An Abstract View of China’s Consumer-Goods Retail Channels

Author: Zhao Bo

Proofreading: Gougou Layout: Zhang Yuwei

Hello, everyone. I am Zhao Bo, founder of New Distribution, and it is a great honor that, right after the Mid-Autumn holiday, you have traveled great distances out of your busy schedules to attend the 5th China FMCG Conference and the 1st China FMCG Distributor Conference. This year’s conference theme is named “Reforging · A New Era.” It may sound like a bit of a mouthful, but it is a theme the New Distribution team settled on only after repeated discussion. So why “Reforging · A New Era”? At last year’s autumn Sugar & Wine Fair, Mr. Hou, Chairman of the Board of China Resources Beer (Holdings) Co., Ltd., stated at the New Distribution conference that China today is undergoing great changes unseen in a century. On that basis, Mr. Hou put forward the slogan “New World,” which sparked heated discussion across the industry. Whether old world or new, the environment we inhabit may not have changed; what has changed is chiefly our understanding of this world. I have noticed a profusion of conceptual buzzwords this year—for example: balance-sheet liabilities, the M-shaped society, the L-shaped economic trajectory, K-shaped consumption divergence, consumption downgrading, and so on. But are they all correct? Hard to say. Amid a welter of complex information, people find it difficult to step outside themselves and think objectively, nor can we exhaust all the information to draw sound, well-organized conclusions. To reduce the brain’s energy consumption, people habitually use models and concepts to simplify our understanding of the world. There is nothing wrong with that in itself, but if you are the head of a company, or you need to make a major decision at a critical juncture, you cannot rely on simple, simplified models to make decisions about your own future and that of your company. Because many momentous historical events are often hidden precisely within this jumble of information. Let me start with a story from history. 1921 was an extraordinary year in Chinese history. Friends with some knowledge of history all know that this was the year the Communist Party of China was born. But if you had been living in that environment at the time, you might have been more focused on the following news items:

• The May Fourth Movement

• The Guangdong Nationalist Government was established, with Sun Yat-sen serving as President

• More than 9,000 workers went on strike on the Guangdong–Hankou Railway

• The Beijing–Zhangjiakou Railway opened

• China joined the League of Nations

• Shanghai underworld tycoon Huang Jinrong divorced his first wife, Lin Guisheng

• Hitler became leader of the German Workers’ Party

• Japanese Prime Minister Hara Takashi was assassinated

Of course, viewed from today, these were all exceptionally important events too, but I would ask you first to turn your focus back to the First National Congress at which the Communist Party of China was founded in July. Can you imagine? This Party congress surely counts as a highly important meeting even within the Party itself, yet the two most important figures in founding and initiating the Communist Party of China, Li Dazhao and Chen Duxiu, did not attend it. Why? Chen Duxiu was then serving as Chairman of the Education Committee in the Guangdong Nationalist Government, and he was in the middle of applying for education funds; if he left, that education funding would never be approved. Li Dazhao was in Beijing organizing a hunger strike by students and teachers over the Beiyang government’s unpaid salaries. If he left, the protest might fail and the back pay would never be recovered. So Chen Duxiu sent Bao Huiseng, who traveled south, as his representative, and Li Dazhao sent Zhang Guotao and Liu Renjing to attend. Regrettably, all three of those sent this time would, one after another, leave the Party. Zooming out, people at the time, overwhelmed by a dazzling stream of news events, could hardly pay attention to a small meeting held by a dozen or so people. Likewise, even the meeting’s initiators could hardly step outside events and sense just how important this meeting was. Even the participants themselves could scarcely perceive that the one who would help the Chinese people remove the three great mountains was the meeting’s young recording secretary, Mao Zedong from Hunan. Looking back now, nothing that happened at the time—whether to the nation or to individuals—was perhaps as important as that Party congress. Many things reveal themselves only after a long historical cycle, when we look back: what was truly important may not have been all that conspicuous at the time. People find it hard to step outside events and view what is happening through the lens of a grand cycle. My purpose in opening with this story is really to make one point: an enormous amount has happened over the past two years, and long from now, the various events of 2023 in the FMCG industry may, like the many news stories of 1921, prove not to be all that important. Returning to the present: no matter how the outside world changes, a company’s owner, an entrepreneur, or a senior manager must possess a cycle-spanning way of thinking with which to view what is happening today. Facing industry change, I want to open with three modes of thinking for looking at change: 1. Induction and deduction from phenomena 2. What changes and what does not in demand 3. Complexity and abstraction on the supply side Let me first mention something discussed a couple of days ago in the FMCG Intelligence chat group: business has been poor these past two years, and everyone’s first reaction is—consumption downgrading. Although bulk snack stores and discount stores have been booming these past two years, please think carefully: does the emergence of these retail formats really mean consumers are downgrading their consumption? Without keeping you in suspense, here is my view: discount stores are a classic case of trading over to affordable substitutes—and might the rise of affordable substitutes be a sign that consumers’ consumption mindset is maturing at this stage? As for the massive proliferation of bulk-discount retail, might that be the result of a retail industry squeezed by online commerce and stagnant for years, with merchants competing themselves into it? If we must insist that consumption has truly downgraded, then in my view, what has actually been downgraded is expectations. Today’s problem is not assets and liabilities; the problem is balance-sheet liabilities. For major FMCG brands, I believe there are three real problems:

