The Business Dilemma Forged by Historical Paths Recently, I have been visiting member distributors of the Tower Alliance intensively. My biggest feeling is that winter has arrived, but the future has not yet come. However, most people are still trapped in the old rule system. What are the old rules? Whether for manufacturers or distributors, business models are largely determined by market demand. Behind the business models built on market demand, there are rules. For example, the agency system for regional distribution prohibits cross-regional channel stuffing and price breaking. Behind these rules is the enterprise's use of them to maintain the stability of the value chain. But the cost of maintaining this value chain is actually very high. For a product priced at 10 yuan, using the traditional value chain, the production cost should not exceed 3 yuan, preferably below 2.5 yuan. The profit of 7-7.5 yuan in between is shared by the brand, distributor, sub-distributor, and retailer. The reason for such high costs is that in the past, the zero-supply system in China's FMCG industry was very backward. There was no large-scale and systematic supply chain to support the distribution network, which forced manufacturers to hire a large number of salespeople and recruit a large number of distributors to complete intensive distribution of goods in regional markets. The above diagram illustrates the profit structure of the ambient milk industry. But from another perspective, is this cost structure reasonable? In an exchange with Mr. Meng, chairman of Biyoute, he said something counterintuitive: Why are prices in Chinese hypermarkets higher than in mom-and-pop stores? This does not conform to business common sense! Whether it is rent per unit area, labor cost per unit sales, or utility and management costs, mom-and-pop stores and convenience stores are all higher than hypermarkets. Why, in China, are hypermarkets more expensive? Why do intermediaries add such high margins? He believes that FMCG manufacturers are not proactive, not upgrading, not optimizing the supply chain, and that distributors' operational efficiency is too low, with operating costs too high. I put forward a viewpoint: It's not that Chinese brand owners don't upgrade; it's that Carrefour led Chinese modern retail astray for 20 years. Hypermarkets represented by Carrefour did not study how to serve consumers well; they only studied how to collect back-end fees from manufacturers and suppliers. Chinese modern retail is so miserable, and Chinese distributors are so inefficient; Carrefour is to blame. From the perspective of brand owners, the front-end and back-end fees of modern channels, CVS, and hypermarkets together deduct about 30%-40% of the retail price. This does not include hidden costs, such as the unspoken parts under the table with the store buyers, and these costs are added to the retail price of the product. To achieve complete market coverage, manufacturers do not want large distributors; to gain greater benefits, hypermarkets adopt marginalization negotiation strategies against suppliers, exert extreme pressure, and divide and conquer. In a sense, this has caused the backwardness of China's FMCG supply chain today. The above is a market coverage diagram for a condiment product, with multiple distributors supplying a city, even one distributor per town or one per channel. Imagine locking distributors tightly into a very small market space; how can they generate scale and gain greater development and survival space? More critically, this market division based on physical regions cannot cover O2O, social private domain, or platform e-commerce, forcing manufacturers to go directly into these channels for operation and management. As for brand owners, without a retail reverse selection mechanism, they cannot seriously study products. Most of their time and expenses are spent on figuring out how to handle channels. The result of not upgrading is severe homogenization: the leader copies the second and third, and the second and third give up and do not work on product upgrades. The final result is that when facing the industry cycle and starting to involution, everyone only knows how to do low prices. This is a bit like the late Qing Dynasty when the country was closed to the outside world. According to research by historical economist Angus Maddison, in 1820, China's GDP accounted for about 32.9% of the world's GDP. In 2024, China is expected to account for only 16% of the world's GDP. Although externally, the late Qing seemed large, if you look at the micro level with a magnifying glass, farmers at that time were extremely struggling, agricultural technology and tools were extremely backward, there were too many people and too little land, and everyone was thin and hungry. The Qing government fell into a systemic dilemma: political corruption, economic collapse, military backwardness, social unrest, and diplomatic failure together constituted the full picture of the late Qing crisis. The interaction of these dilemmas led to the final demise of the Qing Dynasty and profound changes in Chinese society. I seem to see the entire industry's enterprises, like the late Qing, falling into a systemic dilemma. "Systemic dilemma: Within an organization or system, because various parts are interdependent, even if individuals or small groups are aware of the system's problems, due to systemic constraints, they find it difficult to make effective changes." This is the pain of the era. Even if everyone sees the problem, the huge organizational inertia and path dependence make it difficult for each of us to achieve true upgrades. Low price is the trend in the era of shrinking volume It is about reducing intermediate links and improving supply chain efficiency Behind the phenomena of intra-industry involution and copying, low-price competition on e-commerce platforms, and the full discounting trend in retail, there is a new fundamental contradiction:
