This article is the third in a series on integrated production-supply-marketing. I will approach it from the brand's perspective to consider the opportunities and challenges for FMCG brands in the new industry cycle.
The current retail and distribution industries are undergoing profound changes that will reshape the FMCG industry landscape.
Let's review the market's evolution from 2023 to now, which has seen three main shifts:
2023 was the first year of discounting, with New Distribution being among the first to introduce the concept of hard discount.
In 2024, supermarket adjustments replaced discounting as the new main theme.
From 2025 onwards, we believe integrated production-supply-marketing will become the new market theme.
Why has the downstream retail industry evolved from "discounting" to "supermarket adjustments" and then to "integrated production-supply-marketing"?
Understanding the Current Cycle
We need to deeply understand that today's changes in the retail system are largely due to significant changes in the upstream supply chain.
This change stems from major shifts in macroeconomic factors.
I believe this variable is "insufficient effective demand across society."
Insufficient effective demand is a transitional phenomenon as our economy shifts from investment-driven to consumption-driven growth.
Currently, household consumption accounts for about 36% of GDP in China, which lags not only developed countries like the US (68%) and Japan (56%) but also developing countries like India (60%) and Brazil (63%).
Over the past decade, China's economy grew rapidly, but household consumption's share of GDP only rose from 34% to 36%, showing a clear mismatch between consumption capacity and economic growth. At the same time, there has been a large amount of new production capacity, with most capacity utilization rates below 20%, indicating a significant structural imbalance.
This is also evident in the FMCG industry.
Currently, the overall ROE (return on equity) in the FMCG industry is declining, a trend that began in 2023 and accelerated in 2024 and 2025. I believe this decline will continue in the medium term.
ROE is a better measure of a company's overall profitability and capital efficiency. It can be broken down as ROE = profit margin × turnover × leverage.
Let's break down the three components of ROE in the FMCG industry.
Historically, the relatively high ROE in FMCG was driven by:
- High leverage (distributors act as intermediaries, leveraging social capital to amplify capital efficiency);
- High turnover (FMCG are essential consumer goods with high repurchase rates);
- High profit margins (once production capacity and channel networks are built, manufacturers maintain high margins at scale).
High leverage, high turnover, and high margins work in a pro-cyclical economy but become counterproductive in a downturn. The current decline in FMCG ROE follows this sequence: 1. declining turnover; 2. declining leverage capacity; 3. declining profit margins.
- Turnover: Due to insufficient terminal consumption, the overall turnover rate in FMCG has been declining since 2022, meaning total social inventory is increasing.
- Leverage: Leverage in FMCG is often not through bank loans but through distributor credit terms. Even as inventory accumulates, manufacturers can shift it to distributors by pushing stock, using operating leverage to keep ROE from falling sharply.
- Profit margins: Due to the strong shelf-life factor in FMCG, as low sell-through and rising social inventory persist, the price system eventually collapses, lowering the central price and affecting manufacturer margins.
Thus, the past high leverage, high turnover, and high margins of FMCG brands will gradually erode.
The phenomena in retail, from "discounting" to "supermarket adjustments," are closely linked to upstream supply chain changes.
The destruction of the traditional FMCG price system has led to the emergence of discount formats. As discount formats grow in scale, their bargaining power increases, further pushing down the central price of traditional standard products.
Traditional retail is being squeezed on one side by discount formats for standard products (slow-moving, high-priced) and on the other by community fresh food and instant e-commerce for fresh produce. Therefore, traditional retail must adjust its product mix and procurement methods to compete, which we call "supermarket adjustments."
However, supermarket adjustments still face capability gaps:
- Lack of capability in new product categories;
- Without sufficient scale, they cannot support effective direct sourcing to lower prices.
Thus, "integrated production-supply-marketing" is becoming a new trend. For example, traditional retailers are forming supply chain companies to increase scale and reduce procurement costs.
The Foundation of FMCG Brands' "Channel Power" Is Shaken
I believe that in the future, "integrated production-supply-marketing" will involve at least three forces:
- Supply chain companies formed by traditional retailers joining forces, i.e., retail + distribution integration. Their advantage lies in inherent retail empowerment capabilities. They can further extend upstream to production.
- Supply chain companies formed by large regional distributors joining forces. They extend upstream to production, becoming OEM service providers for retailers, and also build their own stores in the region to create controlled closed channels.
- Third-party supply chain companies established by manufacturers. They get involved in downstream retail adjustments or invest in downstream stores to build control over terminals, such as Three Squirrels' all-category, all-channel strategy.
First, today's retail transformation, along with upstream FMCG supply chain changes, will pose huge challenges to brands' foundations, and many brands' offline channel value chains will be disrupted.
