“All consumer goods are worth redoing” and “a large number of offline retail tracks are worth redoing” are phrases practitioners have repeated this year. On one hand, the emergence of new brands seems easier. But on the other hand, achieving scale and building moats is increasingly difficult. We thought it would be valuable at this time to set aside the ups and downs and discuss the essence of “people, goods, and places.” Against this industry backdrop, we held the 2019 Matrix Partners China Innovation Sharing Session, second edition, titled “Forget New Retail, We Return to the Essence of ‘People, Goods, and Places.’” Matrix Partners China's investments in this space include KK Group, Pucheng Dairy, Xingyun Global Hub, XGIMI, Beast, Youjian, Qingmai Supply Chain, Weiku Seafood, and Jijixian. At this session, Matrix Partners China partner Xiao Min analyzed the three major factors behind the rise of the consumer market in recent years, the three major opportunities in the consumer market, and what kind of companies Matrix Partners China favors in this regard:
For consumer brands, product strength comes first; for channel brands, polishing a stable model is most important; at the same time, changes in front-end commerce bring opportunities for back-end supply chains.
Founders of consumer brands must consider an integrated online-offline approach from day one; today, 60%-70% of consumption still happens offline. If you don't design a proper pricing system and distribution system, your brand may only be suitable for online, meaning you lose a huge market and opportunity.
For channel brand companies, they must have the ability to scale, be precise, and replicate. Additionally, the model must have the ability to iterate on a stable foundation.
For supply chain companies, short links, fast response, fast turnover, and strong control over goods—companies that meet these four points will become very strong supply chain companies in the next 5, 10, or even 20 years. Whether it's new consumption or new retail, in summary it's “easy to enter, hard to graduate, cultivate carefully and claim kingship slowly.” Below is a transcript of Xiao Min's sharing. Enjoy: Although consumption is a huge market and everyone feels it's full of opportunities, in fact, in the past few years, although many flowers have bloomed, no truly big flowers have blossomed. Today, entrepreneurial opportunities in the consumer sector are abundant, but the environment changes rapidly and has been in a turbulent process. Much of what I share today is just a summary of the current stage; in the next two to three years, many more changes will occur. Here are some of my thoughts on the industry over the past few years: -01- How big is the consumer market? In the first half of this year, China's total retail sales of social consumer goods surpassed the United States. The market space is definitely huge. We believe the three biggest opportunities are: urbanization, the rise of the middle class, and technological innovation. First, urbanization. Over the past decade, the fastest-growing industry in China has been real estate, with the core reason being the accelerated pace of rural population moving into cities. In all developed countries, although rural areas are vast, rural populations are very small, so most developed countries have very high urbanization rates. China's 60% urbanization rate clearly has a huge gap compared to developed countries. At the same time, today's China is composed of many “Chinas”: first-tier cities are one China, second- and third-tier cities are another, small counties are yet another. Each “China” is a circle, and the urbanization process is the process of these circles upgrading separately. Second, the rise of the middle class. China currently has 400 million middle-class people, and their numbers are growing rapidly. Their consumption power is 6%-8% higher than the social average. One important reason Jane's Yogurt and KK馆 have performed so well in the past few years is the rise of the middle class. Post-85s mothers want to buy better yogurt, and high-income people in second-tier cities want to buy imported good products. Finally, technological innovation. The underlying logic of all consumption upgrades is technological progress. Technological innovation brings about progress in social division of labor, such as the popularization of cold chain technology and retail technology. -02- Where are the opportunities in consumption? On the basis of underlying technology support, the essence of consumption is still “people, goods, and places.” People are traffic. Every segmented consumer market in China is huge, mainly because of the large population. All circles are growing, and the demographic dividend has released enormous consumption power and dividends. For example, from age 20 to 25, people start to consider marriage, and consumption needs change; from 25 to 30, they have children, and consumption needs change again. No matter from which dimension you label a population, you can segment a huge number of people, which are huge traffic pools. Finding a traffic pool that matches your product positioning is the first step. Goods are content. Different goods attract different people. New populations need new content, which requires new goods. From this perspective, whoever redoes products that were not done well in the past has an opportunity, or provides