The More Down-Market a Retailer Can Go, the Stronger Its Competitiveness

Click 'Read Original' for details. Source: Notesman (ID: Notesman) Compiler: Jia Qi Content Source: From June 27-29, 2019, at the opening module of the Unbounded Consumption Innovation Camp Phase II, co-hosted by Shougang Fund's Participating Academy and Hongzhang Capital, Weng Yinuo, founding partner of Hongzhang Capital, gave a wonderful sharing on 'Philosophical Thinking on Unbounded Consumption Business.' Notesman, as a partner, published this with authorization from the organizer and the speaker. Our understanding of the broader consumer sector can be divided into three parts: retail chains (traffic), quality supply chains and brand manufacturing, and technology and services. These three are interconnected, interdependent, and synergistic: First, retail chains (traffic), such as regional supermarkets and e-commerce social platforms, are essentially battles for traffic. Second, quality supply chain manufacturing and new brands. Third, technology and services, including 2C and 2B services. Currently, 2B services present more realistic and reliable opportunities. Retail is constructed from two parts:

First, creating the optimal scenario to meet consumers' ever-changing needs, also known as capturing traffic; second, continuously improving supply chain efficiency. These two parts constitute the essence of retail. The Evolution of Traffic In early times, urbanization was low, and the most primitive form of traffic was the market fair. For example, at 2 PM on a Friday afternoon, we would exchange goods under the old locust tree at the village entrance. This dissemination of information and exchange specified time and place, and these two specifications formed the entry point for traffic. Later, this method became inefficient, so a fixed venue was built where people could exchange goods. This was the earliest form of department stores, which solidified the traffic of people seeking goods. At this stage, materials were generally scarce, and people had a strong motivation to seek out scenarios to obtain goods. Business was simple because demand was high and supply was insufficient. As it evolved further, department stores declined, giving rise to more specialized retail, which moved many categories out of department stores into independent specialized chain formats. Academically, this is called category killers. Then, specialized chains took categories out of department stores, causing department stores' customer acquisition ability to decline. Most department stores were not directly operated but were 'second landlord' models, only providing traffic diversion without engaging in operations, so they began to decline. Further, the entire retail industry developed toward two ends: One end is toward very large scale. Large shopping malls actually construct a super-sized scenario that houses various forms of business, and to attract traffic, they make the entire mall extremely large. We even joke that shopping malls would love to include hospitals, ice rinks, and zoos. The other end is toward precise customer acquisition. The rapid growth of convenience stores in first-tier cities is a sign. The convenience store format is not a low-end format but a very advanced one. The logic behind it is that consumers are willing to pay a premium for convenience; they don't want to travel far to hypermarkets, so convenience stores typically have higher gross margins than supermarkets. B2C e-commerce follows the retail logic of people, scene, and goods, linking people and goods through the virtualization of the intermediate 'scene.' The evolution of B2C e-commerce is a gradual breakthrough of categories, continuously adding categories to form a centralized platform. But centralization implies authority, and later, traffic costs inevitably rise, making it very difficult to acquire new users. The development after B2C is new retail, attempting to achieve two-way traffic and online-offline integration. B2C e-commerce customer acquisition is increasingly expensive, while offline customer acquisition costs are low (especially for certain dining formats that attract traffic). So the idea is to set up front warehouses. By opening more front warehouses, we can meet LBS (location-based services) and provide delivery-to-home services. Delivery-to-home services satisfy a very important human need—laziness. Laziness is the source of commercial evolution. Some consumers in first-tier cities have become increasingly homebound. They know there's a convenience store downstairs but are unwilling to go down to buy; they'd rather pay extra to have it delivered. In this way, 'lazy' people will trust the platform, form consumption habits, and complete repeat purchases. The ultimate human need is instant gratification; consumer desires are insatiable. We thought three-day delivery was tolerable, but after experiencing one-day delivery, three-day delivery becomes absolutely unacceptable. What is business really doing? It's trying to find the driving force of human nature. Four Types of Huge Wealth Accumulation Globally, in modern history, we can roughly divide businesses that accumulate huge wealth into four categories. 