The consumer goods market has been in a downturn for two years, and from the macro environment, it seems that bad news is far from over. There is no mahjong game without reshuffling, even in Sichuan. Under the overturned nest, some consumer goods companies are having a hard time; this is a normal reshuffling reaction, and their previous round of the game has come to an end.
In the past 30 years in China, a company's sales growth has relied on a combination of four forces:
- Market base: the huge market capacity nurtured by a large population base and continuously growing per capita consumption ability;
- Category penetration rate: from non-use to use, the proportion of users in the population is increasing;
- Category upgrade: from spending less to spending more, per capita contribution continues to increase;
- Market share expansion: through brand positioning, product mix, and market segmentation, occupy the market and gain share from other brands.
However, it is unrealistic to expect rapid growth in the population base. Even with the two-child policy, it's no use; people have looked at too many phones, their endocrine systems are generally imbalanced, and their fertility is severely compromised.
Companies that previously relied on China's demographic dividend or category user growth to drive sales have been mainly reminiscing about the past in the past two years. Typical examples include candy, beverages, infant formula, liquid milk, instant noodles, biscuits, sanitary napkins, and shampoo, all of which are bottleneck enterprises. The penetration rate of these categories in the population has reached a certain level, making it difficult to attract new users or encourage more usage, so category development has become sluggish.
In the past several years, China has been enshrined as the "world's incremental engine" in the international divisions of Fortune 500 companies, but now the situation is not optimistic. At the 2016 annual meeting of the Consumer Analyst Group of New York, P&G's global CEO David Taylor said magnanimously: "In China, our second-largest market, no core category is adding users, and most are even declining."
Although growth is sluggish, profit targets must still be met. To this end, some companies have chosen to raise prices abruptly—"I'm raising prices, what can you do about it?" Or they introduce high-end new products to raise prices with dignity—"We've upgraded, it's just a bit more expensive!" But there is a limit; not all brands can support such high premiums, so this tactic quickly reaches its end. As a result, hard friction between brands becomes more intense, marketing costs increase, gross margins cannot improve further, and operating profit margins generally decline steadily.
In addition, the topic of e-commerce cannot be avoided. As mentioned earlier, brand competition has intensified, and the accelerator is e-commerce. The challenge of e-commerce is not just adding a channel; it is a revolution against traditional channels. Traditional companies think this is a newcomer competing for market share and find it naughty, but in reality, they come with a mace to smash your skull and a brick to hit the back of your head. The brand theories, marketing methods, and distribution channels of the industrial age are caught off guard and trembling in the face of e-commerce's fast, cheap, and ubiquitous consumer communication.
At the same time, with the help of e-commerce platforms, the good days have come for "small but beautiful" brands. They quickly occupy fragmented niche markets that big brands cannot see or disdain, and there are so many that big brands cannot fight them all. They are rapidly eroding the market share of big brands. And this is just the beginning; it will become more troublesome later. Big brands remain big and blue-chip, but they are no longer "the same as last year."
E-commerce seems warm and joyful now, but this wave of e-commerce will eventually decline, after all, they are also in the game and will face reshuffling. E-commerce companies are preparing for a soft landing. For example, they are breaking the online-offline boundary and getting more involved in the real economy. JD.com invested in Yonghui, Alibaba invested in Suning and acquired Intime, and there are many such news. Although B2B business in the FMCG field is just beginning, the trend is clear and the momentum is huge. JD New Channel, Alibaba 1688, etc., are coming with a murderous aura, with a clear goal: to replace distributors.
Categories are difficult, companies are difficult, competition is fierce, and e-commerce is challenging to a duel. Looking at these points together, consumer goods companies and channels are conflicted. Everyone is discussing the next step. With the mentality of enjoying the excitement, I will share my views:
Industry Evolution Trends for Distributors
1) Channel profits are insufficient to support a multi-tier distribution network.
Impact from e-commerce and logistics providers: The traditional distribution chain, through distributors, secondary distributors, wholesalers, and finally to the terminal, survives on information asymmetry and regional monopoly. The more closed the information, the greater the channel benefits. These two points are quite fragile in the face of the internet and logistics networks, and brand owners cannot defend the original channel profit structure.
Dilemma from brand owners: Under the attack of three forces—market downturn, industry competition, and rapid e-commerce development—brand owners' operating profit margins continue to decline, leaving less room for price differences for intermediate links.
