---
title: "What Exactly Is Wrong with Traditional Business?"
description: "This article analyzes the fundamental problems of traditional business, attributing them to the twin black holes of inventory and discounting, and proposes a future path through asset securitization, financialization of franchise stores, product differentiation, and crowdfunding via e-commerce."
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published: "2017-02-24"
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# What Exactly Is Wrong with Traditional Business?

> This article analyzes the fundamental problems of traditional business, attributing them to the twin black holes of inventory and discounting, and proposes a future path through asset securitization, financialization of franchise stores, product differentiation, and crowdfunding via e-commerce.

**Click the image for details**
**Introduction:**
This is an invaluable article. To systematically organize it, we spent several months. The article is not long, but it will surely inspire you.
In 2016, traditional business fought an "upgrade war" and struggled in vain.
In 2017, this battle will become a "survival war," and the situation will be even more intense!
In fact, in recent years, traditional business has been struggling in this state: transformation is like going to certain death, while not transforming is waiting for death. From O2O to Internet+ and then to Internet thinking, people have tried to seek future business pathways through innovative concepts. But these innovative concepts have not touched the problem itself.
What exactly is wrong with traditional business? Once we see this clearly, we grasp the direction for solving the problem, and the specific path gradually becomes clear.
Chinese traditional business is ushering in the most magnificent reshuffle in history. What we are witnessing is: shopping malls, supermarkets, and retail, as the three pillars of traditional business, are now struggling, and many brands are walking on thin ice, even facing life-and-death situations.
From Pacific Department Store, Wangfujing Department Store to Wanda Department Store; from Walmart, Carrefour to Tesco; from Metersbonwe, Daphne to Belle, and even catering brands like McDonald's, Xiang-E-Qing, and South Beauty, as well as many home improvement and sanitary ware brands, almost all have encountered declining performance and the tragic fate of closing stores.
Even ZARA, the fast-fashion brand that leads the new business model, closed its largest flagship store in China (Chengdu Lesen Shopping Center), and its store opening pace has slowed; H&M has also experienced its first decline since entering China; Uniqlo's operating profit and net profit have both declined, and at the beginning of 2017, it closed four stores. These up-and-coming brands have also not escaped this round of reshuffling, and the so-called new models may become history.
**Every Link in the Traditional Business Chain Bears an Unbearable Burden**
For manufacturers (factories), labor costs are increasingly higher, tax burdens are heavier, and with the downturn in exports, many have shifted from export to domestic sales, leading to more intense domestic competition. Additionally, many factories produce under OEM arrangements, resulting in severe product homogenization, no added value, and shrinking profits, leading to more factory closures.
For brand owners, they are entangled in upstream and downstream triangular debts, with high inventory levels and severe e-commerce impact; profit margins are also sharply declining. Moreover, the need for substantial capital investment in physical development makes the capital market wary, so their path becomes narrower.
For department stores, their understanding of development remains at the level of expanding business area and luxurious interior decoration, leading to significantly increased operating costs and diminishing economies of scale. As brand owners collapse like a mountain, more counters are removed than added, and the reverse trend of courting brand owners has formed. Various decoration subsidies and advertising subsidies have made the department store business model a chicken rib, and the opening of street stores and small business circles around shopping malls adds insult to injury.
For agents, they are only the intermediate link in commodity circulation, subject to various policies of brand owners, with no voice. Their large amounts of funds have piled up as goods, and various new models, new ideas, and new technologies have repeatedly stalled because they cannot synchronize with the overall strategic planning of brand owners, leaving them in a dilemma.
For terminal stores, rent and department store commission points remain high, promotional discounts have become a necessary sales tactic—if there is a discount, there is a sale; without a discount, no sale—and they also have to compete with e-commerce on price, struggling between sales volume and profit.
In short, this is the current state of traditional business: bosses at every link are too tired, profits are too low, talent is too scarce, and risks are too high. Bosses all feel it's chaotic, all have ideas, but none know how to start.
