---
title: "The Internet Destroyed Big FMCG Companies: How to Sell Products and to Whom? | From Tier 1 to Tier 5 Cities, What Happened (Part 1)"
description: "Over the past two months, we interviewed 11 industry practitioners related to the FMCG sector, covering various functional roles in big FMCG companies and channel-related positions. This series of reports consists of three articles attempting to answer the question: 'Why has the traditional channel system of big FMCG companies collapsed?' Everything is out of control. Big companies have begun to compromise."
author: "李会娜 徐婧艾"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2016-07-14"
language: "en"
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# The Internet Destroyed Big FMCG Companies: How to Sell Products and to Whom? | From Tier 1 to Tier 5 Cities, What Happened (Part 1)

> Over the past two months, we interviewed 11 industry practitioners related to the FMCG sector, covering various functional roles in big FMCG companies and channel-related positions. This series of reports consists of three articles attempting to answer the question: 'Why has the traditional channel system of big FMCG companies collapsed?' Everything is out of control. Big companies have begun to compromise.

Over the past two months, we directly interviewed 11 practitioners related to this industry, covering various functional roles in big FMCG companies and channel-related positions. This series of reports consists of three articles attempting to answer the question: 'Why has the traditional channel system of big FMCG companies collapsed?'

Everything is out of control.

Big companies have begun to compromise.

'Ten years ago, P&G and Unilever could control store prices; they said how much to sell, and you had to sell at that price.' Even then, Wuhu had only one hypermarket, Century Mart. 'Now we need better communication, and ten years ago, you rarely saw their promotional packs, but now there are plenty.' This is the compromise big companies have made with supermarkets and hypermarkets.

In FMCG giants like P&G and Unilever, Century Mart, along with Walmart, Carrefour, and RT-Mart, are all referred to as KA, short for 'Key Accounts,' which is the most important part of the traditional channel, with no intermediate links, direct supply, and transactions.

Image source: ALY SONG/REUTERS

You probably also know that delivering products to consumers in various places relies more on a system called the distributor network. The different levels of 'gold, silver, bronze (or first, second, third)' represent different business scale capabilities.

'Now some very strong distributors will directly slam the table with manufacturers, unlike before when there was a balance among distributors. Now that business is hard, distributors will force us (manufacturers) to give up profits.' Big companies generally don't like doing this, but they have compromised with some distributors.

This compromise, or loss of 'control,' is even more evident when facing e-commerce as a new channel.

'E-commerce has its own festivals, such as 'Double 11' and '618.' If we originally planned to launch new products in August or December, e-commerce will ask us to advance the launch. Because e-commerce grows fast, we generally meet their requirements.' For big companies with strict processes, this was unimaginable in the past.

Let's make the problem clearer now: the traditional sales channel system of big companies has collapsed. This is not an exaggeration. P&G and Unilever, once 'mythical' presences in the Chinese market, relied on a stable and powerful distribution system. The core of the 'management trainee' system that many college students once aspired to was also to cultivate and reserve talent for this system.

In a private supermarket in Mianyang, Sichuan, Zhou Tian was inspecting shelves of shampoo, body wash, laundry detergent, and other daily chemical products. He chatted with the store owner while typing something into his phone. Zhou Tian is a sales manager stationed in Unilever's local office, visiting a selection of stores each week.

He has dozens of salespeople under him, all employed by Unilever but managed by distributors. Every day, these salespeople visit retail stores within their jurisdiction, mostly grocery stores, private non-chain supermarkets, and cosmetics stores ranging from 100 to 1,000 square meters. If there is a shortage, the information is recorded into the mobile ordering system, which then enters the DMS (Distributor Management System).

This system records orders from downstream retailers of distributors. The data it exports tells the distributor's warehouse staff whether to pick goods and where to distribute them. Unilever can also see this system, using the data to decide when to replenish stock—the DMS system is a tool for big companies to grasp distributor distribution and inventory, and a way to manage distributors remotely.