Multi-tier networks cannot continue: Each link must obtain its own returns. When input-output is not ideal, that link will exit the game; this is a basic economic law. Intermediate links will inevitably continue to exit, and channel flattening is an inevitable trend.
2) If you can't support multiple tiers, you must shorten the value chain; this is the process of "flattening."
Flattening is inevitable, but there will be phased layouts, not a one-step leap to the level of regional monopolists. There are two approaches:
Decentralized flattening—a "mountain king" style of flattening, upgrading original secondary distributors and wholesalers to distributors and dividing the market into smaller areas.
Typical practice: Originally there were 60 distributors in 1-2 tier cities; now 220 new distributors are opened in 3-4 tier cities, upgrading original secondary customers to primary customers.
Advantages: Fully protects the interests of distribution customers, giving them enough motivation to develop the market; Disadvantages: 1) Increases management difficulty for the enterprise; 2) Weakens the enthusiasm of large distributors; 3) Increases the difficulty of market price control.
Scale flattening—a "warlord" style of flattening, allowing fewer large distributors to control the market, with large distributors managing lower-level markets through branches.
Typical practice: Reduce 710 distributors to 130, or even fewer.
Advantages: 1) Easy to manage, after all, fewer objects to manage; 2) High market service level, after all, these large customers generally have better service awareness and levels. Disadvantages: A new round of internal multi-tier networks emerges. The head office wants profit targets, branches also need to support themselves, no one will do work that earns little, and coverage of lower-level markets may not be very good.
3) Flattening will inevitably lead to scaling.
From decentralization to concentration is a development law: the result of market development is inevitably toward scaling and greater concentration, eventually becoming relative monopoly. This is an economic law, no explanation needed.
Capital intervention accelerates the process: Capital is a strong medicine that fills people with high enthusiasm for business. Many enterprises backed by capital, such as Eternal Asia, the famous "supply chain finance enterprise," are acquiring distributors nationwide, greatly accelerating the scaling of distributors and artificially ripening them. Today, these ripened distributors stroke their beards and thank Eternal Asia for helping them develop early; tomorrow, they will join brand owners in cursing the unfair distribution of benefits. That's a story for later.
In the end, it's a market for a few big players: The total capacity of China's FMCG market is 1.5 trillion yuan. If offline accounts for 2/3 (in fact, in 2015 it was 96%; e-commerce raised a lot of dust and noise, but its share was less than 5%), that's about 1 trillion yuan. If a scaled distributor maintains a scale of 20 billion yuan, 50 distributors nationwide would be enough.
4) B2B platform companies with e-commerce and logistics genes will quickly seize market share.
Business in the data age is inevitably based on efficient and equal information communication, and e-commerce and logistics companies have such genes.
Only integration at the logistics level can bring true value. In Weifang, more than 300 vehicles from various consumer goods distributors are transporting goods; after integration, perhaps no more than 100 are needed. This saving creates true value.
If a distributed B2B platform cannot integrate logistics and only collects information from mobile terminals for distributors, I don't see much future for it. It cannot create substantial value for society, so it's just a transitional product. Due to poor quality and lack of patience, my judgment criteria for such things are simple and crude: If a tool is better with it and fine without it, it's basically nonsense, won't last long, and isn't worth investing in; if a person is better with them and fine without them, you should cherish them, because such fate can truly warm your life.
Flattening and scaling will eventually evolve into a "brand owner - B2B platform - shopper" model. B2B platforms, or "platform merchants," must simultaneously possess internet trading, logistics networks, and supply chain integration capabilities, all in one. Their efficiency will inevitably be much higher than that of isolated distributors.
Platform merchants will evolve into enterprises similar to Japan's large general trading companies, dominating channel business. Sumitomo, Itochu, Mitsubishi, etc., have established an efficient vertical distribution system for Japan's FMCG market, with 92% of retailer purchases coming from them. Will China be the same? At least it's one possibility.
Changes and Impacts in Retail Channels
1) Wholesale markets: Wholesale markets focused on FMCG are hit hard by B2B platforms, with a sharp decline in scale and number.
China's market is too deep for wholesale markets to completely disappear. After all, minority pastoral areas need ironware, salt, and ham sausages. Wholesale markets have a role as a natural distribution supplement for 5-6 tier areas, but they are not worth brand investment.
2) Traditional small stores: Quickly integrated by institutions and becoming chain franchises.
