Hard discounts are coming, do FMCG brands still dare to raise prices?

Author丨Liu Chunxiong.

Private Label Revolution: As the share of private label brands grows, there are concerns that well-known brands will eventually become redundant. However, private labels are complementary to established brands because established brands generate store traffic, which supports retailers in optimizing margins and providing consumers with choice. It is important to note that a high sales penetration rate of a category's private label brands and a large market share of the category's private label brands do not necessarily lead to maximum category profitability.

Let's start with the answer. The era of hard discounts has arrived, mainly replacing cheap miscellaneous brands. FMCG companies should quickly occupy the first position, and the window of opportunity for the first position is lost in a flash.

The conclusion is simple, the logic is complicated. This article expands on first, and then returns to the topic.

Hard discounts, why hard?

Hard discount, is the absolute value for money. Absolutely cheap with the same quality. Even if it's not discounted, it's cheap.

So, why are hard discounts cheaper?

In the book "Procurement Management and Operation Practice" prepared by the PSCC procurement and ** chain expert team, it is mentioned that under normal circumstances, negotiating price reduction with ** business can only bring 5%-10% of the cost reduction benefits, and reducing management costs through streamlining processes and transaction informatization is expected to bring 10%-20% of the cost optimization space, and 70%-85% of the cost optimization space is generated in the fields of technology research and development, marketing, and consumer services.

Interpret the above sentence.

Under normal circumstances, retailers looking for regional ** merchants to get goods, even if the negotiation power is strong enough, can only bring 5%-10% ** discount. Such a discount space, of course, is not hard enough.

If you bypass the region, find the manufacturer directly, and simplify the channel process, you can bring 10%-20% of the cost optimization space. Although the discount room is a little larger, it is still not hard enough. And the product still bears the brand label, not its own brand.

If retailers get into product development, marketing, and consumer service, then there is 70%-85% room for cost optimization. At this time, the discount space is very hard. And the product erases the traces of the brand owner and becomes its own brand.

In my article "Why Private Label Is So Cheap", I mentioned 5 prices for retailers, and the price difference can be as high as 85%.

1.Workshop cost price = workshop production cost (variable cost) + workshop amortized fixed cost.

2.Company cost price = workshop cost + company amortized fixed cost.

3.The ex-factory price of the company = the company's cost + the company's gross profit.

4.A batch of dealer price = the company's ex-factory price + dealer operating cost + dealer gross profit.

5.The second batch of dealer price = the first batch of dealer price + the second batch of operating costs + the second batch of gross profit.

Wu Jinhong, founder of the private label alliance Ant Business Alliance, said that Ant Business Alliance has many jobs that Chinese retail companies do not have, which is to intervene in the source of production and do some things that were done by brand owners in the past.

The era of hard discounts in China has just begun, and retailers are still in the stage of channel process optimization. At present, it is only to find manufacturers to get goods, and rarely participate in product research and development, so the hard discount is still not hard enough.

That is to say,Although hard discounts are coming, they are still far from their own brands, and the current cost optimization space is not large enough, and it takes a long time to gradually iterate the process.

The reason why the snack track was selected to fire the first shot of hard discounts is mainly because the channels of snack categories are long enough, the optimization space is relatively large, and the discount ratio is relatively high. When the battlefield of hard discounts shifts to other categories, there is not so much room for cost optimization. In addition, the snack track is originally a long-tail category, and there are not many well-known brands.

With the development of China's business, brand owners have reached the terminal through in-depth distribution, and in the environment of dealer miniaturization, industry brand giants have risen.

The development of hard discounts will be for retailers to grasp the right to speak by reaching the source (manufacturers), optimizing the link, and completing and replacing some of the functions of the original brand owners (such as product research and development).

The hardness of hard discounts lies in the fact that the ** chain revolution must be thorough. China's ** chain revolution fired the first shot in the snack track, and it will spread to other tracks in the future.

*The chain revolution is a long cycle, and it is not an overnight achievement. China's hard discounts are not hard enough at the moment, mainly because they are running too fast, for example, Hema's share of its own brands has reached 35%.