For some overly remote areas, salespeople adopt a 'vehicle sales' approach, where a salesperson loads goods and visits stores, replenishing on the spot if there is a shortage. In extreme cases, such as when transportation costs are too high, distributors decide whether to set up sub-warehouses based on local business volume, or find wholesalers to complete the distribution of goods in remote areas. In the latter case, distributors usually cannot obtain systematic sales data from retail terminals, and big companies often hire data research firms like Nielsen to conduct market research to obtain this sales information.

The data fed back from the distribution system determines the decisions of the sales department of big companies. If sales data in a region is low, the sales department may propose canceling the supply of certain products locally; if inventory is too high, they may consider promotional measures, sometimes including subsidies and cash rewards for distributors and retailers.

P&G (USA) distribution center, image from bizjournals.com

If you take a bottle of shampoo from a hypermarket like Walmart or Carrefour, the transaction data recorded by the POS system through the product barcode goes directly into Unilever's backend system.

All this data is known to Unilever's headquarters in Shanghai, where it is aggregated with data from various regions to decide how to organize production, whether factories need to increase capacity, and whether to hire more workers; ultimately, it becomes a performance metric.

Further away, Unilever's global headquarters in Rotterdam, Netherlands, and London, UK, also see these numbers, hoping to see profits from emerging markets. They hope that in a sluggish, declining-demand market, new highlights will emerge. As the economy slows, China becomes important to the profit and loss of many multinational companies.

This sales network, spread like capillaries across the globe, is the lifeline of big companies.

'For multinational companies to succeed in China, the first step is the distribution network,' said Maurizio Marchetti, President of Mondelez China, at an industry innovation forum in Shanghai in April this year. He came to China in 1990 and held positions at P&G, Colgate, and Cadbury, responsible for developing the China market. In his view, building the above distribution system is the first step to success in the Chinese market, taking precedence over good products, pricing, and product mix.

Through a strong distribution system, Unilever has spread its brands to more than 190 countries. Image from condomcollective.com (Note: Unilever has sold several brands in recent years; the company's current brand portfolio may differ from the image shown.)

P&G once had nearly 20% sales growth in the Chinese market 10 years ago. Mondelez (owner of Oreo) saw 4x growth in the Chinese market in 2007. Unilever also had double-digit growth in China, all benefiting from a smoothly functioning channel distribution system.

Now, news from the FMCG industry is mostly about declines, layoffs, and cuts in marketing expenses... P&G saw a decline in sales volume across all business segments in fiscal 2015, with sales down 5% year-on-year, and net income down as much as 40%; Mondelez had 'no growth' in China in 2014; Unilever's first-quarter 2016 performance briefing mentioned that growth in China was basically driven by e-commerce.

'What we first realized was the fragmentation of distribution, and at the same time, some brand values declined, resulting in an unstable price system,' Marchetti said. This is a domino effect, and the concentrated outbreak of problems may have come faster than big companies expected.

In the past two months, we directly interviewed 11 practitioners related to this industry. If you count indirect contacts like Marchetti, the number may reach around 20. They include people currently or formerly working in sales, marketing, or e-commerce departments at P&G or Unilever, some are distributors, some are sales management personnel in hypermarket channels, and some are from e-commerce and other functional roles related to the channel system of big companies. We also made a trip to Xuancheng, Anhui, to see how far big companies have gone in channel sinking in fourth- and fifth-tier cities.

The people we interviewed know what is happening, and in our exchanges with them, we felt more confusion, and sometimes a sense of powerlessness. Most of them requested anonymity or that no information pointing to their employer be disclosed. As requested by the interviewees, most names in the article are pseudonyms or omitted.

