What U.S. Supply-Chain Transformation Reveals About China’s B2B Path

The Current State of FMCG B2B Development in China

Channel digitalization in the FMCG industry has become a basic industry consensus, and here we must talk about B2B.

Since emerging in China in 2013, B2B has been around for six years. From complete obscurity to gradual market acceptance, this process can essentially be described as brutal.

As of today, according to New Distribution’s statistics, there are still 239 B2B players remaining in China, but most of them are service providers along the industry chain; fewer than 50 pure B2B companies remain. The brutality of turnover in this industry is plain to see.

In terms of trends, market education for the industry is largely complete. According to statistics from New Distribution’s market research, although the offline penetration rate of B2B in China is still below 10%, in certain markets or certain regions, B2B coverage and penetration have already reached very high levels. In some markets, B2B coverage is as high as roughly 90%, and penetration has exceeded 50%.

At the upstream brand-owner level, virtually all brand owners in China have now embraced the concept of channel digitalization, acknowledged the necessity and value of B2B, and have successively begun various forms of strategic cooperation with the different platforms. Although in terms of cooperation models, some brands cannot cooperate fully due to their own institutional constraints and legacy business, their attitude toward B2B is already very clear.

But we must recognize clearly that the sales volume of B2B platforms—especially sales generated through direct cooperation with brand owners—still accounts for a very low share of brand owners’ sales. Brand owners’ cooperation with B2B is mostly driven purely by strategic considerations, a partnership obtained by sacrificing some market coverage and accepting conflicts of interest. When faced with relatively large conflicts of interest, or when a brand owner’s management is weak, the priority for cooperation within the brand owner will still favor its original internal channels.

Image source: Bain & Company

B2B’s losses stem, on the one hand, from the fierce competition in the FMCG industry, where channel margins have already been highly compressed; on the other hand, the strategic direction of each B2B platform is not clear enough—they are still in a trial-and-error phase, and massive upfront investments have become sunk costs for the platforms. In addition, shortcomings in operational capability mean that the strategic losses of the entire B2B industry may need to continue for some time yet.

Image source: Bain & Company

After several years of industry development, the various platforms have gradually come to recognize that B2B cannot focus on a single link alone without enabling the entire supply chain. Therefore, in terms of model, most platforms lean toward a supply chain + retail model to string together services across the whole chain. Although the strategy is fairly clear, the high complexity and difficulty of the industry chain, along with the industry’s long adjustment cycle, have likewise made all platforms realize that B2B still has a long road ahead before it can succeed.

The Development Path of the U.S. Supply Chain

I. Characteristics of the U.S. Wholesale Industry

For this reason, the author made a point of studying several American supply chain companies, hoping to find lessons from them that could serve as references for B2B in China.

A research report released by the Economic and Commercial Counselor’s Office of the Ministry of Commerce in the United States points out that the U.S. wholesale industry has the following characteristics:

1. Since the 1990s, the U.S. wholesale industry has entered a period of stable development. Influenced by America’s well-developed system of department stores, chain stores, and supermarkets, as well as the “once-a-week” one-stop shopping habit, few new wholesale markets or companies have opened in the United States in recent years.

2. The boundaries between production, wholesale, and retail are rather blurred, with strong mutual penetration. The chain-operation model is very common among large retail giants; retailers can place orders directly with manufacturers, and manufacturers deliver goods directly. In recent years, the fast By-Pass systems that large U.S. retailers have opened up for wholesale business have become a new trend in the wholesale industry. Many manufacturers have adopted customer-customized production models, specialty-store sales models, and nationwide or global warranty service models, bringing consumers and manufacturers into even closer direct contact.

3. The rise of e-commerce has weakened the functions of wholesalers. The internet has made wholesalers’ advantages in information, capital, and scale less pronounced; producers and consumers establish direct connections, making delivery routes shorter and product prices lower. The widespread use of third-party trading platforms, express delivery companies, electronic payment for remote transactions, and ERP systems in chain enterprises has also caused the traditional functions of wholesalers to be replaced.

4. In the food supply chain, wholesale markets still play a very important role, handling about US$240 billion in food wholesale each year. In particular, through the contract-farm agreement model, wholesalers have established direct connections between dispersed farm owners and supermarkets.

It is precisely because of these characteristics of the U.S. wholesale industry that it is difficult for an excessive number of large supply chain companies to emerge in the American market. Relevant data show that there are currently no more than about 20 mainstream supply chain companies in the United States, and the top five among them posted a combined GMV of nearly US$160 billion in 2016.

II. Profiles of the Five Major U.S. Supply Chain Companies

Sysco:

Sysco is the world’s largest foodservice ingredient supplier. Founded in 1969, it has more than 50,000 employees, serves 425,000 customers across the United States, and posted a GMV of US$58.7 billion in 2018. Beyond the U.S. market, Sysco’s marketing and logistics networks span the United States, Canada, the United Kingdom, France, and elsewhere, providing food ingredient supply services to more than 600,000 customers (including restaurants, hospitals, and schools) in over 90 countries worldwide.

