---
title: "Speculating on the Endgame of China's New Retail"
description: "We have already discussed the profound changes taking place in China's retail industry: for the first time, 'same products, same quality, same price online and offline' has become possible in China. When we extend the timeline to look at innovation, repetition, and the endgame of retail, one thing is unavoidable: regardless of 'new' or 'old,' retail is a competition in efficiency across the entire chain, as well as a competition for high-quality supply chain resources. China possesses unimaginable industrial chain technology, with nearly 70% of global production capacity for major consumer goods located in China. In the coming years, China has the opportunity to produce countless world-class consumer brands, but the prerequisite is that retail companies must approach, control, and even create the best supply chains."
author: "李丰"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2018-09-26"
language: "en"
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# Speculating on the Endgame of China's New Retail

> We have already discussed the profound changes taking place in China's retail industry: for the first time, 'same products, same quality, same price online and offline' has become possible in China. When we extend the timeline to look at innovation, repetition, and the endgame of retail, one thing is unavoidable: regardless of 'new' or 'old,' retail is a competition in efficiency across the entire chain, as well as a competition for high-quality supply chain resources. China possesses unimaginable industrial chain technology, with nearly 70% of global production capacity for major consumer goods located in China. In the coming years, China has the opportunity to produce countless world-class consumer brands, but the prerequisite is that retail companies must approach, control, and even create the best supply chains.

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We have already discussed the profound changes taking place in China's retail industry: 'same products, same quality, same price online and offline' has become possible for the first time in China. When we extend the timeline to look at innovation, repetition, and the endgame of retail, **one thing is unavoidable: regardless of 'new' or 'old,' retail is a competition in efficiency across the entire chain, as well as a competition for high-quality supply chain resources.**
China possesses unimaginable industrial chain technology, with nearly 70% of global production capacity for major consumer goods located in China. In the coming years, China has the opportunity to produce countless world-class consumer brands, but the prerequisite is that retail companies must approach, control, and even create the best supply chains.
Today, we are only at the starting point of new retail. Regarding the core competitiveness and endgame of new retail, I break it down into three questions:
  * In the long race to new retail, what is the long-term competitiveness of consumer goods companies?
  * Where are China's high-quality supply chains currently? What impact will 'same products, same quality, same price online and offline' have on China's retail supply chains?
  * As the era of full-chain competition arrives, how should retail supply chains upgrade?

**▍In the long run, the core competitiveness of retail is having high-quality supply**
In the consumer industry, competitiveness is about traffic in the short term, efficiency in the medium term, and in the long term, what is the core competitiveness? Brand is certainly one, but the most important must be a 'quality, upgradeable' 'supply chain.'
This means that a consumer brand can increase sales in the short term through traffic; after gaining volume, it must find ways to improve efficiency; the essence of improving efficiency is to see who can control or create the best supply chain.
What does it mean to control a high-quality industrial chain? Take Tesla as an example. Tesla's batteries are made by Toshiba. Their cooperation model is to jointly build a factory, with Tesla having the final say in production requirements. The degree of control is evident.
Another consumer goods company that firmly controls its supply chain is Apple. There is a Chinese company called AAC Technologies (HK:02018) that makes acoustic components for Apple, with several production lines dedicated to Apple.
How does Apple control this key supply chain? All the control software and computers on these lines belong to Apple, and the ERP system is also Apple's. The person in charge of the production line at AAC often receives emails from Apple saying there is a problem at a certain point on a certain line, and then Apple grants permission for the AAC line manager to inspect the site. Additionally, Apple has about twenty engineers stationed at the factory on a rotating basis. In simple terms, in principle, except for the equipment and workers, everything else is controlled by Apple.
Besides controlling supply chains, companies that can grow big must also be able to create high-quality supply.
Take New Oriental as an example. In China's huge training industry, New Oriental has become one of the few large enterprises. Having worked there for 7 years, one observation and summary is that it enabled many people who were not originally teachers to become teachers and be very popular.
Its approach is to use market-oriented methods, plus a bit of spiritual inspiration, to recruit a large number of young graduates from top universities like Tsinghua and Peking University, even overseas students from North America, and then through systematic training, turn these people, whose life paths were not originally to be teachers, into full-time teachers at New Oriental.
This is how, through specific methods, high-quality supply that was not originally supply becomes supply and becomes the company's advantage. While the company creates value for society, barriers are also formed. Furthermore, as long as you have high-quality supply, you don't need to worry about demand.
In earlier years, I participated in investing in many C2C companies and came to a similar conclusion: for all platforms that connect two-sided supply and demand, the core competitiveness is essentially supply, not demand.
Applying this logic to retail brands and markets is the same. On the road to new retail, whether you are a channel, platform, or brand, whether you sell products or services, put all the trendy things aside, as long as you are in a two-sided retail business, the ultimate competition is for high-quality supply, and the fundamental issue to solve is the supply chain.
On one hand, you must believe that many excellent companies in China's manufacturing industry will seek self-upgrade; on the other hand, in the process of improving supply chain capacity, management, technology, and efficiency, whoever gets close to them at the front end and leads them to upgrade with sales and traffic thinking will become a very powerful enterprise in the long run.
All powerful retail companies that have grown big, including IKEA and Muji, monopolize supply chains in core categories. These supply chains produce almost exclusively for them and upgrade and evolve together with them.
Xiaomi is also very typical. It has traffic at the front end, efficiency in the middle, and at the back end, Xiaomi and its ecosystem chain bring a large number of intermediate industrial chains to upgrade together.

