The FMCG2019 China FMCG Conference, hosted by New Distribution, was grandly held from August 20-23 at Shanghai Fuyue Hotel. The event attracted 3,000 industry professionals including distributors, manufacturers, and internet companies from across the country, with a full house and unprecedented scale.
The following is the speech delivered by Mr. Zhao Bo, founder of New Distribution, at the conference, organized and published for our readers.
Friends from brand owners, distributors, and the FMCG industry across the country, good morning! It is a great honor to gather again in Shanghai for the annual China FMCG Conference held by New Distribution every August. This year, we have the highest number of participants ever. We prepared 1,900 seats, but the actual registered attendees exceeded 3,000, which surprised us greatly.
Why are you all so enthusiastic to attend this conference? I believe it is because of a common word we all share—anxiety. Whether in the market, channels, or products, everyone is facing many problems.
I hope that through this three-and-a-half-day conference, you will gain insights, learn, and grow in various sub-forums and topics. As long as you gain something, the purpose of our conference is achieved.
Today, I will share with you a topic: Digital Supply Chain Applications and Practices in the FMCG Industry. Before diving into this topic, let me mention a phenomenon.
A couple of days ago, I was invited by a brand owner to conduct market research. I visited Dezhou in Shandong, Wuxiu in Henan, and Luzhou in Sichuan, covering prefecture-level cities, county-level cities, and rural township outlets. I discovered two issues.
First, I found that almost all rural outlets no longer look like they did ten years ago. Various counterfeit products, typically like Kangshuai Fu (a knockoff of Master Kong), are almost invisible in stores now.
The image on the upper right is from a very remote rural store in Hejiang County, Luzhou, Sichuan. There are no counterfeit products; they sell Luzhou Laojiao, Wahaha, and Coca-Cola. The image on the lower right is a township store, where the category structure is already equivalent to that of urban stores.
Behind this phenomenon, it shows that the tanks of big brands have, with the implementation of China's policy of connecting every village with roads, sunk their market down to rural areas.
Second, the recent 618 shopping festival gave me a lot to think about. This year, the beer category exploded, with very fast growth in e-commerce. However, beer is characterized by low value, heavy weight, and high logistics costs. The e-commerce logic is that from warehouse to consumer, the delivery radius is very long, and the cost of product delivery is extremely high. But what if consumers order nearby? Within a three-kilometer radius, there might be beer distributors or secondary wholesalers. Online orders cannot achieve nearby delivery.
Moreover, the most common complaint during 618 and Double 11 is: Online specials, internal conflict. Imagine a scenario: if the U.S. military fought Iraq with the Air Force fighting the Air Force and the Navy fighting the Navy, each fighting separately, could they win?
But today, we see that the e-commerce and sales departments of FMCG companies are fighting every day, without forming a coordinated combat effect. This is worth pondering.
With technological iteration and the popularity of the internet, the integration of online and offline, and the omnichannel delivery under new retail, have become inevitable trends and a consensus among us. Because of pricing, online and offline conflicts are still common, which forces us to think about organizational changes at the brand level.
At the same time, our distributors must also think: when facing environmental changes, how should they move forward?
Let me first talk about the Chinese market. It is a super complex, multi-layered three-dimensional market. There are 285 prefecture-level cities, over 40,000 townships, and the development of markets from tier 1 to tier 6 is highly uneven.
There are over 6.8 million retail outlets, without a large-scale logistics and supply chain system. Small stores are highly fragmented, run by mom-and-pop operations. The capabilities of manufacturers and distributors are extremely asymmetric, and consumer awareness is also asymmetric.
Since 1992, teachers Bao Zheng and Shi Wei proposed a "deep marketing" theory. Many brand owners present here are practicing it. The essence of deep distribution is to emphasize building an integrated relationship between manufacturers and distributors, extending operational reach through distribution to the retail level, and gaining competitive advantage by establishing partnerships with distributors and retailers.
The essence of deep distribution is not entering villages, but driving sales. How to drive sales? By extending operational reach into small stores, intervening in their daily operations, and thus gaining competitive advantage in the store. That is the true essence of deep distribution.
Of course, there is another layer of essence: efficiency. What efficiency? Large-scale production, large-scale circulation, large-scale sales, with manufacturers and distributors joining hands to expand production and sales scale and share the benefits of economies of scale. Procter & Gamble has taken this model to the extreme.
To this end, P&G has its own HBG theory: big brands, big media, big channels. Applied to other FMCG categories, it is the "three axes": celebrity endorsement, CCTV advertising, and channel distribution. This is a model that our FMCG industry is very good at today.
Minimize SKUs as much as possible, expand production and scale, amplify efficiency, and then distribute on a large scale through distributors to expand production and sales and gain competitive advantage. Its core is efficiency.
But now, the HBG model has failed and cannot support the development of the entire FMCG industry in the next decade. Why do I say this?
First, the Chinese market has evolved from a single ultra-large-scale market into a fragmented and diverse market. How to understand this? Typically, consumer demand is extremely diverse.
I often tell a joke: when I was in junior high school, wearing Adidas or Nike was a cool thing. If I saw others wearing them and I didn't, I would feel embarrassed. But now, what is the biggest fear when going out? The fear of wearing the same clothes as others. This is a typical fragmented demand scenario in the apparel industry.
Now, the channels or scenarios where consumers purchase have been divided into three networks: the sky network, the ground network, and the human network.
