The Supply Chain Revolution Has Begun!

At the current stage of China's commercial development, following the trends of the US and Japan, it should be at the stage of supply chain transformation. The US supply chain revolution occurred from 1946 to 1964, and Japan's in the 1970s and 1980s. Due to the rise of the middle class, the popularization of mass consumer brands, and consumer confidence, a supply chain revolution characterized by 'brand disenchantment' has emerged. Currently, four forms of supply chain have appeared in the Chinese market: first, private labels; second, hard discount stores; third, platform distributors; and fourth, the chain-ization of BC stores. The manifestation of the supply chain revolution is direct supply from manufacturers; the essence of the supply chain revolution is de-branded super cost-performance. Some people have misconceptions about the supply chain revolution, believing that post-pandemic consumption downgrading is why consumers favor low prices, discounts, and private labels. This is wrong. The supply chain revolution gives birth to a new commercial era. Why is the supply chain revolution happening? Why is the supply chain revolution happening? Because the Chinese market already possesses the corresponding social environment. First, the impact of the internet on commerce is coming to an end. From the perspective of e-commerce, the impact of the internet on commerce has entered its final phase. Of course, some emerging e-commerce platforms are still active, such as Pinduoduo and Douyin, which saw growth in the first half of the year, but their traffic is transferred from old platforms, and their growth is largely due to the decline in Taobao's traffic. The end of internet commerce is the transformation of traditional channels and retail businesses. Second, mass brands have become widespread, and industry concentration has increased. The popularization of mass brands means that, except for long-tail industries, most FMCG industries are left with first-tier major brands, while second-, third-, and fourth-tier brands have severely shrunk. Of course, China's rural market still has second-, third-, and fourth-tier brands, but first-tier cities basically have no second- or third-tier brands, let alone fourth-tier brands. For example, 20 years ago, Coca-Cola was a high-end beverage in consumers' eyes; now Coca-Cola is one of the cheapest beverages. In this situation, second- and third-tier brands basically have no way to survive. Third, counterfeit and shoddy products can no longer survive in society. Now consumers shopping on e-commerce platforms are not afraid of buying counterfeit or shoddy products because they can return them without reason within 7 days. Recently, Banu Group compensated consumers a total of 8.354 million yuan for the adulteration of lamb rolls in its sub-brand 'Chaodao Self-Service Hotpot'. This is precisely the result of social commercial maturity. After World War II, the US experienced a baby boom from 1946 to 1964, with 76 million people born in those 18 years. This was also the period of greatest change in US retail commerce, with the emergence of general discount stores following department stores and supermarkets. It can be seen that when a country prospers to a certain extent, the form of retail commerce undergoes significant changes, because national prosperity brings consumer confidence, and China currently possesses such a social environment. Consumer maturity and confidence, with middle-class consumption becoming mainstream, are precisely the backdrop of this supply chain revolution. Against this social backdrop, the supply chain revolution has emerged in the Chinese market. The essence of the supply chain revolution is the 'disenchantment' of mass products and the pursuit of super cost-performance. When major brands become widespread, consumers realize that brands are not that special, so a trend called 'brand disenchantment' emerges, meaning the charm of brands disappears. Because mass brands have become widespread, cost-performance in mass products has become important, and consumers no longer pursue brands but instead pursue cost-performance. This is a significant shift. Of course, brand disenchantment does not mean the disappearance of brands, but rather that retailer brands cover manufacturer brands; at the same time, high-end brands rise. Therefore, another phenomenon that appears alongside private labels is brand premiumization. It's not consumption downgrading, but consumer confidence Private labels are a phenomenon of de-branding because their form is direct supply from manufacturers, meaning retailers place orders directly with factories, and factories have no marketing expenses. At the same time, because they do not go through distributor channels, there are no channel distribution costs. Why can snack discount stores sell products so cheaply? Because they directly connect with manufacturers, achieving hard discounts, i.e., absolute cost-performance. In the past, retail sales growth relied on volume growth; now most industries are slowing down. How can retail enterprises achieve growth? Only by selling more profitable products. What products are more profitable? First, high-end products; second, private labels. The reason snack discount stores took the lead this year is that the snack track has no large enterprises, consumption differences are significant, and multi-level wholesale leads to high costs, so