Some leading manufacturers have received interview invitations for “naked sourcing” from supermarkets Since August, New Distribution has received feedback that some brand owners have received phone invitations from the headquarters’ purchasing departments of Yonghui and Jiajiayue, requesting face-to-face talks to re-sign new cooperation terms. According to the brands involved, the negotiation is to implement a “naked sourcing” model that is completely different from traditional supermarket cooperation. The core of the negotiation is only one thing: “price.” Brands that received the invitation said there was no written notice or email; no specific content would be communicated over the phone or online; only face-to-face meetings were arranged. The supermarket side demands two “autonomies” regarding price: first, supply prices must be the same as those for distributors, clearly requiring disintermediation; second, retail prices are set autonomously by the supermarket, no longer restricted by brand owners. Currently, the categories that have received invitations are mainly daily chemicals, personal care, condiments, and snack foods, and they are basically the top 5 brands in each category. A brand marketing executive judged that the supermarkets are very determined in negotiations. In some cases, the supermarket purchasing staff even showed the new “naked sourcing” contracts of leading brands in the same category on the spot. The message is clear: if you cannot accept the “naked sourcing” model, you may be “cleared out.” Why are Yonghui and Jiajiayue strongly pushing the “naked sourcing” model? What are the specific cooperation terms? How should we view “naked sourcing,” and how should relevant manufacturers respond? The naked sourcing model marks the end of the traditional supermarket fee model The traditional supermarket profit model is a land-rent model, where profitability depends not on category management or customers, but on manufacturer fees. Entry fees, barcode fees, display fees, promotion fees, various anniversary fees, plus rebates, have been the main profit sources for supermarkets over the past two decades. The accumulation of various fees has fattened the supermarkets and built the brands, but also pushed up product prices. Therefore, in the past, supermarkets were a high-price retail format and the main battleground for brand building. Amidst all these “exorbitant taxes and levies,” the overall operational level of Chinese supermarkets has not seen significant progress. Mr. Meng Fanzhong, chairman of Biyoute, said: “The root cause of the current predicament of Chinese supermarkets is that they have turned their backs on customers and forgotten their original intention.” The “fee model” is not that they don’t want to abandon it; it simply no longer works. In recent years, online e-commerce and offline hard discount have brought huge impacts on traditional supermarkets; at the same time, the continuous diversification and fragmentation of terminal channels have diverted sales. Large supermarkets have been facing operational difficulties for years. The emergence of the “naked sourcing” model is both a symbol of the dead end of the traditional supermarket model and a step forward for supermarkets to shift from collecting fees to managing categories and customers. It can be said that “naked sourcing” is a product of the vigorous learning from the Pangdonglai model over the past year or so. To gain support from leading manufacturers, Yonghui and Jiajiayue’s naked sourcing model also offers three conditions, which are quite sincere: cancel all front-end and back-end fees; cancel return and exchange requirements; and provide ultra-short settlement periods. The focus of “naked sourcing” is, first, disintermediation—direct sourcing from manufacturers; second, low prices to win consumer favor. In this light, “naked sourcing” is no different from “direct sourcing,” except the former is more striking in wording, and “direct sourcing” is not new. Isn’t this “naked sourcing” or “direct sourcing” model essentially the same as the hard discount chain procurement model of the past two years? Hard discount is not the inventor of the “direct sourcing” model either. In the fresh produce sector, Yonghui Superstores and Jiajiayue have established their influential positions through different forms of “source direct sourcing.” Analysis of the impact of the naked sourcing model on FMCG manufacturers Is the naked sourcing model of Yonghui and Jiajiayue right or good? That is hard to answer. In the business world, most of the time we cannot judge right or wrong; we can only talk about winning or losing. The art of business competition is the art of persistence and compromise. Persist in what must be persisted, compromise on what can be compromised; this has always been the correct guiding ideology for competitive negotiations. The naked sourcing model can strengthen the depth of cooperation between supermarkets and brand owners. Manufacturers and distributors do not need to invest a lot of funds upfront, reducing risk and improving capital utilization, and enhancing brand status within the supermarket. These are obvious benefits. But all benefits come at a cost. Supermarkets are only one of the FMCG channels, not all. New Distribution has learned that the brands that have received naked sourcing negotiation invitations are most troubled by two issues: “brand” and “distributor.” First, the brand. Price is not everything for a brand, but it is the lifeline of a single product; only many successful single products can support the brand’s future. The supermarket’s retail price autonomy targets the big single products that have certain traffic and price benchmark, with prices benchmarked against hard discount stores. But behind every successful big single product is the persistent investment of the brand owner and distributors over the years. Any brand owner with ambition cannot sit idly by while the price of a big single product collapses. Therefore, who decides the “price of big single products”? This is one of the irreconcilable core contradictions between retailers and suppliers under the naked sourcing model. Second, the distributor. Today we can still make this assertion: no successful FMCG brand can exist independently of distributors. Under the supermarket naked sourcing model, distributors are excluded from the cooperative role. However, in terms of service, local distributors often have cost and efficiency advantages over brand owners. Once the supermarket channel business is completely stripped from local distributors, how will local distributors survive and develop? If local distributors really collapse, who will take over the brand’s full-channel coverage and new product promotion in the local area? Any responsible and ambitious brand owner will not turn a blind eye to the survival crisis of local distributors after naked sourcing. Therefore, how should the role of distributors be positioned under the naked sourcing model, and how should their interests be designed and protected? This is another core contradiction for the implementation of the naked sourcing model. Under the naked sourcing model Reactions and responses of manufacturers and distributors FMCG is a broad field, and in the face of the supermarket naked sourcing model, there are two major camps. One camp consists of brands that are not highly dependent on supermarkets, where supermarket sales account for about 10% or less of total brand sales. Examples include mainstream food, beverages, and alcoholic drinks. These categories have omnichannel sales composition; the supermarket channel is important but not that critical. Such brand owners are not particularly interested in the naked sourcing model, but they are very interested in exclusive products specially customized for a particular supermarket. For them, this is a “business” that can share production capacity even if it doesn’t make quick money. The other camp consists of categories that are highly dependent on supermarkets. For example, the personal care, daily chemicals, snack foods, condiments, and imported foods mentioned earlier. For many of these brands, supermarket sales account for a high proportion of overall business, generally 30% or even more than 50%. An executive from one such brand said they are undergoing contract negotiations with supermarkets regarding the naked sourcing model, and the process is arduous. Their persistent approach is: for big single products and old products, continue the existing cooperation model and product price system; but organize a special team to develop a series of products for the supermarket, following the naked sourcing cooperation model. It is reported that negotiations have made some progress. During the process, the naked sourcing model seems to have faced challenges from brand owners across the board, and Yonghui and Jiajiayue’s implementation of the naked sourcing model seems to have become less dogmatic and rigid than at the beginning. An executive from another plant-based protein beverage brand said they have resolved the distributor issue in the naked sourcing model. The procurement contract is signed between the brand and the supermarket, and distributors participate as service providers with a profit margin of about 8%, which is not much but enough to avoid losses. A leading snack food distributor in Chongqing, which represents many well-known domestic and international brands, said that negotiations between supermarkets and related brands on naked sourcing are ongoing. He said, “If the supermarket can adhere to the three conditions it claims—canceling fees, no returns or exchanges, and ultra-short settlement periods—this channel can survive even with only a 5% profit margin. A distributor’s business in a city is not limited to the supermarket channel alone.” Friends in the FMCG industry, is your brand or city currently facing adjustments due to the supermarket “naked sourcing” model? How do you view and respond to it? Welcome to leave a comment and share your thoughts~