We finally summarized these exchanges into a series. In this series of reports, we attempt to answer the following questions:

  * After the channels through which consumers obtain information changed, how did big companies become confused?
  * Why are their products no longer popular?
  * When first- and second-tier markets are saturated, what do they encounter when they try to enter third- and fourth-tier markets?
  * Why do distributors no longer trust them, and even slam the table with them?
  * Advertising spending hasn't decreased, so why aren't sales increasing?
  * What does e-commerce mean to them? Is it the future of the industry?

All these questions attempt to answer 'why the traditional channels of big companies collapse.' It may not be the whole picture, but it is enough to reflect industry problems. Of course, the collapse of the channel system in cities from tier 1 to tier 5 (partially or not yet reached) in China did not happen overnight. You can see from this series how the process from quantitative change to qualitative change occurred.

This is the first article in the series. The other two will also be published within this week.

'Traditional' is actually defined in contrast to 'internet,' another way of saying 'offline' and 'online.' Although the people we interviewed do not think the internet is the whole problem, when asked to point to the cause of change, they all point to the internet.

Let's start with 'how the internet destroyed their confidence.'

The more big companies like to mention the internet now, the more it shows their panic and anxiety.

The destructive force of the standard, rigorous processes of the past many years is widely attributed to the internet, more precisely, e-commerce. If there were no e-commerce—they would make such an assumption—big companies could systematically replicate the channel system from the US to China, from first- and second-tier cities to third-, fourth-, and fifth-tier cities, thereby continuously gaining emerging markets and achieving growth.

However, this basic business law has been broken, and the internet has thrown them into disarray. In the talent pool and database systems of the sales systems of big companies over the past 20 years, the internet is missing, or at least not valued.

Take the simplest example: 'For instance, whether it's a 199 yuan minus 99, or the first 100 orders free, it may cost us the same, but sales can be very different,' Li Leihan, who works at Unilever, told Curiosity Daily. 'We need Tmall to tell us which promotional mechanism works better. They have a lot of data.'

In fact, big companies have never lacked data; it is said they spend hundreds of millions of yuan annually on data collection and analysis. Compared to being at a loss on how to do promotions on e-commerce, what's worse is that they feel consumers have become unpredictable.

Unilever and Alibaba reached a strategic cooperation last year. Image (cropped) from socialbrandwatch.com/Tech News Today

At an industry summit held by Alibaba in September last year, Matthew Price, CEO of P&G Greater China, who attended, said their main consumers in the Chinese market are young white-collar workers who are also expectant mothers. Their consumption situation is far more complex than the US domestic market.

The complexity is due to the diversity of consumption, which conflicts with the mass-market products of FMCG companies. The more fundamental issue behind this is that the channels through which consumers obtain information have changed.

Supermarkets and hypermarkets, including Walmart, RT-Mart, and Watsons, once played the role of 'consumption popularizers.' Many people went to these places not only to replenish daily necessities but also to see 'what's different.' Some curious people would try switching products. In such scenarios, the product's placement on the shelf, packaging color, and promotional offers became the main purchase decision factors.

This is why FMCG products are defined as 'impulse' purchases, and why companies like P&G and Unilever are known for 'marketing excellence,' spending as the world's first and second largest advertisers. Even after cutting marketing expenses, P&G's global marketing spending last year was still as high as $8.2 billion.

Within FMCG companies, there is a 'consumer truth model.' The traditional consumption pattern is: discover consumers (see ads)—consumers buy products offline—consumers use products.

Li Leihan told us that their past marketing activity process was generally: buy TV ad slots half a year in advance; in the following months, the marketing department would be responsible for designing and producing materials (such as shelves, displays, promotional cards), ensuring all visual materials align with brand positioning; communication with the sales department would also begin at this time, with the latter obtaining all details about the product from the marketing department to ensure accurate and consistent communication of product selling points when distributing to national supermarket buyers and distributors; finally, the two departments jointly plan the budget to ensure good shelf placement when the product launches at retail.

Pantene TV ad screenshot

Big companies once used 'TV ads + supermarkets/hypermarkets' to capture a large consumer group. In their marketing experience, the consumer's past consumption path was predictable.