Summary

In the face of hard discounts, well-known brands must not reduce their prices to deal with it. First,Hard discounts are not replaced by well-known brands, but cheap miscellaneous brands;Second,Even if the price is reduced, it cannot be reduced to the price of its own brand. The price and brand endorsement of its own brand determine its huge advantage in terms of costThird,If you're in the price range of your own brand, move or retreat quickly, leaving you less time.

Hard discounts are identity

There is currently an atmosphere in China where hard discounts are a product of consumption downgrades. Very in line with the current sluggish business climate.

So, is hard discounting a product of short-term consumption downgrades, or is it a relatively stable business model that can go through the economic cycle?

"For millennials, shopping for value for money is part of their identity," said the president of Retail at Treehouse Foods. ”

Treehouse divides private label shopper characteristics into five categories: value optimizers (29%), pure qualityists (28%), solution seekers (25%), brand loyalists (9%), and independent habitualists (9%).

Please pay attention to the keywords:Identity. That's the heart of hard discounts.

In fact, middle-class consumption, which was once popular in Europe, the United States and Japan, is also identity. According to a survey in the United States, in addition to the middle class, a considerable number of high- and low-income people also identify themselves as "middle-class". Because the middle class is an identity. This is different from the situation in China, where the typical middle class does not consider itself to be the middle class either.

So, what is identity?This is determined by the way of life shaped by the economy in the medium and long term.

Consumption characteristics of low-income people in the early days:1Consumption of cheap miscellaneous brands;2.Occasional consumption of well-known brands of the masses;3.Look up to high-end brands.

At this stage, buying cheap miscellaneous cards is helpless.

When income reaches a certain level, the characteristics of consumption change:1Normal consumption of low-priced private label (hard discount part);2.Normal consumption of popular brands;3.Occasional consumption of high-end brands;4.Low-frequency consumption of luxury brands.

At this time, the consumption of private label is self-confidence after revenue growth.

There are two important changes after revenue growth:

The first is the attitude of consumers towards popular brands. For example, in the past, multinational brands such as Coca-Cola and Procter & Gamble were considered high-end brands. Now it is regarded as a popular brand. Chinese consumers' attitudes towards popular brands are already similar to those in Europe and the United States.

Second, low-cost private label replaces cheap miscellaneous brands. In fact, hard discount models such as private label brands do not grab the share of well-known brands, but rather the share of cheap miscellaneous brands. The most affected are third- and fourth-tier brands, and even second-tier brands.

In the brand map, the original map is:Cheap miscellaneous brands, popular brands, high-end brands, luxury brands.

Now change to :Private Labels, Mass Brands, High-end Brands, Luxury Brands.

The biggest change is that private label has replaced cheap miscellaneous brands. Private label has two major advantages over cheap miscellaneous brands: first, private label is lower than cheap miscellaneous branding;Second, as a retailer brand, the private label has a stronger brand endorsement.

The history of European private label has been around for 60 years, with economic highs and lows. Private label consumers, high, medium and low consumers. It can be thought of as a business model that moves through the economic cycle.

Such a business model, whether in the economic highs and lows, is welcome. This is the product of the first-chain revolution, not the downgrading of consumption. The reason why it happened at the moment, rather than in the early days of reform and opening up when consumption power was worse, is because the arrival of the ** chain revolution has its historical regularity.

Summary

In the low-income stage, buying high-end and luxury goods is because of lack of self-confidence;In the middle and high income stage, I buy my own brand because I am confident enough. This kind of self-confidence has become a normal way of life, that is, the price-performance ratio of private brands and the brand premium of high-end brands can be accepted normally, such as the Japanese consumption pattern shown by Miura in "The Fourth Consumption Era".

Hard discounts must not be defined as the consumption patterns of low-income groups. It is a consumption mode that is acceptable to all income groups after reaching a certain stage of income, or the common identity of the whole society.

Hard discounts may have ripened quickly at a certain economic downturn, but they are a consumption pattern that can transcend the times. The economy of Europe and the United States has changed a lot in the past 60 years, but hard discounts have been developing benignly.