Investment institutions are pouring large amounts of capital into chain convenience stores, using capital to promote mergers and acquisitions, accelerating the chain-ization of traditional small stores. Brand owners who rely on traditional small stores will have to face the challenge of channel reshuffling. In 1, 2, and 3 tier cities, traditional small stores, mom-and-pop stores (I've always thought that three people opening a store is the perfect combination), grocery stores, and corner stores will gradually become a folk custom scenery. Some people go to Lugu Lake to see the walking marriage, others go to the suburbs to experience grocery stores and understand what business looked like in the past:
—"Child, look, this is the traditional independent small store without centralized purchasing. The bald, fat shopkeeper dozing in the rattan chair in the corner is the owner." —"WOW, Mom, that's so cool."
Some companies have formidable traditional channel coverage systems, such as Master Kong, Coca-Cola, and Wrigley, with thousands of grassroots sales representatives forming various grassroots organizations like sales offices, covering traditional small stores without missing a beat. But these skills are gradually becoming awkward, like the darkroom photography techniques I mastered as a child—developing film, developing, fixing, enlarging, glazing—now they don't even count as intangible cultural heritage.
3) Chain convenience stores: Community-based CVS and small supermarkets are the stars of tomorrow, becoming the most important "KA" of the future.
The "last mile" has heated up chain convenience stores, and their importance is now recognized by the industry. For brand owners, this business is currently conflicted: everyone knows its importance, but current sales are small. Investing early affects short-term performance, while not investing early loses market opportunity. This is a test of corporate vision. Whatever your wishes, chain convenience stores in China are bound to become the retail overlord in the end.
Chain convenience stores, chain pharmacies, community baby stores, and personal care stores—these formats will eventually have a cross-border fight in the community. The outcome is uncertain because the biggest influencing factor is national policy. Based on foreign development, it's more economical to integrate chain pharmacies, personal care stores, and community baby stores. Don't you think a pharmacy selling children's care and personal care products sounds more reliable? If one day the state issues a regulation that infant formula can only be sold in pharmacies, and the non-pharmaceutical part of pharmacies is more open, my speculation will be realized overnight. Nothing new, just America's Personal Care Store.
4) Hypermarkets: Many 1-2 tier cities have reached an average of one hypermarket per 70,000 people, which is too many. Retail turnover and gross margins are declining, commercial real estate rents are high, leading to a wave of hypermarket closures.
A few basic numbers: In 2013, 35 major retail enterprises closed; in 2014, 201 closed; in the first half of 2015, 121 closed. I don't have the full-year number, but it should be over 200. This trend will continue for two more years, gradually reaching supply-demand balance. Eventually, hypermarkets will shrink to one per 200,000 people, gradually coexisting with shopping malls, similar to the trend of department stores, becoming good places for shopping and leisure, focusing on experience. Hypermarkets will always exist, but their glory days are over. MacArthur's famous speech in Congress, "Old soldiers never die; they just fade away," is dedicated to hypermarkets.
5) Terminal procurement becomes more centralized, with strengthened central control.
Regardless of the format, central control management is the trend. The number of regional procurement will decrease, and communication and collaboration between brand owners and headquarters is an increasingly important topic. Almost all customer management follows the KA approach. The days of everyone laughing, smoking, drinking, playing mahjong, and sauna bathing to boost sales are becoming rarer and more precious. In the past two years, everyone has been talking about JBP; in the future, JBP will become the main communication tool. The KA customer management techniques used for Walmart and RT-Mart are essentially the same when applied to large e-commerce companies and large distributors.
6) It doesn't matter whether it's e-commerce or not.
Next, most large e-commerce companies will get involved offline, and offline retailers will enter online in some form. At that point, the term "e-commerce" will soon be obsolete. Everyone will return to being retailers. JD.com, Walmart, Tmall, RT-Mart—there's no essential difference.
Impact of Distribution Channel Changes on Brand Owners
The changes in distribution channels have altered the market ecosystem, and brand owners must adapt to new conditions.
1) The "market service" model for distributors begins.
The "deep distribution" model for brand owners is coming to an end. The era of "enterprises running society" is over. Brand owners are gradually abandoning the "self-built team to cover the market" approach, and this business is gradually shifting to distributors with coverage capabilities and professional market service companies.
2) Platform merchants become super KAs.
The biggest "KAs" for brand owners become Eternal Asia, JD New Channel, Alibaba 1688 Retail Link, etc. They are platform merchants, super KAs. Then, the relationship becomes delicate.
3) The delicate competitive-cooperative relationship between large brand owners and platform merchants.