1. Resource-based businesses For example, mines are resource-based, real estate is resource-based, and many Hong Kong tycoons come from real estate. There are also oil magnates and steel magnates, all resource-based. 2. Finance Warren Buffett's Berkshire Hathaway is essentially an insurance company. Many people want to learn from Buffett, but I think most can't because his investment philosophy is supported by long-term capital. The Morgan family also built wealth through financial intermediary services, banking, and insurance. 3. Retail platform businesses In modern history, many of the richest people in various countries, or those ranked in the top few, are retailers. Japan's richest person basically reflects the evolution of Japanese retail, from the earliest 'department stores' to 'supermarkets' to '7-Eleven convenience stores,' and now to 'Uniqlo.' Germany's richest person, ALDI, has a very large retail platform; JD.com's core is also retail. 4. Virtual social platforms Google, Baidu, and Facebook don't sell physical goods but connect a large number of interacting people, forming super value for the enterprise. What is the core word in these businesses? Super connection. What is the purpose of our business? The famous management scholar Peter Drucker said in his book 'The Practice of Management': The purpose of our business is to create your customers. That means connecting more users because the more connections, the greater the organization's value. So, even with the same 1 yuan net profit, different business models mean completely different values from an investor's perspective. Therefore, when choosing partners, besides earning absolute financial amounts, we must also consider whether we connect more users. Many so-called internet thinking hopes to build barriers by burning money in the early stage, ultimately forming sticky active users. Especially in investment, if you can burn money to create long-term active users, it's valuable. This explains some of the internet's valuation logic, which looks not only at the cash flow value of the business but also at the dimension of active user connections. Of course, no matter how it changes, in the absolute long run, all businesses must look at cash flow. That is, eventually, even a powerful company like Tencent can have its P/E ratio calculated. Retail Platform Type 1. Seizing consumer time Doing business is about seizing consumers' time. Break down a person's daily time for work, life, and study. For example, how much time is spent brushing teeth in the morning? The products related to this time are cups, toothpaste, and toothbrushes. The longer a category occupies consumer time, the greater its theoretical value. We particularly like investing in food because eating is the lowest-cost business for instant gratification—it satisfies the desire for food and drink. Moreover, eating occupies a lot of time each day, so food is a particularly good business. 2. How to reduce the second cost Generally, consumers don't want to pay more. If there's something free with delivery, they'll choose it. So, retail has several important KPIs: 1. Traffic capture: where people are Broadly, there are three scenarios: at home, at work, and at play. Reflecting on the scenario side, there are the following situations: Community is at home, work is the business scenario, and play includes tourism and shopping mall scenarios. So a large number of retail opportunities mainly lie in the repurchase part of community commerce. 2. Conversion rate: purchasing Once people come, how to use the scenario to build trust and form conversion is a very important ratio in retail. E-commerce has conversion rates, and offline has store visit rates and conversion rates. 3. Average transaction value: determined by category Some categories combine average transaction value and repurchase. Very expensive items are often purchased less frequently, but high frequency means high turnover, making it hard to increase gross margins. To capture traffic, a lot of retail business is still very basic. Supermarkets, for example, are a super track because they are daily necessities. These basic categories actually serve consumers better, and traffic is driven by high-frequency categories. Whether investors or industrial capital, a lot of layout is still to capture more traffic users. Only with enough connections will your platform be large. So, people choose high-frequency, low-margin businesses to select retail models. Because the purpose of retail is to form a balance of these four things. Ultimately, it forms consumer trust, which is also the core of the brand: managing consumer trust. Supply Chain Efficiency The supply chain has two parts: One is logistics efficiency: how to deliver goods to the scenario at low cost;