**▍The era of full-chain competition has arrived; how should retail supply chains upgrade?**
Since the supply chain is of paramount importance, where are China's high-quality retail supply chains currently? What impact will 'same products, same quality, same price online and offline' have on China's retail supply chains?
We can divide China's current supply chains into three categories:
  * **Primary supply chains**
These are the production supply chains most susceptible to pressure. In other words, they have not achieved good industrialization, standardization, or cost-effectiveness, and they face pressures such as rising labor costs. However, just as China has a huge number of retail endpoints, primary supply chains are still widely distributed and resilient in China.
  * **Intermediate supply chains**
These can be understood as mid-tier supply chains that have achieved standardization, industrialization, and mechanization. Their production capacity is guaranteed, and management is relatively mature. They have the opportunity to upgrade, but may also migrate under pressures such as labor shortages and reduced foreign trade orders.
  * **Mature supply chains**
These are the ideal supply chain capabilities for new retail: high turnover speed, fast response, and a certain degree of flexibility. They generally cooperate with super brands (such as Zara, Uniqlo), and through extreme polishing and testing by ecosystem design departments, they ultimately create high-quality products with sufficient materials, affordable prices, and strong experience.
The most direct problems China's retail supply chains have encountered in the past decade or so are related to two things: demand and labor.
Here's an example of demand forcing retail supply chains to change. Go back 10 years. The global financial crisis that began in 2007 began to have an increasingly obvious impact on China in 2008. One industry that was hit relatively hard was foreign trade, which forced the industrial chains accumulated over the past few decades to find new outlets, so they were willing to support e-commerce sellers whose prospects were uncertain or even not well-regarded at the time. That year, China's e-commerce industry developed rapidly.
In the current environment and consumption cycle, China, as the country producing nearly 70% of global daily consumer goods, is facing challenges and pressure again for its export-oriented and production-processing enterprises: foreign trade growth is relatively sluggish, and China's labor costs are rising relatively quickly.
As a result, the survival space for factories has been compressed considerably, and some have even had to disappear on their own. Like 10 years ago, they need to find ways to find outlets, i.e., distribution channels and methods that can purchase their products.
The cheapest WeChat businesses and social e-commerce are the two main outlets for primary supply chains.
A very important part of the people they reach are users who completed their first e-commerce purchase on a smartphone. In other words, they may not have been PC users before, nor have they bought things on platforms like Taobao, Tmall, or JD.com.
This group can be compared to the people that e-commerce first reached around 2010. In principle, as long as you offer sufficiently high cost-performance, or sufficiently low prices, they will compare with offline retail that lacks quality and cost-effectiveness, and then smoothly convert to users of WeChat businesses and social e-commerce. This is why social e-commerce and WeChat businesses that rely on cheap prices can achieve explosive user growth in a short time.
However, with the rapid expansion, penetration, and sinking of new retail, when quality and low price are no longer an issue, or when a massive number of affordable branded products are pushed in front of users, these cheapest WeChat businesses and social e-commerce may face a challenge: in plain terms, whether their supply chains can upgrade.