content that didn't exist before—that's also an opportunity. Today, there is great potential in the “content” field. Places are channels, the venues for transactions. Offline, they are stores; online, they are trading platforms. Today, online platforms are fragmenting, with more and more e-commerce platforms emerging. Although transaction volumes are rising, their market share is definitely declining. Meanwhile, offline is consolidating, with the chain rate of various offline industries increasing, gradually becoming more intensive and scaled, and new channel brands are emerging. Next, I'll share from the three perspectives of people, goods, and places. People: The emergence of diverse consumer groups has given rise to diverse channels and product supply Today's population is segmented and labeled, so it's hard for one product to satisfy all groups. Whether from the perspective of consumption concepts or consumption power, it's necessary to segment by population and product. From another angle, due to the popularity of the internet, the information gap has narrowed. Today, young people in county towns and young people in Beijing see similar products; young people in county towns also know what the best trendy shoes, clothes, and cosmetics are. From this logic, entrepreneurs can find their target population, push goods down, and there will be opportunities. When Pinduoduo first appeared, because the information gap was flattened, people outside the fifth ring could see more good products. At the same time, it flattened the channels for goods circulation, delivering the products needed by people outside the fifth ring to their hands. Finding the target population and delivering goods to them—that's the opportunity. Goods: The rapid growth of substitute products and new categories drives changes on the product side After talking about people, let's talk about goods. From the perspective of goods, the two biggest opportunities are: the opportunity for substitute products brought by the upgrade of old products, and the rise of “niche” new categories. Substitute products: Often, the new generation of consumers doesn't want to use a brand's product because it's what their parents use; they need products that belong to them. Therefore, the opportunity for substitute products is clear: solve the same big problem but with completely different solutions. For example, laundry detergent replaces washing powder, both solving the problem of washing clothes, but the product form and the needs met are completely different; electronic locks replace mechanical locks, both solving the problem of locking doors, but the product form is completely different. “Niche” new categories: Often, consumers don't know what they want; good brands gain insight into consumer needs and guide them. For example, mouthwash, soy milk, and kitchen paper are such seemingly small-market products, but once used, they can't be thrown away. Another phenomenon from the goods perspective is brand iteration. In the past few years, brands in various fields have entered a revolving door, with many old brands disappearing and new brands emerging. No matter how long the shelves are, the brands consumers can remember are limited; similarly, the brands sold in malls and those hot-selling on Taobao are also limited. We previously analyzed P&G's products. The number of P&G shampoo brands with stable sales is fixed; when a new brand rises, another must disappear. In summary, from the consumer's perspective, behind the success of goods, there are some decisive factors that need to be considered and satisfied, such as: whether the supply chain is mature, whether the degree of productization is high enough, whether the brand positioning is clear, how high the product's education cost is, and how efficiently marketing can be implemented. At the same time, in today's market, changes in front-end sales and consumer reach have caused the back-end supply chain network and fulfillment system to change accordingly. Consumers are buying more and more goods, so who organizes the goods? A large number of dispersed channels and segmented consumer groups bring huge opportunities for goods organization. How are goods delivered? The new generation of consumers has higher requirements for fulfillment efficiency, cost, and response speed than ever before. Traditional supply chain and fulfillment forms are hard-pressed to fully meet these requirements. It's necessary to coordinate the entire chain, reconstruct intermediate links, and even profit models to satisfy increasingly “picky” consumers. In the past two years, we have systematically looked at supply chain opportunities in new consumption and invested in some companies, such as Xingyun Global Hub and Jijixian. In the future, we will continue to seek investment opportunities in the supply chain field that meet the characteristics of the new generation of people, goods, and places. Places: Channels are gradually merging, online and offline integration, requiring dual capabilities Finally, let's talk about places. An interesting trend today is “online-offline integration.” In the past, people would clearly distinguish: this brand is a Taobao brand, that brand is an offline retail brand. But today, that distinction is no longer made. Brands worth investing in at this moment should consider from day one how to achieve an integrated online-offline approach. From