The Underlying Logic of Internet Transformation for Distributors
Internet transformation changes more than tools for distributors: it changes efficiency, connection, and value creation.
Over the past two years, mainstream single products in the vast majority of FMCG categories have seen sales growth stall or even decline. Most distributors have adopted a horizontal expansion model, achieving lateral sales growth by expanding into new categories.
But distributors know full well that merely expanding horizontally without changing the business model is ultimately not a solution. First, the boundaries of horizontal expansion are always limited; second, the brands and products of most brand owners have already aged, and decline has become the norm for most categories. To achieve renewed development and growth, one must genuinely and deeply study the topic of transformation.
Why raise the topic of underlying logic? In recent field visits, this author discovered many abandoned, half-finished internet transformation projects among city-level distributors: in many places, after same-city warehouses were built, no goods came in; after joining a platform as a franchisee, operations never got off the ground; those who developed their own technology built products with terrible user experiences; and so on. Behind these problems lies the fact that distributors have been rather blind in the transformation process — rushing in without thinking through much of the underlying logic, so problems were inevitable.
Today, this author will explore with everyone some of the underlying logic of distributor transformation.
Since this is a transformation, one must have an accurate understanding of the current market environment and a directional forecast of the industry’s future development. Only on the premise of accurate understanding and directional forecasting will a distributor’s transformation avoid becoming blind.
I. To Make Strategic Forecasts About the Future, First Study Changes in Consumers
Whenever market change comes up, everyone talks about consumption upgrading and the impact of the internet. But upgrading how? Impacted by what? Few distributor friends can explain it systematically. In fact, all changes stem from changes in consumers. If a company is to make strategic forecasts about the future, the prerequisite is that it must first study consumers.
In fact, distributors never used to need to study these consumers. For one thing, some of the products in distributors’ hands were still in the market expansion stage, and there was no need to give much thought to how users felt — as long as the product was good enough, the brand loud enough, and the channel strong enough, a single product could be sold nationwide.
But the emergence of the internet has thoroughly changed consumers’ consumption perceptions and consumption behaviors, and at that point the vast majority of distributors and companies did not deeply perceive this change. As a result, the pace at which the traditional supply chain iterated — from product development to retail — fell far behind the pace of consumer change and iteration. To put it bluntly: consumers changed, but you did not, so poor product sales were the inevitable result.
Consumers Have Indeed Changed
The change the internet has wrought on consumers is permanent and irreversible. As consumers’ consumption awareness rises, their self-awareness begins to awaken, and they start to pursue diversity and individuality, cookie-cutter industrialized consumer goods can no longer satisfy consumers’ ever-changing needs. Moreover, the massive volume of merchandise brought by B2C e-commerce has greatly enriched and satisfied consumers’ various needs. The internet has placed the power of choice truly in consumers’ own hands.
On the other hand, heightened self-awareness has also changed consumers’ purchase motivations, gradually shifting from functional needs to self-gratification and self-affirmation. Buying a product is no longer about how useful it is, but about rewarding oneself — telling oneself one deserves something nicer — even to the point of forming the illusion, the self-suggestion, that by using a certain thing, one can become a certain kind of person.
At this point you discover: no matter how loudly you advertise, consumers won’t buy it. Ask them why not, and they’ll tell you your product is too unfashionable, and the products online are better and cheaper.
But are consumers just chasing bargains? Look at a set of data: in 2016, the Engel coefficient of China’s urban residents had fallen sharply from 35% in 2013 to 29.3%. In addition, the share of urban residents’ spending on service consumption — healthcare, education, entertainment, travel, transportation, and the like — rose from 35.7% to 41%, an increase of 5.3 percentage points, while the share of spending on food and clothing fell from 43.2% to 36.8%, a decrease of 4.4 percentage points. What does this Engel coefficient data tell us? It tells us that ordinary people have more and more money!
Ye Maozhong has a rather classic description of this change in consumers: once the belly is full, of course the mind starts to wander — as it rightly should. When life’s essential consumer goods are already satisfied or even in surplus, consumers naturally seek higher directions for consumption. Having money with nowhere to spend it? That would be a crime, comrades.
The Internet Is Not Merely a Tool
In understanding the internet, one must know: e-commerce is not a channel, and the internet is not a tool — for consumers, it is a way of life.
The internet has broken the constraints of time and space, allowing consumers to be online at every moment. If your merchandise is online for only 12 hours (in-store business hours), users will not wait for you to open your doors — for the other 12 hours, someone will certainly fill the gap for you.
Your competitors are no longer the peers on the shelf, but Tmall, JD.com, Meituan Waimai — even Didi and Mobike.
