Behind the Increase in Quantity The Counterintuitive Scale Index Let me ask you a question: If a ping-pong ball's diameter doubles, how many times does its volume increase? If you haven't encountered this before or lack specialized math training, I doubt most people can immediately give the exact answer. The answer is 8 times. Another question: Earth's diameter is 3.7 times the Moon's. How many times is Earth's volume compared to the Moon's? Earth's volume is 49.3 times the Moon's. Now, with this concept in mind, let me ask a third question:
In a room with many people, assuming everyone could become friends with anyone else, if the number of people increases from 3 to 30, how many times does the total number of friendships increase? The answer: When the number of people increases 10 times, the total number of friendships increases over 108 times. Back to the industry, another question: In a community, one person facing one supermarket has only one possibility of shopping. If 3 people face 3 supermarkets, how many possibilities increase? If 1000 people face 1000 supermarkets, how many possibilities increase? I asked GPT-4 this math problem, and it replied:
- With 3 people and 3 supermarkets, possibilities increase by 26 times.
- With 1000 people and 1000 supermarkets, possibilities increase by 100 million times. In real life, intuition and experience are often useful. But sometimes, they can skew our judgment of the world. ****The Distributor's Ceiling The Essence Is Insufficient Thinking Scale When talking with distributors, many say business is complex and hard now. Digging deeper, what's behind the complexity? It's that the customers we face and the scope of business have changed. Like the math problems above, on the surface, a few new channel types have emerged, but in reality, the difficulty of operations and customer complexity grow exponentially. Roughly speaking, supermarkets and hypermarkets use a classification mechanism; Tmall uses a platform indexing mechanism; Douyin uses algorithm-based recommendations based on user tags. The user scales on each platform differ, people process information differently, and our business logic on these platforms is completely different. Many distributors find it hard because they haven't learned how to do business on these platforms. It's not that we lack resources, but our intuition and experience are completely ineffective on these platforms. You can't use bank teller logic to handle Alipay's transaction volume. Not only with these platforms, but in the current environment, past experience may not be entirely correct for growth under existing business models. Most distributors' business logic looks information-rich, with daily data analysis, but essentially it's still the bank's manual counter, relying on manpower to pile up transaction volume. This sounds abstract, so let me use an analogy: When a manufacturer launches a new product, the normal logic requires sales reps to visit 15-30 stores a day, communicating with store owners one by one. Then they use an SFA sales visit system to place orders, but product placement, shelf stocking, and terminal service are all handled manually, with photos uploaded. It looks highly informationized, but the underlying logic still uses information technology to solve efficiency issues in existing processes. Have you ever thought: What if one day your sales reps need to handle product placement and stocking for 150-300 stores a day? How would you solve that? Let's talk about another scale: What if your reps need to stock 1500-3000 stores a day? How would you solve that? When the scale goes from 1x to 10x or 100x, the complexity of transactions doesn't grow linearly but exponentially. In fact, one person simply cannot handle a larger scale of business. Without more people, you'll find your previous business model completely fails. So, do you rely on more people? Then the marginal cost of labor and management complexity will rise along with sales growth. Is there a solution that doesn't rely on people? The answer is definitely yes. You can do business on platforms like Tmall, JD, Douyin, Kuaishou, community group buying, and flash warehouses. We can think of these as large-scale business models. They use few people; one person can handle thousands or even tens of thousands of orders. But the business logic is completely different from our past methods. Not only on these platforms, but distributors can use the same thinking to solve large transaction volume issues in their own businesses. Genki Forest's Problem-Solving Approach In the past two years, consumer changes have been rapid, and big brands rarely launch new products that wow consumers. Moreover, the pace of beverage innovation among major brands has significantly slowed. This suggests that big brands' methods for developing new products seem less effective. Product innovation is a complex problem, but there are ways to solve it. Industry practitioners typically use the STP method to develop products. You're probably familiar with this problem: Pause for 10 seconds and think about how to solve it. Anyone with a junior high education or above, including me, would first think of using X, Y, Z to solve it. If it's an elementary school student who hasn't learned equations, they might observe and add the first three then divide by 2, also getting the answer. If you've never been to school, is there a better way? I see that OpenAI's approach to building ChatGPT was to brute-force test numbers one by one until the answer is correct. Effort can work miracles. My reflection is: Once people master a method, they lose the ability to solve problems from multiple dimensions. When you hold a hammer, everything looks like a nail. Everyone knows Genki Forest is highly innovative, but do you know why Tang Binsen, as an outsider, has such strong innovation capability? Many say: first principles, metacognition, cross-industry, using gaming thinking for products, etc. These are all valid. What I see is that he has the ability to brute-force unfamiliar or unknown fields. He used a large team, boldly hired inexperienced young people, let them follow their intuition to create products, and then used the platform's capabilities to help young people realize their product dreams. Then A/B testing, using data to decide whether to keep or drop a product. This method is clumsy and brute-force, but in today's uncertain market, it becomes effective. So we see Genki Forest launching new products very quickly and producing many hits. In other words, Genki Forest changed its approach to solve the innovation puzzle. Of course, I'm not saying brute force or clumsy methods are always good or right. I'm just saying that when we encounter an unfamiliar field or a new scale, using intuition and past experience may not yield the optimal solution. ****What Scale Is a Regional Market? I once asked GPT an industry math problem:
A supermarket covers 1500 households within a 3km radius, each with about 3 people. The store sees about 400 customers daily. But because it opened an online supermarket, the coverage radius expanded from 3km to 6km. If calculated proportionally, how many residents can it cover? Without considering online/offline differences, how much would foot traffic demand increase? GPT's answer: Considering only the coverage increase and ignoring other factors, the online supermarket can attract more potential customers, with foot traffic demand increasing at least 4 times to 1600 people. Of course, there's an experiential issue: Online foot traffic conversion rates differ from offline, so sales won't increase proportionally. A friend who helps retail stores optimize online O2O told me: A store that optimizes its online search logic and expands a few categories can increase store sales by at least 10%-20%. Why not more proportional increase? Although the store gains 1200 more foot traffic, each consumer also gains proportionally more choice. Remember the 100 million times transaction possibility? From the consumer's perspective, it becomes a one-in-a-hundred-million transaction probability. This requires algorithms to match demand. Then the platform charges the store traffic fees. For distributors, this 1200-person foot traffic is real. You need to think: How can your products achieve higher conversion rates in front of this traffic? Alternatively, think differently: How can we expand the possibilities of business in this store to meet more of this traffic's needs? Some distributors might think: Listing many products on the platform doesn't guarantee good sales. In regional markets, branding requires focus, subtraction, big single-product breakthroughs, deep operations, market share improvement, and consumer education. All correct. If you follow this logic, brand business can be done well, but it will only grow linearly. What I want to tell distributors is: How do you achieve exponential growth in an already saturated regional market? The Ecosystem Distributors Operate In Has Changed Next to my office is a supermarket, inconspicuous in the community, with a small sign and not a chain brand. But once inside, I was shocked: the store area exceeds 300m2, shelves are very tall, and the products on display exceed 2500 SKUs. This store is no longer a traditional supermarket. In front of the store owner are a row of phones, seemingly doing group-buy specials. Meanwhile, delivery orders are ringing nonstop. At 10 PM, staff are picking and restocking, a busy scene. It's clear this supermarket is online-first, offline-second, a full-channel convenience store with front store and back warehouse. I estimate daily sales exceed 20,000 RMB. Its advantage: through delivery, it covers more surrounding residents; through online community operations, it gains more sales than store operations; and through delivery, it gains more traffic. Compared to traditional convenience stores, it operates the traditional supermarket business with a higher dimension and better model. I believe this might be the future success image for many community stores. If you're a