- How can a 'recommended brand' become a 'preferred brand'? The terminal market is where 'preferred brands' work, while the channel market is where 'recommended brands' work. 'Preferred brands' are the first choice of consumers, while 'recommended brands' are the first recommendation of channel distributors and store owners. In the 'terminalization' stage, how can companies that once thrived in the channel market change their predicament?
- Will rural e-commerce disrupt the market? E-commerce and search technology can be seen as an infinite extension of the terminal market, pushing consumer choice to the extreme and breaking regional restrictions on products. With the improvement of delivery systems, the younger generation working away from home will increasingly choose products online for their elderly parents and children. Will the channel undergo disruptive changes?
- The channel advantages of some industry giants like Wahaha, Hualong, and Baixiang are weakening. Is your channel haven facing a 'fall' crisis?
Main Text
The channel was once a haven for Chinese enterprises. It was the separation between the channel and the terminal market that allowed small Chinese companies to grow on a different platform from multinational corporations. Now, this haven may no longer be a haven; it has become turbulent.
Some industry giants that rely on the channel, such as Wahaha, Hualong, and Baixiang, have seen their sales stagnate or decline in recent years, sounding an alarm for companies with channel advantages. It can even be said that the channel is already in crisis.
▉ Two Logics, Two Markets
Many people still do not understand the operating mechanism of the channel, which is why it could serve as a haven for local enterprises during their growth stage.
The biggest misunderstanding about the channel is that it is a market for low-end products, suitable only for low-end, low-price goods. However, many companies with strong brands have tried low-end, low-price products but did not sell well in the channel.
P&G tried to enter the rural market three times but failed each time. They lowered product quality, participated in channel distribution, and rural chain stores, covering all 4Ps of marketing, but still did not succeed. It can be said that the channel is a natural barrier for multinational companies, and they seem not to understand its logic.
Master Kong has also attempted channel products several times. Its sub-brand 'Fumando' was a channel brand, but despite the backing of Master Kong and low prices, it did not perform well. To enter the channel, Master Kong acquired 'Zhongwang' instant noodles, but ruined a brand that had been successful in the channel.
The difference between the channel market and the terminal market is that the terminal market is driven by 'preferred brands,' while channel products are driven by 'recommended brands.'
'Preferred brands' are the first choice of consumers, while 'recommended brands' are the first recommendation of channel distributors and store owners. The key in the terminal is how consumers 'buy,' while the key in the channel is how store owners 'sell.' Terminal marketing should focus on consumers' 'psychological premium,' while channel marketing should focus on store owners' 'gross profit premium.'
The reason for these differences is that modern terminals are basically 'open-shelf self-service,' while the channel still has 'three-foot counters' where store recommendations play a role. This is the essence of the channel's 'haven' function.
Terminal marketing believes that product sales problems are due to brand or promotion issues. Channel marketing believes that product sales problems may be precisely because the brand is too well-known.
Because the brand is too well-known, prices are too transparent, the price ceiling is compressed, and gross profit margins are reduced. Therefore, the channel often sees the phenomenon of 'the more famous the brand, the less it sells,' and even 'famous brands are hidden for sale.'
Brands that sell well in the channel are usually second- or third-tier brands. They have a certain level of awareness and strong capabilities in new product development and promotion, achieving a balance between brand and gross profit.
This is why the channel forms a barrier for multinational companies. The practices of multinational companies, such as big single products, well-known brands, and long-selling products, which sell smoothly in the terminal market, are difficult to implement in the channel market. Therefore, the channel market seems to be a dedicated market for local enterprises, and many local brands have grown and developed in the channel market.
Before 1998, the Chinese market was basically a channel market, with the terminal market limited to a few first-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen. Since then, the terminal market has continued to extend to lower-tier markets, forming two markets of equal scale.
The two markets overlap in parallel, but because they follow different marketing logics, the distinction between them is clear.
▉ Channel Dividend
The rapid development of China's economy is often attributed to the 'demographic dividend' at the macro level, but at the micro level, there is a 'channel dividend.'
The channel is often underestimated, seen as a market for second- and third-tier brands. Even some brands whose sales in the channel market far exceed those in the terminal market are reluctant to admit that they focus on the channel market. However, companies that have tasted the benefits of the channel market are unwilling to give it up.
