Behind hard discount is a supply chain revolution

Snack hard discount has fired the first shot of the supply chain revolution. Hard discount and private labels will penetrate from the snack track to other vertical and comprehensive categories. Behind hard discount is actually a supply chain revolution. It is the supply chain revolution that makes hard discount's low prices possible. This is a commercial process that Europe, America, and Japan have already experienced, and China cannot avoid it. After the "queue-jumping" of internet commerce, Chinese commerce must make up for this lesson. Facing the supply chain revolution, various manufacturers have different mindsets. Many distributors believe that hard discount is naturally unfriendly to distributors, and the supply chain revolution is a revolution against themselves. Some small manufacturers think the opportunity has come. In the future, they won't need to spend manpower on channels or deep distribution; they can directly participate in retailer bidding. Some big brands think, "Anyway, I have super single products, and after multiple rounds of price chaos conflicts, big brands have developed immunity." Moreover, each round of commercial revolution precisely provides an opportunity to increase industry concentration. Because hard discount has just fired the first shot of the supply chain revolution, there will be second and third shots later. Some people see the first shot and think hard discount is nothing special. They don't know what the real state will be after the second and third shots, nor do they understand the essence of the supply chain revolution.

I believe the supply chain revolution actually redefines the spheres of influence of factories, brand owners, distributors, and retailers through the re-sorting of channels, especially dividing the price band spheres of influence. In the future, there will be three typical price bands: First, the hard discount price band. Hard discount is the private domain of retailers' private labels, which brand owners find hard to touch. Second, the mass brand price band. This is mainly occupied by super single products of well-known international and domestic brands, becoming the moat of brand owners and also the price band with the largest sales volume in the future. Third, the high-end and luxury price band. This is not large in scale but has extremely high added value, and brands are highly personalized. This price band is the most active stage for brand owners in the future.

Hard discount is the private domain of retailers

The traditional channel is: manufacturer (OEM) → brand owner → distributor → retailer. The supply chain revolution is to cut off all links of traditional deep distribution step by step until they cannot be cut further. From the perspective of channel levels, the supply chain revolution must fire three shots to be truly completed.

First shot: Change from distributors supplying retailers to brand owners supplying retailers directly. The supply chain becomes: manufacturer (OEM) ← brand owner ← retailer. Note: There are two differences between this supply chain and the previous channel: First, the supply chain has one less link, i.e., the distributor is removed; second, the arrow direction is reversed, indicating that the dominant party in the supply chain is different from that in the channel. The channel is dominated by brand owners, while the supply chain is dominated by retailers. The current snack hard discount has only reached this step, which makes many small manufacturers, especially small snack food manufacturers, see opportunities.

Why does the first shot of the supply chain revolution start with snacks? Because the snack channel is the longest, has the highest channel gross margin, and lacks nationally renowned big brands. Starting with snacks, the first shot can produce enough discount space. Other FMCG categories do not have such high channel gross margins. Generally, direct supply from manufacturers can bring 10% to 20% discount space compared to distributor supply, but snacks are clearly much higher. After the rise of snack hard discount, I have discussed with many friends: Which other categories have channel gross margins as large as snacks? I answer that any long-tail category is possible, but oligopolistic categories are impossible.

Second shot: Retailers find OEM factories to produce private labels. This is when it truly enters the rhythm of hard discount. Hard discount without private labels is definitely not hard enough. But currently, the snack category clearly cannot achieve this, mainly because snack subcategories and SKUs are too many and change too fast. At this point, the supply chain becomes: manufacturer (OEM factory) ← retailer. How much discount space can the second shot of the supply chain revolution produce? Some industries may reach 70% to 85%. Of course, not all categories have such high discount space, but it will definitely far exceed the discount space after the first shot. The second shot of the supply chain revolution actually eliminates brand owners and becomes the brand owner itself (private label), but there is a price: it must undertake the functions that brand owners used to perform, such as product development and market promotion. Therefore, the difficulty of the second shot far exceeds the first. It can be said that most retailers currently lack this capability. However, the progress of the times will certainly quickly foster this capability. Currently, entities like Hema and Ant Alliance already have this capability, with private labels as a reference indicator. Hard discount brought by private labels is the norm of hard discount. Hard discount without private labels is an incomplete supply chain revolution and will definitely become the target of continued revolution.

Third shot: Retailers build their own factories. Europe's largest hard discount store brand, Schultz, has its own food factory. Many convenience stores in China, including 7-11 and FamilyMart, also have their own food factories. Of course, building a factory has certain prerequisites: sufficient scale (large enough sales volume) and stable sales, so as to achieve the integration of production profit, circulation profit, and retail profit, with heavy vertical integration. True hard discount must ensure quality while minimizing costs and shortening the supply chain to the utmost. As long as there are intermediate links in the supply chain, there is room for continued revolution. Therefore, direct OEM for private labels or even building factories is the normal state of a true private supply chain revolution.

Hard discount is the private domain of retailers. That is, when hard discount based on private labels is completed, there is no room for brand owners and distributors to participate. Now that the first shot of the supply chain revolution has been fired, will there be only the first shot? Impossible. Once the supply chain revolution starts, all commercial systems are involuntarily swept along by the torrent of the supply chain revolution. So in the short term, some brand owners may have opportunities, but in the long run, brand owners have no opportunities in the hard discount private label field. OEM factories may have opportunities, but brand owners do not. Of course, it must be noted that private labels (hard discount) will not cover all price bands; as long as it is a low price band space, it is a private domain for retailers.