Of course, some people have started to toss around new concepts, from O2O to Internet+ and then to Internet thinking, but the results have been fleeting, and after all the fuss, they return to the starting point.
In fact, our previous innovations were conceptual innovations and never touched the problem itself.
**What Exactly Is Wrong with Traditional Business?**
Tracing back through the above links, we find that "inventory" and "discounts" are the two black holes devouring traditional business. Inventory leads to low efficiency, and discounts lead to low profit margins. Both can be fatal, especially when combined.
Let's first look at how "inventory" arises? As shown in the figure:
This is the traditional product pathway, a chain-like wholesale model. Each downstream link must first spend money to obtain goods from the upstream link, and the quantity of goods each link takes is required. Therefore, products are not sold to consumers but first to agents, then to distributors, and finally to consumers.
This is actually a top-down apportionment approach. However, product sales volume is fixed, and the portion beyond the market's absorption capacity becomes inventory, distributed layer by layer among various links.
So, how do "discounts" arise?
Inventory leads to problems with capital return and cycles. To offload their inventory, each level tries to give lower discounts to the next level. Therefore, price reduction is the most primitive demand of traditional business.
For example, a large agent may threaten the manufacturer with the channel: you must lower the discount (e.g., supply at 3.5折) or I won't take goods. And a half-dead agent will close immediately if you don't lower the discount.
This logic transmits to product prices, leading to price wars: if there is a discount, there is a sale; without a discount, no sale; you go lower, and I go even lower.
To ensure their own profits, manufacturers raise the marked price (tag price) while lowering discounts, but the marked price is far higher than the transaction price, so the entire market falls into a chaotic, ruleless situation. **Most importantly: brand value begins to depreciate.**
So, we can observe a phenomenon: domestic brands like Li-Ning, Metersbonwe, etc., seem to be on sale all year round... Thus, the image accumulated by many brands over the years is defeated by "discounts."
This is the commodity pathway model of the wholesale era, which is on the verge of collapse.
The first shot of the commercial revolution was fired by e-commerce, because e-commerce has no channel squeeze. Physical stores can sell at 7 or 8折, but e-commerce can sell at 5 or 6折.
Brand owners saw that this would lead to chaos, so those relying on physical stores began to suppress e-commerce development and resolutely prevent online sales.
However, by this time, the logic of business had been rewritten by the Internet. Blocking is not as good as guiding; excluding is not as good as utilizing. Unfortunately, many brand owners only understood this after being revolutionized.
**The fundamental starting point for solving the problem is: break the layers of exploitation and eliminate layers of obstacles**
**In the future, products should be sold directly from brand owners to consumers, and then all links from factories to distributors will share their profits. There will be no supply price or supply discount, but the brand owner will uniformly set the retail transaction price based on inventory positions.**
This requires brand owners to have pricing and management rights over terminal retail. The previous chain operation models such as direct operation, franchising, trusteeship, joint operation, or improved models based on these: gross profit guarantee model, reverse minimum guarantee model, cost + profit model, cannot achieve this step.
The core of solving the problem lies in: in the future, to achieve the same price for the same product and break the layers of wholesale, we must realize the "three-store integration" model of direct stores, franchise stores, and online stores. The core issue of three-store integration is: how to make franchise stores operate like direct stores?
The core of franchising direct operation is to link the assets of terminal (physical) stores with the brand value.
In fact, in the operation of physical stores, people often overlook a very important issue: the value of retail turnover.
What is an asset? Only the part that can be "confirmed" can be called an asset. What can a store "confirm"? First, the ownership of the store belongs to the landlord; the operating right belongs to the lessee. In addition, the store has another asset: the right to income. The right to income is the store's business turnover.
The only path to turn the store's income right into an asset is "asset securitization." The so-called securitization of store income rights is to share the existing store income rights and let investors invest. As long as investors participate in the store's investment, they can share part of the income distributed from the store's income rights. The most typical example is the model of Heilan Home.
Therefore, this leverages the financial leverage to activate the income rights of physical stores.