Re-delineate the ** zone

With the development of China's economy, the first belt of each category is getting longer and longer. According to the brand map of "private brand, popular brand, high-end brand, luxury brand", a full-band spectrum is being formed.

First, the private label ** belt

Private label constitutes an independent ** band. A typical private label is a three-tier structure.

The three-tier architecture described in Private Label Revolution is:Good, better, best. Of course, the premise is that the hard discount is low. That is to say,Hard discount products are also hierarchical in terms of quality and **, and are not crowded in the lowest ** band.

Even at the lowest pole of the three-tier architecture, the quality is good. So,There is only low price, no cheap.

European private label brands are also evolving, going through the white label phase (1970s), the copycat phase (1990s), the quality generic brand (2000s), the customer segmentation stage, and the hybrid private label architecture (2017 onwards).

Of course, with the popularity of European private labels, private labels have also extended to other ** belt space, which is a later story.

Second, the public brand ** belt

The super single products of FMCG multinational companies and domestic head brands can be regarded as popular brands.

I've been proposing since 2013"Mainstream shifting" is the first major brand of the public to move forward. For example, the mainstream ** band of mineral water has been adjusted from 1 yuan to 2 yuan, and now it is shifting to 3 yuan and 4 yuan. More than 10 years ago, many people thought that Coca-Cola was high-end, and now well-known companies have launched beverages that are rarely lower than Coca-Cola**.

Will the prosperity of its own brands seize more share of popular brands?The book "The Private Label Revolution" tells us what Europe is doing:Of course, private labels will steal some of the share of popular brands, but retailers will pay more attention to promoting more popular brands to balance the whole belt.

After all, popular brands are very important for drainage. But the popular brands with low brand stickiness are not so lucky. The closer the brand is to the private label ** belt, the greater the likelihood of being covered by the private label. On the contrary, the farther away from the private label ** belt, the safer it is.

Third, high-end ** belt

Even in the early days of reform and opening up, Chinese consumers still had the urge to buy well-known brands. It's just that due to limited consumption capacity, it can only be consumed at low frequency.

During the three-year epidemic, despite the impact of the epidemic, high-end consumption has exploded. In the past, high-end brands were the world of multinational brands, China's national strength was strong, and consumer self-confidence was improvedChinese brands are already taking more and more share of high-end brands. Moutai is a relatively early liquor brand to create a high-end brand, leading the process of high-end liquor.

Fourth, luxury ** belt

In addition to liquor, cigarettes and other categories have given birth to domestic luxury goods, luxury goods as a whole are still the world of multinational brands.

Among the above four major ** belts, the most affected by private brands and hard discounts are cheap miscellaneous brands, and well-known brands are basically unaffected. Of course, some hard discount stores take well-known brands to reduce prices, for example, Oriental leaves that were originally 5 yuan are sold for 3$5. It's not a hard discount, it's just a solicitation of pricing.

Summary

The closer you are to the hard discount** band, the more likely you are to be covered by a hard discount. Therefore,Well-known brands should not be closer to their own brands, but away from their own brands. Of course, if you get closer to your own brand, you may have huge benefits in the short term, but it will be harmful in the long run. The key is whether you focus on short-term or long-term benefits.

The window of opportunity for price increases

Well-known brands are the hard currency of hard discounters. The Private Label Revolution tells us that well-known brands are essential in hard discount stores. There is an optimal combination between the two.

From the perspective of the law of economic development, the continuous shrinkage and high-end of the industry are twin brothers. This process has been going on since 2016.

At present, there are three major factors affecting brand owners: industry shrinkage, private label and hard discounts, and high-end. The first two items are uncontrollable for brand owners, and the controllable factor is high-end.

It can be said thatIn the current environment, the main opportunities for retailers are in private labels and hard discounts, and the main opportunities for brands are in mainstream shifting and premiumization.

Specifically, it is the upgrade of the Volkswagen brand (mainstream shifting) and high-end, and the **belt is as far away from its own brand** belt as possible.