But now it has failed; the consumption behavior of young consumers has become irregular. They can obtain various consumption information when traveling abroad or on business trips, on promotional pages of e-commerce sites, in featured recommendations of boutique shopping apps or cross-border shopping sites, or even from friends' 'recommendations.' This is accompanied by consumption upgrading.

The ultimate reason for purchase is even more casual; it could be packaging, novelty, or even just a feeling. But FMCG companies, including P&G, have always been good at 'functional appeals.'

'Well, consumers are willing to treat themselves better. When I see it, I want to satisfy curiosity and possessiveness. We find that whether it's bath products or cleaning supplies, consumers now pay more attention to opening the bottle cap and having a fragrance and fantasy, although it has no effect on function. We also market this environment,' a brand manager at Unilever told Curiosity Daily. 'Now is the screen era; visual stimulation is higher than any other stimulation. The five senses are connected. You can design visual scenes on e-commerce screens to be fragrant, for example, using VR.' You can find some reason why big companies are now keen on various technological attempts.

Video ad visual stimulation shifted to print

Big companies have also adjusted the 'consumer truth model': consumers learn information online—enter e-commerce stores to shop—receive products—use products and provide feedback. But they also know that each step of this path may be interrupted.

However, they cannot ignore the consumption power released by e-commerce platforms. Unilever rarely publishes business data for China separately, but in its 2015 financial report, the company specifically mentioned the development of e-commerce in China, stating that e-commerce sales in China accounted for 5% of Unilever China's total sales, which is 3 percentage points higher than the company's overall performance in the global e-commerce market.

On e-commerce platforms, 'consumers aged 18 to 24 account for 64% of sales, and those aged 25 to 29 account for 20%.' This is data provided by Xu Youjie, Vice President of Communications and Public Affairs at P&G Greater China, in an interview with Curiosity Daily at the end of last year.

'Now all ads, whether with location base (national or regional), must guide online, rarely offline,' the aforementioned Unilever brand manager told Curiosity Daily. 'Unilever's channel marketing has been around for over 20 years. The marketing department is the bridge connecting e-commerce and offline, without favoring one over the other.'

But she quickly added, 'The marketing department also delegates some authority to the e-commerce department. Originally, for offline, we had 100% control over the image; we decided, and you fully executed. For e-commerce, we have dynamic communication with the e-commerce department, letting them try, and our coordination speed is much higher than offline.'

What also affects the marketing department is budget allocation. 'E-commerce is not only a sales channel but also a media channel. Previously, you advertised on Sina, then linked to Tmall and JD.com. Now you directly advertise on JD.com and Tmall. E-commerce has become a traffic entry point, so companies need to create a set of things for e-commerce,' Li Leihan said.

E-commerce as a media channel also gives opportunities to imported and niche brands

Liu Yiman, Director of Tmall Overseas Direct Operations, first felt big companies' emphasis on e-commerce starting in 2013. 'The person connecting with Alibaba changed from the China CEO to the global CEO. Companies including P&G, Unilever, and Nestle all came to discuss strategic cooperation with us.'

In fact, at the end of 2008, when there was no Tmall yet and only Taobao Mall, companies like P&G had communicated with Taobao, 'but at that time, no one knew what the internet was, and many didn't think the internet was a priority. There were also communication issues between local Chinese teams and global teams, but they thought it was the future.'

But for big companies with large structures and very stable internal systems and processes, the internet model means innovation, but also significant risk and trial-and-error costs. Any industry giant is particularly cautious when facing uncertainty, especially when performance data is still good. 'Initially, those who contacted us were either digital marketing people, or marketing or sales department people, or in any case, a person responsible for a very small innovative business. This person had very limited resources and influence, more execution-oriented, not decision-makers,' Liu Yiman said.

Although P&G, Unilever, and others now like to tout their achievements in e-commerce, it looks more like Tmall's 'battle record'—the internet's disruption of yet another traditional industry. Big companies can only choose to cooperate.