1. A shrinking total population brings a decline in total consumption, so the market no longer delivers growth in consumption volume;

2. With economic development, rising incomes, and transparent information, consumers’ consumption attitudes have matured, and they no longer place blind faith in big brands;

3. Young consumers’ individualized, subcultural, and emotional demands run counter to the universal values of big brands.

Second, what changes and what does not in demand. Technology is advancing and the times are progressing; humanity has landed on the moon, yet our bodies have still not walked out of Africa. Therefore, consumer demand must be viewed in two parts: humanity’s physiological, foundational needs are very hard to change; what changes is the environment we inhabit, the scenarios, and our relationship with this world. The biggest change I have seen over the past two years is not the iteration of technology and business models, but the way information is exchanged, and the shifts in how young people consume and in their attitudes. Yet beneath this change lies the upgrading and leap of people’s basic needs in a new environment. So only by grasping what does not change and understanding what does can we avoid being swayed in a constantly changing world. Third, complexity and abstraction on the supply side. Channel fragmentation gives everyone in this room a serious headache. One very important reason is that channel complexity has increased exponentially; moreover, the excessive fragmentation of channels and the dizzying array of price promotions make channel control harder still for companies. We must possess the capacity for abstraction—to identify, within complex channels, the patterns that are common, unifiable, or of a higher order, and use these abstracted patterns to guide our work. Returning to the topic itself: we may need to possess several cycle-spanning capabilities—discerning which modes of thinking to use, discovering what changes and what does not, and, amid noise-filled media, abstracting models grounded in our own businesses rather than parroting others. This is the most essential capability of a company that can span cycles. Here, we cannot avoid pondering a few philosophical questions of marketing. Mentioning philosophy may seem somewhat abstruse, but let us think simply, return to essentials, and use first-principles thinking to probe people’s most elemental needs. I have sketched out a few questions:

• Mindset: In the post-pandemic era, what exactly do people’s consumption attitudes look like?
• Demographics: How do the factual and value judgments of new-generation consumers today differ from those of the previous generation?
• Product: How do we strike a balance between aesthetics and value for money?
• Value: Has consumerism really begun to shift from “more” toward “better”?

These are not all of the questions, but in the present era, if we do not think deeply about them, then facing a constantly changing world, I believe it is truly hard to make correct strategic judgments. What is a correct strategic judgment? I have summed up one way of thinking when confronting problems: a broader scope, a higher dimension, and a longer cycle. If we apply this way of thinking to examine China’s consumer goods market, we quickly arrive at a conclusion: China’s assets are not liabilities, China’s consumption has not downgraded, and China’s market is getting better and better. Judging from the patterns of economic development and consumption cycles across countries around the world, China’s consumer goods market is indeed undergoing an immensely large consumption cycle: China is moving from a growth market to a mature market. What is certain is that China will not drift toward Japan’s M-shaped society, nor will it have an L-shaped economy. China has an immensely vast market, the world’s largest middle class, and an enormous population whose consumption potential has yet to be fully released. As China’s technology sector, led by companies such as Huawei and BYD, keeps scaling the industrial Mount Everest, China’s economy will usher in its most glorious 20 years. These 20 years will differ markedly from the past 20: this is at once a market of great depth and a great unified market, and this contradiction and tension is something every enterprise must spend sufficient time researching, gaining insight into, and exploring, in order to find its own ecological niche in this market. At the same time, we also see China’s deep population aging and a total consumption volume that is no longer growing. Without question, oversupply and involution are bound to be the norm — but then, what mature market is free of oversupply and involution? When you feel you can no longer hold on, perhaps your competitor, just like you, is about to give out too. At the Spring Sugar and Wine Fair, I proposed: in the age of involution, the best way to break out of involution is “innovation.” Professor Schumpeter held that the essence of enterprise innovation is a kind of “new combination”: the enterprise takes the new products, technologies, talent, resources, and other elements that have already emerged today, and recombines and redesigns them around current market demand, thereby obtaining an entirely new product, technology, market, or organizational form to satisfy consumers’ constantly evolving new needs. Over the past two years, the continually emerging new processes, new technologies, and new infrastructure have all, in a sense, been important elements for innovative recombination. For enterprises, innovation itself is not hard; what is hard is possessing an organization capable of continuous innovation. Of course, if you do not want to grind through the involution at home, Chinese consumer goods companies can also consider one of the most important propositions of the next 20 years: going global. Facing today’s sluggish market growth, some companies have floated ideas about diversification and transformation, but what one hears most often is “going global,” repeated over and over by company after company. Indeed, for Chinese consumer goods companies, venturing out into the world, however unfamiliar, is a topic no leading enterprise can sidestep. In the coming years, New Distribution will also gradually turn its attention to the topic of “going global,” helping the industry find overseas-expansion cases and methods that can guide its development. Now that China’s consumer goods market has formally moved from a growth market to a mature market, the logic of consumption will likewise undergo some dramatic changes. I have summarized these changes in several points:

