Liu Chunxiong has been saying that the macro environment is poor, with shrinking volumes across all industries and widespread anxiety over involution. So, what is the outcome of involution? It is the Rule of Three and Four. Shrinking volume inevitably leads to clearing out, and clearing out means companies die in batches. The endgame of clearing out is the Rule of Three and Four, leaving only a few players. The Rule of Three and Four: in a stable market, there are no more than three influential competitors, and the largest market share is no more than four times the smallest. Brand owners in various industries have long conformed to the oligopolistic state of the Rule of Three and Four. The logic behind this is the channel revolution of deep distribution. Distributors and retailers will next conform to the Rule of Three and Four. The logic behind this is the supply chain revolution. Involution is the gradual convergence of industry structures toward the Rule of Three and Four. The Rule of Three and Four is the stable structure of a field or industry. Boston Strategy: The Rule of Three and Four The highest dimension of thinking is ultimate thinking. First-principles thinking emphasizes returning to the starting point, while ultimate thinking emphasizes the end point. What is the final structure of an industry? Do you have a place in the endgame? This is the highest dimension of thinking. Boston Consulting Group is a well-known American strategy consulting firm that has proposed many strategic concepts, including the "Rule of Three and Four" proposed by its founder, Bruce Henderson. Whether it is the deep distribution led by brand owners or the supply chain revolution led by retailers, both ultimately lead to the Rule of Three and Four. Let's first look at a brief introduction to the Rule of Three and Four (excerpted from the first two paragraphs of Henderson's article on the Rule of Three and Four). In a stable competitive market, the number of influential competitors never exceeds three. Among them, the market share of the largest competitor never exceeds four times that of the smallest. This rule is determined by the following two conditions: Between any two competitors, a 2-to-1 market share seems to be an equilibrium point. At this equilibrium point, it is impractical and counterproductive for either competitor to increase or decrease market share. This is an empirical conclusion drawn from observation. A market share less than one-fourth of the largest competitor makes effective competition impossible. This is also an empirical conclusion, but it is not difficult to infer from the relationship of the experience curve. Usually, the above two conditions ultimately lead to a market share sequence like this: each competitor's market share is 1.5 times that of the next competitor, and the smallest competitor's market share is not less than one-fourth of the largest. From a mathematical standpoint, to satisfy both conditions simultaneously, there should be no more than three competitors. The Rule of Three and Four indicates the number of surviving companies in the final structure of an industry and their stable share relationships. The Rule of Three and Four is the highest strategic thinking for enterprises. Competition ultimately leads to the industry outcome of the Rule of Three and Four. Whether it is the channel chain led by brand owners or the supply chain led by retailers, the Rule of Three and Four applies. The Rule of Three and Four for Brand Owners The Rule of Three and Four is actually a process in which an industry transitions from full competition to oligopolistic competition. Oligopolistic competition is the stable state of an industry. Therefore, Anderson said, the stable state of an industry conforms to the Rule of Three and Four. In the early stages of an industry's development, a hundred flowers bloom, and both large and small companies thrive. Then comes the elimination phase. Without elimination, there is no Rule of Three and Four. The result of elimination is known: scale wins. So, who can win the scale competition? Chinese marketing is driven by both brand and channel, a dual driving force. Of course, either one is quite difficult and can eliminate a considerable number of companies. Many multinational brands have good brand management but fail in deep distribution, so they fall behind. Multinational brands that do well in China, such as Coca-Cola, are actually top students in deep distribution. Channel driving in China is deep distribution. How difficult is deep distribution? Most companies cannot achieve nationwide deep distribution; only industry leaders have done it. The biggest difficulty in deep distribution is actually management. Managing a bunch of small distributors to act in unison is quite challenging. The following diagram shows the structure of Chinese channels. To cover national terminals, six levels of management are required. The management difficulty is enormous. It is the extremely high difficulty of deep distribution management that makes brand owners lacking management capabilities retreat. Therefore, various industries have formed the structure of the Rule of Three and Four. The value of deep distribution can be seen from this. Supply Chain Revolution vs. Deep Distribution Recently, the term "supply chain revolution" has become very hot. What is a supply chain? Some people feel it looks familiar—isn't it just the sales channel? Why use a new term? Is it out of boredom or a play on words? Indeed, many people are confused. It is necessary to clarify the original meaning. In the past, there was also the concept of supply chain, but it referred to the supply chain of raw materials before factory production, with the main body being the manufacturer. The current supply chain refers to the retailer's supply chain, with the main body being FMCG retailers. The supply chain is a big deal. How big? Its impact on current Chinese commerce is second only to the internet. Both are rebellions in the commercial field. The internet rebels against offline, and the supply chain revolution rebels against the channel chain. The supply chain revolution is to rebel against the channel; otherwise, it would not be called a supply chain revolution. Revolution means death; the supply chain revolution means the death of some channel players. Why rebel? Because China's FMCG channels are too long and inefficient, and have not progressed for 20 years. How long are China's FMCG channels? Starting from leading FMCG companies, the internal and external levels add up to six levels. And this is without counting secondary wholesalers. A channel with as many as six levels must incur significant costs. Internal levels have management costs, and external channels have distribution costs. The more levels, the higher the costs. All costs are ultimately reflected in the supply price to retailers. So, why do retailers want to rebel now? Because retailers have been living too comfortably in the past, or rather, they have been too comfortably supported by brand owners. Over the past many years, the retail industry has grown rapidly. Brand owners and distributors not only provide goods but also provide dozens of types of fees, and possibly even under-the-table income. Such