distributor/wholesaler, how do you supply this store? Undoubtedly, this store has no time to order item by item. It should use a self-operated central warehouse for centralized purchasing and distribution. If you're an agent for a single brand, directly negotiating supply, payment terms, entry fees, and barcode fees will likely be difficult. Even if possible, they'll demand low prices. Why? Because facing such chains that excel in operations and hold traffic, traditional distributors have no bargaining power. Even if you do, it's because you represent a big brand or have exclusive regional agency protection. Your supply qualification essentially comes from the manufacturer, not from your own real capability. In other words, traditional distributors have no chips to negotiate with traffic holders. They can only be exploited. Yet the older generation still takes pride in holding agency resources for certain big brands. Can we change our approach? Are distributors really just movers of goods? Why not create private labels? Why not open convenience stores? Why not build B2B supply chain platforms? Suppose we tell this supermarket: Your core competency is front-end operations. Leave the back-end supply chain to me. I'll provide one-stop supply. You just focus on front-end operations and tell me your product needs. I'll solve it all. How about that? An American Wholesaler's Business Exploration Let me tell you a story about an American distributor opening a convenience store. The problems mentioned earlier, they experienced them too. In 1927, two brothers, Jesse and Joe, started a business in Dallas, Texas, supplying ice to convenience stores. Riding on America's rapid development, their business grew well and soon flourished. By 1940, the ice business was mature. For growth, they gradually expanded categories, selling milk, bread, eggs, and other goods to stores. But other wholesalers had the same goods, so competition was fierce, and they couldn't make money no matter what. After five or six years of mediocre performance, the brothers discussed: This isn't working; we need a solution. So in 1946, they followed wholesalers in other states and created a convenience store brand, then persuaded the supermarkets they supplied to switch to this brand under franchise. This model had a fancy name in America at the time: franchising. Meaning, the brothers only owned the convenience store trademark and wholesaled or sold goods to the stores. But the convenience store business was still run by the store owners, who chose the brothers' products and services at their discretion. Yes, a bit like Meiyijia, which is common in Guangdong today. Image source: Meiyijia official website After 18 years, the brothers had opened many stores, but the supermarket business wasn't easy, with intense competition. Store owners only cared about price, not service, and many competitors took the opportunity to supply low-priced goods to these stores. Gradually, they found many stores didn't buy from them or listen to them. Except for hanging a sign, the stores had no relationship with them. This troubled them. So in 1964, the brothers decided to buy back the franchise rights. What does that mean? In Chinese terms, previously it was rebranding; now it's tight franchising. The convenience store's image, product placement, and what to sell were all decided by the brothers. Stores could only follow their requirements. The brothers completely controlled the convenience store operations. They began setting unified standards and policies, ensuring all convenience stores sourced from them and provided consumers with a consistent shopping experience. This model was common in America at the time. In wholesale, any sizable player had similar convenience store brands. This model and brand were just one of many American convenience store brands. In the 1970s, several Japanese businessmen came to America to learn and saw this model, finding it impressive. So the Japanese found the brothers and asked if they could franchise the brand and run convenience stores in Japan. The American brothers thought, why not? They happily agreed, collected a hefty licensing fee, and sent the Japanese back with a stack of store-opening materials. Unexpectedly, the Japanese treated these materials as a bible. Back home, they deeply embodied the Japanese spirit of obsessing over details, opening the convenience store meticulously, and it grew more and more, soon surpassing its American parent. The Japanese worried the Americans might revoke their license. To avoid future trouble, in 1987 they flew to America and negotiated a reverse acquisition of the convenience store company's equity. After the acquisition, they continued developing, and now the store has expanded worldwide with over 70,000 stores globally. It's famous worldwide for its convenient food, beverages, and other goods. The store's name is 7-Eleven. You see, there's nothing new under the sun. The problems you face today and what you plan to do next, your American and Japanese counterparts may