**This method is also applicable to other industries. In the future, every industry must leverage the role of finance. Because the essence of finance is credit, once we utilize the value of credit, the speed of product circulation will greatly increase.**
This logic also applies to franchise stores. We only need to use the franchisee's deposit as a guarantee to form dual credit of cash and debt, so that after the franchisee invests in the first store, they can use the bank's revolving credit to obtain funds for subsequent stores.
Of course, in addition, we must also solve the added value of the product itself, which is the power of culture, as well as the problems of production capital recovery and user locking that e-commerce can solve.
This is the future business pathway, which can also be called the four modernizations of retail:
> **01 Securitization of direct store assets: Package the retail sales of all stores as assets and sell them through major trading platforms to realize the circulation and trading of investment shares;**
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> **02 Financialization of franchise stores: Use dual credit of guarantee funds and bonds to continuously open new stores.**
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> **03 Product differentiation: Use cultural and cross-border soft asset elements to solve the problems of product homogenization and insufficient cultural added value, and carry out differentiated competition;**
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> **04 Crowdfunding via e-commerce: Use e-commerce platforms as a crowdfunding path, where consumers can recharge for consumption. This recovers production funds, forms a traffic entry point, and can effectively lock in e-commerce platform consumers within three to five years.**
**So, how to lay out a brand's "commodity pathway"?**
First, package and sell 50% of the total retail sales of all stores to recover the investment at once.
Second, use the investment funds and franchise store guarantee funds to buy back franchise stores as direct stores, and then contract them back to franchisees, making all stores direct-operated, called cooperative direct operation.
2017 will be the most difficult year for physical stores (terminals), and also the best time for bottom-fishing acquisitions. We can complete the layout of terminal stores at this time, and equip all single stores with online stores and micro-stores for three-store integration.
Then, each year, we can create some hot-selling products, leveraging the large publicity windows of culture and film and television, using celebrity fan effects to guide the creation of hot products and increase product depth.
This makes each terminal store and the head office form an organic whole, becoming a "head office - branch" relationship. Each store is built and financially processed according to branch standards. Thus, stores are cooperatively operated, management mechanisms are completely in line with the direct operation system, and brand owners uniformly set prices, manage, and regulate goods, then share profits with franchisees.
At this point, the two fatal problems of business, "price wars" and "inventory," also disappear.
> **1. Disappearance of inventory. Each terminal store is stocked according to sales conditions. Sales data is automatically recorded daily through the cloud warehouse system. The head office promptly produces and distributes goods based on monthly or annual summary data, minimizing terminal inventory to the greatest extent.**
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> **2. Disappearance of discounts. Whether it's an online store, physical store, or micro-store, the price is the same, which eliminates cross-channel sales from the source. All products are classified as fast-selling, regular-selling, and slow-selling based on past sales. Fast-selling items are sold at the original price, regular-selling items at promotional prices, and slow-selling items at clearance prices, ensuring the fairness and reasonableness of prices to the greatest extent.**
This is the four modernizations of retail, and also the future "commodity pathway." It is a more efficient management and operation model. This model transforms loose connections into tight links, with faster response, fewer frictions, and more efficient collaboration.
In terms of input-output ratio, the results of the four modernizations are shown in the figure:
This "commodity pathway" construction is also applicable to other industries.
**We can find that the only secret for a company to grow big in the future is: platformization.**
**The essence of platformization is that business moves from the era of "competition" to the era of "great collaboration."**
**Therefore, this is the best of times, and also the worst of times.**
Some are pessimistic, some are rising.
Pessimists think that in China, nothing makes money anymore because all business logic has been overturned.
Those who rise see the hope of business restructuring and believe that all businesses in China are worth doing again from scratch!
**As the saying goes, "Without breaking, there is no establishment." The true meaning of "crisis" is "danger + opportunity."**
**Business is like this, and so is society.**
**Source: Business Index Special Issue**
▲This article is excerpted from "The New Retail Era," published by China Machine Press in June 2017.
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