The Main Contradiction in the FMCG Market The relationship between supply and demand determines the market theme and the effectiveness of corporate competitive strategies. In a period of undersupply, the market theme is expanding capacity; in oversupply, it is reducing costs. Cost reduction provides the conditions for price cuts, which in turn shift the price curve and mobilize more consumer spending. At the same time, entities that fail to reduce costs are eliminated through competition, thereby rebalancing supply and demand. From the supply side, FMCG capacity consists of two parts: production capacity and distribution capacity. It is necessary both to produce and to distribute.
In a period of undersupply, due to insufficient capacity, the market is inevitably flooded with counterfeit and substandard products. To avoid pitfalls and ensure they buy quality goods, customers are willing to pay a premium. Therefore, manufacturers producing high-quality, high-premium products can capture more market dividends. For retailers, aggregating high-quality, high-premium products allows them to share more market dividends. In a period of oversupply, qualified capacity squeezes out unqualified capacity. Customers rarely see counterfeit products, so they are no longer willing to pay to avoid pitfalls. At this point, customers prefer cost-effective products. Thus, in this period, manufacturers producing cost-effective products and retailers aggregating cost-effective products are more likely to grow. In summary, when supply is less than demand, companies should focus on high quality and high premium; when supply exceeds demand, they should focus on high cost-effectiveness. This is an effective competitive strategy.
Assessment of the Current Historical Stage Currently, China's FMCG market is in the early stage of oversupply. The main characteristics of this stage are as follows:
1. Overall capacity exceeds demand. In recent years, domestic FMCG capacity has grown rapidly, while consumption growth has slowed, leading to overcapacity. Many FMCG manufacturers have insufficient capacity utilization and high channel inventory. In a period of oversupply, the market theme is cost reduction. This is also the current state of the domestic FMCG market.
2. Supply quality is not optimal, and efficiency is not high. Although overall production capacity can meet demand, the quality of that satisfaction is not high. This is mainly reflected in two aspects: First, customers' demand for higher-quality products has not yet been met. Taking the quality of first-tier brand FMCG products as a benchmark, demand beyond this quality has already emerged in large numbers, but supply has not yet followed. Second, distribution costs are too high. Most FMCG products with production costs of 30-40 cents are sold at terminals for 1 yuan, with distribution costs as high as 60%.
3. In lower-tier markets, demand for qualified quality products has not been met, and the market is still commonly flooded with substandard generic brands.
Excessively high distribution costs are also one of the main reasons for insufficient supply in lower-tier markets. Under the traditional multi-tier agency model, the further down the chain, the higher the markup, preventing many quality products from reaching lower-tier markets. Overall, from the beginning of this century to around 2020, the market was characterized by undersupply and capacity shortage. Now (after 2020), capacity is no longer scarce, but quality and efficiency are poor and need improvement. At the same time, in the early stage of oversupply, this surplus is relative. That is, although overall there is surplus, there are still local situations of undersupply. For example, supply for high-end demand is insufficient, and supply for lower-tier markets is also insufficient.
Effective Competitive Strategies: Cost Reduction + Filling Gaps, Dual-Wheel Drive From historical experience, rapid corporate growth often results from the combined effect of supply and demand sides. That is, there is a huge, unmet space on the demand side, and the supply side can meet this demand at relatively low cost. Based on this, I personally believe there are two effective growth strategies in the domestic FMCG field.
The first is to further improve quality based on the quality of first-tier brands, while reducing product premiums, to meet the needs of high-end customers. This is the Pang Donglai model. Pang Donglai's product quality is significantly higher than first-tier big brands, and its markup rate is not very high. This model requires two things from the management team: both achieving quality and service above the market average, and managing costs well. Relatively speaking, the requirements are relatively high. Therefore, it is commonly said: Pang Donglai cannot be learned.
The second is to reduce costs (mainly distribution costs) based on the quality of first-tier brands, to meet the demand of a larger customer base for good quality and low prices. This is the hard discount model. We note that products sold through hard discount channels are of qualified quality, not inferior to first-tier big brands, but their retail prices are far lower than traditional channels. This model mainly requires the team to manage costs well, which is simpler than the Pang Donglai model, so many retail companies can master it. We need to note that many good products, in traditional channels, cannot reach lower-tier markets due to excessively high distribution costs. In hard discount channels with lower distribution costs, these good products can reach lower-tier markets. Moreover, demand in lower-tier markets is still growing, which we call the "lower-tier dividend". Overall comparison: the Pang Donglai model is "insufficiently satisfied high-end market + cost reduction"; the hard discount model is "insufficiently satisfied lower-tier market + cost reduction". Compared to the two, the hard discount model is less difficult to operate than the Pang Donglai model, and its customer base is larger. Therefore, the hard discount model has grown much faster than the Pang Donglai model in recent years. Or rather, the hard discount model is more suitable for the national conditions of most Chinese physical retail enterprises.
On August 20-22, 2024, at the "2024 3rd China FMCG Hard Discount Conference", I will deliver a keynote speech—— "Judgment on the Current Development Stage and Trends of China's Hard Discount", sharing more in-depth thoughts and summaries on the development of hard discount.
Interested friends are welcome to Shanghai to exchange and discuss.