China's FMCG industry is currently undergoing a profound channel transformation and value reconstruction. Against the backdrop of shifting from incremental to stock market growth, consumer behavior preferences, supply chain efficiency improvements, and offline business format innovation have become industry focal points. Distributors, brands, and retail channels are seeking positioning and breakthroughs in the new cycle. On August 20, at the 5th China FMCG Retail Innovation Conference, Pan Jinju, partner of Kuanzhai Ventures, provided an in-depth analysis of the cyclical characteristics, competitive environment, and future trends of China's consumer market from an investment perspective. The following is her on-site speech (partially abridged), compiled by New Distribution for readers.**** China's Consumer Market Enters a New Cycle Three Distinct Features Emerge**** Currently, China's consumer market is shifting from incremental development to stock competition. From the supply side, manufacturing capacity utilization has been below 80% since 2017, especially in food manufacturing, which has consistently remained below 75%, indicating absolute oversupply. Since June 2023, capacity utilization has not recovered after the pandemic, and the oversupply situation continues to worsen. The demand side is equally concerning. The consumer confidence index has remained low after a cliff-like drop in March 2022, reflecting the reality of insufficient effective demand. This dual pressure of oversupply and insufficient demand has intensified market competition, with companies generally feeling profit pressure. In a downward economic environment, consumer behavior shows clear differentiation: On one hand, consumers have become more price-sensitive and more pragmatic. Products like Sam's Club's "poor man's set meal" and Walmart's "cost-effective selection" have been well-received, reflecting consumers' pursuit of cost-performance and quality-price ratio. On the other hand, emotionally premium products also perform well. For example, Pop Mart's gross margin reached 70.1% in the first half of the year, with a net margin of 33.9%, roughly on par with Hermès' 70.3% gross margin and 28% net margin, indicating that emotional value has become a new demand trend and an important competitive dimension in the market. The intensifying market structure differentiation is the third notable feature. Essential goods maintain stable growth, while optional consumption generally faces pressure. Specifically, leisure snacks priced at 1-3 yuan still see over 10% growth in convenience store channels, but products priced at 5 yuan and above experience double-digit declines. This structural differentiation requires market participants to re-understand real consumer demand and re-evaluate product positioning and business models. Unique Competitive Environment: Ultimate Supply Chain and Super E-commerce Ecosystem**** China's consumer market has two unique advantages that shape a distinctive competitive environment. First is the "world factory"-level supply chain system. China has the most complete industrial categories globally, with large-scale, efficient, and comprehensive manufacturing. This advantage makes product development and imitation cycles extremely short, with "Sam's Club same-style" and "Aldi same-style" products available within 1-2 weeks. While this supply chain advantage brings ample market supply, it also leads to intense industry "involution," putting immense pressure on brands and manufacturers. Second is the globally leading e-commerce infrastructure. In 2023, China's e-commerce scale reached 12.3 trillion yuan, with electronic payment penetration exceeding 80%, of which Alipay holds a 53% market share. Instant delivery networks cover the entire country, with over 10 million delivery riders supporting an efficient fulfillment system of 1-3 days. WeChat Pay has over 1 billion users, and together these infrastructures form China's unique online delivery ecosystem. However, e-commerce development also faces new challenges. Online traffic efficiency exhibits a U-shaped curve, with efficiency gains slowing as traffic scale expands. To address this, e-commerce platforms continue to innovate and evolve, with new models such as instant retail, front warehouses, and flash warehouses emerging. Taobao is accelerating the development of Hema Fresh and Hema NB, Meituan has launched and rapidly expanded flash warehouses, Hema has made front warehouses a new strategic focus, and Sam's Club has exclusively introduced front-warehouse-based ultra-fast delivery in China. These demonstrate platforms' extreme pursuit of capital investment and innovation. In contrast, China's offline retail development shows different characteristics. In the 2023 U.S. e-commerce landscape, offline top 5 retailers occupy 4 seats, while in China, all are platforms. This difference stems from divergent development paths: U.S. offline retail has developed over nearly a century, only facing e-commerce impact after 2010; while China's offline retail only began developing with Carrefour's entry in 1993, leaving offline players with limited time to accumulate. This ultimately results in China's offline retail concentration being far below international levels, with CR5 around 10% and CR10 around 15%, compared to about 50% in both Japan and the U.S. China's offline retail has just completed its traffic pool construction with urbanization. In the past, offline stores primarily served as product movers, focusing on regional development. Now, as urbanization nears completion, the offline store network is initially established, but product organization and traffic pool operations are just beginning. Three Major Trend Judgments in the New Cycle**** In the new market cycle, we observe three important trends forming. First, retail channels with traffic sovereignty will become the chain leaders of the industry chain. In the past, under