good times are too comfortable. When Walmart first entered China, it also used centralized procurement, but later compromised with the Chinese market, with each store procuring independently. In essence, during the rapid development of Chinese channels in the past, a low-efficiency channel ecosystem was supported. This low-efficiency channel ecosystem is deep distribution. The West has distribution, but not deep distribution. The Chinese market is too large, and distributors are too weak. Therefore, brand owners led a group of small channel players, forming a controllable ecosystem. The biggest advantage of this system is that it is controllable by brand owners, and the biggest weakness is low efficiency. As China's retail growth slows, especially with e-commerce diverting retail share, large Chinese retailers are having a hard time. However, they have become accustomed to the past supply channels and cannot change overnight. Some companies want to change, such as Bubugao in Hunan, but Chinese channels and retailers have formed an ecosystem, making independent change difficult. Pangdonglai has been changing, but few people pay attention to its supply chain; they all focus on its extreme service. There are two phenomenal cases in the retail industry now: one is hard discount leisure snacks, and the other is Pangdonglai. The essence of both is the supply chain revolution. The supply chain revolution is to cut off overly long channels and achieve direct supply. Either brand owners supply stores directly, or stores find factories for OEM. Those that survive are either distributors or brand owners. Therefore, concepts like deep distribution and channels are value systems led by brand owners, while the supply chain revolution is a value system led by retailers. Chinese commerce is shifting from brand owner-led to retailer-led. The Rule of Three and Four for Retailers In the past decade, the market share of the top 100 Chinese retailers has dropped by 50%, from 12% to 6%, clearly not conforming to the trend of the Rule of Three and Four. It is not that it does not conform, but that the time has not come. What time? It is when incremental markets disappear, truly entering a zero-sum game, and then the Rule of Three and Four takes effect. The rapid development of Chinese commerce over 40 years has supported a group of uncompetitive retail enterprises, which now feel pressure. Everyone is talking about severe involution, but I think involution is not enough. The Rule of Three and Four has a premise: a large number of uncompetitive players must die first, and then the Rule of Three and Four emerges. Of course, the Rule of Three and Four for retail may differ from that for brand owners. The "extreme makeover" of supermarkets led by Pangdonglai has actually started the path to the Rule of Three and Four in retail. Many supermarkets will fall behind in this round of reform. How can supermarkets avoid falling behind? Pangdonglai's "extreme makeover" has already given the direction: First, products must be upgraded, which I call the New Mass; second, the proportion of private brands must increase, and they must have pricing power. Many supermarkets cannot do this and are falling behind. Falling behind is normal; the characteristic of the Rule of Three and Four is that a batch dies, then giants are born, forming a new equilibrium. In the past, many brand owners in various industries died, and the retail industry will do the same. Of course, China still has many small enterprises. These small retailers either join chain systems, such as leisure snacks, which are chain systems. Retail enterprises within chain systems enjoy the fruits of the supply chain revolution. There are still many mom-and-pop stores in China, which will have a large market in the short term, and they have strong vitality. So, where does their supply chain efficiency come from? B2B platform companies are designed for mom-and-pop stores. The Rule of Three and Four for Distributors The small-scale state of Chinese distributors has only formed over the past 20-plus years. The small scale of distributors and deep distribution form an ecosystem that complements each other. Many people think that the small scale of distributors should be the norm, but this is wrong. The 20-plus years of small-scale distributors in China is abnormal. This abnormal state is the result of brand owners strongly leading deep distribution and is also the cause of the current supply chain revolution in China. The supply chain revolution bypasses the distributor link. Therefore, the market share of Chinese distributors will definitely decline gradually. This is an irreversible trend. The trend of small-scale distributors is unsustainable and must enter the track of the Rule of Three and Four. The emergence of B2B platform companies is a sign. With the Rule of Three and Four for distributors, what happens to so many small distributors? The result is elimination. B2B platform companies focus on serving small stores, completing regional orders and urban delivery tasks. In this process, efficiency will greatly improve, and small-scale distributors are no match. Therefore, market share will gradually concentrate on B2B platform companies. For distributors, it is not a matter of business being hard to do, but that the original trading business cannot continue. How many platform companies does a regional market need? Very few. Therefore, distributors will also enter the track of the Rule of Three and Four. This is the law! What should small-scale distributors do? There are two paths to choose from. First, join B2B platform companies as early as possible; there is still an opportunity now. The window of opportunity will close in the future. Second, reduce to becoming service providers for brand owners. Brand owners still need channel players for channel promotion, but it is not the trading business with independent operating rights as in the past, but a specific promotion service business. Some distributors say, who would be willing to be a promotion provider? I wouldn't. If brand owners have needs, someone will be willing to do it. If you don't do it, it doesn't mean others won't. Supply Chain vs. Channel Chain Game The channel chain represented by deep distribution has basically completed its mission. Its value is to complete the Rule of Three and Four structure for brand owners. Its advantage is high channel coverage, and its disadvantage is low channel efficiency. The supply chain revolution represented by private brands and factory-store direct connection has begun, and this process is irreversible, but its current market share is not large enough. Currently, it is a period of dual-track system. Although the channel chain of deep distribution is inefficient, it is still the mainstream. The supply chain revolution is irreversible, but its market share is not yet large enough. The difficulty of the dual-track system is balance; traditional brand owners and distributors must balance. But it also gives innovators new opportunities. We cannot abandon the past, nor can we not face the future. PS: Click Read Original to view more about the 6th China FMCG Conference and the 3rd China FMCG Hard Discount Conference & the 3rd China FMCG Distributor Conference...