---
title: "The Brand-Dominated Channel Distribution System Is Collapsing!"
description: "In 2023, low prices and discounts became the industry's mainstream topics. Recently, while discussing industry changes with friends, I noticed that different people see completely different things in the same event. For instance, some believe discount stores are the future of retail, while others think they are a flash in the pan. We say the industry is undergoing a supply chain revolution, but some say it's exaggerated and we're creating anxiety. What changes are happening in the industry? What is hard discount? What challenges and opportunities do brand owners and distributors face?"
author: "任文青Andy"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2024-01-17"
language: "en"
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# The Brand-Dominated Channel Distribution System Is Collapsing!

> In 2023, low prices and discounts became the industry's mainstream topics. Recently, while discussing industry changes with friends, I noticed that different people see completely different things in the same event. For instance, some believe discount stores are the future of retail, while others think they are a flash in the pan. We say the industry is undergoing a supply chain revolution, but some say it's exaggerated and we're creating anxiety. What changes are happening in the industry? What is hard discount? What challenges and opportunities do brand owners and distributors face?

In 2023, low prices and discounts became the industry's mainstream topics.
Recently, while discussing industry changes with friends, I found it interesting that different people see completely different things in the same event.
For example, some believe discount stores are the future of retail, while others think they are a flash in the pan and won't last.
We say the industry is undergoing a supply chain revolution, but some say it's exaggerated and we're creating anxiety!
What changes are happening in the industry? What is hard discount? What challenges and opportunities do brand owners and distributors face?
Saying discount stores have impacted brand price systems is just a phenomenon.
What is the essence? **It is that the brand-dominated channel distribution system is collapsing.**
Why do I say that?
Many people understand hard discount as discount retail.
Indeed, various discount retailers are accelerating store openings, and traditional supermarkets are also moving toward discounting. This is the most direct manifestation of hard discount.
But if we only understand hard discount at the retail level, many issues will be unclear.
We need to see the factor behind it—supply.
Today, we face severe overcapacity, which has been mentioned many times, but perhaps many people haven't truly understood its critical importance.
You should know: **Without overcapacity, there would be no hard discount. Because without overcapacity, there would be no chaos. Without chaos, discount stores couldn't get goods, and they couldn't develop.**
Take snack discount stores as an example.
In the early days, they were actually blocked by brand owners, especially first-tier brands, but distributors and regional companies had to meet targets, so they could always get goods.
The order of the brand channel distribution system is a large network woven by brand owners, distributors, and retailers under brand leadership. This network was once impacted by e-commerce, but the offline part could still be maintained.
Hard discount has torn a hole in the offline network. The order developed over the past decade or more is now increasingly difficult to maintain.
With overcapacity and severe supply-demand mismatch, no product is indispensable. Everyone has performance targets; if you don't sell, someone else will.
So, snack stores, discount supermarkets, or the discount transformation of traditional supermarkets—these are phenomena. **"Hard discount" is a description of a phenomenon—whether we call it hard discount or not is actually unimportant.**
You should know that discount stores are not new; they existed over a decade ago. Even earlier, more than twenty years ago, there were attempts at hard discount supermarkets in the Chinese market, but why didn't they develop?
Because the supply side didn't support it.
So many people ask: Are discount stores a flash in the pan? This question remains superficial; we need to see the essence behind it.
Let me show you two charts.
Source: China Merchants Securities
China's overcapacity is more severe than other countries, and the food industry is more severe than other industries.
Of course, "overcapacity" must be viewed in conjunction with the demand side; changes in demand are another important factor. I won't discuss that here because there are already too many articles and reports analyzing the demand side.
Here, I'll just mention the big picture: In 2022 and 2023, China's population declined for two consecutive years, and this trend will not reverse in the short term.
So, supply-demand mismatch will not change in the short term, but in the next few years, it will definitely be a process of gradually finding some balance.
This process is painful, but there are also opportunities.
First, brand owners' channel systems and organizations face adjustment.
The industry is changing, and brand owners are aware, but many haven't understood what is happening and how to respond.
**The environment nurtures the development of hard discount, and the development of hard discount in turn strengthens this environment.**
For example.
With the rapid development of snack discount stores, many brands have ridden this wave, and sales have grown quickly.
But the regional sales of these manufacturers are struggling because snack stores are chain operations. The company has performance, but regional business is taken away by chain discount stores, making regional sales targets harder to achieve.
What to do? They can only pressure distributors with tasks.
Distributors' effective selling points are already decreasing. Under the dual pressure from the market and upstream, many distributors will exit the market in the future.
**In the past, manufacturers decided how many distributors there were and how many stores they covered. In the future, it will be the reverse: how many stores support how many distributors, and how many distributors support how many regional sales personnel.**
We serve brand owners and also have very close cooperation with distributors. When manufacturers talk about distributors, they complain about non-cooperation and other issues. When distributors talk about manufacturers, they complain about exploitation.
The source of conflict is that manufacturers pressure distributors with tasks, and distributors can't complete them.
