In 2020, distributors in the FMCG industry are struggling, especially dairy distributors, who face even greater difficulties. Due to the novel coronavirus, offline terminals across provinces have closed, making every day a torment for dairy distributors dealing in short-shelf-life products. Invited by New Distribution, I will discuss the market trends and marketing strategies for the dairy industry in 2020, sharing my personal views from four aspects for your reference.
1. How can distributors quickly resolve inventory issues given the severe impact of the epidemic? 2. Will consumer behavior change due to this epidemic? 3. Will the dairy industry undergo structural changes under the epidemic's influence? 4. What strategic adjustments should dairy manufacturers make in 2020 in response to market changes?
-01- How dairy distributors can quickly handle inventory under the epidemic First, let's start with a basic logic. There are three indicators to measure whether a company is profitable: cash flow, profit, and return on investment. Based on this premise, the most important thing for distributor friends at this stage is to recover cash flow. Keep cash in hand, and you won't worry about running out of firewood! Regarding clearing inventory, many articles have mentioned it recently, but today I'll add a few points that may not have been covered.
1. Break it down into smaller parts Dine-in at restaurants is banned, and in the short term, demand for takeout has surged. Therefore, consider communicating with catering companies to add your products to their takeout meal sets, digesting some near-expiry products and recovering cash flow. Of course, if you can get manufacturers to invest some funds to support this and develop the catering channel, you can further reduce losses.
2. Use product combinations effectively For distributor friends who operate multiple categories, use hot-selling products to drive dairy sales, such as bundling instant noodles, ham sausages, rice, and flour with dairy products for joint promotions, thereby boosting dairy sales. If you only deal in dairy products, in the short term, it's recommended to seek help from distributor friends in related categories within the circle. Because products that are hot now may become sluggish in a few months. People get tired of eating too much, and they stock up too much to use up! So now they help you, and in a few months, when you recover, you can help them. In the long run, it's recommended that distributor friends enrich their product mix in the future, solving the balance between volume and profit through product structure, and also avoiding putting all eggs in one basket, increasing resilience against risks.
3. Huddle together for warmth Establish regional distributor alliances, integrate advantageous resources, improve operational efficiency, and reduce operating costs. For example, share terminal service teams, warehousing and logistics systems, etc. The equity structure of the new company/alliance can be exchanged based on the past turnover, cash flow, and profit of each trading company.
Co-create a new retail platform. Currently, major brand manufacturers and distributors are rushing into home delivery services and group buying, but this is not a long-term solution. One palm cannot clap; one person cannot support alone. In the end, it will be hastily concluded, wasting already scarce resources. Instead, why not have distributors of non-competing categories in the region join forces to create a home delivery service platform? This way, you can sell not only milk but also chocolate, beverages, and beer, helping each other survive the winter.
-02- Will consumer behavior change due to the epidemic? From a channel perspective, consumer shopping habits will not undergo fundamental changes. This epidemic cannot, like SARS back then, give rise to internet e-commerce giants such as Alibaba and JD.com. In 2003, the internet penetration rate was only 6.2%, with fewer than 80 million internet users. According to data from China Business Intelligence Network, in 2019, the internet penetration rate was 61%, with about 870 million netizens, a tenfold increase; and 99% of netizens access the internet via mobile phones. Therefore, many channels have been used by consumers all along, such as group buying and home delivery; many consumers have already experienced these forms of consumption. It's just that due to the epidemic, offline terminals are temporarily closed, and only these online platforms can operate normally, so all demand is concentrated, giving people the illusion that home delivery business is about to take off.
In fact, it won't. When the epidemic passes and the lockdown is lifted, consumption will return to normal and rationality, and home delivery and group buying will only be slightly better than in 2019. Offline consumption will still account for more than 70%. There will be no fundamental change. If this seems abstract, think of it this way: In normal days, would you prefer to go out for a stroll and buy something, or stay home every day waiting for delivery? But services like home delivery, group buying, and fresh e-commerce will still develop along their established path. 2020 just added fuel to the fire, making fresh home delivery services hot again. But in the end, it comes down to innovation, product, and service. Only when most consumers suddenly feel the "internet touch" like in 2003 will these platforms and services be able to replace offline business.
