This is the second article in Mr. Zhao Bo's series column 'China Commercial Circulation Revolution Series'. Series Column: 1. In the early days, China's retail landscape was primarily composed of traditional mom-and-pop stores and wholesale markets. I categorize China's retail into four generations:
First generation retail model (1989-): Mom-and-pop stores + wholesale markets
Second generation retail model (1998-): Chain convenience stores + hypermarkets
Third generation retail model (2007-): Platform e-commerce, vertical e-commerce, private domain e-commerce
Fourth generation retail model (2016-): Front warehouses (community group buying + flash warehouses) + discount/membership stores (bulk snacks + hard discount + membership) + interest e-commerce (category + KOL + content) 2. Under the four generations, there are also different supply chain models. The architecture of the distribution channel varies, with some being long and others short. 3. From a global perspective, China's retail landscape is highly fragmented, and even today, modern retail's share remains low. 4. Facing a highly fragmented and backward retail environment, without a large-scale supply chain service system, Chinese consumer brands pioneered a deep distribution model, partnering with distributors to extend their reach to retailers and gain competitive advantage by influencing shelf space. 5. Overall, over the past 30 years, brand owners have dominated the circulation of goods in China's commercial sector because the power dynamics between manufacturers and distributors were asymmetric, with brands being strong and distributors weak. 6. Since hypermarkets had an advantage over traditional wholesale markets and mom-and-pop stores, they could earn substantial profits without much effort. Therefore, Chinese hypermarkets adopted Taiwan's slotting fee model, earning gross profit by charging backend fees and squeezing the market budgets of intermediaries and brand owners. 7. Because hypermarkets were passive and only collected slotting fees, in a sense, early KA retail was also a distribution channel for brand owners. Brand owners only needed to pay a certain product display fee to get their products on shelves. In this case, distributors merely acted as movers, helping manufacturers list products locally and spend and overturn the channel. 8. Due to the costs and operational barriers of listing in hypermarkets, a large number of small and medium-sized enterprises with production capabilities but no brands could still thrive by covering traditional mom-and-pop stores through extensive wholesale markets and agents. 9. The emergence of Taobao in 2016 was a landmark event, marking the beginning of the era of infinite shelves. The cost of listing products on infinite shelves is extremely low, breaking the slotting fee model of traditional hypermarkets. Many small and medium-sized brands discovered that they could reach a vast number of users without paying exorbitant slotting fees. 10. As the online market matured, the infinite shelves online also became crowded. I previously conducted a statistic: at the peak of Li Ziqi's popularity, there were over 20,000 SKUs for luosifen (river snail rice noodles) on Taobao. 11. Users' cognitive bandwidth is limited, making it hard to distinguish, so Taobao began to indirectly charge exposure fees through algorithms and the Zhitongche (drive traffic) model. 12. But whether it's the barcode fees of hypermarkets or Taobao's Zhitongche, essentially, merchants pay for the opportunity to expose their products to consumers, and retailers like hypermarkets and Taobao earn 'toll fees' through this model. 13. As always, because the Chinese market is vast, as long as you can afford the toll, you can achieve huge sales. Therefore, brand owners are trying every means to reduce production costs and increase relative retail prices, indirectly pushing up channel costs. 14. Under the traditional slotting fee model, business is primarily led by brand owners, with distributors playing a supporting role. Brand owners pay channel fees to sell, hence we call it a channel. 15. But this model has completely failed to keep up with market changes. On one hand, there is traffic fragmentation from same-city instant retail, online B2C, live-stream e-commerce, and interest e-commerce; on the other hand, hypermarkets' own inaction, outdated business models, and over-reliance on backend fees while ignoring consumers' real needs are directly responsible. 16. I have a bold prediction: in the next 5-10 years, 70-80% of traditional hypermarkets that rely on backend fees will close their doors. This includes well-known national hypermarkets like Yonghui and RT-Mart. The times are changing too fast, and huge size means huge inertia. If they don't gain insight into consumer demand and lack the ability to reform their models, being eliminated is historically inevitable. 17. Not only retailers, but brand owners' dominance over the supply chain is also weakening. Undeniably, brands are still a very important factor in consumers' product choices, but consumer changes are rapid, and there has been a fundamental paradigm shift in demand for products. The traditional production, communication, and sales promotion models of brand owners can no longer adapt to the fluidity of consumer demand. 18. Brand owners' product logic is based on large-scale industrial production, using STP (Segmentation, Targeting, Positioning) models, which segment based on physical attributes of the population. Of course, there may be a few scenarios, but today's consumer market changes rapidly, supply is excessive, and physical attribute needs are fully met. That is, it has shifted from 'I need' to 'I like', and this 'like' is an emotion, fluid and constantly changing. 19. In this context, the distance between brand owners and consumers is too great, with distributors and retailers in between, making it impossible to quickly understand, gain insight into, and meet consumer needs. At this point, the dominance of consumer insight needs to shift from brand owners to retailers, who can monitor consumer changes in real-time and provide timely satisfaction. In this process, distributors help retailers organize the supply chain, while brand owners provide the corresponding products. They are linked, integrated, and need to respond quickly. This is the true value of the transformation of distributors into supply chain platforms, achieving integrated production, supply, and sales. 20. However, in recent years, we have observed an important trend: the discourse power in the circulation field is gradually shifting from brand owners to some retailers. Some retailers are returning to the essence of retail, discovering quality products based on consumer needs, and leading the supply chain through cash selection or customized development. Specifically, companies like Sam's Club and Hema are no longer relying on slotting fees but are genuinely gaining insight into consumer demand, designing and adjusting product categories based on consumer needs, and carrying out retail reform. 