The root cause is still severe oversupply. In the past two years, we talked about stock competition, but in the future, it may not be stock competition but shrinking competition.
The past model was: **Brands do marketing and promotion, deliver through the channel system, brands gain premium, and the premium supports marketing and channel organization costs, plus considerable profits.**
In the future, except for a few truly strong brands, this cycle will be difficult to sustain.
Facing the rise of discount store channels, brand owners are very conflicted: on one hand, they need sales; on the other, they need to maintain the existing business.
We often say this brand embraces or doesn't embrace. Actually, embracing or not is just an action.
Whether a specific discount store model can succeed and how far it can go is not the point. The important thing is to see through the phenomenon to understand what is truly changing in the industry.
Brand owners' channel and organizational systems are matched with the past deep distribution model. Now brands need to think: What adjustments should my organizational system make to adapt to future changes?
Second, the challenges for brand owners are actually opportunities for some factories.
**The rise of factory brands, or white labels, is an opportunity for manufacturing factories.**
They are different from traditional brands.
What is a brand? "品" (pin) means quality products. "牌" (pai) means self-generated traffic and mind-share.
From product to brand requires marketing investment, bringing brand premium. So, in reality, consumers pay for marketing and promotion.
There are many factories in China that can produce quality products, but they have products without brands. Having products without brands means OEM for others.
In the past few years, the rise of new consumer brands has been backed by a large number of quality factories. They can produce good products but don't know how to do brand marketing. New consumer entrepreneurs came and matched perfectly.
Of course, these factories not only OEM for new consumer brands but also for first- and second-tier brands.
The market environment has changed, demand has shrunk, but capacity remains. They need to find a way out.
Is there a way out? Yes: live streaming, community group buying, and hard discount. Brands don't need marketing and promotion in these channels. Quality factories can directly supply products to these channels, and sales quickly rise.
Private labels developed by retailers and products jointly made by distributors can be classified into this category, backed by these quality factories.
Of course, not all factories have this capability; it's manufacturing-type factories.
Manufacturing and processing are different. Processing is primary, just OEM. Manufacturing requires four capabilities: **R&D capability, product realization capability, product assurance capability, and product service capability.**
**Also, in the future, whether for manufacturers, distributors, or retailers, industry barriers will become very high.**
Discount stores have led to a reduction in effective selling points for traditional channel distribution. This has already happened in 2023. Many distributors we surveyed who supply supermarkets have experienced a 30%-40% decline in business, some even halved.
Discount stores sell cheap. Do nearby supermarkets and mom-and-pop stores have to sell cheap? In the future, the concept of discount stores will fade, and everyone will be at parity.
With the pan-discounting of retail, terminals without special location and product advantages will find it hard to survive.
The trends of retail chainization and distributor consolidation that have existed for years will be further strengthened.
Their essence is the same: **Use scale cost and efficiency advantages to offset increasingly high delivery and fulfillment costs.**
For manufacturers, cooperation with chain terminals and large distributors in different regions is very important because hard discount has limited SKUs. What if you don't get in? You can sell at low prices in other channels, but consumers won't go there, capacity won't be released, supply chain won't have advantages, and costs will be higher. Those who follow new channels will see volumes grow, supply chain advantages strengthen, creating a positive cycle.
In an era of oversupply, if you can't achieve cost leadership, you can't stay at the table. Similarly, without cost leadership, you can't enter the game—to achieve cost leadership, you need huge investment.
So, in the future, production, distribution, and retail will all become very barrier-heavy.
Hard discount is behind the collapse of the channel system under brand sovereignty, and at the same time, it is a supply chain revolution under consumer sovereignty.
How to understand this?
Recently, two news items caught my attention. One: On January 12, Costco's first store in South China opened, with customers flooding in. By the opening day, over 140,000 memberships had been issued, ranking first globally. Another: Also on January 12, Dong Yuhui's live stream announced a one-day suspension "because there was nothing to sell."
In an era of oversupply, two things are scarce: **one is truly good products, and the other is the ability to organize and mobilize consumers.**
The ability to organize and mobilize consumers is very important.
Hard discount is just a synonym. Through it, we see that the order in which brand owners push products to consumers through distribution systems is collapsing.
Through it, we also see **another order being established—organizing and mobilizing consumers, aggregating their needs, and finding good products for them.**
This process has already begun. It is both a challenge and an opportunity.
**From March 14 to 16, the "Supply Chain Revolution" 9th China FMCG Innovation Conference & 2nd China FMCG Hard Discount Conference & China FMCG Distributor Conference will grandly open in Chengdu!**
**On March 15, the 2nd Hard Discount Conference will spend a full day with discount retail industry experts, brand executives, etc., to re-examine new channels, new directions, new thinking, and new opportunities in the discount era!**
In addition, at the conference site, over **3 days**, with **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**, we will meet with thousands of FMCG brand owners, distributors, retail transformers, and industry service providers from across the country in Chengdu, continuously brainstorming, and jointly discussing the challenges and opportunities, changes and ways out in the era of supply chain revolution.**
We hope every participant will still have a place in this wave, and we believe this will be a conference worth attending!


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