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 replied that I hadn't seen a single one that had launched successfully; 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 a basic scale, almost no FMCG brand has had a good start 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 budding brand-building efforts of previous years have not only been extinguished but have also given rise to a trend of 'de-branding' .

If you recall, a few years ago there was a prevailing notion that Pinduoduo was killing Chinese brands, which many lamented. 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-name brands? Why is this happening?

First, we need to understand what constitutes an FMCG brand 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, brand theory 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, goods and products exported overseas were imbued with infinite mission. 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, prompting scholars from academia and consulting to continuously 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 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 'de-branding' trend? Chinese brands are reverting to the old path of 'Made in China,' with a flood of low-priced white-label products in the market. 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 outcome of the combined effects of these four. Two points need attention: first, it is the result of multiple core elements working together; second, a brand is a result, not an action. Building a brand is a comprehensive outcome of a series of corporate actions. For example, product taste and quality determine consumer word-of-mouth and even form consumer mindset; supply chain scarcity determines product scarcity, and scarce products are more likely to achieve differentiation; marketing actions help accelerate the formation of consumer mindset; channel fit affects the accessibility of target consumers and their perception of the product. In short, whether it's delicious products 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 a company's finance and organization, because the company's scale also determines whether a brand can be established. For instance, below 1 billion yuan in scale, it's generally hard to consider there is brand power; when the scale exceeds 10 billion or even tens of billions, consumer trust and endorsement are further strengthened. Therefore, we use the metaphor of an hourglass: brand equity formation is like the combined effect of supply chain, product, marketing, and channel, gradually precipitating over time and space to eventually 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 brand power indicators like name-based purchasing, pricing power, and mental pre-sale. This is like the sand accumulating deeper at the bottom of the hourglass.

It should be noted that among the four elements—supply chain, product, marketing, and channel—two are highly correlated with the external environment: supply chain and channel. Supply chain scarcity can help form a brand, and channel stability and fit can also help. Conversely, supply chain homogenization and involution, as well as rapid channel changes and iterations, can also affect the precipitation and construction of brand equity. Therefore, brand formation requires a certain soil. It needs a stable state of channels and supply chain, and over time and cycles, it eventually precipitates into a brand. We also believe that because brand theory originated in the U.S., all brand research has entered a narrow research area, focusing on product and marketing. This includes brand image theory, symbol theory, brand positioning theory, brand equity theory, brand personality theory, brand relationship theory, and 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. Similarly, in the game between channels and brands, if channels remain in a strong position, the space for brand establishment is compressed very narrowly. In contrast, the logic of American brands can be established based on the fact that 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, due to the relatively high cost of the U.S. domestic supply chain, brands can maintain a healthy pricing space. Why do all American brand studies focus 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 talk to some North American food and beverage startup teams, 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, making brand building relatively more difficult! Many Chinese founders harbor brand dreams, but not every soil is suitable for brand building, or the difficulty is relatively high. Brand establishment 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 brand owners. However, in the current market environment, on one hand, the supply chain is extremely competitive, making it hard to have space for premium products; on the other hand, channels change rapidly and are too strong. This forces most entrepreneurs to expend a lot of energy on 'how to survive,' constantly negotiating with manufacturers, competing with low-priced competitors, and dealing with powerful channels.

This is particularly evident in traditional FMCG sectors like food and beverages and daily chemicals. Because consumers in these categories place more emphasis on basic functional attributes, they are most susceptible to external environmental impacts from channels and supply chains. 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 controlled by channel operators, while national brands are products under large FMCG companies that, through years of brand building, have deep consumer recognition 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, but in China, it's just beginning. In Europe, the share between private labels and national brands in FMCG is about 50-50, while in the U.S., it's about 20-80. This ratio difference 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 protects its national brands, allowing brands and channels to maintain a very good symbiotic relationship. A simple question: 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 community has done a lot of work to protect these national brands to maintain the symbiotic relationship between brands and channels. Why do European FMCG brands have less space compared to American companies? Because European channels are relatively stronger, especially in some Nordic countries where discount channel penetration is extremely high, and consumers are more rational with less brand obsession. Therefore, on the shelves of discount channels in these countries, you can only see a few national brands with deep consumer mindshare, like Coca-Cola and Henkel, while almost everything else is private label.

But looking at our market, first, the downstream is extremely competitive, with numerous retail channel companies squeezing the space of brand owners and factories to compete for the existing market. Under this premise, the upstream supply chain becomes increasingly competitive. In China, the trend of private labels competing with national brands has already begun, but it manifests as the rise of white-label and factory brands. Due to the surplus of supply chain resources in China, some emerging retailers currently neither need nor have the energy to extend their hands fully into manufacturing. This is why I say that future brand entrepreneurship in FMCG sectors like food and beverages and daily chemicals will be more difficult: First, the supply chain is extremely competitive, leaving little room for premium products; second, channels change rapidly and are too strong; third, coupled with the disruptive changes of future discount channels, unless you pursue extreme efficiency, the difficulty and challenges are immense. 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 to all entrepreneurs my own viewpoint: 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 that basis, precipitate 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 arise with 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 even 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, and 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, overly idealistic ideas are not advisable. Hold on to these channels, deeply understand them, and you can survive. In Europe, large CPG companies have already chosen a new symbiotic approach 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:

Brand formation is like an hourglass: supply chain, product, marketing, and channel work together, gradually precipitating over time and space to eventually 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 precipitation. But our basic national conditions determine that it is difficult for brands to gain a relatively comfortable living space in a market environment with highly competitive supply chains 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.

From August 20-22, 2024, the '2024 6th China FMCG Conference' with the theme 'Navigating the Era of Shrinking Volume' will be grandly held in Shanghai.

At that time, we will invite senior executives from leading FMCG brand owners and retailers, as well as regional major distributors, to discuss the direction and path for brands in the era of shrinking volume.

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