**Q1: After new retail fully covers the market, whose users will these mobile e-commerce users, initially attracted by extremely low-priced WeChat businesses and social e-commerce, become? In other words, when quality and low price are not an issue, what will users buy?**
New retail is one of the main outlets for intermediate supply chains. Companies like Miniso, and Xiaomi's Mijia Youpin mentioned earlier, after gaining volume, occupy the intermediate layer of supply chains that have a certain standardized quality standard and production capacity. The intermediate supply chain also has the possibility of upgrading due to its combination with new retail, further acquiring flexible capabilities such as rapid adjustment, rapid design, and rapid feedback.
This is also the special significance of new retail in today's China: on one hand, supply chains with high-quality production capacity but facing pressure from new channels need to find more outlets. On the other hand, brands' demand for high-quality supply chains will also grow. The two complement each other.
In addition, another very typical outlet for intermediate supply chains is cross-border e-commerce.
During the last financial crisis, although foreign trade was affected, a small wave of cross-border e-commerce companies emerged, including LightInTheBox, among others. In the current cycle, China will also see the birth of more export e-commerce companies. Take Club Factory and Patpat, which Fengrui invested in, as examples. They are both based on China's high-quality production capacity supply chains, making direct sales channels, with the target being foreign middle classes.
These better intermediate supply chains, which have been trained for decades, when facing the pressure of labor becoming more expensive, harder to recruit, or even being migrated to other countries with cheaper labor costs such as Southeast Asia, have a strong incentive to cooperate with new business forms and opportunities to upgrade and turn themselves into high-quality foreign trade producers.
This is another open question we leave today:

**Q2: Besides new retail and cross-border e-commerce, where else can the high-quality production capacity of these supply-side entities, which have both production and design capabilities as well as strong data-driven management capabilities, go?**
Correspondingly, there is also a small question:

**Q3: At this stage, for the primary supply chains that are struggling to survive by adapting to low-priced products and new channels, in the medium to long term, will they be eliminated or continue to exist?**
One advantage of China is that time always passes quickly, and a year of development and change can equal many years in other countries. Now, China's retail has experienced the baptism of e-commerce, the rapid development of commercial real estate, and the reflection, adjustment, and reshaping of offline retail formats, and is moving towards a highly competitive and highly marketized mature market.
What remains unchanged is the logic of retail—short-term is traffic or sales, medium-term is efficiency, and long-term is the supply chain. What essentially grows out of this is called brand.
In this fierce battle of new retail, time will give us the answer.

**Summary of this article**
**1** The competitiveness of the consumer industry is traffic in the short term, efficiency in the medium term, and the core competitiveness in the long term is having high-quality supply. The way is to either control high-quality supply chains or create high-quality supply chains.
**2** The special significance of new retail in today's China: on one hand, supply chains with high-quality production capacity but facing pressure from new channels need to find more outlets. On the other hand, in the fierce battle of new retail, brands' demand for high-quality supply chains will also grow. The two complement each other.

**On October 23-24, during the Autumn Sugar and Wine Fair, the '2018 FMCG City Distribution Logistics Conference' hosted by New Distribution will be held.** At that time, we will invite industry experts, FMCG warehousing and distribution specialists, and distributors who have transformed into unified warehousing and distribution platforms to discuss and answer questions about the future development trends of FMCG city distribution logistics and practical cases of distributor transformation to unified warehousing and distribution, under the theme 'New Distribution, New City Distribution,' hoping to bring you different inspiration and thinking!
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