Platform merchants, with a childish face, don't understand regional business well, have strong idealism, and speak with a big tone. Large brand owners, with a normal mindset and without prejudice, say these platform merchants are actually quite annoying. But with capital and industry bigwigs behind them, the probability of success is high, so they must be taken seriously. Large brand owners will worry about these issues:
Sales: Incremental or existing? Will it bring additional sales growth, or just eat into the volume of existing distributors?
Profit: How to maintain the manufacturer's operating profit margin? These platform merchants have much stronger negotiation power than ordinary distributors, so brand owners must give them greater policy support. Once platform merchants form a relative monopoly, their fee collection will not be lower than Carrefour's, further reducing brand owners' profitability.
Capital: How should manufacturers respond to the capital pressure from platform merchants' payment terms? As platform merchants grow, they begin to demand payment terms from manufacturers. Since the mid-1990s, most distribution links have been cash before delivery. The increase in channel receivables greatly increases the capital burden on brand owners and ultimately leads to a decline in return on investment.
Price: How to maintain the price system? Take JD New Channel as an example. Based on JD's usual style, it will definitely use low prices to open the way and achieve rapid terminal expansion. If JD gets competitive prices from manufacturers and bypasses intermediaries, there will be a lot of profit space, and JD doesn't care about short-term gains from New Channel, so it will inevitably bring price competition in the channel.
Existing distributors will definitely choose price retaliation to defend against JD New Channel. This back-and-forth will push the market price system to the brink of collapse.
Management: Cross-regional channel diversion? Cross-regional diversion is inevitable. Balancing the national network of platform merchants and the regional networks of existing distributors is a headache for brand owners.
Let me speculate on the development path of platform merchants:
Early stage: Large brand owners will not strongly support the development of platform merchants; it is extremely difficult for them to balance the relationship between platform merchants and existing distribution networks. Popular mainstream products will not abandon traditional distribution channels in the early stage, so a new channel that can only do hot products or non-mainstream products will have very limited appeal to offline terminals. A platform that cannot offer one-stop ordering will not have high terminal usage, and platform merchants will have a hard time at this stage. During this period, they may calm down and compromise, cooperating with distributors to build market platforms, which will develop more smoothly than building complete channel coverage with their own small universe.
Mid stage: When the platform merchant network is built and mature, under pressure from small and medium brand owners to occupy the market, large brand owners will gradually cooperate, likely providing special products for the platform, but always using various means to control their weight in the business. At this point, the customer network and brand owner network are basically built, and platform merchants will turn to deal with the distributors in the united front. This is a purge; history tells us that distributors cannot be winners.
Late stage: Large brand owners gradually differentiate. Some focus on brand building, product R&D, and production, completely entrusting sales to platform merchants.
4) Opportunities and challenges for small and medium brand owners.
At this stage, small and medium brands have limited capabilities and can only develop limited regional markets offline.
Under the new platform merchant landscape, as long as they enter the system, they can quickly expand nationwide and gain additional incremental volume. Since it's all incremental, there's no issue of disrupting the market system. Small and medium brands will be willing to share more benefits with platform merchants, and platform merchants will have greater motivation to support small brands. Small and medium brands that cannot cooperate with platform merchants will be further squeezed in the offline market and forced to invest more resources in e-commerce platforms.
Large brand owners are making a fuss, saying that platform merchants alone cannot educate customers of small and medium retailers to accept unheard-of brands, so sell-through will be poor, and this model won't work. You might as well go to the countryside and see that those stores display a dazzling array of 3-4 tier brands, most of which you don't recognize. The reason is simple: high gross margins.
The downstream customers of platform merchants are mainly small and medium retail enterprises. The smaller the terminal, the stronger the influence on consumers. This can be deduced from the number of shoppers per store employee; pharmacies are a good example. If platform merchants leave enough benefits for terminals, small and medium terminals will be willing to cooperate in promoting high-margin small and medium brands, and the promotion effect will not be too bad.
In short, this platform is bound to be an ecosystem developed and first benefited by the support of small and medium brand owners. In this system, large brand owners are in an awkward position.
5) Platform merchants will inevitably get involved in supply chains and production.
To maximize profits, platform merchants will inevitably move toward private labels.
Platform merchants will gradually turn brand owners with strong production but weak channels into OEM factories, further weakening the brand role of homogeneous products.
Small and medium brands that cooperate closely with platform merchants may face capital issues during expansion and will use the platform's supply chain finance support, eventually developing into equity cooperation.
Disclaimer: This article is sourced from Zhi -END-
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