The complexity and pace of change in China's retail environment and consumer behavior are increasing, which is undoubtedly a huge challenge for FMCG brands. Source: YI OU, Author: Tong Huiguang FMCG products, due to their essential nature, high usage frequency, and strong repurchase rates, are the main categories of daily consumption. In the past, FMCG giants succeeded by developing multiple product lines, then using TV, magazines, and even wall-painting ads to capture consumer minds, and finally through distribution systems placing products in any offline consumption scenario consumers could reach. However, with the explosion of mobile internet, giants have gradually lost their dominance, seemingly overnight not knowing where consumers have gone. New retail is both an opportunity and a challenge for traditional FMCG brands. How Did Traditional FMCG Giants Perform in 2018? In May last year, Kantar Worldpanel's "2018 Global Brand Footprint Report" showed that the top 10 FMCG brands in China were Yili, Mengniu, Master Kong, Haitian, Want Want, Shuanghui, Bright, Uni-President, Liby, and Nongfu Spring. The concept of new retail was proposed at the end of 2016. If 2017 was a year of observation and exploration for brands, then 2018 was the year they began actual investment. YI OU checked the business data for fiscal year 2018 of the above 10 brands. Overall, there was steady improvement compared to fiscal 2017. Except for Bright, all other brands saw gross profit and net profit growth rates exceeding revenue growth, indicating enhanced profitability. At the same time, brands generally increased market sales investment, indicating that in the context of dispersed consumer behavior, customer acquisition costs are rising. It is worth noting that brands place great importance on product and technology R&D, with the largest investor, Yili Group, seeing a 104.08% year-on-year increase in this area. Procter & Gamble (P&G) faced a news storm last month due to its delisting from the Paris stock exchange, which once triggered public concern about the prospects of traditional brands. In fact, P&G's toughest year was 2016, when performance plummeted to the bottom. In fiscal 2018, P&G's organic sales in China grew by 7%, with 6 of 7 categories achieving growth. Now P&G's stock price exceeds $100, the highest in a decade. Another international FMCG giant, Unilever, also has its stock price at a decade high. Having left the era of rapid growth when supply fell short of demand, FMCG is gradually becoming a stock market. According to CTR data, as of the end of June 2018, China's FMCG market sales grew 4.5% year-on-year, with online channels growing 30.3% year-on-year. The proposal of new retail has given traditional FMCG brands direction after years of confusion. Having direction is good; at the sales level, the focus is on developing online business and omni-channel. Centralized Marketing Tactics Are a Thing of the Past Advertising bombardment + multiple product lines + comprehensive offline channel penetration were the supreme methodology traditional FMCG relied on in the past. In the era of centralized marketing and sales channels, this methodology worked repeatedly, but today it is clearly outdated. According to CTR's "2019 China Advertising Market Review and Outlook" report, in 2018, China's advertising market grew 2.9% overall, with traditional advertising declining 1.5%. In the five years from 2014 to 2018, there were declines in four years, with only a slight recovery of 0.2% in 2017. The three key FMCG industries—beverages, food, and daily chemicals—are increasingly weak in traditional media advertising. Looking closely at the advertising media that achieved growth in the chart, we find an interesting phenomenon: besides the internet, radio targets driving scenarios for car owners; elevator TV and elevator posters target office workers and residents in scenarios of waiting for or riding elevators; cinema video is the five minutes before a movie starts. In these scenarios, consumers' attention is easily focused on ads. The logic of advertising has never changed; in the past, TV, newspapers, and magazines were popular because consumers had only these channels to obtain information. The explosion of the internet and mobile internet has brought about the decentralization of information. Consumers' ways of obtaining information have become diverse and fragmented: Weibo, WeChat, Douyin, Xiaohongshu, live streaming, online variety shows and dramas... Especially, the majority of mobile internet users are post-80s, post-90s, and post-00s. For the new generation of consumers, their definition of brands has changed significantly compared to their parents' generation. Traditional brands are facing, and have to face, the crisis of aging. In the new retail form, "people" have become the core of the three retail elements, so brand owners need to guide innovation based on consumer needs, rather than educating consumers with products. To some extent, this also means that the extensive multi-product line strategy is no longer effective. Sales conversion rate, a number that was impossible to calculate in the traditional advertising era, has become the most important indicator for measuring advertising effectiveness in the internet era. To achieve precise placement, it is necessary to promote or even reverse-customize corresponding products based on the scenarios and audiences targeted by the channel. For example, a snack brand launched a giant package for the Spring Festival, which became a hit. Traditional Distribution Models Are Being Reconstructed; Sensitivity to Channel Changes Determines Brand Future Space Before the emergence of domestic e-commerce platforms, brand owners rarely directly sold to consumers (to C). They typically covered cities through supermarkets or used dealer systems to reach mom-and-pop stores and rural markets. However, with the improvement of underlying technologies such as mobile internet, mobile payment, artificial intelligence, and big data, the transformation of China's retail model is leading the world. Brand owners must maintain absolute sensitivity to channel changes. 