In recent years, the FMCG market has seen the emergence of many new brands, including innovative brands that pioneered new subcategories and internet-famous products that have captured the attention of young consumers. However, it is worth noting that these brands primarily focus on online channels such as Taobao, JD.com, and Douyin e-commerce. In most physical retail stores, customers find it difficult to purchase new consumer brands. For brick-and-mortar retailers, this phenomenon brings two problems. First, the degree of category differentiation and segmentation in offline scenarios is hard to improve. For example, in the coffee category, online channels have already segmented into multiple subcategories such as instant coffee powder, drip fresh coffee, capsule fresh coffee liquid, tea-bag fresh coffee, and freeze-dried coffee. But offline channels still mainly offer instant coffee powder and bottled coffee. Second, some product brands in offline channels are aging and struggle to attract young consumers. For instance, brands like Xuanma Egg Yolk Pastry, Yongpu Coffee, and Lamian Talk, which are bestsellers online, derive over 50% of their sales from online channels. So, is this situation because physical retailers and new consumer brands are unwilling to connect with each other? After extensive interviews, "Third Eye Retail" found that the opposite is actually true. Expanding into offline channels is a necessary path for new consumer brands to further increase market share and avoid being a flash in the pan. As physical retailers increasingly demand optimized product structures and enhanced differentiated competitiveness, connecting with new consumer brands has become an important task for retail enterprises. For example, starting from June 2021, Better Life, a regional leader in Hunan, has focused on product differentiation, requiring stores to achieve a 50% differentiation rate in products compared to other local enterprises, and to replace 4%-5% of underperforming products each month. At the same time, Better Life also plans to allocate 1% of profits as R&D expenses for new products to further strengthen its product capabilities. In other words, the difficulty of new consumer brands entering traditional channels has become an urgent issue for both parties. This requires retail enterprises to consider multiple dimensions such as corporate characteristics, regional constraints, and procurement models, first clarify the specific problems faced by different enterprises, and then introduce high-quality products that can boost sales and attract young customers. Gross Margin Space Is a Direct Point of Contention: Different Calculation Methods The core dispute in the process of physical retailers connecting with new brands arises because the two parties use different calculation methods. On the surface, it seems they cannot agree on gross margin space. But at the root, it is a stage-specific issue in the transformation of the distribution system. First, from a direct revenue perspective, since most physical retailers still rely on promotional fees, entry fees, and barcode fees as profit sources, while new consumer brands mainly enter with a net price model and typically do not provide fee support. Therefore, until traditional retail enterprises completely change their procurement models and eliminate entry fees, this dispute will evolve into a fee transfer issue of "the wool comes from the sheep's back." Specifically, in the conventional product procurement process of most retailers, they mainly connect with brand distributors at different levels based on procurement volume. The distributor system ensures regional price protection before sales, thereby preventing cross-regional dumping at different purchase prices, which would harm retailers' interests. Secondly, during the procurement process, distributors can accept retailers' credit terms and provide added value such as warehousing, promotional fees, and personnel support. Even if retailers face slow-moving inventory, most distributors have return and exchange policies to reduce retailers' loss pressure. In this context, when retailers connect with traditional brands, they can accept relatively lower gross margins. For example, a regional retailer executive in Jiangxi told "Third Eye Retail," "Our gross margin with Unilever and P&G is very low, within 10%. But they provide a lot of promotional fee support and are willing to pay entry fees, barcode fees, and promotional fees. New consumer brands generally enter with net pricing. To ensure profit, I have to demand a gross margin of over 50%." According to the retailer's calculation, a large portion of that 50% gross margin becomes promotional expenses, usually accounting for about 30%. Of the remaining 20% gross margin, the retailer also has to cover slow-moving inventory losses and display space losses. The final gross margin left is around 15%. In other words, this type of retailer makes new consumer brands bear entry fees and other costs from the purchase price. Another situation is that some retailers intending to cultivate new consumer brands do not charge barcode fees. However, due to limitations such as customer structure and low brand awareness of new brands, such retailers require new consumer brands to price lower than traditional brands in the same category to attract consumers with price. "Because new brands are niche brands. The more niche the brand, the smaller its traffic. If the price is higher, it pushes consumers further away. So in terms of pricing gross margin, we set new brands about ten points lower than traditional brands," a hypermarket procurement executive in Hunan explained to "Third Eye Retail." But for new consumer brands, because offline retail sales volume is relatively dispersed, it is also difficult to offer greater concessions on the selling price. Ultimately, the gross margin issue becomes a core problem preventing smooth cooperation between the two parties. Secondly, from a long-term perspective, traditional brands launch new products through offline channel distribution to enhance consumer awareness. In contrast, new brands first achieve concentrated online success, build brand awareness, and then expand sales channels. The difference means that physical retailers actually do not get a distribution method suitable for them, so they can only introduce new brands by lowering gross margins. This has led many retailers to implement a "quick in, quick out" policy for new brands. Retailers treat new brands as opportunistic items to attract young consumers' attention and enhance differentiation awareness, rather than as "gross margin contributors" for long-term cultivation. At the same time, due