And FMCG companies' understanding of e-commerce is no longer just a sales platform supplementing offline channels, but also a platform for innovation and brand building. The latter even takes higher priority when big companies cooperate with e-commerce platforms. 'Not only old brands like Head & Shoulders and Rejoice, but also new products. In the past, from R&D to distribution, it might take 2 to 3 years to introduce to China. Now we work with them on new product launch strategies, marketing, and execution plans, and can reach consumers with a new product in 1 to 2 weeks,' Liu Yiman said.

This sounds like a huge temptation, and it's no wonder that P&G launched 17 imported products at once on the Juhuasuan platform in April this year. In fact, more and more FMCG companies are putting new product launches on e-commerce first.

P&G's 'Any Door' marketing during this year's Juhuasuan launch event

'But there are more products on e-commerce than in supermarkets, and it's harder to gain sustained consumer attention. You can buy a banner ad slot at launch, but what about after?' Li Leihan sometimes questions his own work. 'The company is also making various attempts internally, but it always feels like scratching the surface. Integrating front-end product development with back-end marketing on e-commerce, I think this tug-of-war is very difficult.'

Additionally, big companies realize that some third- and fourth-tier cities are not where e-commerce is strong. 'Consumers there may be used to buying clothes on Taobao, but daily necessities are still offline. E-commerce's reach to consumers in this category also takes time,' Zhou Tian said.

But these doubts are not enough to hinder senior management's emphasis on e-commerce. At P&G China, the e-commerce department often promotes experienced excellent employees from the sales department. In the view of one P&G employee, moving from the sales department responsible for traditional channels to the e-commerce department 'is actually a promotion.'

Many people chose to leave. At the end of June this year, Lin Xiaohai, President of P&G Greater China Sales Department, announced his departure to join Alibaba. This is the third time in the past 4 years that P&G China has seen senior sales department changes. In July last year, Xiong Qingyun, former President of P&G China Beauty Care, left to join JD.com. She was called the highest-ranking local Chinese in P&G globally. Although recent news suggests she faced adaptation issues at JD.com and was demoted.

'When our sales director left in 2014, we all felt that the big hole had finally burst,' Dong Rina, who joined Unilever in 2012, told us. She didn't specify what the big hole was. 'We all knew why sales were declining: system issues, inventory pressure, professional managers' rigid thinking...'

Dong Rina, who was determined to enter an FMCG company upon graduation, left Unilever in 2015. 'It was a very good start for a career, but there were too many negative things in the work environment.' Li Leihan, while feeling anxious, also had thoughts of leaving.

The loss of core strength and the departure of young talent representing the company's future all show that big companies have no confidence in turning things around. The collective flow of talent to internet companies is always seen as pointing to the industry's future.

Maurizio Marchetti, President of Mondelez China, described the successful path of multinational companies in China in the 1990s: set up representative offices in Beijing, Shanghai, and Guangzhou—expand to other cities—recruit the best graduates from China's top universities—find distributors—small stores stock goods—professional managers sent to China learn Chinese—get promoted—repeat.

The internet has indeed broken this cycle, and the trend seems irreversible. 'Everyone has gone from initially rejecting e-commerce to gradually accepting it, and even wanting to use e-commerce or mobile internet technologies to change the interaction between physical stores and consumers. I think this is a good thing. The ultimate goal is still to find consumers,' said Wu Kun, General Manager of Chando. 'E-commerce has created a cheap image, but besides price, what added value is there online? This is what the entire industry is exploring now.'

'Stabilize the foundation to find new channels; FMCG companies have always done this. Offline is the foundation; doing e-commerce doesn't mean abandoning the foundation,' an employee of P&G's e-commerce department said.

What they need now is how to rebuild confidence.

_(As requested by interviewees, Zhou Tian, Li Leihan, and Dong Rina are pseudonyms, and geographic names have been processed)_

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