A few days ago, I had a conversation with a founder who asked me whether I had seen any promising new FMCG brands this year. I said that I hadn't seen a single one that had successfully launched this year; instead, some white-label products seemed to be doing okay. Indeed, apart from brands that caught the tail end of the online dividend two years ago and built some basic scale, there have been almost no FMCG brands that have started up well from the end of last year to the beginning of this year. Over the past year, 'branding' in China has suffered a catastrophic blow. The seeds of branding that emerged in previous years have not only been extinguished but have also given way to a trend of 'de-branding'.

If you recall, a few years ago there was a prevailing notion that Pinduoduo was killing Chinese brands, and many people lamented this. Pinduoduo's traffic mechanisms and algorithms led to intense competition among suppliers, rampant counterfeit and white-label products, the demise of national brands, and consumers focusing solely on price. But why do consumers immediately abandon high-premium brands when low-priced white-label products appear? Moreover, with the rise of discount channels in recent years, why do low-priced products occupy a better position compared to big brands? Why is this happening?

First, we need to understand what so-called FMCG brands are and the origins of brand theory. In today's China, interpretations of brands vary widely: academia, consulting, and business circles each have their own understanding. But tracing back, all brand theories essentially originated in the United States. Why the U.S.? After the war, the American commodity economy began to flourish. As a new nation, compared to traditional continental Europe, it was far inferior in both culture and historical heritage. First, from any dimension, the U.S. needed a system to export its values and culture. As the purest capitalist country, the goods and products it could export overseas were endowed with infinite missions. Second, enterprises and brands also needed a logic to increase the premium of their products. In short, from product to brand, the U.S. needed a theory to fully construct the underlying logic of its commodity economy. The U.S. needed to explain why its brands commanded high premiums, so scholars from academia and consulting emerged to explore and delve into the deeper connotations of brands. Even in the 1980s, brand equity theory emerged, explaining why brands are assets, and organizations like Interbrand were established to evaluate global brand value.

But why is it that in today's China, brands still struggle to become assets? Why, after years of talking about transforming from 'Made in China' to 'Created in China' and then to 'Chinese brands,' are we now seeing a trend of 'de-branding'? Chinese brands are reverting to the old path of 'Made in China,' and the market is flooded with low-priced white-label products. Why is this happening? Let me first share our understanding of brands.

A brand is like an hourglass. In our view, a brand is the final result of a combination of comprehensive elements that interact with each other. This includes four key elements: supply chain, product, marketing, and channel. A brand is the result of the combined effects of supply chain, product, marketing, and channel. Two points need attention here: first, it is the result of multiple core key elements working together; second, a brand is a result, not an action. The establishment of a brand is a comprehensive outcome of a series of corporate actions. For example, the taste and quality of a product determine consumer word-of-mouth and even form consumer mindset; the scarcity of the supply chain determines the scarcity of the product, and scarce products are more likely to achieve differentiation; marketing actions help accelerate the formation of consumer mindset; and the fit of the channel affects the accessibility of the target consumer group and their perception of the product. In short, whether it's a delicious product or marketing campaigns, they are not the brand itself, nor the entirety of the brand, but they all play crucial roles in brand building. More broadly, a brand is even related to the company's finance and organization, because the company's scale also determines whether a brand can be established. For example, below 1 billion yuan in scale, it's generally hard to consider there is brand power, but when the scale exceeds 10 billion or even tens of billions, consumer trust and endorsement are further strengthened. Therefore, we use an analogy: the formation of brand equity is like an hourglass. The four elements—supply chain, product, marketing, and channel—work together, and over time and space, gradually settle to form a brand. At the same time, only after a certain period of time and when the enterprise reaches a certain scale can brand power be manifested, such as some manifestations of brand power: name-based purchasing, pricing power, and mental pre-sale. Just like the sand accumulating at the bottom of the hourglass, the deeper it gets, the stronger the brand power.