past experience, when online brands go offline, they have a lot to learn, whether it's channel expansion, pricing, or dealer networks. So far, not many internet-native brands have done particularly well offline. Brands that do well in offline channels may be slower online, needing to familiarize themselves with new traffic tactics and operations, but overall, they develop faster than brands transitioning from online to offline. From the perspective of consumption scale, offline is still the absolute majority, with 60%-70% of consumption still completed offline. Therefore, if you don't design a pricing system and distribution system that fit offline channels, your brand may only be suitable for online, meaning you lose a huge market and opportunity. So, doing well online and offline are equally important issues. 1. How to do well offline? The core of doing well offline is to play a combination of products + services and find large channels that can satisfy the large waist population. First, we need to understand that, in general, online traffic always changes. With content changes, it shifts from Toutiao to Douyin, but the traffic at the small store near your home hasn't changed; it was the same ten years ago and will be the same ten years later. The customer structure is more stable than online. Although offline channels are difficult, doing them will be more stable. But offline cannot avoid the limitation of physical radiation: limited radius, limited traffic, limited population. Although urbanization has formed many areas with relatively high population density, it still cannot compare with online's ability to cover the whole country with one network. So it's necessary to fully realize online playbooks offline. After capturing consumers through offline channels, achieve multi-touchpoint reach, stick closely with consumers, and increase wallet share. Therefore, how to transform the back-end supply chain to be faster and more responsive, stretch product depth and richness; how to digitize, standardize, and productize store management systems; and how to diversify consumer touchpoints are all very important. We have been looking for large channels that can satisfy the 800 million waist population. 2. How to do well online? Doing well online also has new elements. Today is a golden period for brands, and one important reason is that today's sales path has shortened, from product production to reaching consumers has become faster. A group of DTC brands that rose rapidly in the United States was achieved precisely by shortening the upstream chain and removing intermediate links. China has similar opportunities. Another reason is that the medium of interaction between goods and consumers has undergone major changes. Live-streaming e-commerce, video e-commerce, and social e-commerce are all achieving consumer reach and transaction conversion through new interaction methods, content carriers, and communication paths. Li Jiaqi, Wei Ya, or even your friends around you can bring goods, assist transactions, and even influence transactions. This also poses challenges to the supply chain networks behind online platforms. Technology: Technology is the underlying foundation of consumption We've been saying that technology is the underlying foundation of consumption. Changes in people, goods, and places cannot be separated from technological reconstruction, bringing upgrades in product, supply chain, and scaling capabilities. In the past, when discussing technology in consumption, it was more about sales-level technology, which I think is incomplete. We believe that technology reconstructs new consumption, mainly reflected in three aspects: first, technology that truly helps make products better; second, technology that helps reduce costs and improve efficiency from the source, improving cost-performance or fulfillment efficiency; third, technology that helps reduce the difficulty of management after scaling. These technologies deserve our serious attention. We care about the degree to which startups value technology itself. -03- What kind of companies do we favor? We've spent several years looking at new consumption and new retail. In summary, the characteristics are one sentence: “Easy to enter, hard to graduate, cultivate carefully and claim kingship slowly.” Whether it's a brand, channel, or supply chain company, no company runs fast from the start. Any company that runs fast at the beginning will definitely have many areas to make up for later. Brand companies: We focus on several capabilities: product strength is definitely first. Many companies today talk not about product strength but marketing strength. If you don't focus on product, don't focus on channels, and only focus on marketing, you might be able to go from tens of millions to hundreds of millions, but how can you reach 3 to 5 billion later? In the long run, consumer brands are still about product; word-of-mouth affects repurchase. You need to form a long-term positive communication channel and interface with consumers, and product is the core factor. Offline channel companies: We care about the stability of the replicable model. If the model is unstable, opening one store might be a hit, but the faster you replicate, the faster you might die. A good model allows the company to develop long-term and allows franchisees to make money. This requires a long time to polish. The model