One is product efficiency: how to form differentiated core. In capturing traffic, Chinese business is full of tricks and plays that are world-leading. But in product supply chains, we still have a long way to go. Most retailers don't understand products, categories, or brands, so there are many opportunities. 1. Product scenarios From the format perspective, the overall social retail landscape is divided into supermarkets as a major category, department stores as a major category, pharmacy retail as a small category, and daily necessities, which have developed rapidly in recent years but are still a small category in total scale; it's a retail format subdivided from department stores. But in reality, various models coexist. China is a huge layered world. Our first-tier, second-tier, and third- and fourth-tier cities are almost different consumption eras. Retail studies consumers by studying population structure and consumption behavior. Overall, China and Japan are very similar: both experienced wars, then population growth and prosperity, and the social values evolved from collectivism (large families) to increasing independence (small families), further evolving to single, unmarried, and childless. Therefore, given the high sensitivity of consumption behavior to population structure, and the possible severe aging in first- and second-tier cities in the next 10 years, business design must pay attention to the needs and changes of the aging era. Consumers are greedy; their consumption motives are basically 'more, faster, better, cheaper,' but these four words are contradictory—a paradox. Consumers' needs and motives can change greatly in different scenarios. An advanced retail format can hardly meet diverse consumption needs at once. But the world is diverse. I believe in multiple retail business philosophies. As long as you reach a certain scale, different scenarios and meeting consumer needs can coexist. Offline retailers need to find the maximum possibility of profit, requiring a balance between cost and efficiency. The larger the format, the more stable its model; the smaller the format, the more unstable its single-store model because it has more variables that can quickly affect cost efficiency. But the advantage of small formats is rapid replication, while large formats are difficult to site and require heavy investment. Each has advantages and disadvantages. 2. Contact with consumers How to contact consumers? There are two ways: one is more precise segmentation, such as fresh food; the other is super cost-performance. 1. Monopoly The battle for absolute monopoly of traffic in the same region. The supply chain makes money from monopoly. Only by becoming the absolute leader in a city can you optimize your supply chain and form an advantage. Retail is a cruel business. In absolute regional competition, the winner takes all. So you don't need to be that excellent; you just need to be better than your next-door neighbor. That's retail. 2. Down-market The judgment of opportunities in China's consumer industry is called the down-market. You can look at Shanghai and Beijing, but if you really want to make money, you need to go to the down-market. Traditional old retail doesn't know when consumers bought what. New retail attempts to digitize offline store traffic, retain it, better convert it into members, reach them, and also encourage fission, new customer acquisition, and repurchase, turning traffic into member assets and data assets. New retail is about building a private domain traffic pool, retaining member data, and then operating it. New retail models like Hema are a choice when B2C e-commerce traffic declines. They turn front warehouses into large stores covering a three-kilometer radius to meet members' delivery-to-home services. This is an exploration of new retail, trying to operate both offline scenarios and delivery services centered on it. Building membership and private domain traffic pools is the same logic. The only difference is the category for customer acquisition, but the overall logic is very similar. Luckin Coffee tries to build a membership pool with coffee. The scenario it builds hopes to use coffee, a highly sticky category, to convert more active users. So, retail is all about traffic, conversion rate, and repurchase. 3. Various changes in retail formats Department stores are becoming less efficient because they are diverted by larger formats, so they are gradually moving toward shopping mall-ization. Chain discount supermarkets are becoming more efficient. Models like ALDI believe 'less is more' and that giving consumers too many choices reduces their purchase decisions (choice phobia). B2C e-commerce, after traffic and customer acquisition costs rise, gave rise to social e-commerce. But no matter the platform or brand, they all manage consumer trust. Ten years ago, social e-commerce was centralized media. If you could afford CCTV, you could quickly build awareness and spread the brand. This was the 'heaven and earth' approach, quickly forming trust.

But today, trust in social e-commerce is trust in your social circle. It reduces trust costs, so it grows very fast.