• AI-assistant-driven consumption > media-informed consumption

• KOL-led consumption > expert-recommended consumption

• Algorithm-driven consumption > shelf-selection consumption

• Experiential consumption > need-satisfying consumption

Throughout this process, our consumer communication, brand communication, and business management philosophy must all continually adjust and adapt to the changes in how consumers consume today. But however things change, we must identify the levers of certainty — and this lever, I believe, is called: the scenario. Today, the scenario is the first principle of marketing. When we re-examine the 4Ps from the perspective of scenarios, you will find that consumers have changed in new ways, and our marketing methods must change in step, at the right moment:

• Product: the evolution and change of consumption value (functional, experiential, symbolic)

• Pricing: the change in value logic (customer delivered value and consumers’ learning costs)

• Channel: the change in the logical relationship between shelves and the supply chain (point–line–plane–solid)

• Promotion: the change in the consumer communication and operational logic behind sell-through

Due to time constraints, I cannot unpack each of these changes one by one; I will focus on a model I have abstracted from the changes in channels — point, line, plane, solid — and walk through it. Point: the scenario. We all know that in the past, the places where consumers made purchases were fixed. Today, however, it is impossible to determine at which venue, in which location, or on which app a consumer’s purchase will occur — so we can understand that today’s arena of transaction is uncertain. In the past, the focus of all our marketing was on the channel. Every marketing action revolved around how to get products to reach consumers. Today, however, the focus of marketing must be how to trigger the consumer’s desire to buy in front of the shelf. Marketing used to mean “brand-driven” purchases in transaction scenarios; marketing today means “consumer-pain-point-driven” purchases in consumption scenarios. When transactions can happen at any moment, their occurrence is premised on demand arising within a scenario. To put it in a sentence everyone can understand: “the scenario is the channel, and the channel is the transaction.” When both communication and transaction behavior occur on the basis of pain points within consumption scenarios, we can understand that all marketing must revolve around this single point — the scenario. The focus must center on the scenario, providing consumers with their unique “caramel pudding” (JTBD: Jobs To Be Done). Line: the value chain. The solutions enterprises offered consumers used to be media communication + channels. Today, consumers’ shopping journeys have moved from purely offline to all domains, so the path of the value chain has changed as well. I call this change the relationship chain + supply chain. The relationship chain solves the question of where to communicate with consumers; the supply chain solves the questions of where consumers buy and where goods are delivered. Note that this does not conflict with the earlier media + channels framework; rather, it uses a higher dimension and a more abstract perspective to understand the value-chain logic behind today’s shopping behavior. If we cannot read the logic of these two chains, you will be unable to cooperate with the vast number of newly emerging retail channels today, still less understand why companies like Sishijiufang and Hanke can bypass e-commerce and bypass general-trade distribution yet still sell billions of yuan. PS: when you view promotions through the lens of the value chain, their significance is no longer merely incremental volume but added value (acquiring new customers and driving repeat purchases / launching new products / boosting engagement). Plane: the channel mix based on transaction scenarios. Mr. Shi Wei once proposed a view**: consumers exist in three-dimensional space (online, social, offline), and consumers’ shopping journeys (AISAS) leap freely across these different spaces.** This is like being blindfolded and trying to shoot, with a rifle, a little bird hopping about among the branches of a big tree. If we want to hit it, the most effective way is to take a large-caliber shotgun and hit every branch of the tree in a single blast. But today we cannot possibly cover every channel. It is neither economical nor realistic. Yet consumers’ consumption is inseparable from the characteristics of the scenario and of the category itself, and we must construct the optimal mix of products within channels based on consumer behavior. Based on consumers’ paths of attention, interest, search, action, and sharing within the scenario, we must design the product’s shopping “fan” within the scenario, thereby achieving the most efficient channel mix. Take a bottle of water, for example. In the past, following OBPPC logic, we started from the channel, analyzing what combinations of needs the consumers coming into the store had, and then built the product mix and promotion methods around that combination of needs. But if we start from the consumption scenario, we must ask: when a consumer in this scenario needs a bottle of water, where are they most likely to buy it? What is the purchase path? Do they pull out their phone to search, or head straight for a store? What are the biggest pain points in their purchase