most retail stores and distributors regard snacks and leisure foods as a major source of profit. This time, snack discount stores bypass wholesale markets and distributors, purchasing directly from manufacturers, immediately driving down prices and achieving hard discounts. Direct supply from manufacturers means goods go directly from the factory to retail stores, eliminating the distributor (B) link. This is different from e-commerce, which is B to consumer (C); the supply chain revolution is manufacturer (F) to retailer (b) to C. Do not think that the emergence of de-branding is because consumers are seeking cheapness. We have a mistaken belief that the supply chain revolution and hard discounts are due to consumption downgrading. How could it be consumption downgrading? Consumption downgrading corresponds to cheap goods, not private labels. If it were consumption downgrading, consumers would have no money, so why do snack discount stores only appear in first- and second-tier cities, not in rural markets with weaker purchasing power? Now, rural consumers still want to buy major brands, while urban consumers, after the popularization of mass brands, have confidence in private labels. Therefore, the supply chain revolution is due to consumer confidence. The product selection logic for private labels should still be based on middle-class needs, not low consumption. Otherwise, major mistakes will be made. Regarding the supply chain revolution, I have three judgments: First, China has entered a new round of supply chain revolution lasting 10 years. The previous 10-year commercial revolution was due to the emergence of the internet; now the internet commercial revolution is coming to an end, and the supply chain revolution has begun. If not for the disruption of the pandemic, this would have progressed faster. China's 10-year supply chain revolution may accomplish what took the US 90 years. China is catch-up development; either it doesn't learn, or it learns quickly. Second, the internet did not eliminate distributors, but the supply chain revolution will eliminate a batch, especially those outside first-tier brands. In the future, besides head brands, a large number of non-first-tier brands may be replaced by private labels. The impact of direct supply from manufacturers on distributors will reverse the channel role of distributors. Third, the commercial scale affected by the supply chain revolution is similar to e-commerce, exceeding about one-third of total physical retail sales. In the future, retail commerce will be roughly three-thirds: e-commerce accounts for one-third, private labels for one-third, and others for one-third. Impact of the supply chain revolution on the channel ecosystem Impact on manufacturers: My judgment is that manufacturers of brands below second-tier will accelerate their shrinkage and even disappear. Manufacturers of brands below second-tier survive because they are cheaper than others, but private labels are the retailer's own brands, with no other costs and higher cost-performance. In fact, in first-tier cities, second-tier brands are already rare, and the emergence of private labels will accelerate the disappearance of small enterprises. Of course, the rural market is different. Why have I recently emphasized that small enterprises should go high-end rather than low-end? Because in the past, the long tail of various industries in the Chinese market was at the low end, but in the future, the long tail will be at the high end. It is not realistic for large enterprises to go high-end because the high-end market volume is insufficient; large enterprises must focus on the mainstream market and upgrade the mainstream, for example, the mainstream price band for bottled water rising from 2 yuan to 3 yuan. Large enterprises should produce mainstream products at the 3 yuan price band, not 10 yuan products. Small enterprises will survive in the high-end in the future, because making low-end products is not viable; they cannot be cheaper than major brands, as cheapness requires scale. Private labels are not produced by small factories under OEM, but directly by manufacturers with scale. If small enterprises reduce quality to lower costs, they will have no way to survive. Note that the absolute cost-performance of the supply chain revolution is not absolute low price. So what is the survival path for small manufacturers in the future? First, do e-commerce; small manufacturers actually have room to survive in e-commerce. Second, build high-end brands. Third, go overseas and target less developed country markets. Impact on distributors: The impact on distributors is the greatest because private labels directly skip B and become F2b2C. First, look at private labels. Currently, private labels are mainly retailer private labels; distributor private labels are negligible. Retailer private labels include those of large KAs and alliances of small and medium-sized retailer private labels, such as Ant Alliance, which has 108 retailers, 15 private labels, and 5000 SKUs. The product categories of private labels are often mainly long-tail products. Although long-tail products account for a small proportion of distributor revenue, they are key to product portfolio profitability. As long as it is a private label, it must be directly supplied by the manufacturer, bypassing the distributor link, squeezing exactly the distributor's sales volume. Next, look at hard discount stores. Hard