Read the transcript below.
JAMES ROOT: The slowdown in China's fast-moving consumer goods categories, which is pretty much across the board, still [has] some positive areas in categories like skin care and cosmetics, but on average [there is] very low growth. Many categories are shrinking.
That slowdown has really revealed some underlying weaknesses in the distributor system that practically all brands use in China. The weaknesses were always there. But in the good times, when you were growing at 15% or 20% a year, you didn't have to focus on them.
A couple of things are being identified as problematic. First is, as we knew, there are lots of hand-offs from the factory gate to the final retail shelf where the product is going to be sold—to a primary distributor, perhaps to a secondary distributor, perhaps to a regional wholesaler, then to a sub-wholesaler who might get it finally to a store in a more rural town.
[There are] lots of markups. There could be as many as 20% through the system, which is expensive for the brand owner. And just as important, frankly, is the lack of visibility. Once these products get into the distributor warehouses and their systems, the brand owners can really no longer see what they're selling, at what rate, to which customers.
These challenges in the distribution system are actually, ironically, coming at a time when the brand owners need the distributors most. The last 10 years of growth have been substantially in modern-trade, large-store formats in the big cities—hypermarkets and supermarkets that you're very familiar with. [Some of] those stores are closing; certainly the growth plans that those retailers had for those stores are all on hold.
Because the growth is happening in small-format modern-trade stores, and in traditional stores, and in smaller cities in China, what we would call Tier-3 or Tier-4, or even in townships outside those cities. And in those cases, we're talking over 3 million outlets, 3 million points of presence, for which the distributors themselves have been absolutely critical in getting product from A to B.
One of the interesting trends—we don't yet know how it will play out--is the emergence of a whole series of companies offering, let's call them, digitally enabled route-to-market platforms, or e-RTM's. You might want to use the shorthand. They're simply platforms where companies like Alibaba, jindong.com and a host of others are creating marketplaces between retailers and brand owners.
We don't yet know if they're going to work. [They require] lots of investment. Many of these companies, unfortunately, will not survive. We might end up with a series of consolidations and mergers and integrations over time. It's a definitely a threatening proposition as far as the distributors go.
There's upside for the retailers. They don't have to work with all the distributors anymore if they can get it all on one platform. There's upside for the brand owners. They don't have to work with all those distributors anymore if they can use the platform to reach all the retail outlets. [But] for the distributors in the middle, in some versions of these digital models, there is no role.
Read the Bain Brief: Trouble in Store