Traditional brands and distributors are best at the ground network, covering distribution through KA, TT, CVS, and other channels. The sky network includes B2C e-commerce like JD and Alibaba, as well as the new retail that has emerged in recent years, integrating online and offline.
The "human network" that has risen in the past 1-2 years, such as the "Little Bear Muffin Biscuits" that became popular on Douyin (TikTok), where the owner doesn't even know why it became popular, but it was accidentally "shaken" to fame by a group of kids on Douyin.
In summary, China's market demand is increasingly diverse, and retail channels are increasingly fragmented, but our capabilities are still very singular, only good at offline distribution and promotional pull.
We believe that at this stage, we have encountered a new business logic. First, consumption stratification/upgrading; second, information overload, with a large amount of information flooding in from Douyin, Toutiao, and WeChat Moments every day.
Once information is overloaded, our choices become more difficult, and for companies, the difficulty of communication increases; third, oversupply, which goes without saying. Today, most brand owners' factory utilization rates rarely reach full capacity; fourth, consumers consume across all scenarios. Before a consumer places an order, you never know where they will order.
Sitting here today, as long as we pick up our phones, theoretically, you can buy any product from anywhere in the country or even the world. The key point is just which app you order on and which store you consume in. For brand owners, this is a disaster. Channels are too fragmented to cover everything.
Therefore, the existing distribution channels have great limitations. Online and offline are separated, company departmental walls are extremely serious, and there is no coordinated combat across air, sea, and land.
In addition, the existing distribution model cannot support a large number of innovative retail scenarios. Moreover, with diverse demands, a large number of brand owners have produced a large number of niche long-tail products. However, the problem is that the existing channel model cannot support the distribution of niche long-tail products, nor can it support the integration of online and offline. There are channel blind spots, data gaps, opaque distribution data, and inefficient use of channel funds.
The problem arises: under this model, how should we transform? We have summarized three contradictions: First, the supply-demand relationship has reversed. That is, the contradiction between scale-oriented sales methods and the growing personalized needs of consumers cannot be satisfied;
Second, the contradiction between diverse shopping scenarios and a single distribution model; Third, as China enters the ranks of middle-income countries, the contradiction between cost and efficiency.
That is to say, based on the past efficiency and the business model that prioritizes channels, we believe it should be transformed into a model oriented by consumer value and retail user consumption scenarios. The specific transformation is worth thinking about for everyone.
Of course, the popularization and application of digital technology also bring us new hope or new models.
Facing external changes, we believe brand owners should achieve four points: First, precise reach and precise marketing; Second, omnichannel coverage; Third, flexible delivery across the entire network supply chain; Fourth, digital management.
How to achieve this specifically? First, the 4Ps need to be restructured. The 4Ps themselves are not a problem. But what needs to change is the logic of thinking: from mass to segmented, marketing from funnel to ripple, channels from analog to digital, and organization from management to empowerment. (Due to time constraints, I cannot elaborate on each point now; I will write and publish a separate article later. Please stay tuned.)
We believe that the organizational model suitable for the future supply chain can be summarized as "three online, three warehouses, trinity, and middle-platform support for collaborative models." It sounds a bit abstract, so let me explain one by one.
First, to achieve a digital supply chain model, we must first ensure three online: product online, transaction online, and data online. How to achieve this? You can think about it carefully. For example, in the B2B model, with the separation of people and warehouses, should we consider adjusting our supply chain?
Second, integrate city warehouses, regional warehouses, and front warehouses into a network for flexible delivery across the entire network. In the past, commercial flow and logistics were integrated. We sold goods to distributors, and they handled everything locally.
But today, we see that to achieve a digital supply chain with flexible delivery across the entire network, the premise is that people, goods, and warehouses must be separated. This is inevitable.
How to achieve this? Outsourcing logistics to third parties is a very challenging task. Although there is no large-scale, nationwide logistics system yet, brand owners must do this. Only by doing so can your inventory be online through digital technology. Only when inventory is online can transaction data be real-time online. Only when transaction data is online can the entire chain's data be fully online.
Only with these online can we truly achieve one-stop online delivery for KA, B2C, O2O, and a large number of innovative scenarios. Only then can we provide consumers with products and services corresponding to their consumption scenarios. Logistics is the core.
Regarding marketing, teacher Shi Wei has proposed concepts of cognition, relationship, and transaction. Based on online and offline, social, brand, and channels, we need to do a systematic restructuring. Online, we need to achieve integrated delivery of cognition, relationship, and transaction through content, interaction, and online e-commerce; offline, we need to build cognition based on scenarios, experience based on relationships, and traditional channels based on the human network; in the social field, we need to achieve integrated delivery of online, offline, and social networks based on KOLs, communities, and social e-commerce.
Regarding organization, first, the company's departmental walls are particularly large, making it impossible for online and offline to coordinate operations, and various core points cannot support niche long-tail distribution. How to achieve this? We believe that only through small teams and small organizations can we effectively solve this. Sales, marketing, and supply chain should build a new middle platform system around marketing channels and products. Behind the design of the middle platform system is to operate and serve users around new retail, communities, and neighborhoods, based on online, offline, and social fields.
In summary, it is called "three in one": small teams, big middle platform, and user operations. There is too much information here; today I am only providing a framework. However, this diagram can basically explain the internal logic clearly. I believe this is the organizational model suitable for the future complex, diverse, fragmented scenarios and long-tail demands.