21. These retailers can be divided into two types: the first is supply chain-oriented retailers like Hema and Sam's Club, which directly connect with production ends, with PB (Private Brand) as their core competitiveness, and no distributors in between; the second is retailers like Biyout, which, although having fewer private brands, work directly with brand owners to compress intermediate links as much as possible, providing consumers with more cost-effective services. 22. As for CVS convenience stores, some category stores, such as bulk snack stores, are trying to gain price advantages by compressing intermediate links and concentrating categories. But this model fundamentally does not solve the immediate consumption needs of consumers; it merely serves as a supplementary scenario for impulse consumption. 23. Some Japanese companies are attempting to optimize this model, especially in fresh food, although they have not yet achieved significant results, we have seen CVS's efforts to meet consumer needs. 24. Domestic local convenience stores have been trying to gain scale advantages by integrating traditional mom-and-pop stores and seeking opportunities for reverse customization, but their supply chain model is still a retail system built within the traditional supply and marketing chain. This traditional system is inefficient, opaque, costly, and slow to respond, making it difficult to meet the ever-changing consumer demands. 25. China still has over 5 million mom-and-pop stores, and the supply chain discourse power of these stores is still in the hands of traditional brand owners. But as mentioned earlier, the past distribution system, driven by brand-driven deep distribution, can no longer adapt to today's ever-changing consumer demands. Therefore, China's mom-and-pop stores need a major force to reform and upgrade them to adapt to today's consumer changes. 26. I believe that for the vast majority of small mom-and-pop stores in China, the supply chain should no longer be led by brand owners, nor should it be CVS chains. Although CVS chains have the capability to integrate mom-and-pop stores through supply chain scale and professional retail operations via rebranding/franchising, the biggest problem with traditional CVS is the lack of control over upstream products. Their understanding of products is based on consumer shopping data feedback, which is lagging and lacks insight. CVS's supply chain management for products adopts a trial sales model, lacking consumer-end promotion and education. 27. China's commercial circulation is jointly built by brand owners, distributors, and retailers. It is not a self-contained system, nor does it generate sales solely from data and feedback. It requires insight and marketing, R&D and design, planning and production, communication and branding, warehousing and logistics, promotion and sales, data and feedback, and many other links. It is a closed loop that requires the joint efforts of all members of the chain. 28. I believe that Chinese distributors have certain opportunities in the commercial circulation field to connect and integrate upstream and downstream. Why distributors rather than retailers? Here is a market segmentation perspective: a. Hypermarkets will reform themselves, bypassing distributors to negotiate direct supply with brand owners;
b. The business model of chain stores, constrained by operating costs, cannot expand their trade areas on a large scale;
c. Traditional mom-and-pop stores have the need for upgrading and iteration, but lack the ability to change;
d. Distributors connect brands upstream and retail downstream, and their own operations inherently possess the capability for global connection of production, supply, and sales. However, the prerequisite for distributor integration is transformation into a supply chain platform. 29. This is the core and origin of the supply chain platform's need for integrated production, supply, and sales that I mentioned when founding Tameng (Top500 China FMCG Distributor Alliance), and it is also an important reason for us to do this. We see that in the commercial circulation revolution, distributors are not just movers but an important force and role that must lead industrial change. In this process, distributors must complete their role transformation, from being agents of manufacturers to becoming supply chain platforms with integrated production, supply, and sales capabilities, from the perspective of the commercial circulation revolution, and build distribution and retail networks based on consumer demand changes. Only in this way can they truly integrate China's 6 million mom-and-pop stores, and this is also the last opportunity for distributors. 30. From a business focus perspective, why did McLane, the largest supply chain platform in the US, originally a hypermarket operator, later transform into commercial distribution? Why did 7-11, originally a wholesaler, later engage in retail? This reflects different retail scenarios and formats. For the landscape of commercial circulation, what is the dominant force and key link? Every distributor must have clear and profound thinking on this matter. 31. My understanding is that from the four dimensions of more, fast, good, and economical, hypermarkets focus on the 'more' and 'economical' of products. In this case, the supply chain in the middle needs to integrate more products, manage them well, and obtain cheaper prices through bulk purchasing. This is the key to hypermarket success. 32. Convenience stores emphasize the 'good' and 'fast' of products. How to define a good product must be based on consumer needs, so consumer dynamics become extremely important. What is 'fast'? It means the operator's business actions must be fast, efficiently managing the store based on consumer changes, including category mix, product management, and service convenience. 33. Taiwan's 7-11 adjusts the products in its cold cabinets four times a day, providing breakfast milk and rice balls, lunch bento boxes, afternoon tea snacks, and evening beer and braised food for nearby residents. What is this? This is 'fast'. For consumers, being able to meet their needs is 'good'. 34. In this context, you will find that whether it is brand owners, distributors, or retailers leading the discourse power of circulation, everything is fundamentally based on insight into and satisfaction of ever-changing consumer needs. Enterprises that keep pace with the times, operate leanly, innovate boldly, and continuously iterate themselves are the ones that can truly have discourse power and lead the business! 35. 'New Distribution' was established because we saw that the discourse power in China's commercial circulation is about to undergo a major paradigm shift, and there are huge opportunities for distributors. That's why we decided to establish Tameng (Top500 China FMCG Distributor Alliance) and unite a group of capable, idealistic, resourceful, and willing distributor friends to explore and break through together, helping distributors succeed in transforming into localized supply chain platforms in their cities.