70% of personnel, policies, and sales come from the terminal, but 70% of profits come from the channel. Before e-commerce became significant, many companies said this. Many companies completed their initial capital accumulation in the channel.
The terminal is a market dominated by modern retailers, with relatively clear rules. Besides products and brands, sales mainly come from investment in the terminal. Additionally, the terminal implements elimination of the weakest, leading to intense competition, with promotions and deductions severely eroding profits. The terminal becomes a place to gain attention (brand).
The channel is highly fragmented, making it difficult for big brands to focus. Coupled with the 'natural hostility' of second-tier distributors towards brands, the channel does not follow the principle of force. The high-investment strategy of big brands in the terminal does not work in the channel. It was once thought that the channel required much more technical skill than the terminal.
Therefore, channel profits are much higher than terminal profits, which is the channel dividend.
▉ The Channel is Shrinking
The channel market is not limited to rural areas; it also includes small terminals in cities, such as urban-rural fringes and grocery stores in urban villages.
The channel market is shrinking, which is an inevitable result of urbanization.
Previously, the share of the channel market was declining, but the total volume was still growing. Now, the total volume of the channel market has reached a critical point of decline. It seems that the channel market is indeed in trouble.
According to the National Bureau of Statistics, in 2013, the urban population accounted for 53.73%, totaling 725 million; the rural population accounted for 46.27%, totaling 625 million. The absolute number of urban residents is already 100 million more than the rural population.
The above population statistics only include permanent residents who have lived for more than 6 months. If we consider temporary urban residents and migrant workers, the urban population is even larger.
In addition to the decrease in population, the structure of the rural population is also changing.
Among the rural left-behind population, there are a large number of elderly and children, whose consumption capacity is limited. In fact, the transfer of labor and consumption capacity to cities is faster than the population transfer.
There are also channel markets in cities, but the commercial forms in cities are also changing. For example, urban villages originally belonged to the channel market, but with large-scale demolition in cities, urban villages are decreasing, and the number of traditional commercial forms is also decreasing, compressing the channel space.
Some may ask: the rural population reached its historical peak of 850 million in 1995 and then began to decline. Why has the channel market only started to shrink now?
Although the rural population has been declining every year, the growth rate of consumption capacity has exceeded the rate of population decline, so the overall channel market has still been growing. However, when the rural population declines to a certain level, it will lead to a decline in the total market volume.
▉ Channel Terminalization
Urbanization, even if farmers do not move to cities, will bring about population aggregation, forming market towns.
In the past, market towns generally referred to townships. Besides being administrative divisions, when farmers gather to several thousand people, they form market towns with strong commercial functions.
The aggregation of population liberates farmers from a self-sufficient state, creating exchange, and exchange gives rise to commerce. If the gathered population is small, commerce manifests as traditional commerce, i.e., the channel form. If the population reaches a certain scale, it can manifest as modern commerce, such as hypermarkets and supermarkets.
Rural towns in the United States typically have several thousand to tens of thousands of people. In the past, they had traditional commerce, but Walmart started from rural towns in America. Because it started in rural towns, when it became the largest retail business in the U.S., most urbanites were unaware of Walmart. Walmart's headquarters is still located in the rural town where it started, with a population of only about 30,000.
(Walmart's headquarters is in Bentonville, Arkansas.)
Due to the relatively developed economies in many southern provinces, around 2000, supermarkets began to go to the countryside and villages. In northern provinces, around 2010, there was also a large-scale movement of supermarkets to the countryside and villages. I call this phenomenon 'channel terminalization.'
If previously supermarkets mainly went to the countryside, now with urbanization and the aggregation of rural populations, it is more about supermarkets entering villages.
The initial terminalization of the channel was manifested in the self-transformation of traditional grocery stores and wholesale-retail stores, changing from counter operations to open-shelf operations. Later changes mainly involved standardized supermarket chains going to the countryside or the emergence of rural chain operations.
Channel terminalization changes the business logic, transitioning from 'recommended brands' to 'preferred brands,' and the channel market severely shrinks.
Who benefits from channel terminalization?
If channel companies adjust in time, shifting from channel operations to terminal operations, they can benefit. However, most channel companies cannot do this, viewing this transformation as a major threat rather than an opportunity for transformation.