As a distributor, if you want to be irreplaceable within the supply chain, then you must do good consumer insight work, study consumers’ consumption behavior, and build your own product structure and business model around consumers’ consumption behavior.
II. The Future Value of Distributors Lies in Vertical Supply Chain Services
For brand owners, the fundamental value of their existence is to satisfy consumer needs. When consumers’ consumption philosophy and consumption behavior have fundamentally changed, then brand owners must certainly change too — though of course, that is not the topic we need to explore today.
In the internet era, against the backdrop of the socialized division of labor, the changes in brand owners and consumers are bound to change the business models and commercial forms of intermediary distributors and retailers. Visualized commercial flows, routed logistics, financialized capital, and datafied information are the basic requirements that supply chain leaders place on supply chain service providers, and this has changed some of the cooperative relationships among the intermediaries of old.
This change, this author calls: a shift from a chain-link form to a steel-cable form.
What are the chain-link form and the steel-cable form?
The chain-link form refers to a supply chain in which each link is an interdependent yet independent entity. The relationship between the links in the chain is one of hand-offs and one of gamesmanship; information does not flow between them. Moreover, once any link leaves the main body of the chain, it loses its reason for existence, and that link is incapable of independently carrying out its corresponding function.
The steel-cable form refers to a supply chain in which every member can directly connect to the supply chain’s upstream and downstream. Each individual can independently take on business at both ends of the supply chain, and the members within the steel cable can also cooperate, taking on the larger business needs at both ends of the supply chain together.
This shift, simply put, is a move from horizontal full-function operation toward service in vertical, specialized domains.
To describe it in terms of actual business models: the work that a distributor used to do alone may now be completed by a specialized local same-city delivery company, a B2B trading platform, and a specialized customer-acquisition or field-marketing team. Each company’s business module can cooperate with brand owners independently, and they can also form local alliances to jointly complete brand owners’ localized marketing work.
And the core of these business models is data, is finance, is information flow.
III. Content Marketing Is Now a Basic Capability for Distributors
Without a doubt, once the distributor’s supply chain role — the mere warehousing and logistics function — is carved off, the distributor is left with only one most important function: localized marketing work.
In the past, marketing only required getting the product well stocked on shelves, doing good merchandising display, and running product promotions in big-box stores, and the product would achieve sell-through. But in today’s channel work, merely stocking product into the channel can no longer effectively generate sell-through. Now, for distributors doing marketing, they must also possess the ability to sell products directly to consumers.
Therefore, distributors absolutely must possess the ability to communicate directly with consumers. Fortunately, their advantage is that distributors can combine localized media resources and use the internet to innovate.
Internet communication tools — such as WeChat official accounts, Weibo, or Tencent’s Guangdiantong — are in fact all conduits that allow you to reach consumers. But distributors must be clear: setting up an official account is not internet marketing, and the people following you are not fans; adding a WeChat friend is not CRM, and starting a WeChat group is not a community. Advertising-style indoctrination broadcast at consumers has stopped working. How to attract consumers through high-quality content and communicate with them sincerely — that is the inner discipline distributors must focus on cultivating.
The product is the good looks; content is like the acting. However good-looking you are, you can’t withstand fans’ fickle appetite for novelty. Distributors who lack content marketing capability need to catch up on this lesson quickly.
IV. The Prerequisite for Internet Transformation Is That the Company Must Complete Digital Transformation
A distributor’s internet transformation has one prerequisite: the company must achieve digital transformation both internally and externally. Simply put, all of your company’s operations must be capable of informatization and real-time online status — whether internal management, external transactions, or marketing work, everything can be unified through information systems, and through real-time online data you can see the state of your company’s operations at every moment.
Many distributors cannot even accomplish their own company’s digital transformation; wanting to pursue internet transformation is then a rather difficult thing.
When your company’s own level of informatization is already high, using internet tools to empower your own business is in itself a process of upgrading, not revolution.
V. The Prerequisite for All Transformation Is Organizationally Driven Transformation
Having discussed so much of the logic of transformation — whether thinking, models, marketing, or technology — behind all of these, it is people who do the driving. However impressive the technology, it needs good operational methods; however formidable the business model, it needs people to realize it. The organizational drive model of traditional commerce and trade certainly does not fit the new supply chain system of the future internet era. If you truly want to transform, the first step is to achieve effective reform in organizational drive: respect the value of the individual, genuinely unleash the potential of the individual, and at the organizational level drive the implementation and execution of the company’s business model — rather than merely copying and franchising someone else’s business model.