In terms of product categories, the products Sysco distributes fall into more than 10 categories, specifically including fresh and frozen meat, seafood, poultry, vegetables, fruit, snacks, as well as eco-friendly tableware, kitchen supplies, and more. Fiscal year 2018 data show that the largest category was fresh and frozen meat, though its share did not exceed 20%; other categories with shares above 10% included canned and dried goods (17%), frozen fruits, vegetables, and bread, etc. (15%), poultry (10%), and dairy products (10%).

Sysco’s rapid growth is inseparable from its investment in warehousing and delivery logistics; its powerful logistics and distribution network provides the guarantee for timely, high-quality product delivery. As of the end of fiscal year 2018, Sysco operated 332 logistics centers and 14,000 logistics vehicles. Sysco takes an asset-heavy approach to its logistics footprint: as of the end of fiscal year 2018, 78% of the company’s logistics distribution center floor space and 88% of its logistics vehicles were company-owned.

Investment and acquisition are part of Sysco’s innate commercial DNA. As the world’s largest food supplier, Sysco’s development history, examined closely, is a history of corporate mergers and acquisitions. In 1969, founder John Baugh persuaded eight other small food distributors to merge their companies with Zero Foods, which John owned, forming Sysco—so that it could deliver any food product within the regions it covered. In 1970, Sysco listed on the New York Stock Exchange and completed its first acquisition that same year.

In 1976, America’s fast-growing economy entered a cyclical downturn. To cope with this period, Sysco acquired Mid-Central Fish and Frozen Foods Inc., which was engaged in the distribution of frozen meat, poultry, seafood, fruit, vegetables, canned and dried products, and paper. This acquisition added a considerable number of agricultural product categories to Sysco’s portfolio, especially fresh categories immune to economic cycles. According to media statistics, Sysco completed 43 acquisitions before 1990. By 2012, Sysco had acquired a cumulative total of 157 companies.

Through acquisitions, Sysco consolidated its dominant position among food suppliers step by step. Yet Sysco is not one of those companies that only knows how to expand wildly without ensuring positive business performance. According to industry data, Sysco’s return on invested capital (ROIC) in 2017 was on average 5.6% higher than that of its competitors.

McLane

Founded in 1894 and headquartered in Cameron, Texas, McLane is one of the largest supply chain service companies in the United States, primarily providing comprehensive supply chain services—groceries, food, alcoholic and other beverages—for America’s convenience stores, hypermarkets, drugstore chains, restaurant chains, and more. Its flagship customers include Walmart, 7-Eleven, and Yum! Brands. It has 22,500 employees, serves 47,000 convenience stores across 50 states, and posted revenue of US$48.2 billion in 2015.

McLane’s Main Customers Served

Data source: official website

McLane is a wholly owned subsidiary of Berkshire Hathaway (owned by Warren Buffett) and employs more than 20,000 people. In fiscal year 2016, McLane’s revenue was US$48.075 billion, with pre-tax profit of US$431 million and a pre-tax profit margin of 0.9%.

McLane has invested a cumulative total of more than US$1 billion in infrastructure and supporting facilities, operating 22 distribution centers nationwide, 1,600 modern trucks, and 2,700 multi-temperature-controlled trailers to ensure that goods reach customers accurately and on time while guaranteeing product quality and safety. McLane maintains deep partnerships with suppliers of thousands of products. In several categories—such as tobacco, candy, and snacks—McLane is one of the largest buyers in the world.

McLane’s business model has the following three major characteristics:

1. Enormous revenue scale;

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2. Razor-thin profit margins, with pronounced service characteristics, but low risk;

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3. Reliance on a handful of large clients

C&S Wholesale

Founded in 1918, C&S Wholesale is the tenth-largest privately held company in the United States, with 17,000 employees, providing supply chain services to more than 6,500 chain stores across the country. With revenue of roughly US$30 billion, it is also one of the largest supply chain service providers in the United States.

C&S owns the Piggly Wiggly grocery brand (independently franchised stores) as well as the Best Yet private label. In terms of revenue, C&S is currently the largest wholesale grocery distributor in the United States. Yet at its founding, C&S Wholesale was nothing more than a small, three-story grocery distribution center. In the 1940s, as supermarkets became widespread, C&S made a number of improvements to its distribution processes, including a warehouse “roller system,” while also having delivery drivers double as salespeople, thereby cutting order fulfillment costs in half. In 1958, C&S began providing supply chain services to BIG D supermarkets, and from then on C&S officially entered a period of rapid growth.