Terminal companies initially do not pay special attention to channel terminalization, after all, these terminals are still small. If most companies do not pay attention, it will ultimately be the natural extension of terminal companies to cover the market of channel terminalization.
▉ The Squeeze of Rural E-commerce
China's e-commerce has surpassed the United States and is now the largest in the world. But in the past, e-commerce mainly served the urban market (county level and above), and the obstacles in the rural market were the lack of infrastructure such as delivery and internet.
In 2014, Jack Ma proposed the concept of 'rural e-commerce.' Ma invested billions of yuan in building e-commerce platforms and shouted the slogan of 'creating another Taobao' through rural e-commerce. JD.com recently also decided to make the rural market the focus of its expansion in 2015.
Taobao, in response to the problems of rural e-commerce, proposed a 'Five Ones Project' in some regional pilots: one central station (integrated delivery and service), one broadband connection, one computer, one large screen (specially designed for rural e-commerce), and some technical personnel.
With the 'Five Ones Project' platform, e-commerce can quickly develop. Especially since farmers are more price-sensitive, and the most prominent label of e-commerce is discounts.
With the emergence of rural e-commerce, famous brands can also be bought cheaply, and the living space of traditional commerce will definitely be compressed, making it even more difficult for companies serving the channel.
▉ Channel Under Pressure
Developed countries basically do not have channel markets.
Multinational companies focus on the terminal market in China and underdeveloped countries. Even when targeting the channel market, they still use terminal products for the channel market. In fact, the Chinese approach of doing business in the channel market is very effective in underdeveloped countries.
The shrinking of the channel market in China is an irreversible trend.
In a few years, the channel market will no longer be a market of equal scale to the terminal market. In more than 10 years or even a few years, the channel market may shrink to a marginalized market. Although it may exist for a long time, its volume will continue to decrease, making it difficult to exist as an independent market with its own characteristics.
According to China's long-term population plan, the agricultural population will account for 20%. This part of the rural population will no longer mainly live in scattered settlements, so the future rural market may not necessarily be a channel market.
▉ Full Transformation and Product Upgrade
Under the channel crisis, pure channel companies must quickly adjust and shift to the terminal market and e-commerce market.
This is not just a simple adjustment of market direction, but a comprehensive adjustment in terms of products, personnel, and market strategies.
For example, if the original channel team is asked to do terminal or e-commerce, some individuals may adjust, but the entire team almost certainly cannot.
Companies that do both channel and terminal originally used channel profits to support terminal competition. This strategy may also need to be adjusted. Channel profits are declining, and the terminal is affected by e-commerce, impacting both sales and profits.
At this time, the terminal market, which was originally focused on boosting sales, may have to transform into a profit market. The main reason is that when e-commerce attracts price-sensitive consumers, the consumers left in the terminal become high-value consumers. Although terminal sales are affected, the value of consumers has increased. Companies can completely adjust their terminal product structure according to the diversion of consumers, making the terminal the main source of profits.
Whether channel-dependent companies enter the terminal market or terminal-dependent companies enhance value, they all face product adjustment issues.
Given that the original product system was 'double low' (quality at the bottom line, price at the bottom), mainly to solve the contradiction between consumers' 'consumption hunger' and 'insufficient purchasing power.' The main contradiction that marketing needs to solve now is the contradiction between 'sufficient purchasing power' and 'low product added value.' Therefore, they all need to do the terminal market with the idea of 'mainstream product upgrade.'
Can the original channel companies, when they enter the terminal market and do it with the idea of 'mainstream product upgrade,' gain consumer brand recognition?
We believe that in the past, whether channel brands or terminal brands, their brand value was nothing more than: at the same price, selling more than competitors.
Mainstream product upgrade has three typical characteristics:
? Word-of-mouth products: This is a change in quality, where consumers genuinely love it and cannot help but praise it. One try leads to continuous purchase and sincere recommendation to others.
? Charming products: This is a change in feeling, where consumers love it at first sight, from the bottom of their hearts.
? Value products: This is a change in value, with higher added value and higher gross profit.
In the face of mainstream product upgrade, channel companies and terminal companies face the same problems. Channel companies can take this opportunity to leap forward and become the new mainstream products in the terminal.
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