both traditional distributors and those transforming into B2B platforms will face a life-and-death test. Many think this is all caused by discount stores, that they are disruptors who break market order with low prices and should be condemned by the entire FMCG upstream and downstream. Actually, that's not the case. The market is like a lake: in the growth phase, the water surface expands, and large ships, small boats, and rafts can navigate relatively orderly. Although there was competition in the past, overall, manufacturers, distributors, and retailers each did their own jobs, maintaining order. But when the market enters a stock or even contraction phase, the water level drops, and the surface can no longer accommodate so many vessels. They will inevitably collide, and the original order becomes unsustainable. Collisions mainly occur in two aspects: peers colliding with each other, and upstream colliding with downstream. Hard discount is a phenomenon, a result of oversupply and demand changes; the essence is that the order of commodity circulation is unsustainable. The so-called unsustainable order simply means that in the past, distributors were responsible for commodity circulation, and retailers for selling goods, each doing their own job. But now, retailers are doing distributors' work. Retailers doing distributors' work was not started by discount stores but by e-commerce. "Low prices" and "direct sourcing from upstream" have always been labels accompanying internet commerce, supported by the removal of distributors. E-commerce platforms present themselves as retailers but also take on the role of distributors. Due to the low price and immediate demand characteristics of FMCG, e-commerce has taken some business from physical stores, but the main market remains offline. The traditional distributor group, which has been repeatedly claimed to be "doomed," is still thriving. But with the arrival of discount stores, the industry truly feels the pain. The labels accompanying them are almost identical to e-commerce: "low prices," "direct sourcing from upstream," and "removal of distributors." Some criticize that low prices are bad, that low prices are wrong, and that low prices will lead to no one making money. Of course, that's true! But who doesn't want to make more money? The problem is that if prices are high, goods won't sell; there are more sellers than buyers, resulting in low prices. What problems do low prices bring? Insufficient profits to share, so we see two phenomena.
First, the circulation process is compressed, from long chains to short chains, manifested in the removal of distributors after various retail formats emerge.
Second, using scale to offset high delivery costs, manifested in the consolidation of distributors and the chainization of retail. These two trends have always existed, but after hard discount formed a certain market force, we see them more clearly. In a sense, hard discount is a signal that makes us realize the industry is undergoing change! The so-called change, in other words, is the collapse of the old order and the formation of a new one. Currently, three forces are driving the establishment of a new order offline and the transformation of the commercial circulation system. The first force: hard discount chain retail. Represented by snack hard discount, this is the vanguard, with leading systems forming closed, independent systems. Multi-category discount stores, overall, may not achieve major breakthroughs in store scale in the short term, but they clearly see that once they form certain supply chain capabilities, they can supply retail terminals outside the system and do distributors' business. The second force: national chain supermarkets. On January 17, Walmart announced that last year it upgraded 29 domestic stores, halving SKU counts, with 80% of products co-developed with source factories. Such upgrades will continue in 2024. Walmart's transformation of its existing model is, I believe, a landmark event. In 2024, we will see more national supermarkets take similar actions. In fact, they still have advantages in hardware, scale, and supply chain accumulation. Once they turn around, they will be an important force in the new order. The third force: regional chain supermarkets. Integrating the strength of regional retailers to directly source from upstream, with the aim of reducing intermediate links and costs, while opening their supply chains to other retail terminals, thus doing distributors' business. These forces will drive the transformation of China's offline commercial circulation system and the pan-discounting of Chinese retail. No matter which force is doing what, none involves distributors. What should distributors do? I believe that in this era of great change, distributors should join in and become the fourth force in establishing the new order! Why do I say this? First, retail is a regional business. No matter how high the penetration of retail chains, they cannot do all the business; there will always be local retailers that need distributors to supply them. Second, whether it's local retailers transforming themselves, or new entrepreneurs entering discount retail, or those transitioning, they will definitely need distributors to provide supply chain support. That is, distributors have their own ecological niche in the future new order. However, this niche needs to be occupied by distributors with cost and scale advantages, that is, B2B platform operators. With B2B platform operators joining, four forces will drive the new order of China's commercial circulation. It's important to understand that once you transform into a B2B platform operator, you will inevitably conflict head-on with retailers. For example, the supply chain platform of regional chain convenience stores is also a force in local B2B platforms. As mentioned earlier, your competitors are not traditional distributors, nor even your local B2B peers, but retailers. If retailers can grab distributors' business, why can't distributors grab retailers' business? In fact, many retail founders come from a distributor background. I won't expand on this topic now; I'll discuss it in a later article. Distributors who are not ready to give up and are still seeking future development should think deeply about this issue. **