It is the contradiction between consumers' longing for a better life and their anxiety about future uncertainty, which makes them dare not consume; it is the contradiction between retail's demand for low prices and the high cost of supply;
It is the contradiction between enterprises' ability to produce good products and their inability to meet consumers' new emotional value demands. Low prices are not scary. What is scary is that behind low prices is the squeezing of the supply chain, a zero-sum game low price, such as the low prices of community group buying and Pinduoduo, which are poison. At the same time, we also see that in the era of shrinking volume, a large number of excellent enterprises have emerged that can thrive in the cold winter. But some modern retailers, such as Biyoute, Luoyang Dazhang, and Pangdonglai, achieve low prices by optimizing supply chain efficiency, reducing intermediate links, compressing back-end costs, and improving capital efficiency through cash procurement and sales. Although retail prices are low, the profits of participants in the value chain have not decreased. Some distributors have transformed into B2B supply chain platform providers, such as Luoyang Hecai, Guangxi Yixing, and Tangshan Yihe. They can tolerate low gross margins. Through online transactions, large-scale warehousing, centralized distribution, automated accounting, and operational efficiency gains, their scale advantage allows them to achieve extremely low distribution costs. Whether in retail or supply chain, excellent enterprises gain a competitive advantage in total cost leadership through technological reform and model transformation. From these excellent enterprises, I see a trend in modern zero-supply: Traffic is concentrating, and every member of the supply chain is trying every means to optimize the supply and marketing chain, reducing intermediate links, and lowering costs through scale advantages, efficiency maximization, and informatization. The big direction is to extremely compress intermediate links; distributors and wholesalers can only keep one, or even none. Intermediate links are being optimized. Several articles by Ren Wenqing of New Distribution have also mentioned that the trend of zero-supply integration and supply-marketing integration is very obvious. The big logic is that retailers are starting to do B2B supply chain business, and B2B supply chains are doing retail chain franchise business. This is what I said earlier: the rules of commercial zero-supply are changing due to the rise of new forces. And low prices are also an inevitable result of the zero-supply integration process. Although this change is happening slowly, such as the rise of B2B platforms in regional markets, the rise of snack food volume retailing, and the discounting trend of hypermarkets, all are trying to squeeze out the water from intermediate links and optimize the efficiency of the supply chain. In other words, completely optimize away links that should not exist or can be optimized at any time. Through model changes, compress away links and costs that should not appear. We should welcome this kind of low price. Even if it disrupts the manufacturer's distribution rules, we should also think: does this rule limit distribution efficiency and reduce enterprise competitiveness? In the past, the traditional distributor model of manufacturers is now disintegrating in regional markets into some new distribution models: Large agents (channel agents) + large platform operators + large supply chain service providers + direct-operated channel combinations are replacing the single-market, single-product regional agent full-channel operation distributors. So those distributors who are still struggling to support single-brand full-channel operations will find business increasingly difficult in the past two years. Because the complexity of the market and channels is increasing, the operational threshold is rising, and manufacturers' requirements for distributor capabilities are also rising. Relying on loyalty, capital, and obedience is no longer enough to meet the requirements of manufacturers and the market. The manufacturer's overreaching hand is also slowly retracting. One of the most notable phenomena is that a large number of manufacturer direct sales representatives are transforming into distributor sales representatives. Manufacturers are gradually returning the market to distributors, allowing them to play their original functions and roles. Brand owners should actively cooperate with regional B2B platforms In the past two years, a batch of B2B distributors that have transformed into supply chain providers have also begun to grow wildly. Once these distributors cross a sales scale of about 100 million yuan within a certain period, they will quickly become the supply chain overlords of the regional market. New Distribution has currently taken stock: there are about 100 regional B2B platforms that have reached scale, and they are all growing rapidly. At the China FMCG Conference in August, New Distribution will also release a directory and manual of B2B platforms for brand owners' reference. Here, I strongly suggest that some brand owners actively cooperate with such platforms. New Distribution operates the Tower Alliance (top500 China FMCG Supply Chain Alliance), under which it has also built the Lianhuowang B2B mall to help brand owners and these B2B platforms build a production-sales integrated supply chain docking platform. (The Lianhuowang platform is in trial operation; all brand owners are welcome to join.) If you are interested in joining the Tower Alliance and exploring the digital transformation and upgrading of distributors with us, and jointly optimizing supply chain efficiency, you can contact our colleagues. These regional B2B platforms act as agents, distributors, and wholesalers; they provide one-stop supply to small stores, and also do chain franchising and small store rebranding. In terms of efficiency, their warehousing and distribution efficiency is far higher than that of distributors; in terms of market coverage width, they can basically cover all stores in the market; in terms of depth, their relationship with small stores is more like business consultants, and they even do chain franchising. At this time, you will find that scale is a barrier. Big and comprehensive: large-scale procurement, full-category product coverage; fast and many: high selectivity, fast supply chain delivery;