From a category perspective, consumer demand will diverge, and most products will not see the revenge growth everyone expects. Why? First, define what revenge consumption is. Emotional, reckless consumption behavior is "revenge" consumption. For example, after the earthquake, many Sichuan people changed their consumption views, expanding consumption by buying cars, traveling, and purchasing luxury goods. So fixed consumption categories will only transition smoothly, without any explosive growth. For example, dairy products, beverages, laundry powder, and other such categories. You use the same amount as before; being locked at home for over a month doesn't change your psychology to make up for what you didn't drink or use. These products have poor expansibility; once lost, they're lost, and even large-scale promotions later can't fully recover, ultimately making life harder for everyone.
Emotional consumption categories may see a boom, such as health products and cosmetics. This epidemic is more of an emotional blow, with people's feelings suppressed. Emotional blows lead to emotional outlets, such as consumption and hedonistic services. Consumers suddenly realize that they themselves are the most important. So these categories have stronger expansibility; demand naturally increases, and with appropriate promotion and sales, they can bring greater sales. So, how to determine whether your product belongs to fixed consumption or emotional consumption? Mainly look at the proportion of product cost to the retail price. If the cost proportion is high, such as milk, soy sauce, laundry powder, etc., it belongs to fixed consumption. Products with a low cost proportion, meaning high brand premium, belong to emotional consumption, such as health products, cosmetics, luxury goods, etc.
-03- Will the dairy industry undergo structural changes? First, competition in the dairy industry will become more intense. Because we lost several months of sales, everyone hopes to make up for previous performance losses, but dairy is a fixed consumption product with poor expansibility, so the only way is to compete through large-scale promotions, harvesting existing demand and limited incremental demand. Secondly, the industry is about to undergo a major reshuffle, with increased brand concentration and distributor concentration. Brand concentration will intensify. Due to inventory backlog and logistics disruptions, the entire dairy supply chain has been severely impacted, and some small brands may be the first to collapse and go bankrupt. Milk source concentration will also intensify. Due to declining demand, transportation difficulties, and tight spray-drying equipment, there have been cases of large-scale milk dumping by upstream dairy farmers in 13 provinces. So in the short term, milk prices will tend to be low, and only large dairy enterprises can insist on purchasing milk at the original contract price. Therefore, in the future, as brand concentration increases, more milk sources will be absorbed by leading dairy companies. Distributor concentration will also intensify. At this stage, if a distribution company has insufficient cash flow and weak operational capabilities, its ability to withstand shocks is also the weakest. Such small and medium-sized distributors are forced to reduce channel stores, shrink categories, or even lay off employees to survive, thereby ceding territory to stronger distributors who survive. Thus, the strong become stronger, and the weak become weaker.
-04- In 2020, what strategic adjustments should be made in response to market changes? 1. Business focus: Focus on advantageous products, channels, and regions! For brand manufacturers with limited resources, first strive to survive, so they must concentrate resources to ensure their advantageous business is not harmed. For key regions, protect your flagship products. Dairy is a strong supply chain product; if you lose the milk source, you lose the qualification to compete. Even if you don't go bankrupt this time, you're not far from being out of the game.
2. Support customers: Distributors are still important partners for most brand manufacturers. If distributors fall at this stage, you may not find more suitable customers in the future, especially previous excellent customers. Because they are in the hardest-hit areas, such as Central China, or due to phased strategic mistakes, such as overstocking for the Spring Festival or insufficient cash preparation, leading to operational difficulties, manufacturers need to provide targeted support. For example, provide credit, supply chain financing, etc., to ensure cash flow is not interrupted; exchange new goods, compensate with product donations, etc., to ensure distributors don't suffer heavy losses due to large amounts of expired products; provide personnel incentive fees to help distributors stabilize employee morale.
3. Invest in innovation: Since consumers' emotional demand will increase, can we also develop corresponding products for dairy that cater to consumer emotions? For example, products focusing on personal emotions like nutrition and health, immunity enhancement, fitness and body shaping, or even personalized nutrition may gain more recognition, but this will further increase supply chain requirements. Or channel innovation, such as integrating online and offline businesses, no longer having two separate systems. Let online and offline products flow through one inventory and be accounted for together. The e-commerce department is just a sales department, and logistics and distribution are completed by the distributor responsible for the consumer. In recent days, many regions except Hubei have seen zero growth, and many distributors have resumed work, indicating that everything is developing positively. For dairy distributors, we must remain firm in our beliefs, guard our channels, and tide over difficulties together with manufacturers and customers. As the situation improves, dairy consumption will gradually recover, after all, 2020 has just begun.
About the author: Liu Huaming, Partner and Senior Consultant at SMI Consulting, MBA from Sun Yat-sen University. Committed to helping consumer goods companies open up marketing channels and solve regional expansion challenges.