to limited offline display space and capped foot traffic per store, retailers also have different logic in terms of trial-and-error opportunities and new product cultivation space compared to new consumer brands, including differences in conversion rates and competition difficulty. For example, a regional retail enterprise calculated that the conversion rate of new brand purchases among its single-store visitors is about 1/100. The conversion rate for online new brands is lower than 1/10000. But the problem is that online platforms have massive user bases and more focused sales channels, mainly official flagship stores. In the end, offline regional retail enterprises' sales volume cannot easily leverage more resources from new brands. Meanwhile, comparing traditional and new brands, due to the support of traditional brands' regional distribution systems, retailers usually only need to compete with retailers in the same region, and retail prices can basically be set by retailers based on their promotional needs. At this time, the main influencing factors include retailers' procurement negotiation ability, procurement volume, and consumer loyalty. But with new brands, retailers not only need to compete with brands in the same region but also face channels like online platforms. Especially during events like "Double 11," "618," and livestream commerce, the sales prices of new brands on online platforms are significantly lower than offline channels. Therefore, if this issue is not resolved, physical retail stores will find it difficult to smoothly introduce new consumer brands. New Brands' Distribution Capability Is Hard to Guarantee: Subdivided New Categories Are More Likely to Break Through Currently, most new consumer brands have not yet established a comprehensive offline distribution system. However, to "break the ice" with offline channels, some new brands and retailers have attempted to connect. In this process, both parties have encountered issues such as shortened product life cycles, limited distribution capabilities, and emerging homogenization. Multiple retail executives told "Third Eye Retail" that the product life cycle of new brands is shorter than that of traditional brands. This leads to retailers spending time and effort, and sacrificing gross margins to introduce new products, only to see them become "outdated" shortly after being put on shelves. Mo Xiaoxian founder Wang Zhengqi also publicly stated, "Currently, Chinese internet brands are in a rapid iteration cycle. The brands on the annual '618' TOP list change significantly. 99% of new brands from 10 years ago may have disappeared. Up today, down tomorrow, gone the day after. Many new brands may be like this." For online platforms, they earn traffic fees. New consumer brands pay large sums to purchase traffic for market promotion. This means that even if one brand is eliminated, another will take its place. But in physical retail enterprises, the rapid decline of internet-famous products means performance losses. At the same time, new brands, due to the lack of a distribution system, have shortcomings in warehousing, logistics, distribution, and capital advance capabilities. On one hand, this is constrained by new brands' management capabilities. Compared to the online platform model of centralized warehousing and nationwide shipping, expanding offline channels requires new brands to simultaneously monitor inventory dynamics, expiration management, delivery fulfillment, after-sales promotion, and other dimensions across hundreds of stores. The management radius and intensity will be magnified a hundredfold. On the other hand, cost issues are also a major reason limiting new consumer brands from building offline sales networks. "Because there is no distributor for regional integration, most new consumer brands cannot achieve economies of scale in logistics costs, terminal services, and other operational costs in the short term. Look at Genki Forest; they always lose money in direct operations. Once they achieve scale, they will want to be profitable, so they still need to find distributors. Now Genki Forest has recruited many former Nongfu Spring people to expand the distributor network extensively, ultimately returning to traditional methods," a regional retail enterprise procurement director analyzed. Fan Shuxing, founder of plant-based milk brand Daily Box, also told "Third Eye Retail" that if they were to expand channels downward, Daily Box would first choose to connect through a general distributor, usually not signing directly with channels. "Distributors are an essential part of offline circulation. Unless retailers are willing to pay cash on delivery, I might sign directly. But that's impossible, so I need intermediate support for capital advance and delivery. We can't say we've laid out such a large channel and rely entirely on ourselves to bear the credit period? Someone has to bear the credit period for you; it's either the bank or the distributor," Fan Shuxing said. In addition, the homogenization problem of new consumer brands is gradually emerging. This has also become an important reason why new consumer brands find it difficult to enter traditional channels. Retailers prefer to introduce new subcategories rather than new brands within the same category. A Better Life executive said, "When selecting new brands, we value whether they can truly identify a niche market and have unique advantages in that niche to meet consumers' different needs. Only then will we introduce them." Because the advantage of new brands is to bring product upgrades. Otherwise, they cannot bring higher premium space for retailers. For example, for the same mineral water, a traditional brand can sell for three yuan. A new brand, without scale advantages or differentiated selling points, can only sell for three yuan at most. For retail enterprises, the marketing cost of selling mature brands is actually lower, so they will not take risks to introduce new brands. But for categories like plant-based milk, due to strong product differentiation and higher pricing than ordinary dairy products, it is possible to help retailers improve overall gross margins and thus open up the offline market. At the same time, targeting a niche category means the brand's target consumer group is more focused. If that group is a specific demographic with trendsetting significance and low substitutability, such as fitness enthusiasts, young women, or mother-and-baby groups, it may help retailers open up niche markets, optimize customer structure, and guide retailers to cultivate that category long-term. Source: Third Eye Retail (ID: retailobservation) Author: Zhang Siyao Are you "watching" me?