incremental market conditions, the supply chain adopted a brand-led "push" structure, flowing from manufacturers through multiple levels of distributors to terminal stores. In a stock competition market, the supply chain will shift to a traffic retailer-led "pull" structure, where goods flow directly from manufacturers to central warehouses or IDCs, then to stores. The core driver of this shift is the need for "efficiency" improvement. With limited market growth space, all participants feel the pressure of low-price competition. Low prices become the simplest and most effective way to compete, ultimately forcing the entire industry chain to improve efficiency. Retail channels with traffic sovereignty, being closer to consumers, gain increasing influence in the industry chain, and both distributors and brands can clearly feel the trend of channels becoming more powerful. Second, the zero-supply relationship is being reconstructed around consumer needs. The core factors influencing transaction completion are value perception and price cost. To reduce transaction friction, either lower the price while maintaining the same perceived value, or enhance perceived value while keeping the price constant. Perceived value can be enhanced through functional value, experiential value, or social value. Take Pop Mart's Labubu products as an example: they not only have label value but are also regarded by many as asset value, with different styles having corresponding price systems in the secondary market. Whether Aldi emphasizes affordability with white-label products or Sam's Club emphasizes quality assurance with same-style products, both essentially work around consumers' actual needs. The consumer decision-making path has also changed significantly. Content platforms like Douyin and Xiaohongshu can successfully enter e-commerce because they intervene in the decision-making process before consumers even realize their needs. When users casually discover products like white shoe brushes or special ointments while scrolling Douyin, these unplanned purchases are examples of platforms successfully intercepting consumer budgets. Therefore, whether manufacturers, product brands, or channel players, all need to conduct business around consumers' actual needs. Third, offline retail format differentiation is just beginning. In stock market competition, regional density, format complexity, and supply chain differentiation become key to offline breakthrough. Take snack discount stores as an example: they have successfully achieved two things. First, they replace some mom-and-pop stores. Second, they transform the supply chain system, utilizing the surplus capacity of upstream first-, second-, and third-tier brands, reducing packaging specifications, and controlling unit prices within 5 yuan. This change aligns with consumers' purchasing willingness during economic downturns. Specific data shows that leisure snacks priced at 1-3 yuan maintain over 10% growth in convenience store channels, while products priced at 5 yuan and above continue to see double-digit declines. Companies like Aldi and Sam's Club have distinct supply chain capabilities, but both have optimized around consumer needs. Offline Retail Innovation Is Just Beginning**** China's retail format differentiation is just starting, and the future is full of variables. From a capital perspective, we often ponder an ultimate question: within the same category, among different supply options like 1-3 day e-commerce, 60-minute flash warehouses, and 30-minute delivery, who will gain more market share? Can instant retail erode the share of existing e-commerce and offline stores? There is no clear answer yet, but it is worth deep consideration. China's unique urban spatial structure provides development opportunities for different formats. Most cities adopt a closed-community model, contrasting sharply with high-density road network cities like Japan. This uneven traffic density between points creates a unique survival space for front warehouses and dark stores in China. In Japan, where offline convenience is extreme, models like flash warehouses might struggle to survive, but in China, they have development potential. The uneven distribution of traffic also raises new considerations. Should retail formats based on regional development break through single-format limitations? Can convenience stores only be convenience stores, or can they also develop discount stores or B2b businesses? Should they exist as multi-format integration or as a single format expanding across regions? These are questions worth exploring. Innovative cases are already emerging. Zhengzhou's Xianfeng Life, originally a 3,000-6,000 square meter hypermarket format, is now opening 500-1,000 square meter innovative formats in communities. This indicates that China's retail format differentiation is just beginning, and the entire offline market landscape is in the early stages of reshaping. We look forward to seeing more innovative models in the future. Overall, China's retail market is in a complex transformation period. Online fulfillment efficiency is approaching its limit, while offline formats have just completed basic network construction and are entering a new stage of deep operation and model innovation. In the future, companies that can respond to consumer needs more efficiently will gain an advantage in fierce competition. From an investment perspective, scale is the ticket for future offline retail participants to compete, while efficiency and differentiation are the moats during competition. Here, regional density scale is needed to build supply chain efficiency, product strength matching and construction around consumer needs, and differentiation based on format innovation and brand building. These capability structures will be key indicators measuring the success of offline retail chain brands. The innovation wave in China's retail industry is just beginning.