Simply put, the core competitive advantage of traditional FMCG brands has been their "channel capability." But this capability will be leveled in the future. "Channel capability" can be understood as: network penetration capability + value chain profit distribution capability.
Traditional FMCG brands rely on multi-tier distribution systems (brand → first-tier distributor → second-tier wholesaler → terminal store), achieving market coverage through layer-by-layer stock pushing. This system is very effective in a pro-cyclical market. But once downstream demand weakens, it starts to backfire.
Integrated production-supply-marketing flattens the distribution chain, weakening the channel value chain system that brands have cultivated. The offline network reach and value distribution capabilities that brands built will gradually transfer to large supply chain companies, eroding or leveling the advantages brands once relied on.
At this point, the key competitive factors for brands will begin to shift.
This means brand competition will fully enter the "era of user sovereignty." The core competitive factor shifts from channel control to user value creation and mining, with the ability to continuously discover new user needs becoming more important than channel capability.
First, in product development, the methodology will shift from relatively broad demographic positioning to scenario-based need mining.
On the supply chain side, production capabilities will move toward flexibility. Frankly, the current FMCG supply chain system lags behind other consumer goods industries. A typical example is the apparel industry, which, due to greater downstream inventory pressure, completed its agile supply chain construction earlier. The FMCG industry is still in a relatively extensive capacity expansion phase.
But more importantly, brands today must start building new ecological relationships with downstream channel partners.
As the distribution industry enters a period of change, the ecological positions of production, supply, and marketing will all shift.
In the past, brands (production) held the profit distribution power in the entire value chain, distributors (supply) served brands, and retailers (marketing) were reduced to terminals for product placement, surviving on backend fees.
Now, with insufficient effective demand, product sell-through declines, and this system faces deconstruction.
Retailers (marketing) must cope with the impact of discount formats on one hand, and on the other, since traditional products don't sell, they must undergo thorough adjustments to face consumers.
Meanwhile, distributors (supply) have shifted from being brand agents to serving both brands and retailers.
Brands (production) can leverage retailer data to discover more new niche products, rather than relying entirely on traditional distribution channels' hero SKUs.
But today, many brands still rely on path dependence, growing through stock pushing or a mix of stock pushing and repurchase. This growth carries risks, as it comes at the cost of declining ROE.
Building Competitive Advantage Through "New Standard Products"
How can brands build new competitive advantages?
First, they must recognize that the balance between channel capability and product capability has shifted. Strong channel capability + decent product capability + stock pushing could drive growth in the past economic cycle, and the market could fully absorb the goods. Now, what's needed is stronger product capability + new channel relationships.
Second, brands must realize that they need to build new channel relationships now. Those who seize the initiative in the new market environment will gain a leading edge.
In the past, brands and channels operated in relatively closed silos. Brands wanted channels to share downstream data, while channels wanted brands to co-develop more products.
Now, with the economic cycle shift, the environment is ripe for deeper integration between brands and channels, allowing both to leverage their strengths.
Brands must deeply integrate into retail practices to better discover unmet consumer needs.
Specifically:
Large brands can form deeper partnerships with large retail systems that share their values, enabling data sharing between manufacturer and retailer. The retail system extracts consumer needs, and the brand develops corresponding products.
Large brands can establish internal retail support teams to intervene in adjusting small retail enterprises, creating deeper ties with downstream channels.
Large brands or small manufacturers can invest in or co-found third-party supply chain companies to intervene in small retailers' category adjustments, forming deeper channel bonds.
Brands can invest in or incubate downstream retail enterprises to gain control over terminal channels.
Furthermore, through deep integration, brands collaborating with retailers to create "new standard products" can be a win-win strategy.
The core of retailer adjustments is reshaping product power. The product structure should shift from "fresh + traditional standard products" to "fresh + prepared food + bakery, private label + new standard products + novel/imported products."
Retailers need to develop new standard products because traditional standard products no longer sell, and they lack price competitiveness compared to discount channels.
"New standard products" are independent of the traditional distribution system but not entirely private label. They retain the brand's logo to some extent but are co-created with retailers. They are based on new consumer insights and developed in collaboration with retailers.
Special, novel "new standard products"—rather than traditional hero SKUs—give consumers a clearer reason to visit the store.
For brands, partnering with retailers to develop these products helps transform their organizations toward product-driven and consumer-driven approaches, seizing the initiative in the new cycle. It also helps tap into unmet consumer needs and prevent further erosion of price levels.
As the saying goes, "reversal is the movement of the Dao"—crises breed new opportunities. Rivers surge for thousands of miles because they constantly break existing patterns and flow eastward. In this era, we will witness the fall of old brands and the birth of new ones.
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