It should be noted that among the four elements—supply chain, product, marketing, and channel—two are highly related to the external environment: supply chain and channel. The scarcity of the supply chain can help form a brand, and the stability and fit of the channel can also help form a brand. Conversely, the homogenization and involution of the supply chain, and the rapid changes and iterations of channels, can also affect the accumulation and construction of brand equity. Therefore, the formation of a brand requires a certain soil. It needs a stable state of channels and supply chain, and over a certain period and cycle, it eventually settles into a brand. We also believe that because brand theory originated in the U.S., all brand research theories have entered a narrow research area, focusing only on product and marketing. Whether it's brand image theory, symbol theory, brand positioning theory, brand equity theory, brand personality theory, brand relationship theory, or brand community theory, this is because the U.S. domestic market has maintained a stable channel and supply chain environment.

But as we said, supply chain and channel are also the foundation for establishing a brand. Conversely, changes in supply chain and channel will fundamentally affect the logic of brand establishment. For example, if the supply chain lacks a certain degree of scarcity, or if the industry is in a state of severe overcapacity, products are easily homogenized, and the establishment of premium brands almost lacks a foundation. Another example is in the game between channels and brands: if channels have always been in a strong position, the space for brand establishment will be compressed very narrowly. In contrast, the logic of American brands can be established based on a foundation: in the U.S., brands are always above channels, or in all historical development stages, American society has shown protection for its national brands, and brands and channels have maintained a very good symbiotic relationship. This was also evident in the early relationship between Walmart and Procter & Gamble. At the same time, because the cost of the U.S. domestic supply chain is relatively high, brands can maintain a healthy pricing space. Why do all American brand studies focus solely on product and marketing? Because their brand building is in a benign environment where supply chain and channels are relatively non-competitive. So, if you've talked to some food and beverage startup teams in North America, they can almost 'purely' focus all their energy on the product, because their channel and supply chain environment is relatively stable and standardized.

But China is in a completely different environment, and building a brand in China is relatively more difficult! Many Chinese founders harbor brand dreams, but not every soil is suitable for brand building, or the difficulty is relatively high. The establishment of a brand requires two social soils: first, a relatively non-competitive supply chain environment; second, a relatively stable channel structure that maintains a good symbiotic relationship with the brand side. However, in the current market environment, on the one hand, the supply chain is extremely competitive, making it difficult to give you space to make premium products; on the other hand, channels change rapidly and are too strong. This forces most entrepreneurs to spend a lot of energy on 'how should I survive?' constantly negotiating with manufacturers, competing with low-priced competitors, and dealing with powerful channels.

This is particularly evident in traditional FMCG sectors such as food and beverages and daily chemicals. Because consumers in these categories place more emphasis on the basic functional attributes of products, they are most susceptible to external environmental influences from channels and supply chain. This is because channel operators and low-cost suppliers can easily replace your brand.

The future transformation of discount channels will further profoundly affect the survival space of brands. Why do I say this? Brands are generally divided into Private Label and National Brands. The difference, simply put, is that private labels are brands controlled by the channel side; national brands are products under large FMCG companies that, through years of brand building, have deep consumer awareness and cannot be replaced by channels. Therefore, you might now understand that the share battle between private labels and national brands is precisely the behind-the-scenes war between retailers and brand owners. In fact, the battle between private labels and national brands has been ongoing. It's just that this is only just beginning in China. In Europe, the share of private labels and national brands in the FMCG sector is split 50-50, while in the U.S., it's 20-80. This difference in ratio can be understood as the relative strength of channels versus brands. (Data source: IRI)

Why do American national brands fare relatively better than their European counterparts? The core reason is that American society as a whole protects its national brands, allowing brands and channels to maintain a very good symbiotic relationship. The simplest logic: would the U.S. allow its proud national brands like Coca-Cola, Procter & Gamble, Heinz, and Campbell's, which represent American culture and spirit, to become retailers' private labels? The answer is no. In fact, the entire American business society has done a lot of work to protect these national brands in order to maintain the symbiotic relationship between brands and channels. And why do European FMCG brands have less space compared to American companies? Because European channels are relatively stronger, especially in some Nordic countries where the penetration of discount channels is extremely high, and consumers are relatively rational without excessive brand obsession. Therefore, on the shelves of discount channels in these countries, you can only see a few national brands with deep consumer mindshare, such as Coca-Cola and Henkel, while almost everything else is private label.