have already experienced. Distributors don't have just one path. If you dare to think and act, the world has infinite possibilities. Distributors are not at a dead end. What's at a dead end is the current model, the mindset, not the opportunity for industrial development. The next decade is the most critical for Chinese distributors to transform into supply chain operators. If you don't, you'll be eliminated. The business distributors face today has fundamentally changed. If you stick to your old model, you can still operate, but it will get harder and harder. Regardless, whether to transform is your choice. Consumer purchasing power is shifting online, toward discounting, chain operations, home delivery, and integrated supply chain models. That's inevitable. More critically, same-city traffic is finite. The sum of all online and offline store traffic in a city is your business ceiling. Only by transforming can you face the exponentially complex retail market with the possibility of responding to changes with constancy. You might say: I don't know how to open a convenience store, do B2B, or deep operations. I have no talent, little capital, and don't know how to start! I know most distributors lack resources, capabilities, and technology. Early entrants have stepped on many pitfalls. But what I want to say is: Wanting to do something and knowing how to do it are two different things. If you don't know, you can learn. But if you don't want to, we can't wake someone who's pretending to sleep. New Distribution established the Tower Alliance (塔盟) with the aim of creating a model similar to rural cooperatives, bringing together the country's best people and resources to help distributors transform toward supply chain operations. The Tower Alliance regularly organizes activities: study tours, salons, internal sharing sessions, private board meetings, company visits, case sharing, and data sharing, providing members with technical, resource, system, and supply support. It gives distributors access to learnable, referable, and collaborative resources and capabilities, helping them avoid pitfalls and complete supply chain transformation quickly, becoming local supply chain giants. **Final Thoughts In the past two years, due to the pandemic and unfavorable international situation, the poor economy has led people to think that business stagnation is normal. But this phenomenon masks a truth: Even if the environment were good, FMCG would not improve again. Because the environmental constants have changed: aging population, declining birthrate, and total consumption will not see major changes. Over the past two decades, Chinese households have accumulated high debt. Once economic growth slows, people will deleverage and consume cautiously. That's why discount stores have become popular in the past two years. In March, we held a supply chain product selection fair at the Spring Sugar Fair. Essentially, the Tower Alliance pooled our distribution power to demand policies, prices, and good products from brand owners. But we know, distributors don't lack products or brands; they lack low-priced hit products and products with bargaining power at terminal stores. We ask companies to present their excellent products and most suitable new products at the lowest prices to distributors. You don't need to sign agency agreements or meet high thresholds for payment and shipping. It's straightforward: look at the products, let good products speak for themselves. The essence behind this is to build a supply chain product selection platform for distributors, letting them choose products to sell, choosing products that sell well. Then we explore a new supply chain distribution model together. From March 14-16, 2024, the 9th China FMCG Innovation Conference, co-hosted by New Distribution, with Ande Zhilian as co-host and Yonyou Digital as co-host, along with the 2nd China FMCG Hard Discount Conference and the 2nd China FMCG Distributor Conference, will be grandly held in Chengdu! The 2nd China FMCG Distributor Conference is hosted by New Distribution and co-hosted by Zhoupu Data; the 2024 Supply Chain Digital Innovation Summit is hosted by New Distribution and co-hosted by Yonyou Group. During the three-day conference, themed "Supply Chain Revolution," there will be one main forum, one China FMCG Hard Discount Conference, one China FMCG Distributor Conference, over ten sub-forums and closed-door exchange sessions, and the first major debut of the [Extreme Supply Chain] Brand Factory Direct Procurement Fair. Together with thousands of FMCG brand owners, distributors, retail transformers, and industry service providers from across the country, we'll gather in Chengdu for continuous brainstorming, discussing the challenges and opportunities, changes and solutions in the era of supply chain revolution. In this era of supply chain revolution, a new business era will be born. I hope every participant will still have a place in this wave. I believe this will be a conference worth attending! 🔺Scan for ticket inquiries🔺