In the 1970s, C&S expanded its warehouse space to 28,000 square meters. With the expansion of its warehousing and distribution facilities, C&S also formally began serving several large supermarket chains, including A&P. Starting in 2013, C&S began building a partnership with BI-LO (a well-known American supermarket chain), providing warehousing, distribution, and procurement services to all 480 Winn-Dixie stores. As a result, C&S began operating six existing Winn-Dixie distribution centers in the southeastern United States. In September 2014, C&S signed an asset purchase agreement with Associated Wholesalers Inc. (AWI) (a service provider to retail enterprises, supplying food to retail businesses), acquiring all of its assets.

Core-Mark

Core-Mark is one of the largest marketers of fresh and broad-line supply solutions in the North American convenience retail industry, serving traditional convenience retailers, grocery stores, drug, liquor, and specialty stores, as well as other stores carrying convenience products. Core-Mark has 5,500 employees and approximately 30,000 customers across the United States and Canada. To date, Core-Mark has established 30 distribution centers, two of which operate as third-party logistics providers.

Core-Mark was founded in San Francisco in 1888 by the Glaser brothers. After several generations of ownership, the Glaser family sold Core-Mark to David Gillespie in 1974, and the company was listed on the Toronto Stock Exchange in 1984. Core-Mark subsequently changed hands several times and was relisted on the NASDAQ stock exchange in 2005, where it remains to this day.

SuperValu

SuperValu is an American wholesaler and retailer of grocery products, founded in Minnesota in 1926, with fiscal 2017 revenue of 12.48 billion yuan and a workforce of 29,000. Looking across SuperValu’s development history, it too has been filled with investments and acquisitions.

In 1963, SuperValu acquired Bursley & Company, a food marketing company based in Fort Wayne, Indiana, whose history dates back to the early 19th century.

• In 1971, the discount chain ShopKo was acquired by SuperValu.

• In 1975, SuperValu acquired Hornbacher’s (an American supermarket chain).

• In 1980, SuperValu acquired Minnesota-based Cub Foods, which operated five stores in the Twin Cities area. As of 2011, Cub operated more than 73 stores in Minnesota and Illinois.

• In the early 1990s, SuperValu began acquiring several chain store companies.

• In 2003, SuperValu acquired the former Midwest Fleming business from C&S Wholesale Grocers, including the Sentry Foods and Festival Foods brands.

• On January 23, 2006, SuperValu announced that, together with CVS Corporation and a group of investors led by Cerberus Group, it had agreed to acquire Albertsons (an American retail enterprise and North America’s second-largest supermarket chain, with 2,778 stores) for US$9.7 billion.

The Direction of China’s FMCG B2B Development

Through studying these several representative supply chain companies, the author has identified a number of characteristics:

Regional intensive cultivation: limiting the delivery radius and emphasizing deep cultivation of a particular region;

Leveraged buyouts: each company’s growth history is a history of mergers and consolidation;

Mixed operations: wholesale combined with retail—and specifically, consolidating small and medium-sized retailers through wholesale

Full-category operations: operating across all categories, including food, beverages, and tobacco

Diversified business: in addition to the wholesale business, also offering brand building, store design, advertising consulting, financial and budgeting consulting, efficiency improvement, financial services, and more

Without a doubt, the development path of American supply chain companies holds extremely important lessons for the development of China’s FMCG B2B companies. Viewed in light of the history of the American supply chain, if China’s B2B companies want to turn a profit, they must accomplish the following:

1. Cultivate regions deeply

2. Pursue gradual cross-regional expansion through mergers and acquisitions

3. Move upstream by seeking to become first-tier or second-tier agents

4. Move downstream by integrating with convenience stores in various forms

5. Leverage the location advantages of small stores to gradually open up direct connections with consumers through community group buying

A rather encouraging signal is that China’s FMCG B2B sector is indeed developing in these directions. Investment and acquisitions—exemplified by Yijiupi’s acquisition of Huijinhuo—have begun to take off; chain retail enterprises such as RT-Mart and Meiyitian have entered B2B one after another, while B2B players have begun developing chain retail businesses of their own, and B2B2C has become the consensus of the entire industry……

Without question, domestic B2B business models have gradually come to approach, or converge with, the models of today’s large American supply chain companies. This also demonstrates that domestic B2B has completed the trial-and-error phase of its own model; in the next phase, it will likely place greater emphasis on its own profitability, and on achieving end-to-end integration of the industry chain through intensive coverage of local markets, in preparation for the industry mergers and consolidation of the phase to come.

The objective fact, however, is that the high degree of fragmentation upstream means that FMCG distribution in China can hardly be concentrated in the hands of one or a few supply chain companies, and distributing goods through the traditional distributor model remains the mainstream of today’s FMCG channels. Although upstream production relations have begun shifting from small-scale production toward large-scale, intensive modes of production, and nationwide B2B platforms represented by JD Xintonglu and Alibaba Lingshoutong have begun to emerge, compared with the large American supply chain companies—most of which took nearly a century or even several centuries of development to reach their current scale—China’s FMCG B2B, which has existed for only a little over a decade, still has a long way to go.