Summary of Key Points
This article focuses on the phenomenon of "overstocking" in the fast-moving consumer goods (FMCG) industry: despite a deteriorating market environment (the impact of new retail and the contraction of traditional sales channels), brands continue to pursue growth targets. Due to difficulties in innovating new products, ineffective channel expansion, and unprofitable investment, they resort to forcing products on distributors to create misleading sales figures, leading to a false sense of prosperity. This approach not only harms the distributors but also undermines the brand's future potential. The true solution lies in returning to product innovation and finding growth opportunities in consumer demand.
I. Why Do FMCG Brands Rely on Overstocking? – A Difficult Market, but Unrelenting Growth Demands
The FMCG market is challenging today: online new retail models (such as community group buying and live-streaming e-commerce) have pushed prices down significantly, eroding the business of traditional supermarkets and convenience stores. However, company executives (the board of directors) are unconcerned about these issues and are willing to spend money to achieve growth targets. These targets are cascaded down the hierarchy—headquarters demand an 8% increase, which is then assigned to regional offices, which in turn pressure distributors to purchase more goods.
What can sales teams do? Traditional methods of driving growth (new products, new channels, and investment) are ineffective: the success rate of new product launches is low (9 out of 10 new products may fail); new channels are highly competitive (for example, high commissions are required to enter community group buying platforms), and traditional channels are shrinking. Investing in marketing may not be cost-effective (for instance, spending $10 on advertising might only generate $5 in sales). As a result, the only option left is overstocking—moving goods from the manufacturer's warehouses to those of distributors, which makes the financial reports look better and allows sales teams to earn commissions.
II. The Hazards of Overstocking: Distributors Cannot Sustain It, and Brands Face Serious Consequences
Overstocking does not represent real growth; it's like borrowing from the future. The problems it causes are numerous:
1. Distributors go bankrupt: Their funds are tied up in inventory, and they struggle with cash flow. If goods cannot be sold, they have to be sold at reduced prices (either by moving them to other regions or selling them online at lower prices), leading to a chaotic pricing system for the entire brand. Traditional supermarkets may demand price adjustments or even impose fines or remove products from their shelves.
2. Overdrawing Future Sales: Goods stocked this quarter will still need to be sold in the next quarter, and no new products will be purchased, resulting in a decline in future sales.
3. Masking Real Issues: Overstocking hides underlying problems such as unappealing products, unreasonable channel policies, and poor customer service. By the time the inventory crisis hits, the issues are too severe to resolve.
4. Erosion of Trust: Distributors, fearing further pressure, may choose to abandon brands that force them to overstock, leaving the brands without their support and resulting in a loss of market presence.
III. Behind the Overstocking: The End of the Growth Era, and the Lack of New Drivers
In the past, the FMCG industry was in an era of growth, where the market was expanding, and brands could increase sales by expanding into more channels. Now, we are in an era of contraction—the market is shrinking, and competition is fierce. If you don't take market share from others, you will be eliminated.
Many brands have not yet adapted to this change and continue to use overstocking to maintain growth. The fundamental issue is the lack of a "real growth engine"—products that genuinely attract consumers. They rely on forced channel sales to drive sales.
IV. True Growth: Emerging from Consumer Needs Through Product Innovation
What constitutes healthy growth? It's when goods flow from the distributor's warehouse to the consumer, creating a sustainable cycle. The key is product innovation:
- Meeting Unmet Needs: For example, Nongfu Mountain Spring's sugar-free tea meets the demand for healthy beverages, and Wailong's konjac snacks address the desire of young people to eat snacks without gaining weight.
- Even Small Innovations Can Make a Difference: You don't need to create a blockbuster product; changing the product size (e.g., from 500ml to 300ml for women or children) or adding a "breakfast companion" feature to biscuits can boost sales.
- Innovation Requires Genuine Effort: This means truly understanding consumers (e.g., observing their purchasing habits and asking questions) and investing in research and development, while also coordinating with sales and marketing teams (e.g., using sales data to identify popular products).
Growth driven by such innovation is genuine and sustainable—consumers are willing to buy, and distributors are motivated to purchase, eliminating the need for overstocking.
V. The Path Forward: Moving Beyond Overstocking and Back to the Essence of Business
The FMCG industry is in a period of consolidation. Brands that rely on overstocking will eventually be eliminated. What's more alarming than declining sales is inventory buildup that cannot be sold.
What should brands do? Accept the short-term decline in sales and shift their focus from overstocking to product innovation and boosting sales at the point of sale. For example, they can help distributors with promotional activities to get products to consumers or improve products to encourage repeat purchases.
Remember: Growth lies not in distributors' warehouses but in consumers' shopping baskets.
This article serves as a wake-up call for FMCG brands: stop deceiving themselves with false sales figures created by overstocking. Only by truly addressing consumer needs can brands survive the industry's challenges and emerge from the current cycle.