First, mainstream shifting

After 2016, there was an opportunity for mainstream resistance, and many companies seized the opportunity. For example, the unified Tongda people.

Recently, many brands are planning the adjustment of popular brands. The popularity of Oriental leaves in 2023 can be seen as an example.

The few years starting in 2024 should be a window of opportunity for mainstream gear shifts. When the window of opportunity comes, whoever takes the lead has an advantage. For example, in recent years, the mainstream shift of beer companies has been very good, and the white beer of Tsing Beer, Heineken of Xuehua, and U8 of Yanjing have grown rapidly.

Second, high-end

The high-end is far from the mainstream, but not as luxurious as the ** band. For example, the sub-high-end of the liquor industry.

Take the popular brand as the dividing line. The faster the development of private label and hard discounts, the more dangerous it is to leave the products with private labels. At the same time, the closer the product is to the private label **, the greater the opportunity.

Industry shrinkage, private brands and hard discounts, the biggest impact is on low-end brands. The ** belt of the low-end brand overlaps with its own brand, and there is no advantage in brand endorsement.

Some people fantasize about being able to become their own brand business, but it should be difficult for small and medium-sized brands to meet the demanding requirements of their own brand chain. Of course, at present, many small and medium-sized snack brands still have opportunities, the main reason is that the hard discount of snacks is only from the manufacturer, and has not evolved to participate in product development and production.

I suggest that low-end brands stay away from the low-end as soon as possible, and there will be more opportunities for the high-end than the low-end in the future. The lower the end, the more important the scale advantage. And the high-end is precisely differentiated, but there are opportunities for small and medium-sized enterprises.

The opportunity for Volkswagen famous brands is first in the mainstream shift, and the second is in the high-end layout. The mainstream shift is large-scale, and the **belt is the public brand** belt, which has advantages. The high-end focuses on the layout, not the scale. Because the mainstream shift is a continuous process, the current high-end may become the mainstream shift in the future.

Influenced by the pursuit of sales scale in the past, many people are now particularly wary of declining sales. In fact, the era of shrinkage has already arrived, and mainstream gear shifting and high-end are inevitable trends. Even private labels and hard discounts can't change the trend of mainstream shifting and premiumization. On the contrary, because of the promotion of hard discounts, the pace of mainstream gear shift and high-end will be accelerated.

The famous American futurist Nesbitt has two famous sayings:

Success is not about solving a problem, but about seizing an opportunity;

Opportunity is like a window that is not closed on the night of a storm, you don't know when it will open or when it will close.

When the window of opportunity has opened, don't hesitate to seize it. After all, there are not many opportunities for such a strategic opportunity in a lifetime.

Summary

To occupy a ** belt is to occupy an era. Hard discounts are not the era of low prices, but the era of redrawing the ** belt. The sooner you occupy the new zone, the more likely it is to dominate the zone.

Do you dare to raise the price?

Back to the topic of this article. In the era of hard discounts, do FMCG brands still dare to raise prices?

My answer is:In the era of hard discounts, FMCG brands should raise prices. The lower the price range, the more the price should be raised. If you can't afford to raise prices, make a plan to retreat early. Because it is impossible for brands to compete with the hard discounts of their own brands in the low price range.

But whether you dare to raise prices depends on three major causes and effects: first, the perception of the times;Second, self-awareness of marketing capabilities in the new environment;Third, the definition of marketing objectives is whether to obtain short-term benefits or long-term industry status.

Of course, the best solution for price increases is not to increase the price of old products, but to build brand premiums by pushing new products. The pursuit of both hard discount cost performance and brand premium are two conflicting and reasonably reconciled consumption directions in the hearts of every consumer. Which direction can achieve dominance depends on the consumption desire aroused by the consumption scene.

Note: This article refers to a large number of opinions and data from "Private Label Revolution", thanks here!After all, European private labels account for 38% of retail share, leading the world. Private label is the premise of hard discounts, and the evolution of European hard discounts provides a model and reference for the development of hard discounts in China.