But looking at our market, first, the downstream is extremely competitive. A large number of retail channel companies, in order to compete for the existing market, further squeeze the space of brand owners and factories. Under this premise, the upstream supply chain will also become increasingly competitive. In China, the trend of private labels competing with national brands has already begun, but it is manifested in the rise of white-label and factory brands. Due to the surplus of supply chain resources in China, some emerging retailers at this stage do not need to, nor do they have the energy to, extend their hands fully into the manufacturing end. This is why I say that in the future, brand-oriented entrepreneurship in FMCG fields such as food and beverages and daily chemicals will also be more difficult: first, the supply chain is extremely competitive, making it hard to give you space for premium products; second, channels change rapidly and are too strong; third, coupled with the disruptive transformation of future discount channels, unless you go for ultimate efficiency, the difficulty and challenges are likely to be enormous. At the same time, in the medium to long term, considering the current per capita disposable income level and the macro environment, I don't think high-premium FMCG brands in food and beverages and daily chemicals have much room to survive. Therefore, I have been conveying my own viewpoint to all entrepreneurs: we must fully respect the fact that the market environment we face now and in the future is that channels will become increasingly strong, and low-price competition will only intensify. This is determined by our national conditions. With this in mind, we must also be mentally prepared for the long term: how to survive in this market environment, and on this basis, accumulate certain brand value over the medium to long term. All brand founders must learn to embrace change. In the past, due to high expectations, the bubbles of high-premium brands that grew one by one will be pricked one by one in the coming cycle. It must also be acknowledged that high-premium brands are born out of consumerism. When consumers start to tighten their wallets, the trend of 'de-branding' will emerge. At the same time, when downstream demand tightens, in an onshore market with obvious overcapacity, it will force the upstream to become more competitive, and unscrupulous price wars will naturally lead consumers, who are not well-off, to vote for low-priced goods.

Final Thoughts

In a cycle of rapid channel transformation, in a social soil environment where channels are strong, embracing channels is the most important thing. Because in a social environment where channels are stronger than brands, some overly idealistic ideas are not advisable. Hold on to these channels, deeply understand these channels, and you can survive. In Europe, large CPG companies have actually chosen a new way of coexistence in their battle with channels. Unlike North America, large CPG companies like Nestlé and Unilever have, in fact, already chosen to become private label suppliers behind discount channels years ago.

Summary:

The formation of a brand is like an hourglass. The four elements—supply chain, product, marketing, and channel—work together, and over time and space, gradually settle to form a brand. The formation of an FMCG brand requires a relatively stable supply chain and channel market environment, and a certain period of time and space for accumulation. But our basic national conditions determine that it is difficult for brands to gain a relatively comfortable living space in a market environment with a highly competitive supply chain and strong, rapidly changing channels. The economic downturn and consumption downgrade in the past two years have likely made 'branding' even more difficult in China. Therefore, the growth path for domestic brand owners must be more pragmatic. In a social environment where channels are stronger than brands, following strong channels for growth is the most pragmatic strategy.

On August 20, the 5th China FMCG Retail Innovation Conference will be held in Shanghai. With discount expansion, store renovations, and instant retail acceleration, the huge waves in the retail sector over the past two years are having a massive impact on the traditional FMCG industry order. How should we view these changes?

We have invited more than 10 heavyweight guests to explain the changes in FMCG retail from different perspectives. When everyone is saying 'business is difficult,' we need to answer 'what exactly is happening' and 'what should we do'!

At this conference, we have specially set up a roundtable dialogue:

"Retailers Making Private Labels, What Should Brand Owners Do?"

We have invited multiple frontline experts from the brand, retail, and supply chain sectors to discuss this important topic that concerns the future of the industry chain.

How can brands coexist with retail private labels?

How can we defend consumer mindshare in the face of 'open schemes'?

How can brands and retailers build a win-win relationship?

This is not an anxious complaint session, but a deep dialogue about future survival strategies.

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