International supply chain efficiency is also higher than other physical channels. For example, Germany's ALDI has single-item efficiency far exceeding Walmart. Walmart hypermarkets need 20,000-30,000 SKUs, while ALDI concentrates on 800-1,300 SKUs (stock keeping units). As mentioned earlier, convenience stores are a format that develops rapidly after per capita income reaches a certain level globally. Its core is actually an upgraded version of the traditional mom-and-pop store. The key is proximity to consumers and meeting instant needs. In convenience store categories, tobacco can account for about 30%. Convenience stores are no longer a simple business; they will definitely become a widely spread format, but they have requirements for per capita income. At around $10,000, this format is actually a very advanced one. The more aging a society, the less people want to travel far. An aging society also includes young people (who have lost the ability to cook). So, convenience stores become a solution to life's problems. Food is increasingly moving toward semi-finished products that can be heated and eaten. This form is already very large and mature in Japan. Another direction is fresh food, like sushi rolls and various braised foods, instant foods. In fact, retail is increasingly moving toward dining. The boundary between retail and dining is blurring. Retail is operating dining, and dining is trying to retail-ize. Regional retailers. For Chinese people, eating is too complex; each place has very different foods. American and European supermarkets have very similar category mixes, but Chinese supermarkets are different; each place is very localized. If we talk about size, how to expand to county-level markets, merge and acquire, and continuously form supply chain efficiency is a big deal. So, the more down-market a retailer can go, the stronger its competitiveness. Community fresh food. Many interesting business models have emerged in the fresh food competition. For example, front warehouse models, community platform models, including unmanned retail, are developing rapidly, but many haven't formed scale validation. Community demand certainly exists. The high-density front warehouse for delivery-to-home services is actually a 'dark store' model, without a physical scenario. It acquires customers through operations and provides delivery services to meet consumers' last-mile instant needs. The categories are basically the same as physical stores, mainly operating three meals a day. But the problem with this model is that many front warehouses still have sorting, packaging, and delivery, making the final delivery cost very high. Community group buying. This turns small B into group leaders, using social tools to hold these users, interact with them, manage and convert consumers, and centralize supply chain services for small B. Yunji started with beauty products and has strong supply chain in beauty;

Global Catcher started with food, so it initially cut into the food supply chain;

Ai Kucun cuts into the clothing, shoes, and hats supply chain. So we can see that S2B2C has been very successful in different sub-categories. Because fresh food is the category with the highest loss and the greatest operational pressure and difficulty. Due to many non-standard items, delivery requirements and experience requirements are very high. 4. SPA retail model There is an independent retail format called the SPA model (specialty retailer), which does a lot of product combination but doesn't simply collect goods from various brands into a collection store. Instead, it forms products with the supply chain itself, like MUJI and Japan's NITORI. This model greatly shortens the supply chain, more effectively linking customers and suppliers to meet consumer needs. Retailers have entered a more extreme supply chain era. Retail can be split into a store or scenario company and a supply chain company, but ultimately, the supply chain company makes the money, not the store company. Costco is an extreme competition. It doesn't make a margin on goods at the store level but compresses the supply chain with huge scale to make money. So, the retail end is increasingly dominated by supply chain companies, including platform companies and S2B2C, which are essentially supply chain companies. 5. Manufacturing retail We want to talk about Private label, which is the retailer's own brand. Its overall growth rate exceeds that of brand companies. In the game between brand and traffic, traffic has the advantage. That is, an extreme retailer's long-term development not only captures traffic but also moves toward manufacturing in the product supply chain to gain more profit. Retailers not only make a margin on goods but also extract profit from their upstream. China's retail private label share is only about 5%, but Europe's retail private label share has exceeded 50%. For example, Japan's 7-Eleven's PB products have exceeded 60%. The various brands you see are made by retailers' factories or partners. Retail is increasingly moving toward manufacturing, even flexible manufacturing. New retail actually uses internet traffic to try to connect online and offline. Offline traffic acquisition is a strategy, but online traffic acquisition is becoming increasingly difficult. 6. Future landscape China has already seen a phenomenon: the defeat of many foreign retail formats. Except for Walmart, basically many foreign retail brands in China have been defeated by local retailers. In operating consumers, local retailers definitely understand consumers better. And China is so large. Can a regional leader easily defeat the local leading enterprise in another place? The answer is no; it will definitely be very difficult. How to integrate in the future? We proposed a possible approach: capital + supply chain integration. Capital is simple—it's a matter of buying and selling—but how to integrate the supply chain? The answer is supply chain empowerment. When your retail procurement scale reaches a certain level, you can form procurement alliances with more retailers. When you join my procurement system, I help you increase gross margins. So, the core of retail is the integration of technology and supply chain, opening up data, doing more technology empowerment, and improving efficiency. Integrating supply chains for efficiency and technology-driven will be a major trend in the future landscape. So, from retail chain operations to business models to many new retail opportunities, essentially two things haven't changed: one is using traffic and scenarios to meet consumer changes; the other is continuously improving supply chain efficiency. Don't completely separate these two things because they are actually a positive cycle and complementary process: Capture traffic, then you can improve the supply chain; supply chain improvement helps you capture traffic better; then it returns to supply chain improvement, further enhancing your ability to compete for users, finally evolving into an extremely excellent retail enterprise.