Super single products are the moat of brand owners

Will hard discount spread to all price bands? Of course not. Mass brands with strong user stickiness are relatively safe. For example, the super single products of the top two dairy companies, the super single products of the top two instant noodle companies, and the super single products of the top three beer companies. As for Coca-Cola and P&G's super single products, they are even more secure. The true value of a brand is its ability to resist low prices and make consumers insensitive to price. Therefore, the emergence of hard discount is the time to test who is a true brand. Even in the hard discount era, retailers still rely on well-known brands to attract traffic and on private labels to make profits. Combining different brands for traffic and profit is a rule that retailers have tried and tested. Head brands, especially their super single products, are not only traffic drivers but also not afraid of price chaos. Coca-Cola and P&G have experienced multiple rounds of price chaos in the internet era; has it ever affected them? In 2023, Oriental Leaf was so popular that almost all snack hard discount stores used it to attract traffic. Is Oriental Leaf afraid of price chaos? If a retailer makes a private label like "XX Leaf," even if it is cheaper than Oriental Leaf, it will be hard to beat Oriental Leaf. Super single products of well-known mass brands are a rigid demand for retail stores, a rigid demand for traffic, and products that private labels cannot replace. They are goods with low sensitivity to hard discount. More importantly, the mass brand price band is the price band with the largest sales volume. In the normal distribution curve of price bands, it is in the middle position. For example, Yili has sales of over 120 billion, with 5 super single products exceeding 10 billion and 2 exceeding 20 billion. Brand owners with super single products will not actively seek retailer bidding. For head brand owners, if retailers want direct supply, they certainly need sufficient scale; otherwise, they can only go to distributors. Once direct supply is established, a series of services from product shipment will depend on the retailer's internal logistics system. Distributors will not provide localized services. If needed, there is a price. Why emphasize the super single products of head brands? With the advancement of hard discount, retailers will inevitably take a synchronous action: compress brand owners' SKUs, concentrating sales on a few super single products. Only by concentrating sales on a few super single products can scale be better formed and supply chain issues further resolved. Without scale, there is no supply chain revolution. Distributors of head brands will certainly have living space. After all, among the more than 6 million retail terminals nationwide, most do not have direct supply capabilities and still need distributors for deep distribution. The most difficult may be second- and third-tier brands. Their user stickiness is not strong enough, and they are caught between private labels and well-known brands. Therefore, the supply chain revolution will naturally integrate various industries again, and quite a few second- and third-tier brands will disappear. In snack hard discount, brands that have to lower prices have problems in two aspects: first, insufficient brand stickiness; second, lack of super single products. Super single products are the confidence for brand owners to resist hard discount.

High-end is the most active price band in the future

When God closes a door, he opens a window. With the supply chain revolution, brand owners gradually withdraw from the low-end field. So where is their living space?

The answer that many people cannot imagine is: in the high-end.

In recent years, there has been a clamor about consumption downgrading. In fact, after experiencing the three stages of consumption quantity growth, excess, and then shrinkage (reduction), regardless of the overall economic environment, Chinese FMCG has entered an era of structural adjustment. During the three years of the pandemic, high-end and luxury were the fastest-growing segments. In the past, we thought high-end was the domain of big brands, but look at Coca-Cola and P&G: do they do high-end? They are typical mass well-known brands. More than 20 years ago, some Chinese consumers might have regarded them as high-end, but now they are typical mass brands. Low-end and mass rely on scale; high-end relies on differentiation and added value. In the past, many said small enterprises could do differentiation, but it is actually difficult to differentiate in the low-end; high-end is the most suitable stage for differentiation. Some used to say low-end is easy and high-end is difficult. Now it is the opposite: low-end is the hardest, while high-end is relatively easier. Of course, some will say, "If you can't do low-end well, how can you do high-end?" Some enterprises do low-end because they were squeezed into the low-end price band in market competition; others do low-end because they missed the best opportunity to develop in the mass brand price band. In recent years, I have seen quite a few successful cases of enterprises transforming to high-end. In the future, low-end is difficult mainly because the scale threshold is too high. High-end is difficult because of improper methods. Breaking through the method threshold is relatively easier than breaking through the scale threshold. Small enterprises succeed in high-end, and then large enterprises acquire them. This is a routine move in the capital market. Therefore, a series of changes brought by the supply chain revolution will gradually become apparent in the future.

Under this trend, from March 14 to 16, the 9th China FMCG Innovation Conference & the 2nd China FMCG Hard Discount Conference & the 2nd China FMCG Distributor Conference, themed [Supply Chain Revolution], will grandly open in Chengdu!

Over three days, there will be one main forum, one China FMCG Hard Discount Conference, one China FMCG Distributor Conference, and more than ten sub-forums and closed-door exchange sessions. Together with thousands of FMCG brand owners, distributors, retail transformers, and industry service providers from across the country, we will meet in Chengdu for continuous brainstorming to discuss the challenges and opportunities, changes and ways out in the era of supply chain revolution.

In this era of supply chain revolution, a new commercial era will be born. I hope every participant will still have a place in this wave, and I believe this will be a meeting worth attending!

🔺Scan code for ticket consultation🔺