process? Even though it is the same bottle of water, with a different perspective, our product’s channel-mix strategy will be different. Solid: the three-dimensional shelf at the city level. Channels used to be two-dimensional. But today, when we take the consumer’s perspective and add scenarios to the time and space dimensions of the shelves consumers shop from, a city’s channels turn from two-dimensional into three-dimensional. We must learn to upgrade our view of a market from two-dimensional channel thinking to three-dimensional shelf thinking. Deep distribution in the past ran only on the logic of space and time — it was two-dimensional, and a two-dimensional deep-distribution model simply cannot work the three-dimensional shelf. A three-dimensional city requires a three-dimensional distribution/sell-through model to solve consumer coverage and reach. This is the moment that tests an enterprise’s theoretical sophistication and strategic vision: decision-makers must use systems thinking to sort through and integrate the various scenarios, value chains, and channels, and put forward a city-level solution suited to their own products. They must consider online–offline synergy, weigh the relationship between cost efficiency and experience, and, above all, balance the interests inside and outside the organization. City managers, too, must possess the ability to fight three-dimensional campaigns within a city. And the enterprise organization must in turn be able to provide the support and resource coordination a city manager needs when fighting such a three-dimensional urban campaign. Once we have abstracted the changes in markets and channels at a high level through the lens of point–line–plane–solid, several things demand attention. Beyond what was said earlier — that two-dimensional deep distribution cannot serve the three-dimensional shelf — we should also note the following points: 1. Price volatility: the market’s infrastructure — e-commerce + logistics, group buying + forward warehouses, factory-direct supply to stores, and similar models — is all attempting to shorten the supply chain. We need only remember that we are providing consumers with their caramel pudding (JTBD), and the 2C price is one part of the solution. 2. Transaction logic: the decision logic of transactions is shifting from selling goods to curating assortments, from retail-and-wholesale to group buying, from soft promotions to hard discounts, from consumers ceding their choices to AI making the decisions. What enterprises should focus on behind these changes is not price itself, but the restructuring of the value chain. 3. Scenario-driven consumption: with emotional consumption, consumption scenarios and communication scenarios are becoming more important than transaction scenarios. Over the forty years of China’s reform and opening up, a new generation of retail model has emerged roughly every ten years; to date, China has gone through four generations of retail models:

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 commerce

Fourth-generation retail model (2016– ): front-line warehouses (community group buying + flash warehouses) + discount/membership stores (bulk snack retail + hard discount + membership) + interest-based e-commerce (category + KOL + content)

****These four retail generations also correspond to four different supply chain models:

First-generation retail model: distributors + sub-distributors + wholesalers

Second-generation retail model: brand direct operation + distributors

Third-generation retail model: brand direct operation + TP agencies + sub-distributors

Fourth-generation retail model: direct brand supply + super supply chains + TPs + distributors

Watching this process unfold, I wonder whether my distributor friends have realized something. That’s right—within each successive retail model, the value of the distributor’s existence keeps shrinking. The retail industry is undergoing a shift from a model of single formats with enormous scale to a new retail model of diverse formats with enormous sales volumes; the value chain keeps shortening and disintermediating. If distributors do not want to be eliminated, they must adjust their business models in step with changes in the market and in retail channels. **Distributors, too, must evolve from a single-brand, high-volume model into a supply chain model of diverse products and enormous scale.******As time is limited, I will share this topic in detail at the China FMCG Distributor Conference on the 11th. In Closing Today’s Chinese market is moving from a growth market into a mature one; beyond fierce competition, the market has become extraordinarily complex. We must start from first principles to gain insight into demand, deduce the logic of consumption, and abstract marketing models. ****Without question, scenarios are the first principle of marketing today, and **companies must possess the ability to deliver the caramel pudding (JTBD) to consumers from within those scenarios. Channels, too, have undergone a major transformation today, upgrading from two dimensions to three; we must understand channels through the lens of points, lines, planes, and solids. Abstracting retail out of these changes, it has passed through four generational shifts, and the supply chain has likewise evolved through four generations; the trend toward distributors becoming supply chain operators is irreversible. That concludes my sharing today. Thank you, everyone.