Cheap and convenient: online transactions, low-cost advantages brought by extreme supply chain. In this development process, we will gradually see a batch of enterprises that make good use of the new supply chain infrastructure. For example, flash warehouses, and individual retail entrepreneurs who join same-city supply chains. Great companies have all experienced cold winters They are even nurtured in the cold winter Wang Yuquan said in a public class of [Science and Technology Training Camp] that as an enterprise, don't treat yourself as a cactus: suffering and enduring, surviving the dry season, and then being soaked to death in the rainy season. Instead, be a towering tree that plants seeds in the dry season, quietly waiting for the rainy season to come and harvest abundant fruits. There is a fact that surprises many people: many great companies were founded during economic recessions or financial crises. These companies planted seeds during economic recessions and eventually grew into towering trees. These companies founded during economic recessions include: General Motors: 1908 (during the "Panic of 1907" economic recession) Procter & Gamble: 1937 (during an economic recession) Hewlett-Packard: 1939 (at the end of the recession, world trade was below the level of ten years earlier) Microsoft: 1975 (during the mid-1970s oil crisis and the U.S. stagflation period of the 1970s-80s) Apple: 1976 (during the U.S. stagflation period of the 1970s-80s) CNN: 1980 (during the stagflation period) Electronic Arts: 1982 (the seventh post-war economic crisis) Adobe: 1982 (during an economic recession) ARM: 1990 (the early 1990s recession hit the UK hard) ...(The list is long, so I won't list them all.) Looking at all the great consumer goods and retail enterprises globally, they either experienced multiple economic cycles or were nurtured in the cold winter of economic cycles: 1. Procter & Gamble (P&G) P&G performed well during the Great Depression of the 1930s. By introducing innovative marketing methods, such as sponsoring radio programs (the famous "soap operas"), P&G successfully maintained market share and launched many products that later became well-known brands. 2. Unilever Unilever was founded in 1929, but its predecessors, Lever Brothers and Margarine Unie, merged during difficult economic times to achieve stronger market competitiveness. Unilever continued to expand its product lines during the Great Depression, including fast-moving consumer goods such as soap and margarine. 3. Nestlé Founded in 1867, Nestlé maintained growth during difficult economic times, especially during World War I and the Great Depression of 1929, by expanding its product lines and global markets. Nestlé launched many popular consumer products, such as baby food and milk powder, further consolidating its market position. 4. The Coca-Cola Company Founded in 1886, Coca-Cola successfully maintained growth during the Great Depression of the 1930s through innovative advertising strategies and marketing. The company used the emerging radio advertising and product promotions to enhance brand awareness and market share. 5. H.J. Heinz Company Although founded in 1869, Heinz successfully weathered difficult times during economic depressions through a diversified product line (such as ketchup and canned food), as well as excellent product quality and brand marketing, and continued to expand. 6. Aldi Aldi's history can be traced back to 1913, when Anna Albrecht opened a food store in Essen, Germany. However, Aldi's real development and expansion occurred during the economic recovery period after World War II. In 1948, brothers Karl and Theo Albrecht took over their mother's business and officially named it Aldi in the 1950s. Through minimalist store design and strict cost control, they successfully created the discount retail chain now famous worldwide. 7. Don Quijote Founded in 1980, Japan was experiencing economic slowdown and the eve of the bubble economy's collapse. Don Quijote attracted a large number of consumers by offering a wide variety of low-priced goods, gradually developing into a well-known discount retail chain in Japan. Researchers counted the founding dates of the 2009 Fortune 500 companies and compared them with economic recession periods. The conclusion was that a total of 256 companies, that is, more than 50%, were founded during economic recessions. Distribution of founding dates of U.S. Fortune 500 companies In bad economic times, it is actually a process of accelerated elimination of enterprises: companies with backward business models, unhealthy finances, and slow or even declining growth accelerate their demise. Although the companies disappear, market demand still exists. The famous economist Frank Knight was the first to study the relationship between uncertainty and entrepreneurship. He concluded: Without uncertainty, there would be no profit for companies; without uncertainty, perhaps there would be no entrepreneurship. Uncertainty is an important part of entrepreneurship. Only entrepreneurs who can see certain demand in an uncertain market and seize opportunities in a shrinking market and declining economy can achieve enduring success and become the kings of the era. From August 20 to 22, 2024, the "2024 6th China FMCG Conference" with the theme "Crossing the Era of Shrinking Volume" will be held grandly in Shanghai. At that time, we will invite senior executives from leading FMCG brand owners and retailers, as well as regional major distributors, to discuss the following topics: the dilemmas and solutions for brand owners in a shrinking market / how brand owners, distributors, and retailers can build a symbiotic relationship / the direction and path for brands to increase volume / the current market's brand owner channel model transformation, etc.