discount is not the common supermarket discount, but achieving absolute cost-performance without discounts. Since World War II, the US has entered the era of general hard discount stores, and most retail business models have the shadow of discount stores. For example, Walmart is a discount store. Because Western countries like the US only discount at specific times and only have one promotion method, unlike China where promotions are daily and varied. Hard discount is absolute cost-performance; general hard discount means most retail is hard discount stores. In 2023, the hard discount stores that broke out in the Chinese market were snack discount stores, also directly supplied by manufacturers, bypassing distributors. According to statistics, the impact on retailers around distributors has reached about 30%. The snack category traditionally has long channels, high gross margins, and low brand loyalty, making it an important category for distributor profitability. Next, look at platform distributors. So-called platform distributors can supply any goods that retail stores need, whether large or small, in one stop. Because many new retail formats, such as flash warehouses, require one-stop supply. Traditional distributors definitely have a channel mindset; new retailers require distributors to transform into a supply chain mindset. Recently, I visited a distributor in Xi'an who reached 1 billion yuan in scale in 6 years, which is impossible for traditional distributors. These distributors also operate under an agency system: if they can get an agency, they do first-tier; if not, they do second-tier. Because distributors can deliver to all retail stores and have a particularly wide channel, manufacturers are willing to cooperate with them. This has led a large number of distributors to transform into such platform distributors, and ultimately a county will have no more than three platform distributors, so truly large merchants will gradually emerge in the Chinese market. Finally, look at the chain-ization of BC stores. BC stores will become chain-ized, meaning they hang someone else's sign and receive centralized delivery from others. For example, cities like Changsha and Guangzhou are places where BC store chain-ization is developing faster. When I inspected Japan, I found that street retail stores of all sizes are basically FamilyMart, 7-ELEVEn, Lawson, etc., with few other brands. Under the trend of BC store chain-ization, the strategy of KA for volume and BC stores for profit, which has been the profit strategy for distributors over the past decade, has been affected. The purpose of chain-ization is still direct supply from manufacturers, because small BC stores do not have the ability to find source direct supply. It can be said that distributors are the most affected group in the entire channel chain. After the impact of the internet and the supply chain revolution, not only will market share decrease, but they also need to undergo platform transformation. If they cannot achieve platformization, they will likely disappear. Impact on retailers: Because manufacturers are starting to directly supply retail stores, China's retail formats will undergo major changes. Most retailers' product operations will have three categories: first, mass head brands; second, private labels; and third, high-end brands. Among these three categories, mass brands are not profitable because consumers are loyal to these products; private labels offer cost-performance; and high-end brands offer profit. Although consumers no longer pursue high-end in mass consumer goods and mostly turn to cost-performance, high-end brands in other categories still have a market. In the future, retail operating models will also change, such as the disappearance of shopping guides. In the past, Chinese KA stores mainly collected backend profits, meaning I rent you the space and the shelf is yours. In the future, this will not be the case. Store owners will disrupt the centralized display of brands, for example, placing private labels next to similar P&G products, 2/3 cheaper. Some consumers will buy P&G, while others will buy private labels. The cost-performance of private labels can only be generated through comparison, and at this time, KA stores earn front-end profits. Pang Donglai has long required manufacturers not to have shopping guides in stores because guides affect its private label sales and cause consumer interference at the terminal. Impact on wholesale markets: Wholesale markets will gradually disappear. What products do wholesale markets mainly distribute now? Major brands basically do not enter wholesale markets due to deep distribution; small brands or products from unknown manufacturers enter wholesale markets. In recent years, small and medium-sized enterprises in leisure foods have had the most distributors because some small manufacturers found that even if their marketing is weak, as long as they make good products and update them several times a year, they can survive in wholesale markets because costs are relatively low. In the future, with direct supply from manufacturers, wholesale markets will not be able to exist. Of course, wholesale markets like Yiwu may be exceptions. Overall, China's retail commerce cannot rely on volume growth or high profits from major brands. Therefore, there is no other way out for retail commerce to break free; it must find a high-margin operating strategy for the current era.