must iterate quickly on a stable foundation. The population in a community is fixed, but they grow and change. A 25-year-old woman buys cosmetics and snacks; at 30, she buys milk powder for her children. So offline channels die quickly not because of a lack of customers, but because product and content iteration hasn't kept up with the speed of consumer demand changes. Companies without iteration capability have only a few years of life cycle in the channel; they slowly age, and aging is a very scary thing. Must have the ability to scale, be precise, and replicate. These three keywords are equally important. A company that can't replicate a store making 1 million yuan a month to 100 stores won't grow big. If you can't replicate precisely, with some stores losing money and others making money, such a company is also dangerous. Everyone should carefully figure out their own business and then slowly explode. Like an airplane taking off, there is a process of building momentum. Supply chain companies: Today, any supply chain company that meets the needs of the new era can at least be ten times bigger than in the past. Short links, fast response, fast turnover, and strong control over goods—companies that meet these four points will become very strong supply chain companies in the next 5, 10, or even 20 years. Brand and channel innovation will inevitably force supply chains to respond quickly to changes and innovations. We look forward to it. A while ago, an article spread widely on social media saying that all consumer goods are worth redoing once. That's a very assertive conclusion. Do you 100% agree with this view? Are there any points worth debating? Answer: This view originally came from a foreign report. As far as the retail front end is concerned, it can be broadly divided into consumer brands and channel brands. If we narrow the concept to consumer brands, at the current stage, there are great opportunities for substitute and innovative products, but we still suggest everyone have a long period of accumulation to form product strength. With only one hit product, the company's subsequent development will still face many challenges. Also, you must use a different logic to make products; don't compete in the same track as strong mature brands. Between channel brands and consumer brands, which type do investors think has a better chance to grow big? Answer: We value growth potential, that is, how big it can become and how high the ceiling is. There is a big difference between channel brands and consumer brands. Large shopping malls are typical channels, and consumer brands like P&G have also become very large. Both types can become very big, but the capability requirements are very different. Matrix Partners China is an early-stage financial investor. For brand companies, we value product strength more, as well as the ability to push products down channels, rather than just looking at online seeding and marketing. Xia Haitong, CEO of Pucheng Dairy, said it well: competition starts with design, and layout determines the outcome. Product design must consider structural issues. Product gross margin and product structure must support the channel sinking of the business; don't give up the broad market on this point. For channel brands, we place great emphasis on model stability and replicability. Frankly, most channel brands find it difficult to stabilize their early business models, which limits replication ability; the more they expand, the more they may lose. KK Group's model today is relatively stable, reflected in the fact that every store they open is a hit, and the revenue range between stores doesn't fluctuate much. They also have iteration capability, from the initial small stores to flagship stores to the new brand THE COLORIST. Regardless of the type of brand, what matters is how long they've been polishing, what the boundaries of their cognitive abilities are, and what level their integration capabilities with upstream and downstream are... From 0 to 1, look at business construction; from 1 to 10, look at iteration and organization; and ultimately, victory is determined by values—these are core capabilities. This year, many discussions may focus on marketing, but for investors, the challenge is “dazzling flowers confuse the eye.” Some companies may not have strong product strength, but they are particularly strong in internet marketing, quickly going from zero to 20-30 million in sales, and then nothing more. That's a pity. How do investors view segmented populations, and what opportunities are there? Answer: Many declining brands didn't do anything wrong; they just got old. Universal products should definitely target younger age groups to cultivate consumers. But there are always opportunities in segmented populations. Channels, traffic, content—whether you can find the right population and the right traffic depends on whether you can organize appropriate content for the segmented population, that is, good products. This is very important. Otherwise, you still can't retain customers, just like the small store near your home: many people pass by every day, but no one comes in. I still suggest founders design these things well from the beginning and make them match each other; you can't just focus on one point. Source: Matrix Partners China (ID: matrixpartnerschina) If a tip is adopted, a reward of 400-2000 yuan will be paid.