1. Offline Supermarkets Remain the Foundation In 2018, from a performance perspective, the supermarket format saw overall stable revenue, but the revenue structure is changing. Taking Sun Art Retail (RT-Mart, Auchan) and Walmart as examples: RT-Mart's same-store sales saw slight declines in both 2017 and 2018, but the O2O business Taoxianda brought online orders to RT-Mart; in 2018, Walmart China's same-store sales fell 0.2% year-on-year, but Walmart China cooperated with JD.com, implementing a "three-way connectivity" strategy for users, stores, and inventory. JD Super and JD Daojia serve as online traffic entry points and logistics providers, while Walmart is responsible for supply chain and store stocking. In 2018, the pattern of supermarkets aligning with Alibaba or Tencent was set. After grafting with online platforms, the value of supermarkets is being reconstructed. FMCG brands need to think about how to interact with supermarkets to build a product system that adapts to the combination of online and offline. 2. Online B2C Supermarkets: JD and Tmall Will Be in Long-Term Confrontation This is very clear. In November last year, Tmall Supermarket became an independent business group, moving closer to JD's self-operated model, shifting from mainly "consignment" to a parallel model of "consignment" and "purchase-sale." FMCG is a strategic market; both Tmall and JD will invest heavily. FMCG brands just need to avoid falling into the awkward situation of "choosing one of two." 3. Small Formats Usher in an Explosive Period Convenience stores and community fresh food stores are experiencing rapid expansion driven by capital: Suning Xiaodian, Yonghui Life, Bianlifeng, Today, Linji, Jianfu, Fresh Legend... In second- and third-tier markets, the market of mom-and-pop convenience stores is being squeezed by formal forces. As instant consumption scenarios, convenience stores are moving toward the ultimate goal of "thousand stores with thousand faces." Therefore, FMCG brands will definitely play a significant role in the backend supply chain support for "thousand stores with thousand faces" in the future. 4. Brands' Traditional Dealer Channels Are Being Disrupted by Tmall and JD The over 6 million mom-and-pop stores offline account for nearly 50% of China's FMCG market share. The business is huge and fragmented, highlighting industry pain points: on one hand, brand owners need to reach these stores through self-built multi-level dealers, resulting in low supply chain efficiency and lagging consumer insights; on the other hand, because these stores are at the end of the industry chain, they face high procurement prices, unguaranteed quality, and an inability to systematically manage product structure and inventory. Alibaba's New Distribution and JD's New Distribution—online giants with internet genes and high digital momentum—are entering the FMCG B2B field. In response, FMCG brands are both embracing and wary: embracing the shortening of circulation chains and the trend of full digitalization, but worried about being controlled by Tmall and JD through data. 5. For New Retail Models, Brands Should Keep Watching and Test Waters at Appropriate Times Unmanned convenience stores, office shelves, social e-commerce, community group buying, front warehouses... One trend after another, brands as service providers actually have dividends. But trends rise quickly and can fall quickly. Brand owners should actively embrace innovative formats, at least keep watching, and enter the market at appropriate times and to an appropriate degree. Future Business Will Definitely Be Consumer-Oriented and Technology-Driven In terms of profitability alone, brand owners have far greater advantages than retailers, and their cash flow is healthier. The complexity and pace of change in China's retail environment and consumer behavior are increasing, which is undoubtedly a huge challenge for FMCG brand owners. P&G Greater China President Matthew Price once said that P&G's crisis in China around 2016 was due to: lack of correct innovation, lack of investment in emerging channels, unbalanced channel costs, and failure to develop or customize market communication strategies based on Chinese consumers. Since then, P&G has undergone a series of slimming and transformation, changing the way it communicates with Chinese consumers and formulating local marketing strategies for the Chinese market. This is consumer orientation. Future business will also be technology-driven. Technological changes can bring about earth-shaking business transformations. In short, FMCG brands need to maintain sufficient sensitivity to channel and retail model innovation, increase R&D investment in products and technology, use digital tools to study consumers and conduct precision marketing, thereby improving supply chain efficiency. -END-